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Sovereign Virtue


The COVID-19 crisis has taught Australia a powerful and timely lesson – you can’t run a nation state like it’s a convenience store.

Sovereign capability – the ability to produce the things you need, when you need them – is a little more complex than having milk, bread and the daily papers dropped to your door every day. And the consequences of not having those things when push comes to shove are dire.

The crucial ingredient required for mass globalisation and just-in-time supply chains to function – a high degree of trust in the system and the players to deliver as promised – has been shown to be an illusion at best. And this loss of trust has profound consequences.

As essential workers scrambled for personal protective equipment, healthcare professionals found themselves desperately short of ventilators and hand sanitiser became the new coin of the realm, Australians rattled by the coronavirus pandemic sweeping the globe found themselves asking – how on earth was this allowed to transpire?

How could a sophisticated, first world economy such as Australia’s find itself so desperately short of the basics in a time of crisis?

And what if the next disruption is not face masks, but liquid fuel or medicines?

There are to my mind five critical lessons to have emerged from the COVID-19 pandemic, each of which present enormous policy challenges for Australia.

  1. No nation can rely on just in time delivery of critical items.

  2. A good’s price is the price when you need it, not the price when you’d like it.

  3. Global supply chains are controlled by nation-states, not companies.

  4. Nation-states will act in their own interests and behalf of their citizens first.

  5. Australia needs a trading system with globally understood and enforced rules.

Faced with these challenges, Australia must forensically assess its vulnerabilities, define its ‘must have’ productive needs, urgently reverse its dependence on global supply chains for critical items, diversify trade away from nation-states that cannot be relied upon or trusted, and work with like-minded countries to maintain a rules based trading order.

While on this occasion the stress placed on global supply chains was from a health induced crisis – it is perfectly possible that the next could be diplomatic or conflict oriented. When the crisis does come, the choices we make today will determine how readily we can handle those challenges.

Central to this policy conundrum is the 800-pound dragon in the room – the Chinese Communist Party.

How Australia manages its ever more capricious and assertive major trading partner and the choices we make in responding to these challenges as a whole will have enormous economic, social, geo-strategic and political ramifications for decades to come.

Getting the balance right will be critical. Fortress Australia operating as an economic autarky will make us poorer and less secure, while refusing to adjust to the new reality will leave us catastrophically exposed when – not if – the next big disruption comes. A passive continuance of the status quo will also leave Australia dangerously exposed to trading away something far more important than iron ore – our sovereignty.

Fortunately, like any great crisis, hidden within these challenges are enormous opportunities. If we get it right, we can set Australia up for a new golden age that rivals previous eras.

If the political class is only just waking up to the challenges highlighted and exacerbated by the coronavirus, the Australian people are way ahead of them.

According to a recent poll by the Lowy Institute, only 23% of Australians say they trust the Chinese Communist Party ‘to act responsibly in the world’, while a whopping 94% think that the government should work ‘to find other markets for us to reduce our economic dependence on China’.

A recent poll commissioned by the YouGov found that nine in every ten Australians believe that coronavirus has served as a ‘wakeup call’ and are demanding ‘Australia lifts its domestic production of essential products and reduces its reliance on Chinese imports’.

The Australian public have worked out what ‘Twiggy’ Forrest and company don’t want to admit; it’s time to quietly, confidently and seriously reset the terms of our engagement with the Chinese Communist Party.

The Great Decoupling

Australia is not alone in this challenge. The ‘China Question’ will dominate geopolitics long into the foreseeable future. Expert consensus suggests that while COVID-19 won’t ‘change everything’ it will accelerate and pull forward changes that were already underway or inevitable.

One of those changes is the increasingly fractious relationship between the United States and China.

While the relationship between these two powers is critical to the world, what happens between our principal ally and major trading partner is overwhelming relevant to Australia. Before the pandemic set in, the US and China had started to increasingly treat one another as strategic rivals – the trust was gone.

The US, which lists trade cheating, IP theft, currency manipulation and predatory practices amongst its economic grievances with the Chinese Communist Party, has suddenly woken up to the fact that its economy, technology and national security are utterly reliant on or interwoven with CCP controlled supply chains.

Central to this change in outlook, US strategists had begun the slow process of ‘decoupling’ the US economy from China’s as a way of reducing strategic vulnerabilities and exposure risks to a regime hell bent on replacing it as the great power.

