“Industrial policy” — the use of subsidies and tax incentives to support targeted industries — is all the rage in a growing number of countries. By one count, it accounts for almost 50 per cent of new trade policies across the globe in recent years.
Industrial policy differs from traditional protectionism — tariffs, import quotas and other overt or covert barriers to trade — by not imposing additional burdens on consumers or business users of the affected items. It instead imposes burdens on taxpayers or, to the extent the policies are funded by larger budget deficits, on future generations of taxpayers.
But, like traditional protectionism — which has also had something of a revival thanks largely to Donald Trump, and which will increase significantly if he is returned to the White House — industrial policy can hit living standards by encouraging the inefficient allocation of labour and capital. As the International Monetary Fund has warned, “historical experience suggests that getting industrial policy right is a tall order” and that “an abundance of failed programs in countries with strong institutions shows that it is difficult to avoid policy mistakes.”
Australia’s main new industrial policy is Labor’s Future Made in Australia program, or FMIA. Announced just before the 2024–25 budget, it is slated to cost $22.7 billion over ten years (although the legislation establishing it has yet to pass parliament).
FMIA has two streams. The first, the “net zero transformation stream,” provides for public investment in industries “assessed to have grounds for sustained comparative advantage in a net zero economy,” in cases where “public investment is needed for the sector to make a significant contribution to emissions reduction at an efficient cost.” The second, the “economic resilience and security stream,” provides for public investment where “some level of domestic capability is necessary or efficient to deliver adequate economic resilience and security” and “the private sector would not invest in this capability in the absence of public investment.”
I have no in-principle objection to the first stream. The magnitude of the investment required to ensure the transition to net zero happens within the time-frame the science tells us it needs to, and the risks associated with failing, are such that public investment will be vital — especially given the absence of any political consensus as to what Australia’s emission reduction targets should be and how they should be achieved. My only real concern is whether investment decisions are made transparently and by reference to objective criteria, and that “policy support for industries identified” under this stream will be “time-limited,” as Treasury (rightly) says it should be.
The second stream is a different matter. It reeks of what I have long called manufacturing fetishism — the belief (by no means unique to Australia) that manufacturing is the noblest form of economic activity and that manufacturing jobs are more important than jobs in agriculture, mining or (especially) services.
The “economic resilience and security stream” is all about subsidising, through tax concessions, cash handouts or (if the Greens have their way) partial public ownership of solar-panel and lithium-battery manufacturers, “critical minerals” processing operations, quantum computer developers, “green steel” mills, and (if their initial forays are successful) the makers of caravans, chocolate and “healthier, low-emissions foods.”
This is all justified, so we are told, on the grounds that the world is “churning and changing” in ways that have created a “new economic orthodoxy.” Most of the time, that’s a reference (albeit one typically made more obliquely in Australia than in the United States or Europe) to the challenges posed by China’s emergence as a major power and its refusal to abide by the rules-based international order established by the United States in the aftermath of the second world war and maintained (with varying degrees of fidelity) by it since then. The fragilities in global supply chains exposed by the Covid-19 pandemic also figure, but in a lesser role.
Larger Western economies have responded particularly to China’s extensive use of subsidies to become a world leader in the production of solar cells, wind turbines, batteries, electric vehicles and railway rolling stock. And Australia must also make these things, we are told, because other countries are doing them.
You might accept (as I do, up to a point) that there are risks in being as dependent as we have become on a single country — a country with which we might at some point find ourselves in conflict — for the supply of a range of items that might be depicted as critical. But surely, if our friends and allies are prepared to spend many billions of their dollars, euros, yen and won subsidising the manufacture of these “critical products,” it makes more sense for Australia to source our requirements from them rather than spending billions of our own taxpayers dollars (or dollars borrowed from someone else, since we are likely to be running continued budget deficits for the foreseeable future) trying to manufacture them ourselves.
Doing something dumb just because other countries are doing it is like drawing up a circular firing squad — as should have been one of the enduring lessons of the tit-for-tat tariff increases that helped put the “great” into the Great Depression of the 1930s.
Especially disconcerting is the fact that so much of this is dressed up as a matter of “security.” That’s because the history of the past quarter-century shows that whenever a successful quest for a subsidy, a tax break or some other form of protection from competition is wrapped in a “security” blanket, we’re highly unlikely to be told why that subsidy, tax break or other form of protection has been granted — or even, sometimes, how much it will cost — because it is a matter of “security.”
Indeed, even to question a decision ostensibly made on the grounds of security is liable to put you at risk of being called a flat earther, or worse, accused of putting Australia’s security at risk.
Treasury secretary Steven Kennedy has rightly cautioned that “if we over-correct and adopt a zero-risk approach… seeking to be overly self-sufficient, we will quickly undermine the productivity, competitiveness and dynamism of our economy.” Yet the experience of the past two decades demonstrates that once something becomes defined as a matter of security, the quest for a “zero-risk approach” overwhelms any and every attempt to quantify risk or calibrate probabilities.
American international relations scholar Daniel Drezner sums it up well in the latest issue of Foreign Affairs when he writes that “the national security bucket has grown into a trough.” Here in Australia, the “economic resilience and security stream” of Future Made in Australia has created a new trough into which rent-seekers can stick their snouts. And they’re already queueing up. •
