From the Industry

National resilience and economic sovereignty In the early months of this year, when the lockdowns in China were suddenly upon us – followed shortly afterwards by more widespread interruptions to global production, the fracturing of supply chains and shortages of shipping and air freight – there was a good deal of talk about “economic sovereignty”.

This was given a particular flavour by the sudden leap in demand – and expected demand – for a range of health, sanitising and protective equipment. However, concerns were not limited to these areas; they were felt across a very wide range of industries. All of a sudden, we could not source windows, packaging materials, and a whole range of components for this and that. These were global phenomena of course but we felt it particularly acutely in Australia because here we are at the other end of the world, tyrannised by distance and feeling all the more vulnerable by the decline in our manufacturing sector over recent years. While today our membership is drawn from across a broad spectrum of employers, Ai Group has a rich tradition in Australian manufacturing – and for well over a century it was our exclusive focus. We remain deeply engaged with the sector and we welcome the increased attention on domestic manufacturing. Nevertheless, from the outset, we were wary about some of the emphasis on “economic sovereignty”. Over recent decades, Australia has become an open economy. We have derived, and we continue to derive, very significant benefits from our engagement with the rest of the world. We are richer, more diverse and we face many more opportunities because of the exchange of capital, people, goods and services. From this point of view, it would be a strange reaction to the vulnerabilities we felt, when threatened by a breakdown in trade, if our solution was to close ourselves off from trade. That said, we certainly recognise the frailties exposed by those early months of the COVID crisis. And there are parallels with the need for us to have robust defence industry capabilities in Australia. There are also parallels with the prospect of further closures of uneconomic oil refinery capacity in Australia. While we remain firmly in favour of trade, and while we were wary, and we remain wary, of where an undue emphasis on economic sovereignty might take us, we also recognise the importance of the resilience of our economy. We think that framing the issue as one of resilience is a much better way to approach the issue than by a more whole-hearted embracing of economic sovereignty. But of course, there are many ways to build national resilience. One of the most important is by adopting much more through how we approach managing the risks of international supply chains. We have been very starkly reminded of the importance of diversified sources of supply. We have been jolted into a realisation of the vulnerabilities of just-in-time delivery and of the virtues of inventories. Of course, none of these are new considerations. But there is certainly a case to say that we had lost sight of some of the risks we ought to have kept on our registers. And as at the level of individual businesses, so also we ought to recalibrate things at the national level. Defence capabilities – most obviously around sustainment – are clearly one area where increased regional and geopolitical risks are rightly giving rise to a reconsideration of our defence capabilities in co-opting those of our defence industry capabilities. Medicines are another area. Rare earths and petroleum fuels are others. And no doubt there are many more that should be examined.

“There are many ways to build national resilience. One of the most important is by adopting much more through how we approach managing the risks of international supply chains.”

In some of these cases the sensible solution might be ‘economic sovereignty’ – bring it in house, or in country. But in others, that will not make sense and we can achieve the desired level of resilience at much lower cost (economists will quickly remind us that here we should be thinking “opportunity costs”). So instead of economic sovereignty we are attracted to the idea of “smart sovereignty”. That involves not just making sure we have desired levels of resilience in particular areas. It also, and more fundamentally, means that we should invest broadly in domestic capabilities. And I am not just thinking of manufacturing capabilities. These investments will contribute to the building of specific areas of resilience that will underpin our ability to meet unexpected contingencies. On that note, it was impressive to see a very wide range of domestic producers put their hands up and, by calling on their existing capabilities – technical, managerial and those in their workforces – pivot to address some of the major areas of shortfall and areas of expected emergency demand in those early months of the COVID-19 crisis. As we look at how we build resilience, it is important that we remain mindful of being an open economy. It’s not always easy – particularly in the face of so many impulses in the opposite direction. Of course, we need to ensure continuity of supply and we need to appropriately manage the full range of risks we face. A key benefit of us being open is that we subject ourselves to competitive pressures. We make sure we remain exposed to global best practice. In the end, that is perhaps the most important step we can take to building and sustaining national resilience.