Given the costs associated with a decoupling, analysts were split as to what degree this would occur in practice and how big any future schism between the two highly integrated economics might be.

Yet any dovish pretence that things might return to a comfortable ‘normal’ has been thrown out in the aftermath of the coronavirus.

The gloves are completely off. Decoupling is on in earnest.

As the US recalibrates its foreign policy to deal with CCP annexations in the South China Sea, its debt book diplomacy through its ‘Belt and Road Initiative’ and its plans for technological dominance via its China 2025 plan, America has realised it can’t neatly separate itself from the Chinese economy – even as it sees itself assailed.

The US is discovering that in a globally integrated world where China acts as the world’s factory – breaking up is hard to do and separations can be expensive. The risk for the world is that in the process of decoupling ends in a messy and ugly divorce.

The risk of conflict aside, it’s quite likely that the world will be split into two different economic, technological and governance camps. One lead by an alliance of democracies and the other by the CCP, Russia and parts of the emerging autocratic world.

Dealing with this will not so much involve ‘picking sides’ as managing risk and tensions in the national interest. While we won’t decouple from China, according to Peter Jennings of the Australian Strategic Policy Institute, some ‘strategic distancing’ is clearly appropriate.

And this isn’t just a US centric approach – the rest of the world is seeing the same problems and asking the same questions. Japan for example has set aside nearly $4 billion dollars to literally pay its manufacturers to move production out of China and back home or to more dependable nations.

Those who tut-tut such an approach as alarmist or ‘containment’ or admire the command and control approach of China should look to the CCP’s own decoupling from global dependence as it deliberately seeks to uphold the primacy of the regime, party, its economy and its people.

Australia has already been presented with policy dilemmas in this context. Australia bravely lead the world in rejecting high risk vendors – namely Huawei – from its 5G network on the basis that it was inconceivable for Australia to hand the digital keys to its kingdom over to a company that is owned by and answers to an authoritarian techno-nationalist state. The US has done likewise while Europe, the UK and others are considering bans of their own.

The Chinese Communist Party has responded to Australian autonomy such as this through increasingly bellicose rhetoric and more recently via trade coercion by placing tariffs on Australian exports to China.

More tough decisions will come, which will make holding our nerve increasingly challenging and ever more important.

But we can make this process easier on ourselves. Reducing CCP leverage over our economy is one important way of buying insurance the next time we need to make a big call in the national interest.

None of this is to say Australia shouldn’t trade with China – of course we should. However, being so heavily geared to one market is risky for any entity, let alone a nation state the size of Australia.

The risk of Chinese recession alone should give us pause for concern, while CCP bullying and threats to turn off the rivers of gold speak for themselves.

This analysis, as worrisome as it is, only looks at the ‘income’ side of Australian risk exposure.

A risk assessment conducted by the Henry Jackson Society found that out of New Zealand, the UK, the US and Canada, Australia is the most reliant on Chinese production.

The report found Australia leans heavily on China in a staggering 595 strategic areas and is completely dependent on CCP supply chains for critical items such as medicines, fertilisers, heavy industrial equipment and vital chemicals. In 35 areas deemed critical to the next industrial revolution Australia is totally reliant on Chinese production.

That’s what ‘turning off the tap’ might look like.

Furthermore, lax foreign investment laws have allowed China via its state-owned enterprises to amass worrying market dominance in critical Australian infrastructure such as electricity supply, gas pipelines, airports, productive farmland and, most unbelievably, the Port of Darwin.

Additionally, Australia has less than three weeks of liquid fuels – a breach of our International Energy Agency requirement to store 90 days of supply – and has reduced the number of operating oil refineries from four from its previous eight.

Looking at these issues, any fair-minded person can start to see some serious problems emerging.

As we shape our future strategies, we would be wise to remember that trade is a hard-nosed game between competing nations and businesses.

Nobody trades looking to do anyone a favour. China buys our iron ore, coking coal, gas and food because it needs it to build its nation and feed its people and we are a reliable, high quality supplier.

Rebuilding Australia is Labor business

Australian Labor is the natural political party of government to pull the threads of, industry policy, national security, economic policy, regional policy, national unity and geopolitical coordination into a coherent national effort.

Since Federation, Australia has undergone two major reconstruction efforts; surviving and rebuilding after World War Two and the overhaul of our sclerotic economy in the 1980s and 1990s. Australia’s effective response to the Global Financial Crisis was guided by Labor.

