Pandemic shortages force Australia to nurture manufacturing

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Australia has been forced to rethink its industrial policy after an acute shortage of ventilators and protective equipment exposed what critics labelled its “dependence” on China.

As part of the country’s effort to tackle its coronavirus outbreak, Canberra has promised to nurture local manufacturing to ensure it is less reliant on global supply chains.

“Open trading has been a core part of our prosperity over centuries,” Scott Morrison, Australia’s prime minister, told parliament.

“But equally, we need to look carefully at our domestic economic sovereignty as well.”

Canberra has tightened restrictions on foreign takeovers and is now trying to ensure it can source critical raw materials, make vital components and manufacture the medical products required to boost self-sufficiency during crises.

Australia is a nation that has built its economy on free trade and shipping raw materials to China. Its two-way trade with Beijing was worth more than A$200bn ($128bn) in 2019.

So the new policy represents a pivotal change for the conservative government, which oversaw the demise of the local carmaking industry and called subsidising local businesses “corporate welfare”.

But it is also emblematic of a wider move by western nations that are being forced by coronavirus to make radical decisions to boost local manufacturing of medical equipment.

US president Donald Trump has enacted wartime legislation to compel companies to manufacture products to combat the virus, while in the UK a consortium including Smiths Group, Rolls-Royce and Formula One teams McLaren and Mercedes is working with the government to deliver 10,000 ventilators.

John Spoehr, director of Australian Industrial Transformation Institute, said: “This crisis has exposed deep vulnerabilities in global supply chains and how many western nations have allowed their manufacturing sectors to become hollowed out amid low cost competition, particularly from China.” 

World Bank data show manufacturing’s share of the economy in the US, UK and Australia has shrunk to its lowest level in more than 30 years to 11 per cent, 9 per cent and 6 per cent respectively. At its peak in the late 1950s, manufacturing accounted for almost 30 per cent of gross domestic product in Australia. 

Andrew Liveris, a former chief executive of Dow Chemical, who advised Mr Trump on US industrial policy, has been appointed to head an Australian manufacturing task force to draw up a new industrial blueprint.

“Australia drank the free-trade juice and decided that offshoring was OK. Well, that era is gone,” Mr Liveris told the Australian Financial Review.

Manufacturing's share of economy

“We’ve got to now realise we’ve got to really look at onshoring key capabilities.”

But restoring Australia’s manufacturing industry faces stiff challenges, including high energy and labour costs and a lack of industry clusters with enough depth to compete against foreign rivals, analysts said.

And while there is general agreement that important medical and pharmaceutical manufacturing industries should be produced locally, there is debate about the policy levers required to support homegrown manufacturers.

“The main challenge to rebooting manufacturing in Australia is overcoming the complacency engendered by successive mining booms,” said Roy Green, emeritus professor at University of Technology Sydney. 

“This has cut short efforts following the tariff reforms of the 1980s and 1990s to reimagine a high-skill, high-productivity economy with a strong manufacturing presence.”

Public procurement is one option already being pursued. Last week Canberra awarded a A$31m contract for 2,000 ventilators to a consortium led by Grey Innovation Group, a company specialising in commercialising medical technologies.

“We realised about a month ago that there was going to be a big shortfall in ventilators because of choke points in the global supply chain and the spike in demand in the US and Europe,” said Jefferson Harcourt, executive chairman of Grey Innovation.

“Everyone assumes we can just buy stuff from China but that just isn’t the case. Everything is finite.”

Canberra already mandates that a certain proportion of work on defence contracts be done locally and manufacturing advocates would like similar schemes introduced in other sectors.

“The government can really move the dial on this by mandating that critical equipment be bought locally. If you do those things you could see a quick resurgence of industry,” added Mr Harcourt.

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But any plan to subsidise domestic manufacturers will face opposition from free-market liberals. Tim Wilson, a backbench MP, warned this week that post-coronavirus protectionism would “make our nation and people poorer”.

Instead, Mr Wilson singled out Australia’s dependence on China, which accounts for a quarter of the nation’s trade, as a weakness. He said that diversifying supply chains among other markets would help manage risk better than subsidising local companies. 

It is unclear how much Australia’s drive towards bolstering its economic sovereignty will benefit local industry. But manufacturing supporters detect a significant change in thinking both at home and abroad.

“Even rusted-on neoliberal governments are finding the hands-off approach doesn’t work in a pandemic,” said Mr Spoehr.

“Nations are realising low-cost goods are not the only priority and China will not retain the dominant position in manufacturing it enjoyed prior to this crisis.” 

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