Manufacturing is the wrong answer on the economy — and a dangerous one

Australia is rushing full tilt into a new era of protectionism that means less spending on government services, more poorly paid jobs and fewer opportunities for exporters. And there’s a bipartisan consensus for it.

Yesterday Anthony Albanese unveiled a National Reconstruction Fund worth $15 billion to fund manufacturing projects via loans, co-investments and guarantees, with the intention of generating a return for taxpayers. Areas targeted would be food, renewable energy, medical supplies, transport equipment. It would, Albanese said, “harness the power of government purchasing to grow existing industries”.

His argument was two-fold: that Australia needs to become more self-sufficient in manufacturing, and that too much investment flows into “real estate or is returned to investors as higher dividends”.

He’s right about real estate investment, though the way to address the attractiveness of real estate might be to remove the billions in taxpayer subsidies that flow into the property market, not create new subsidies for sectors that pay the price for that.

Self-sufficiency is the new fashion in the post-pandemic world. Having discovered our dependence on global supply chains — and especially supply chains tainted by links with the nefarious China — everyone is now committed to onshoring supply chains and reviving manufacturing of “essentials”. An Australia Institute Centre for Future Work report last year showing Australia had the lowest level of manufacturing self-sufficiency in the OECD was reported as evidence that globalisation had to be thrown into reverse in Australia.

The government unveiled its own manufacturing fund last year, albeit a lousy $1.3 billion over a decade, targeting a similar list of “priority areas” like mining, medical suppliers, food manufacturers; “clean” (i.e. not renewable) energy investment and projects in space and defence.

Today the government is announcing another handout for manufacturing, this time in defence, with a $1 billion missile manufacturing plan. The $1 billion is just a downpayment — one estimate is that the government will have to spend tens of billions in coming decades on “hypersonic weapons that exceed the speed of sound”. Part of that will be the huge premium that comes with building them in Australia, on top of the huge profit that large multinational defence contractors will earn. The delays, blowouts and debacles that characterise existing local defence projects never seem to get mentioned when big new defence announcements are breathlessly reported in the media.

At least with defence manufacturing you get to throw the word “sovereign” around. ““It’s an imperative we now proceed with the creation of a sovereign guided weapons capability as a priority,” Scott Morrison said in announcing the future target of scathing ANAO reports and critical media coverage.

“Sovereign” is the new “security” — the word you could append to any industry (food, energy, water) to indicate it deserves some form of special government intervention.

The self-sufficiency invoked by both Albanese and the government in justifying support for manufacturing has much in common with the thinking behind throwing terms like “sovereign” around: we can’t trust foreigners; every import is a sign of weakness, a dollar lost overseas that could be supporting Aussie jobs for Aussie workers.

We know where this leads. We saw it in the 1930s. When all our trading partners start to think the same way as us, markets for our exports dry up, killing off the jobs of workers in export industries. For a long time Australia had a trade deficit that subtly encouraged this sort of anti-trade thinking. But now we run a massive trade surplus: trade surpluses popped up now and then in the Labor years but in 2017 Australia entered an extended period of rising and now massive trade surpluses.

Much of that is down to our success in commodity exports and particularly minerals. Shipping off minerals, though, isn’t people’s idea of a successful trading nation — despite the fact that our big mining companies in Western Australia are the world’s most innovative large-scale mining operators. The eternal cry — one repeated by Albanese yesterday — is that we should be making stuff from minerals, not just shipping them offshore. Manufacturing exerts a hypnotic power over policymakers, as the kind of “real” economic activity we should be doing instead of efficiently digging up rocks — and certainly instead of being a service economy, which is what Australia has become.

Far from suffering as a result of the decline of manufacturing as a source of economic activity and jobs, Australians have grown wealthier on the transformation to a service economy, running thirty years without a recession and the enduring a much shorter and shallower period of high unemployment as a result of the pandemic. And the demand for future labour is about the demand for services workers — in health, in education, in professional services — rather than in manufacturing. That’s where we desperately need skilled workers.

And that’s where we’ve seen what little wages growth we’ve had in recent years. Manufacturing is low paid, low-skilled work, with low wages growth. It’s not the answer we need for an economy where the biggest challenge is pushing up wages growth and inflation.

Advocates like to talk of Australia having opportunities in high-skilled, elaborately-transformed sectors. But how high-tech and high-skilled is making PPE gear, now a fetish for both sides of politics? Do we want our sons and daughters to grow up to an exciting career in making face masks and surgical gowns?

They can be manufactured by low-skilled workers more cheaply and more efficiently, meaning we pay less for them, elsewhere. The money we save from spending on cheaper imports can be spent elsewhere in the economy, most likely in services where Australians do have a competitive advantage and wages growth is higher.

These basic points about the dangers of protectionism used to be taken for granted in national discourse about trade and industry policy, but they’ve now dropped entirely out of circulation. Meantime, taxpayers’ money gets directed toward an ever-greater array of local manufacturing and the world turns its back on free trade — a dangerous outcome for a country like ours that relies so heavily on it.

Is Australia barking up the wrong tree with its manufacturing push? Let us know your thoughts by writing to letters@crikey.com.au. Please include your full name to be considered for publication in Crikey’sYour Say section