On those occasions the challenges – and opportunities – fell to Labor. Fortuitously it meant that Labor governments defined the parameters of the changes and policy trade-offs that would be made.

Thus, both reconstruction efforts and our recent economic recovery had a decidedly Labor feel to them – things we still enjoy today. One only has to look at the UK or the US to see the stark differences when the other side is holding the levers.

Working people need modern Labor to channel the nation-building zeal of Curtin and Chifley and combine it with the consensus seeking and economic vision of Hawke and Keating.

The key questions we need answered are:

  1. What must we produce here and how much?

  2. How scalable should these capabilities be?

  3. What should we store and how much?

  4. What should we buy and from whom?

Harnessing our natural advantages in minerals, people, research and natural resources and renewable energy should give us every opportunity to do this efficiently and allow us to compete globally while providing hundreds of thousands of jobs for Australians across the entire country, particularly in outer suburban and rural-regional areas.

Australia must urgently develop a clear list of red lines on these questions and seek to ensure that we deliver on it. Importantly we cannot allow the business community to force supply chain risk onto the Australian people via a return to just in time supply chain arrangements that are not dependable when push comes to shove.

While there may be some up-front economic costs in pursuing such a policy, keeping the five COVID-19 lessons at the forefront of our minds will help remind us that the sticker price is not always the true price. And that dependence comes with a cost of its own. Doing so will let us more clearly assess the policy trade-offs. Beyond national industrial revitalisation, it is quite conceivable that a global decoupling might also create opportunities for Australia to integrate itself into the economies of other nations by becoming the democratic and dependable producer of first choice.

Such economic alliances would also bring important strategic dividends for Australia as it seeks to form deeper relationships with important democracies in our region. Rare earth material – critical to the development of technology such as batteries, computer chips and other high-tech equipment – is currently dominated by Chinese based producers.

Australia can become the world’s dominant miner of this precious material and, over time, a producer of high-quality, high value manufactured products. Such an approach can help Australia deepen its economic relationship with Japan – a powerful economic and democratic counterweight in East Asia – that desperately needs rare earth to keep its high-tech manufacturing sector open.

One can think of similar opportunities with powerful regional democracies such as India, South Korea and Indonesia. Furthermore, there might be products that we currently source from China that we would be perfectly happy to receive from a more dependable democratic partner.

Importantly, such an approach can help Australia secure a central pillar to its prosperity – a global trading system. Australia has flourished in a world where the rules are well understood, and all parties abide by them.

This requires a critical mass of nations to agree to the rules of the game and punish those who seek to cheat or who refuse to play the game at all.

Trade cheating can be likened to doping at the Olympics, only with higher stakes. Instead of gold medals being on the line entire industries, billions in wealth, millions of jobs and geostrategic advantage are up for grabs.

While every country massages the rules to its advantage; industrial scale cheating must be punished. The CCP’s trade cheating has reached Russian Sochi Games levels. It’s time the world called it out. China has benefited enormously from the global trade system it was invited into and must play by the rules, not exploit and destroy it.

These fault lines will present enormous political challenges and will test future governments of all persuasions.

For the first time in a generation, Australia will be forced to reckon with genuine systems competition between democracies and autocracies.

These challenges will not be on distant continents but our doorstep.

Australians have shown that they’re up for tough conversations and they expect our political class to do likewise. Sound economic programs – often the Achilles heel of Labor oppositions – will no longer be enough to win their votes.

To be entrusted with federal government, Labor must have impeccable economic and national security credentials.

Labor in government would no doubt use this crisis as an opportunity to retool our economy and align our mineral, manufacturing, tech, research, business and defence sectors into one coherent, nationally resilient stream of policy tributaries.

At present, the task falls the conservatives; and they will seek to capitalise on the opportunity in their own way. Make no mistake, Scott Morrison aims to steal this agenda from underneath Labor and remake it in his own image.

This week’s announcement of a $270 billion defence strategy, coming on the heels of the Manufacturing Taskforce, shows Morrison understands the challenges, can smell the opportunities and will not die wondering.

We may still get the chance to shape things, but we will need to argue for it strongly in 2022.

Reconstructing Australia will call upon the talents, resilience, and earthy realism of the Australian people. Getting sovereign capability done right with Labor characteristics demands more – that is, courage.

Click here to read Toscin No. 10 - July 2020 here.


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