Chart of the Month - May 2024

Last week’s Federal budget had an AUD 22.7 billion headline: Australia wants to be among the leaders of renewable energy and it is willing to invest public money to do it. Welcome to the “Future made in Australia”.

This brave-new industrial policy marks a turning point after decades of deregulation and the championing of free trade by the island nation. But this is not Australia acting in isolation, rather the Biden administration has articulated a new narrative that yokes economics and trade to national security and the fight against climate change. New US tariffs on Chinese EVs, semiconductors, and greentech announced in May underlines this “new consensus”.

While Australia  cannot match the US and China in terms of semiconductors, EVs, or AI, it is dreaming of building on its natural strengths to become a green energy and green metals superpower. The chart below suggests it has a good chance.  

“The low carbon future should belong to Australia”. Ross Garnaut, renowned Australian economist and former Australia ambassador to China

Source: Clean Energy Australia 2024

The new economic-security consensus

“After the Second World War, the United States led a fragmented world to build a new international economic order. … But the last few decades revealed cracks in those foundations …  So this moment demands that we forge a new consensus.” Jake Sullivan, US National Security Advisor, from a speech at the Brookings Institution, 27 April, 2024.  

When President Biden entered office, he did not overturn Trump’s China tariffs as some expected. Instead he has made them part of a new industrial policy. A policy which has been solidified with the 2022 “CHIPS” Act and 2022 Inflation Reduction Act.

Free trade and globalisation have now given way to a new economic-security nexus. Economic rationalism has lost its dominant position in policy making to national security and the environment. Industry policies and protectionism is rising around the globe (see chart below).

This new consensus has arisen because the economic rise of China has not gone to plan for the US and the West. Free trade has brought riches but also inequality in the West; Western manufacturing hollowed out and old manufacturing towns turned into the rustbelt. The pandemic also revealed the degree of supply-chain dependence on China. Further, China hasn’t become more democratic or bought into the Bretton Woods world order as hoped. Instead, the Chinese Communist party has reasserted itself and is unsurprisingly pursuing what’s best for China. This includes using trade as a weapon as both Australia and Lithuania have felt firsthand.

On top of this, it has become clear that the developed world needs to do a lot more to prevent and mitigate the current and future impact of climate change. It just so happens that the need for a “Green New Deal” also dovetails with industrial policies that “de-risk” the West from China. This is because China has such a lead in many critical green technologies (see chart below).

“Australia is going to have to sacrifice some economic gains for some security investment.” Hayley Channer, Director of the Economic Security Program, United States Study Centre, University of Sydney.

Australia’s green opportunity

“If Australia is to realise its immense opportunity in a zero-carbon world economy, it will require a different policy framework.” Garnaut.

“If we stand still, the world will move past us” Jim Chalmers, Treasurer, Australia.

Garnaut’s quote above is from 2019 while Chalmers’ quote is from 1 May this year and teased the announcement of the “Future Made in Australia” industrial policy, which was unveiled in the budget on 14 May.

The new policy comprises two main streams: the Net Zero Transformation stream and the Economic Resilience and Security stream. They include government investment into commercialising new renewable energy technology and developing new mineral resources deemed vital to a net zero future and national security. It also includes incentives to encourage private sector investment in the streams. 

The hope is that the Net Zero Transformation stream will position Australia to become the green energy superpower Garnaut envisions.

While the Australian government cannot compete with the money being spent by China, the EU, Japan, and the US, it can lean into Australia’s existing comparative advantages. Australia has among the highest solar radiation levels in the world while wind speeds on some coastal areas rival that of the North Sea. The chart below shows that Australia’s price of renewable energy is expected to be among the cheapest in the world in 2030 and 2050.

Green metals

Australia also has huge reserves of ores essential to the world’s net zero transition. This includes iron ore, nickel, lithium, cobalt, and vanadium.

In the past, it usually did not make economic sense for Australia to process its ores. However, unlike coal and LNG, renewable energy cannot be exported cheaply. For example, hydrogen cannot easily be transported in its natural gas form. Instead, it must be converted into a different state such as ammonia, methanol, or LNG. This conversion and potential reconversion at the other end adds to the export price.

While these transport costs make export harder, it provides a natural cost advantage for using renewable energy close to its source. Australia could take advantage of this and develop a green metals industry, including green steel and nickel.   

“Australia should have a much stronger comparative advantage in energy-intensive minerals and agricultural processing in a zero-emissions world economy than it had in the fossil-energy past.” Garnaut.

Final thoughts

Australia is well aware of the dangers of infant industries that never grow up. After the Second World War, Prime Minister Ben Chifley decided Australia needed to be able to make its own car for reasons of natural security. In 1948, the Holden FX became Australia's first mass-produced car. But when government assistance finally dried up, nearly 70 years later in 2017, GM and Holden pulled the plug on the Australian car industry.

Some industries never develop as hoped and instead constantly need government handouts to survive or worse become rent-seeking zombies. The Australian economy suffered throughout the 1970s as its protectionist foundations were shaken by changes in the global economy.

Now the government is hoping to lean into the changes in the global economy and to give Australia a competitive advantage through tailored investment in areas of strength.