By Peter Roberts
That federal government’s economic adviser the Productivity Commission has a new spring in its step and new targets of its quest for an economically pure Australia – defence procurement policies and local content rules more generally, especially those applied by the states.
The PC’s 50th Trade and Assistance Review (TAR) just released frets about these twin threats to its mantra of identifying those areas of world trade where Australia does well without any sort of industry intervention.
Of course this idea that Australia should pursue its comparative advantages rather than use policy to create new competitive ones essentially boils down to an Australia exporting undifferentiated raw materials.
In his introduction to the TAR PC Deputy Chair Alex Robson acknowledged that local content rules were often motivated by a desire to generate employment in particular industries, or to advance a broader range of cultural, strategic, or security objectives.
Robson said: “While these policies may achieve certain short-run objectives, they can reduce overall income levels when they redirect resources away from sectors in which a nation enjoys a comparative advantage.”
Just imagine the horror of a government advancing ‘cultural, strategic, or security objectives’.
Robson did welcome the elimination by the government of 457 nuisance tariffs which continues trade liberalisation of the last few decades.
But he warned of new challenges, with a return to trade protection and industry policy among the major economies, including in Australia.
This is a reference to the US Inflation Reduction Act and out Future Made in Australia response.
Robson said: “There are risks in this approach.
“While the current suite of industry policies has been aimed at a range of policy goals – indirectly pricing externalities, building supply chain resilience, providing for structural adjustment for areas particularly exposed to the net zero transition, positioning countries to benefit from the net zero transition, and enabling the building of industries in which individual countries might have reason to expect to enjoy an enduring comparative advantage – if poorly designed, they could act as a form of trade-protectionism.”
The TAR report outlines the areas where federal and state governments have some sort of local content rules.
While it didn’t overtly criticise defence procurement rules, you can see that this will be a major area of concern for the PC in future.
The TAR said: “Commonwealth Defence Procurement Rules and government procurement rules (like the Commonwealth Procurement Rules) can effectively require that government departments preference a local supplier.
“For instance, under the Defence Industry Procurement rules consideration must be put towards how certain proposals contribute to broader Australian defence industry capabilities.
“The Australian Industry Capability and Australian Industry Participation rules also require certain programmes to have a plan to utilise domestic industry.
“These requirements can benefit domestic industry, insofar as being a domestic provider notably increases the likelihood of a successful tender.”
The bottom line of the TAR is of course that the goals of industry mentioned above are not worth pursuing.
As the TAR said: “After all, a $100 subsidy for domestic producers can have the same protectionist effect as a $100 tariff imposed on their foreign competitors.
“Because alternative policies can achieve many of the goals of industry policy, it is important that the goals of each policy be well articulated and subject to rigorous, publicly available cost-benefit analysis.
“It is also vital for off-ramps to be incorporated into policy design, to allow a timely exit if policies fail to achieve their stated goals.”
Image: Productivity Commission