How is The Australian Economy Affected in Times of COVID-19: Ideas and Reflections
1. The Australian Economy and COVID-19
The Australian economy in times of COVID-19: ideas and reflections. The pandemic caused by COVID-19 has widely impacted the political, economic, health, and diplomatic dimensions, among other issues. However, one of the most relevant but paradoxically little considered aspects is the crisis unleashed by the shortage of essential inputs and strategic products at the national level. This critical situation again forces us to reflect on our production model.
To begin with, the global crisis has led to an unprecedented drop in international trade, reducing it to its minimum expression, if not to a state of almost total paralysis. On the one hand, all global value chains experienced disruption or even broken.
-Goods for Final Consumption
The goods for final consumption produced in multiple countries and assembled mostly in China ceased, highlighting the limitations of this mode of production typical of globalisation.
Another effect has to do with the fall in international prices of commodities and raw materials. Although most of them were on the downside, with the collapse of the oil price as their flagship, the international health crisis has only accentuated this decline. For Australia, the prices of its mining and agricultural exports have dropped dramatically. Faced with falling volumes and export prices, foreign exchange earnings declined considerably.
Finally, the health emergency has highlighted the lack of essential goods such as critical medical equipment. This has only put the lack of international cooperation in this type of situation on the counter, exacerbating nationalism and leaving each country to its own devices.
The pandemic has clarified that each country must resolve the situation for itself, and each productive system must supply itself with essential and critical goods. In this sense, dependent economies become extremely vulnerable.
-Strategic Manufacturing
Similarly, it could be added that the present situation has exacerbated the dependence on strategic manufacturing for the economy. The paralysis of international trade shows what the country produces and what it does not. Or rather, what it was producing and has stopped doing so to import at cheaper prices from other destinations, mainly from China.
We know that the eastern region of Australia is the seat of most of the financial services and industries. This dynamic sector includes industries such as banking, insurance, finance, commerce, media, entertainment, tourism, and government services, such as education and health. While for its part, the western region controls most of the natural resources, including iron ore, gold, oil and natural gas.
This region also contains the world’s largest resources of coal, lead, zircon, nickel, tantalum, uranium, zinc, bauxite, copper and silver. The truth is that between these two large regions oscillate political decisions on the country’s development plans.
Almost 30 years ago, Australia began a process of change in its productive matrix consisting of leaving aside the manufacture of goods to develop the service sector. It is common to hear daily that the manufacturing of objects has officially ended. Australia is today a country whose economy is about doing things and helping people. They abandoned the protected country to make way for an opening. The result was 27 years of consecutive growth.
-Disappearance of Sectors
However, the direct consequence was that many sectors disappeared. Some, in which the country was strong, such as textiles and automobiles (in 1974, it produced half a million units). In the latter, Australia leaned towards managed reduction. Brands such as Mitsubishi, Ford, General Motors and Toyota closed their plants after the economic reform that prompted the lowering of tariffs and the removal of subsidies for 2014. The last to do so was the local brand, Holden, in October 2018.
It is the flagship company whose story has been written by Robert Maxwell Conlon and John Perkins in “Wheels and Deals: The Automotive Industry in Twentieth-century”.
With the opening, the 24 million inhabitants were choosing imported models that displaced those of local production that cost less or are better equipped. Around, 1.2 million 0 km became sold.
According to estimates, in just over 10 years, the US $ 23,000 million in benefits had been allocated to the sector that did not have a growing counterpart in exports. In Australia, too, the cars that were made were expensive and difficult to place abroad.
The other sector that had strong protection was textiles that produced expensive products due to the high level of protection with tariffs between 30% and 80%.
-Competitive Export
This prevented them from being competitive to export. Gradually, protection was removed and the industry that produced “everything but expensive” was converted to specialise in certain items to be able to export. The principle that guided this change was to begin to consider that tariffs were a subsidy paid by all the inhabitants. Nowadays, the focus is on design areas, with high added value.
Finally, concerning other sectors, the steel industry has subsisted in this model; One Steel continues to be the most important producing company. However, purchases from China, Japan and other countries have increased. Electronics is also mostly imported in this model. We can say the same for aluminium ships and planes.
In this way, the production of manufactured goods is not considered because it is thought expensive and of lower quality than imported products.
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2. Opportunities and Risks of Globalisation
The end of the Cold War, marked by ideological tensions between East and West, and the consequent extension of the capitalist system to almost the entire world, gave rise to a new international order characterised by globalisation.
They thus described the world as a Global Village in which technological progress developed with it the field of communications to shape information-based societies. Canadian Sociologist Marshall McLuhan coined the term in 1962 and is the first antecedent of globalisation. The development of electronics and the rise of the Internet completed the process.
The truth is that the initial euphoria for globalisation lasted a short time. Countries quickly assumed that this process presented opportunities and risks, new possibilities and threats. This ambivalence manifested itself in two specific situations. First, is the difference between commercial globalisation and financial globalisation. Faced with a first image that warned that globalisation would open markets and sell more, an increasingly dangerous trend emerged: the volatility of financial flows.
