Australia: Local Environment Preps up for Investments

Summary

• Global trade growth has been lacklustre over the past decade.
• Protectionism and deglobalisation accelerated due to COVID-19.
• China and Australia trade relations are reaching an inflection point.
• Australia seeks the right policy at the right time to secure its economic prosperity.

Late last year, we noted that if one were to think that protectionism and deglobalisation are short-term deterrents to global growth, it could well be a misconception. Evidently, in the below graph, it can be seen that over the past decade, trade between countries had been lacklustre as against the rapid growth we had been accustomed until 2008.

As incumbent fiscal policymakers try to embrace budget responsibility, fiscal prudence and economic prosperity, the consequences have led us to witness tariffs, duties, Brexit and long-lasting trade negotiations – some that don’t yield any results.

Since people and goods move at larger scale and speed than 2003, it gives us some answers why COVID-19 evolved to become a pandemic rapidly -- causing large-scale dislocations across the globe compared to the SARS-CoV -- which erupted early in this century with similar transmission characteristics.

Irony is that both COVID-19 and SARS-CoV emerged in China. Leaders across the world have backed the notion of an independent enquiry into global response to the COVID-19 pandemic. Beijing is not particularly happy with the proposal of an independent enquiry.

Leaders want to trace the origins of the virus that has triggered havoc across the globe, causing deaths and extreme stress on healthcare systems. The virus has induced policymakers to emphasis on diseases that could have pandemic like potential – something that had been ignored by the legislators in this century – even after warnings like MERS, SARS, and Ebola.

A large part of the world started floating active containment measures to deal with COVID-19 after it was declared as a pandemic by the WHO, which was 11 March 2020. Moreover, people movement across most of the countries was ongoing until mid-March.

An investigation into the origins of the virus will likely help in better decision-making for the next pandemic. Also, it would allow the society to criticise the role of public bodies, healthcare authorities and alike that have failed to act efficiently.

Now the cost of the pandemic is clear to everyone as job losses and economic contraction have wiped the gains of a decade-long policy and initiatives. Perhaps we are living in one of the worst economic contraction that the world has witnessed in decades. Such that even the elderlies have not experienced anything close to like COVID-19 in their lifetimes.

Since we don’t have any vaccine yet, the risks of second wave are higher, which may force legislators to impose lockdowns and public health measures again, effectively hurting economic activity. But scientists are scrambling for a medical breakthrough, which will eventually bring some normalcy in the psychological behaviour, thus economic environment.

Australia has raised the issue of independent investigation into the originations of the virus, which has not been appreciated by its counterparts in Beijing. Chinese attitude towards Australia has changed over the recent past.

Actions from Beijing suggest that Australia may need to diversify its exports. China being the largest trading partner of Australia has maintained the demand for Australian goods over the decades, helping it evade many downturns. Australia supplies a range of goods and commodities to China and imports a lot of goods as well.

Recently, Chinese officials have introduced new measures that would conduct inspections on the iron ore shipments on request of the importers. Four Australian beef facilities were suspended by Chinese authorities, citing licence issues. Also, China has imposed an 80.5% tariff on Australian barley imports, claiming that Australia has been dumping barley produce in China and barley farmers in Australia are subsidised by the Government.

Australia has denied claims of dumping. Reports suggest that Chinese claims on the barley tariffs on imports are not backed by genuine reasons. Barley is majorly used in beers and Australia may need to find new buyers for the produce.

Chinese media reports suggest that Chinese Ministers are not pleased with the actions of Australia, noting that around 100 anti-dumping cases have been initiated by Australia since relations began in 1970s. Australia has launched three anti-dumping cases this year, which are not only directed towards China but a host of countries.

These include aluminium micro-extrusions from China and precision pipe and tube steel from Korea, Taiwan, Vietnam, and China. Australia has also launched an anti-dumping case related to A4 copy paper, accusing Thailand, Indonesia, China, and Brazil.

Amid deterrents to growth, NCCC is seeking to pull Australia out of troubles

Australian Government has established the National COVID-19 Coordination Commission or NCCC. It is working with policymakers to minimise the impact of pandemic on jobs and businesses, while making floor for the fastest recovery.

In early April, the body started collaborating with manufacturers to supply essential products. NCCC is headed by Neville Power and is augmented by a highly regarded team of professionals who know in and out of many industries.

They have been inclined to restart the manufacturing sector of the country, which has seen dramatic fall over the decades. And, in the process, Australia has become a heavy commodity exporter and a finished goods importer nation. Centuries old theory of comparative advantage has limited the ambitions for many countries in the globalised world, and COVID-19 has exhibited all the flaws in the theory.

It is also time to reset the economic picture of the country, which is largely dependent on commodity exports at a time when the world has been eager to promote lesser use of fossil fuel, seeking to control global warming.

Moreover, a strategic review is underway by policymakers to make the most out of dislocation caused by the pandemic. A lower interest rate environment is also a better time to invest in a country. Policymakers may need to focus on best possible areas where Australia could emerge as a winner.

As an example, corporate tax rate of 30% in Australia makes it less competitive destination for investors to set up large-scale businesses. Any relaxation in corporate tax rates would mean a boost for investor sentiment.

Manufacturing is indeed required to be revamped in the country, but what areas would be optimal to support economic growth should be stressed more by the policymakers. It pays off well when you consider second-order and third-order consequences of a decision. For instance, the evaporated car manufacturing industry was on life support already via government support, before the last man standing ceased operations.

Must Read: Is COVID-19 Australia’s Cue to Strengthen the Manufacturing Sector?