Explainer: Trade in an Era of Contestation and De-risking

By Richard Maude, Executive Director of Policy.

Since the mid-1990s, when it became clear that large, multilateral trade deals negotiated in the World Trade Organization (WTO) could no longer be secured, Australian trade policy has been characterised by still strong support for the WTO as a maker and enforcer of global trade rules, alongside the negotiation of bilateral and regional free trade deals to secure preferential access for Australian exports.

Australia became a more open economy, with the applied mean tariff level on imports falling to less than two percent by 2020, and secured significant new market access, especially in Asia, where a now complex web of bilateral and plurilateral trade agreements enmesh Australia with our neighbourhood.

This was an era in which globalisation and the economic and security benefits of interdependence were generally embraced. Governments and businesses saw openness as critical to Australia’s future, improving the nation’s competitiveness, generating jobs, giving Australia access to new ideas and technologies, and lowering prices for consumers and producers. (Australia’s trade unions, worried by potential impacts on jobs and domestic industries, were generally less convinced.)

Today, Australia is navigating a world in which support for globalisation is caveated and in which interdependency creates unacceptable risks in some sectors, with significant implications for the nation’s approach to trade, investment and manufacturing, and to other global linkages like migration and research cooperation.

The drivers of this new era are complex. As competition with China and Russia hardens, democracies are re-thinking economic dependencies on autocracies and the national security risks of sharing some technologies, like advanced semi-conductors and AI systems. Dependency on China for some manufacturing inputs, such as processed critical minerals, is seen as another vulnerability.

Western policy responses are evolving, led by the United States. The Biden Administration has imposed China-focussed export and outward investment controls on some advanced technologies and promotes a “new industrial strategy” to “invest in the sources of our own economic and technological strength”,  including semi-conductors and green technologies. Europe is exploring similar “de-risking” and industry policy approaches. Tax concessions, other subsidies and concessional loans are all in the tool kit.  

China, too, has plans to make itself less dependent on the world and the world more dependent on it. It worries about resource and food security and wants to be able to sever dependence on the United States for the advanced technologies it believes will secure economic and military advantage. Beijing sees US export and investment controls as evidence of an intent to “suppress” and “contain” China.

In many Western economies, domestic political and social developments are also drivers of the push to make things “at home”. Globalisation powered economic growth for decades but with unequal results. Today, especially in the United States, more weight is being given to jobs and the livelihoods of “working Americans”, not just to economic efficiency and comparative advantage.

Finally, in the wake of the pandemic, governments and businesses are also looking at supply chains with an eye to making them more resilient to future global upheavals.

“De-risking” is not yet as prominent in Australia as it is in the United States and Europe, partly because the nation is not a significant producer of advanced technologies. 

Even so, Beijing’s punitive trade actions on Australian exports since 2020, now slowly being dismantled, starkly underlined the nation’s dependence on the Chinese market (30.2 percent of goods and services exports in 2021-22). Trade diversification has become the order of the day, albeit on a “China plus” model – the government has been clear it does not seek, nor see as possible, significant de-coupling from China’s economy.  

The Albanese government also increasingly emphasises resilience as a central objective of economic policy.  Prime Minister Albanese says Australia can’t “just sit back and allow ourselves to be at the end of global supply chains. We need, to put it simply, we need to make more stuff here”.

The Government’s National Reconstruction Fund is designed to drive investment in Australian industrial capacity.  And as part of broader Western efforts to develop new supply lines for critical minerals, the government is making small but strategic investments into critical minerals processing in Australia.

The 2023 Lowy Institute Poll suggests there is popular backing for such measures - 70 percent of respondents said Australia should place a high priority on ensuring supply chains run through countries that are friendly towards Australia, even if this means higher prices. 

Against this background, the government has identified four policy priorities

• deepening and diversifying Australia’s trade relationships, particularly in Asia
   
• reform of the World Trade Organization so that it “delivers for Australia”, including in new rules and disciplines
   
• the use of economic, industry and social policy to build industry capability in Australia, especially for higher value-add products. The government wants diversification to be as much about what Australia exports as where it exports
   
• ensuring that the benefits of trade are shared among the community.

The challenge for the government is to find effective and economically smart responses to Australia’s dramatically changed international environment. The need to “de-risk” some linkages to China is the inevitable result of the path Xi Jinping has set China on – nationalist, authoritarian and hostile to the West and to liberalism.   

Still, for an open economy like Australia, the policy choices are not straightforward.  Most will involve trade-offs, including costs to the broader economy. Australia’s Productivity Commission, for example, argues that the cost of building and maintaining a domestic production capacity in “non comparative advantage sectors” is likely to be “large”. And Australia remains deeply enmeshed with Asian economies who are in turn deeply integrated with China.

For the foreseeable future, Australia will navigate a world characterised simultaneously by separation and on-going interconnectedness: an “old world” of globalised trade and rules-based free trade agreements, and a “new world” of “de-risking” and “de-coupling”, trusted supply lines, and the return of industry policy.

You can read Asia Society Australia’s interview with Trade Minister Don Farrell about Australia’s trade in an era of geo-political contestation here.