-Central Risk Emerging
Times of COVID-19: ideas and reflections speak to central risk emerging. This was a central risk for emerging and middle states. Faced with a progressive and gradual inflow of capital, a crisis followed with drastic capital flight. The crises of Mexico in 1995, Southeast Asia in 1997, Brazil in 1998, Russia in 1999, Turkey in 2000 and Argentina in 2001 are proof of this.
Again we reflect on the Australian economy in times of COVID-19: ideas and reflections. However, here we want to point out a second situation. Globalisation brought with it a new way of producing consistent both in the relocation and relocation of international companies.
On the one hand, large multinational companies moved their production to countries with cheap labour located mainly in Southeast Asia and with an epicentre in China. On the other hand, companies relocate their production line to different countries, generating regional and global value chains.
The consequence has been the design of a global market that has weakened if not erased national borders. Open borders have challenged concepts such as national sovereignty. The truth is that through these changes, these flexibilities and interconnections, the production of manufactures and essential goods has migrated from one country to another.
Also, from some regions of the world to others with comparative advantages for this purpose. In the 21st century, the favourable region to host industries in Southeast Asia for offering lower costs, mainly cheap labour. And in particular, the country that presents the best conditions in China.
-The Situation for Australia
The situation for Australia is that globalisation has been an opportunity to overcome what Geoffrey Blainey called The Tyranny of Distance since the effect of distance on the country’s economic history has become one of the greatest obstacles to its development.
In a world where distances are shortened or relative, the country could perceive it as an opportunity to better insert itself by selling more of its products to the world. Globalisation incorporated new potential markets, some of them very attractive for being very populous and with great purchasing power.
However, simultaneously with this vision, it began to be perceived that this new world was no longer so benign and presented certain risks for the country. This situation revealed the growing global interdependence placed the country as an exporter of raw materials (mainly metals and minerals (refer to footnotes) and to a lesser extent agricultural products. It acted as an importer of more and more manufactured products, mainly of medium and high technology.
-Internal Development
Times of COVID-19: ideas and reflections revolve around internal development. Although the economy grew for 27 consecutive years, the pattern of internal development was gradually changing. The industrial sector decreased in the percentage of GDP, while agriculture and raw materials rose, and the novelty was the rapid growth of the service sector, mainly driven by tourism. The balance of payments (international account par excellence, which accounts for all capital income and expenses) is an image of this transformation.
Even so, the balance of payments showed a surplus, since even though imports of industrial products increased, exports of raw materials and food increased, and at the same time the income of foreign currency from tourism and investments in land purchases. All this explanation finds a common denominator in China.
3. China: Between Optimism and Pessimism
The beginning of the 21st Century brought about a change in the international order or at least a transition from a unipolar order to a world with a multipolar tendency. In this new scenario, the role of the People’s Republic of China begins to stand out, which since the 1990s has become the “factory of the world” producing a change in the centre of gravity of world trade and production.
Times of COVID-19: ideas and reflections make us focus on various trade relations. We cannot understand this phenomenon in isolation but encompasses Asia as a system as a whole. In this region, there has been a process of economic restructuring (productive, commercial and financial) (refer to footnotes).
-Relevance of China and Asia
In this way, the relevance of China and Asia in general at the beginning of the 21st century meant a “tectonic change” in the very dynamics of international relations. This happened since, for the first time in five centuries, the centre of world power and wealth moved from the Atlantic to the Pacific.
China’s global rise has been peaceful, collaborating and cooperating with the United States and not opposing it. The increasing commercial and financial interdependence has acted as containment or appeasement of the rivalry.
Although in North America some internal sectors perceive China as a threat to hegemony, at the moment it is only economic power. The arrival of Donald Trump at the White House has indeed exacerbated the antagonism, generating great global uncertainty.
-Impact on Asia-Pacific
China’s abrupt rise has had a very profound impact on Asia-Pacific. In general, it has been viewed with mistrust by the region. Consequently, Beijing’s containment strategies have been stepped up. The first and most chosen option has been balancing or balancing power, that is, approaching the United States or deepening the alliance with this country.
The other innovation has been the “matching” or the concretion of multiple alliances with regional actors opposed to China. In this case, there is an increase in reciprocal commitments between India, Japan, South Korea and Australia, for example. The last option far from containing is the Bandwagon, which means getting on the winning car. In this case, it would involve aligning with China.
-How to Relate to China
Times of COVID-19: ideas and reflections on how to relate to China. When deciding how to relate to China, the problem lies because on the economic side, since it became a large importer of raw materials, energy and agricultural products, helping to substantially improve the terms of trade and creating a highly favourable international environment. The Chinese alternative, given its spectacular and sustained growth, contributed significantly to international permissiveness so that other actors could move with a greater margin of diplomatic and commercial maneuverability.
However, the predominant link was traded. First, China became a key buyer of food, hydrocarbons (contract for 25 billion for liquefied natural gas) and raw materials (mining), while secondly, it became a supplier of industrial products.
Although at first, they perceive it as an opportunity to export given the immensity of its domestic market; it is in the second instance, when Chinese products enter in mass at reasonable prices destroying industries, which begins to be perceived as a risk or more.
