Insight

Shaping the future: the role of Government in revitalising Australia’s onshore manufacturing

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The Albanese Government ascended to power with a commitment to build sovereign manufacturing capability in Australia.
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The strategy for re-shoring manufacturing revolves around seven priority industry sectors: renewables and low emission technologies, medical science, transport, value-add in agriculture, forestry and fisheries, value-add in resources, defence capabilities, and enabling technologies. 

To date, two key industry support mechanisms have been announced: the Industry Growth Program (IGP), and the National Reconstruction Fund (NRF). The aim of these programs is to encourage private sector investment in catalytic projects necessary for building the new onshore capabilities. The clear focus being on Australia’s transition to clean energy, its pathway to net-zero emissions, and supporting positioning as a global renewable energy superpower.

However, the impact of these supports on achieving these objectives is yet to be significantly impactful. The IGP grants stream, only opened on 2 May 2024, and many businesses report hesitancy around NRF investment due to the ambiguity surrounding the details of investment and loan terms.

Charting the course: the ‘Future Made in Australia Act’ 

The recently announced ‘Future Made in Australia Act’ underscores the Government’s commitment to the manufacturing re-shoring objective, demonstrating a willingness to adopt an interventionist approach to safeguard and build our sovereign capabilities, ensure our competitiveness with neighbouring countries, and allies and guard against growing geo-political tensions.

Announced by Prime Minister Anthony Albanese at the Queensland Press Club in mid-April, the proposed ‘Future Made in Australia’ Act aims to bolster Australian industry development, mirroring strategies observed in countries like the United States, Japan, and Canada. This aligns with a global trend, as research published by the International Monetary Fund in April catalogued more than 2,500 industry policy interventions worldwide in 2023 – a threefold increase since 2019, predominantly in the world’s wealthiest, most advanced economies.

The ‘Future Made in Australia Act’ is set to provide a governing framework to coordinate government support for industry. This includes the $15bn National Reconstruction Fund, $2bn Hydrogen Headstart fund, $1bn Solar Sunshot fund, and other measures and incentives to be unveiled in the upcoming May Budget. The Act will necessitate close collaboration between industry and research and education institutions, including CSIRO.

We anticipate the upcoming Federal Budget will provide more details on the Act, with speculation including the introduction of new tax incentives, grants, and direct investment. A government taskforce has already identified four priority sectors: critical minerals, energy generation and storage, renewable hydrogen, and green steel.

The Act is also expected to introduce regulatory changes to stimulate investment, including streamlining the Foreign Investment Review Board rules. The government has already announced plans to fast-track ‘trusted investors’, such as pension funds.

Another key objective of this initiative is to counter the outflow of Australian intellectual property and expertise to more supportive international markets, such as the US through the IRA – established in 2022. A concurrent objective is also to bolster the complexity of Australia’s manufacturing sector, which, according to the Harvard Atlas of Economic Complexity, ranks Australia 93rd out of 133 countries in terms of the current state of a country’s productive knowledge, placing it alongside Pakistan and Uganda.

The role of trade and tariffs

As Australia fortifies its domestic manufacturing capabilities, it’s crucial for the Federal Government to maintain a balanced approach in reviewing trade policies and consider how these policies can best work alongside the Future Made in Australia Act. Australia is party to numerous bilateral and multilateral free trade agreements and, as a signatory to the World Trade Organisation agreement, it must ensure that the enhancement of onshore capability does not infringe upon any existing agreements.

The question arises: is it time to revisit the Customs Act 1901 (Cth) and consider amendments that would empower the government to take appropriate action, including tariff and non-tariff-based retaliation, to address unfair trade practices or when sovereign capabilities are under threat?

Such amendments could mirror the China 301 tariffs introduced by the USA, or the Carbon Border Adjustments Mechanism (CBAM) Tariffs implemented by the EU and UK, which apply to all non-EU imports regardless of whether a Free Trade Agreement (FTA) is in place. More recently, with the EU and USA introducing tariffs on Chinese Electric Vehicles (EVs), these markets might turn to Australia for the supply of goods for EV production. This could protect our domestic industry, foster new trading partnerships with Australia, and create an opportunity for Australia to specialise in EV batteries.

Strategically implemented tariffs and CBAMs can shape investment decisions. By levying tariffs on imported goods, governments can incentivise domestic manufacturers to produce locally, potentially encouraging investment in industries that were previously import-dependent. Tariffs can also shield domestic industries from foreign competition, creating a stable and protected market that may attract investment.

The mechanisms introduced by the USA and EU aim to stimulate domestic manufacturing capabilities while also reducing carbon emissions in supply chains. While additional tariffs and CBAMs could potentially open up new export markets, it’s important to consider whether such tariffs could impact existing positive relationships with our key trading partners.

Navigating the future: balancing intervention and market forces in Australian manufacturing

The government’s dedication to bolstering Australia’s sovereign manufacturing capabilities through continuous and future investments is clear. However, the challenge of establishing the domestic value chains necessary for self-sufficient manufacturing in the targeted sectors is significant.

The questions that linger are: Will the pace of support deployment and the nature and amount of incentives be adequate to hasten the transition and achieve the set objectives? Is the interventionist approach the right path, or should we rely on the free market to generate the necessary competition?

Furthermore, with revised inflationary outlooks, the impact of this policy on inflation and the possibility of impending cash rate increases also warrant consideration.

As Australia navigates its way towards a future made domestically, these questions will guide discourse. The answers will determine the success of the ‘Future Made in Australia Act’ and its role in securing Australia’s place as a global manufacturing powerhouse.