Caught in the middle

Australia has been walking a difficult line of late. Our largest trading partner is locked in a struggle with our ideological and military partner. China’s behaviour in Xinjiang and Hong Kong has earned it rebukes from the Australian government. China has responded with punitive tariffs against some Australian exports. Both parties have accused the other of espionage. The SCMP has a nice timeline here.


So it is with some interest I read Scott Morrison’s speech the UK think tank Policy Exchange. It is mostly a familiar restatement of liberal international values. There are calls for more mutually beneficial international cooperation. Morrison talked up the importance of international institutions as a way of managing conflict and creating positive sum benefits.

More interesting are the various passages where he attempts to reset China-Australia relations:

Australia desires an open, transparent and mutually beneficial relationship with China as our largest trading partner, where there are strong people-to-people ties, complementary economies and a shared interest especially in regional development and wellbeing, particularly in the emerging economies of Southeast Asia.

Equally we are absolutely committed to our enduring alliance with the United States, anchored in our shared worldview, liberal democratic values and market-based economic model.

Australia is not and has never been in the economic containment camp on China, no country has pulled more people out of poverty than China. And  Australia is pleased to have played our role in the economic emancipation of millions of Chinese through the development of the Chinese economy.

The global competition between China and the United States presents new challenges, especially for nation-states in the Indo-Pacific. Like other sovereign nations in the Indo-Pacific, our preference in Australia is not to be forced into any binary choices. 

Our actions are wrongly seen and interpreted by some only through the lens of the strategic competition between China and the United States. It’s as if Australia does not have its own unique interests or it’s own views as an independent sovereign state. This is just false. And worse it needlessly deteriorates relationships.

I see an olive branch to China.

The best case for Australia is clearly the one Morrison’s hopeful rhetoric lays out: that the superpowers will stop forcing binary choices on smaller powers, and international institutions obviate any serious conflict.

However, the speech reveals what happens if that breaks down – shared worldviews don’t create many jobs. Australia’s statement is directed at China, not the United States. It is an assurance to China that while sharing a worldview, values, and economic model with the US, we are not on “Team USA” in any strategic competition.

If, as looks likely, Biden’s administration continues to treat China as a strategic competitor, Australia might soon be asked to repeated again that: “our actions are wrongly seen and interpreted by some only through the lens of the strategic competition between China and the United States.

A Budget Response

I watched the Treasurer’s speech last night for the first time since I was an undergraduate (at our first [and only] “budget party”). Like that party, this post might be a little economics-y.

Wait, we’re actually watching the Budget?

I won’t bother talking through the detail, others far more qualified can do that far better.

I respect the Coalition for putting their qualms about debt aside, I only wish they had spent some of the money differently. Still, putting the specifics aside, I want to share a few broad impressions:

  • Manufacturing is BACK – This is something of an overgeneralisation, but if you went back even a decade, the idea that we would organise industries by anything other than ruthless efficiency was ludicrous. The result was outsourcing and global supply chains.

    From the 1980s on, the advice to the developing world was, if your competitive advantage was services like tourism, then double down on hotels and jet skis. Unfortunately, it turns out that services might not provide as many positive externalities or be as productivity boosting as manufacturing. You’ll notice South Korea or China chose steel and shipbuilding over seaside holiday packages. Other developing economies are now jumping on the bandwagon.

    The revival story of manufacturing is a little different in the Global North. Job losses in certain internationally vulnerable industries created concentrated pockets of anger, then Trump and Brexit. It has not helped that the replacement service sector jobs have often been lower pay (Technically service sector jobs could also be high pay. One reason they are not is because unions today are weak, but service sector workplaces are also probably harder to unionise – one factory with a thousand workers versus 100 supermarkets with 10 workers each.). Before Corona this was creating pressure to “bring back manufacturing.” Even as that was happening, Chinese competition and the need to replace sunset industries was leading the US and the EU to champion manufacturing and industrial policy in a way not seen in decades.

    Covid-19 accelerated this trend by reminding countries there might also be national security reasons for having domestic manufacturing capability.

    The Australian Government’s new $1.5 billion industrial fund cautiously follows this trend. I expect it to continue as governments reinvent (rediscover) industrial policy while studiously avoiding calling it that
Why do they never take off the tie?
  • Are we at the bottom of the supply-side barrel? – A lot of the policy to date has focused on supply. Everything to do with training, apprenticeships, education, or helping people find work hopes that more educated workers and more flexible labour markets will eventually create demand.

    There have been some efforts to target demand. Wage replacement policies like JobKeeper maintain existing sources of consumer demand. New payments for pensioners, the (predictable and grotesque) tax cuts, and new expensing rules are all potential sources of demand, but rely on the private sector choosing to spend/invest the new money. They might choose to sit on it. I know I will. The policies ultimately depend on confidence and uncertainty improving enough for the incentives to kick in. We will have to wait and see what the animal spirits do.

    An alternative could be government more actively directing investment, or even building things itself (like social housing, which has barely increased in 20 years). This direct approach, and government spending more generally, is still viewed with caution despite renewed interest in Keynesian economics. This has roots in several reasons I won’t go into here, except to say some are very questionable (e.g. government spending is self-defeating because infinitely long-sighted people will factor in future tax hikes to pay for it [which never happen] and offset the spending accordingly).

    The Government is increasing its spending on infrastructure, along with the new manufacturing fund. This will definitely help, but the logic of investing in infrastructure is that the private sector would not do it otherwise. However, presumably, the goal now is to get the private sector to do things it would normally do, but is not.

    In my opinion, with QE, we are reaching the limits of supply side economics. If the recovery stutters (and the Treasury’s projections are incredibly optimistic), then governments may actually have to get their hands dirty. I sincerely hope we have a V shaped recovery, because if not, the government will have handed out billions we need.
  • The Left is (still) Fucked – The Coronavirus virus has forced Conservative governments everywhere to close the final distance that separated them from the centre-left. Even as they drone on about how this spending was only possible thanks to years of balanced budgets, they are rolling out positively promiscuous fiscal policies.

    This is only an acceleration of a longer-term trend. Across the west, Conservative parties have realised that if they talk a little louder about workers and health, paper over tax cuts for the wealthy with a few concessions to low-income groups, they can dominate the centre-left’s terrain. The Labor party is being forced into a position where its platform will read: “What they do, but 1.4% more on Health and Education.”

    The environment could be a distinguishing point, but it has yet to have big electoral success and Conservative parties are learning how to talk a good game (we love rivers, recycling, and Koalas), while doing very little (GAS LED RECOVERY). Soon, Conservatives will finish their pivot to the “its too late to do anything now anyway” position, at which point they will be able to go back to openly refusing to do anything. On the environment, China may well save us all.

    The best case scenario now seems to be Biden-esque candidate, which, unless they pull a surprise LBJ, I find rather disappointing.