It remains a threat. Even more, the extractives model that said actor promotes and has the effect of reprimanded economies has been criticised. We must remember that Australia’s main trading partner is China. They value its exports to China at $98.2 billion and its imports from China are worth $54.3 billion. This gives Australia a positive $44 billion trade balance with this country.
4. Towards a New Development Model During COVID-19
The global crisis unleashed by the COVID-19 pandemic has highlighted the unease in many parts of the world over the current dynamics of world production and trade to where leaders such as Donald Trump and Europeans Emmanuel Macron or Boris Johnson have declared that after the emergency, international trade relations will no longer be the same.
In this direction, they propose national reindustrialisation supported by certain sectors such as automotive, steel and aluminium, among others, to the detriment of imports from China.
-Debate and Positions
The debate and these positions regarding times of COVID-19: ideas and reflections are widely transferable to Australia. The crisis has once again brought the opportunity to discuss the development model. From this place, we refuse to believe that our country should grow only by promoting natural resources (agribusiness, mining and energy, mainly), and from there generate employment in the service sector. We think that certain strategic industrial sectors should be recovered.
The emergency has revealed that importing essential items from abroad can be problematic. On the one hand, articles such as medical or pharmaceutical supplies, are scarce in these times of health emergency but of first necessity for the population.
-Strategic Sectors
On the other hand, promoting certain strategic sectors would be vital for the development and promotion of an internal market that would promote production, work, science and technology. Durable consumer medium goods would represent these sectors such as automotive, metalworking, electronics, and even aircraft or parts thereof.
Times of COVID-19: ideas and reflections refer to the last option. This last option is relevant since it would allow a certain degree of control over the economy to be retaken. Participation or redirection by the State would allow a greater margin of decision and action on what is to be produced. The result will be greater self-sufficiency and a more robust economy that allows strengthening national entrepreneurship and therefore the internal market.
Self-sufficiency would make it possible to face critical situations such as those that arise with the current pandemic, with fewer difficulties and with greater capacity for self-response and more resources. In the same way, they could be in other scenarios such as great economic cataclysms or even wars.
-Clarification
However, some clarification is necessary. In the first place, it is not proposed to carry out a total process of import substitution since it would not be convenient or politically or economically viable. But simply to locally produce some sectors that political and economic elites consider strategic to strengthen the national interest.
Second, it is necessary to recognise that the economic cost of these essential goods will be greater than if they continued to be imported (they will be more expensive) and perhaps of lower quality sometimes, but it would cause greater self-sufficiency, more work and national wealth. It would resort to raising tariffs to protect the chosen sector and some subsidies to promote it.
Times of COVID-19: ideas and reflections also require some perception and clarity. From our perception, they link the importance of giving this debate not only to the present but to the history of this country since, as D. A. Copeland argued, “Australian history is, of course, largely economic history”.
In the absence of civil wars, revolutions or other events that stress the history of other countries, the evolution of Australia since 1788 is decisively marked by business cycles. Possibly we will find ourselves if we so wish before the beginning of a new and more prosperous cycle.
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5. International Situation Caused by COVID-19
The unprecedented international situation caused by the COVID-19 pandemic is generating, among other ruinous aspects, economic consequences for the entire world. Examples of this are the fall in production and employment worldwide, the quasi-paralysis of international trade.
Also, the collapse of prices for both commodities and raw materials, and the global lack of essential goods such as medical equipment are critical. To the current debate on how governments should face this scourge economically, there is an added reflection on how the production model should be reconfigured a posteriori.
-Australia and Globalisation
Australia inserted itself fully into globalisation without being clear that it carries both opportunities and risks. Although in this process in which the world became smaller, it benefited from overcoming its distance problem to be able to supply its products. It soon began to import more and more elaborate and sophisticated products as companies and world production moved to Southeast Asia. Given its low labour costs, China was the great beneficiary of this new process.
Although Australia could sell large quantities of gold (and other metals and minerals), liquefied natural gas, and agricultural products to it. Little by little, it was buying large quantities of manufactured goods (which in parallel ceased to produce internally).
Conclusion
Times of COVID-19: ideas and reflections. From this work, we question the current Australian development model. The pandemic did nothing more than exposing a reprimanded economy based on the service sector, while it depends on other countries to source industrial goods. The aim is to recover part of the industrial productive apparatus through tariff protection and subsidies.
It would not entail a general system, but exceptions, in sectors considered strategic, such as automotive, steel, aluminium and some components in electronics, ships and planes. While these products would be slightly more expensive and of lower quality, strategic they gain capacity, the internal market strengthens, and considerable jobs become created.
Footnotes
1. While much can be read, the contribution of Geoffrey Blainey whose book “The Rush that Never Ended” develops the history of mining in Australia is significant.
2. The Chinese emergency has produced an industrial restructuring in Asia and the Pacific and a consequent change in relationship dynamics. China has displaced Asian countries in labour-intensive products, becoming the world’s leading exporter of these. Therefore, Asian countries have increased their productivity to sell China’s intermediate goods. This is for their production while Japan provides it with high-tech, high value-added goods. Funding and investments for China come from the United States, Europe, Japan, Taiwan. This happens while the vast Chinese community is scattered around the world.
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