A Future Made In Australia will fail if we don’t use “nuisance tariffs” to protect, and generate purchase orders using public procurement policies

By Michael Buchanan and Prof. Renu Agarwal

A recent Australian Financial Review article on the demise of Energy Renaissance shows domestic manufacturing’s commercial success requires purchase orders. Initiatives such as the government’s Future Made in Australia won’t have economic impact on a grants program alone – they need subsequent protection of nascent domestic capability and complimentary encouragement of demand. 

Over the years, there have been multiple reports recommending how to achieve economic impact by supporting SMEs, innovation and manufacturing, the latest of which is Future Made In Australia. These all follow the now familiar commercialisation process, which has been globally standardised as the Technology Readiness Levels, showing concepts progressing from development through to commercial success. This includes crossing the feared “valley of death” where grants and funding decline as production ramp costs grow and sales revenue is only beginning. 

The case study of Energy Renaissance clearly shows viability of a business depends on a growing order book, not only to transition from grant revenue to sales revenue, but also to maintain investor confidence that orders will convert to sales revenue, to justify additional tranches of investment funding.

Government economic initiatives don’t have complimentary focus on public procurement policies to improve SME order books from public agency requests for quote and tender, after economic initiatives’ programs of public grants investment. The initial grants revenue needs to be followed by policies encouraging orders and subsequent sales revenue to achieve the desired economic impact. An example of this is the complimentary approach taken by America’s Small Business Administration. Not only does it have “America’s Seed Fund” of grants to develop products, but also both procurement of products produced by the Seed Fund grants, and more general automatic and exclusive SME set asides for the multi-billion American federal contracting marketplace.

How do we “make sure” domestic businesses and the economy benefit from our globally significant Australian sun and wind natural resources? 

Isn’t intervention to put a “finger on the scales”, making sure domestic businesses create the desired economic impact, against free trade rules?

After all, these Australian domestic manufacturers are competing in a “level playing field” governed by WTO open and fair trade, against products imported from countries also rigorously adhering “letter and spirit” to WTO rules? Or do other countries take a more commercially sophisticated approach (perhaps more professional?), and rigorously adhere to the letter of the law only? 

It is instructive to read recent WTO trade review summaries of Australia and China, the AFR article’s named source country of competing batteries. 

The Australian report refers to the 5 per cent import tariffs on nominated manufactured goods as “nuisance tariffs” being removed, while the China report refers to domestic industries benefiting from an average tariff of 7 per cent, quotas, licensing, plus provincial local and departmental licensing requirements.

The Australian trade policy review names industry support such as Future Made In Australia Fund (transparently available on the public website here), while the WTO China trade policy review states:

“23.  China continued to provide financial support and other incentives to different sectors and industries during the review period….The two notifications submitted to the WTO during the review period and the replies provided by China do not enable the Secretariat to have a clear overall picture of China's support programmes. In particular, the Secretariat was not able to gain deeper insight into the levels of financial support for certain highly traded sectors, such as aluminium, electric vehicles, glass, shipbuilding, semiconductors, or steel.”

After praising China for the many benefits from its participation in the WTO, there was the following in the concluding remarks by the Chairperson

“Many Members reiterated their demand for China to increase transparency in its state support framework. Considerable scepticism remained among Members about the thoroughness and overall quality of China's subsidy notifications. In addition to the lack of transparency, many Members believed that China's subsidies distorted global markets and promoted overcapacity. Some Members urged China to join other major economies in discussions on industrial policies to help mitigate their possible negative global impacts.”

The Australia Trade Review concluding remarks by the WTO Chairperson were far more effusive in praise – following is a typical paragraph:

There was unwavering praise by Members for the role played by Australia in the multilateral trading system including participation in all major areas of WTO work, taking on leadership roles…..Australia clearly demonstrated its commitment to open and rules-based trade, with the WTO at the core.

It is clear both approaches, Australia’s based on “spirit and letter” adherence, and China’s based on adherence to the “letter” of trade law, are both permitted by the WTO. 

The economic orthodoxy of open and fair competition is a long-term ideal, rather than Australia’s trading situation in the current, short and medium terms. 

If Australia is to successfully grow “A future Made in Australia”, while it cannot compete against policies of far greater support subsidies, it needs to quickly explore other approaches to support its grants investments in nascent manufacturers; they need orders for these economic initiatives to be successful. 

There are two main policy areas mentioned in the article that can assist nascent Australian manufacturers, such as those of batteries.

The WTO permits a 5 per cent tariff to protect domestic manufacturers such as Energy Renaissance. Yet when battery importers asked for its removal, Australia agreed to remove this minimal protection of the domestic battery manufacturing (NOTE: Theoretically, if Energy Renaissance’s margin was 5 per cent, a tariff on same priced import would double ER’s margin – despite the tariff’s “nuisance” value.) Shouldn’t this permitted tariff protection be part of Australian economic initiatives, just the same as the initial grants investment of public funds?

The second complimentary policy support is to generate purchase orders with public procurement policies, preferencing domestically manufactured products developed under the initial grants of the economic initiatives. Having some orders from public procurements helps sales-based revenue, establishes credibility and orders in the marketplace with private and public companies, and reassures investors. Shouldn’t economic initiatives include not only the initial grants, but also the subsequent order support from procurement policies? 

Both protective “nuisance tariffs” and order-supportive procurement policies are needed to compliment grants programs under economic initiatives such as Future Made in Australia, to achieve the desired economic impacts and benefits.

Picture: Michael Buchanan

Further reading

Computer/information services and the path to a Future Made in Australia

Future Made in Australia tax breaks introduced

70 economists back Future made in Australia, blast Productivity Commission

Calling out attacks on a Future Made in Australia

Withdrawal of major investor, subsequent “cash crisis” cited in Energy Renaissance’s collapse

Energy Renaissance, Australia’s first lithium battery manufacturer, goes into administration