Thank goodness we’ve finally got someone saying something sensible about Anthony Albanese’s Future Made in Australia. So far, it’s been a phoney war between the old fogeys from the Productivity Commission – all government subsidies are rent-seeking – and the Bring Back Manufacturing Brigade, pushing the notion that making goods is more economically virtuous than providing services and quoting bulldust measures of “economic complexity” to prove it.
The man talking sense – adroitly picking his way through the blind ideology, partisanship and rent-seeking to find the sound economics – is Rod Sims, former chair of the Australian Competition and Consumer Commission and now chair of Professor Ross Garnaut’s brainchild, the Superpower Institute. Sims spoke to the Melbourne Economic Forum last week.
For reasons I’ll explain another day, the Productivity Commission old-timers are right to insist that the basic principles of economics haven’t changed. We must resist the false promise of self-sufficiency and stick to doing the things we’re particularly good at – our “comparative advantage” – which, throughout our history, has included exploiting our “natural endowment” of some of the most valuable deposits of minerals and fossil fuels in the world.
On the other hand, though the basic economic principles haven’t changed, the Back to Manufacturing Brigade is right – or half right – in saying that the circumstances in which the world economy now finds itself have changed radically.
This is not because, in its present period of craziness, the United States has turned protectionist, staging a trade war with China and subsidising various local industries. Others acting contrary to their own best interests – their comparative advantage – is not a sign that we should go crazy too.
No, the big change is the world’s grudging realisation that if we want to stop global warming, we must cease burning fossil fuels and switch to renewables. The move to net zero emissions of greenhouse gases by 2050 will surely be the biggest and fastest structural change the industrialised world has ever experienced.
The implications of this euphemistically named “transition” are huge for every economy, but for ours, they are monumental. Why? Because, as Sims points out, Australia is the world’s largest exporter of coal and gas, combined.
What everyone knows but doesn’t seem to get is that, within a decade or two, our economy will have been hit by a meteor. The world will have stopped buying our fossil fuels. It will have taken a huge chunk of our natural endowment and declared it worthless.
So, our greatest comparative advantage is in the process of ceasing to exist. This is what Albanese lacked the courage to say in his happy-clappy speech about a Future Made in Australia.
This is what the generals busy fighting the last war don’t get. This is why their implication that the government should sit back and see how the market reacts to this sudden drop in our standard of living is bad economics.
What we must do is something we’ve never needed to do before: hunt around in our natural endowment to find something else offering us a new comparative advantage. This is why we’re so heavily indebted to Garnaut for being the first to realise and trumpet the news that, in a decarbonised world, all our sun and wind have suddenly gone from being of little value to hugely valuable.
Australia has much more sunlight than most other countries and as much wind as the best of them. What makes this so valuable is that it’s so expensive to turn renewable energy into a form that can be exported.
Sims demonstrates the value of our new comparative advantage with the example of iron metal. At present, we export iron ore, the metallurgical coal used to reduce the iron ore to iron metal, and both the thermal coal and gas, which can provide the heat to make the iron metal.
We export the ingredients and let others bake the cake because that’s what makes economic sense. In the coming zero-carbon world, however, it will make economic sense to produce green iron in Australia.
Green iron is likely to need green hydrogen in place of the coking coal that turns the ore into metal. However, making green hydrogen requires a massive amount of renewable energy to power the electrolysers that split water into hydrogen and oxygen.
So green iron should be made in Australia because the economics has been turned on its head. If it costs, say, $100 to mine a tonne of metallurgical coal in Australia, you can send it to China for just an extra $5 or $10. But if hydrogen costs $100 to make here in Oz, it will cost at least another $100 to ship it to China.
With hydrogen, you need to turn it into ammonia, at great expense, to be able to ship it, and then you need to turn it back into hydrogen at the other end. This is complex and will involve much leakage.
So renewable energy should be used close to where it’s produced. Sims says all overseas studies he’s seen suggest that Australia is likely to be the cheapest place in the world to make green iron. Those trying to make green iron by importing hydrogen will be uncompetitive.
It should be the same story for green aluminium, green fertiliser, green silicon and green aviation fuel. We will be able to export our masses of surplus renewable energy embedded within those many products.
So, yes, we can have a lot more manufacturing in our future. And the best place for this further processing will be close to the regional sources of sun and wind-produced electricity.
But while green iron-making technology is proven, it’s not yet been done at scale, Sims says. Those who go first will inevitably make mistakes, from which others will learn. Those mistakes will be costly for the first mover but hugely beneficial to those who come after.
In other words, this learning by doing is a “positive externality” – a benefit to other businesses and the community generally for which the first business isn’t rewarded.
This is the hard-headed economic justification for temporary government grants to firms starting out in industries directly related to the exploitation of our new-found comparative advantage.
(The key “negative externality” relevant to the transition to renewable energy is the cost to the environment from the use of fossil fuels to make steel and many other things that the relevant businesses aren’t required to pay for, thus putting renewable energy producers at a price disadvantage – something the former Productivity Commission bosses keep forgetting to mention.)
But, Sims rightly warns, if all the Made in Australia talk means subsiding businesses making solar panels, wind farm components, batteries and electrolysers – in none of which we have a comparative advantage – then there’s no way we’ll become a superpower, and the extra manufacturing jobs will come at the expense of jobs in all other industries. Labor voters and the ACTU take note.
