Does Australian Manufacturing Deserve a Second Chance?

Manufacturing goes beyond creating job opportunities…

Within the realms of universities and schools, it is taught that manufacturing is a sunset industry within Australia because our lack of competitive advantage means the costs outweigh the benefits. The statistics agree with manufacturing going from 28% of GDP in 1960 to 6% of GDP in 2019.

Whilst this may be true for low-skilled manufacturing, there is a potential for Australia to become a market leader in certain areas of complex manufacturing.

Rather than a revival of protectionism over inefficient industries, the argument is for the emergence of high tech, flexible manufacturing firms that can make use of the abundance of natural resources within Australia. For example, Australia has all the necessary components to construct lithium batteries that are growing in demand to support the reliability of renewable energy.

The coronavirus strongly challenged specialisation trade theory and highlighted the ingenuity of our manufacturing industry. The forgotten local manufacturing industry acted as our hero in the face of fractured supply chains reminding us of their importance to the overall economy. Through them, hospitals had gloves and masks, businesses had enough hand sanitiser and we had enough toilet paper. Had the industry been larger, the shortages wouldn’t have been as drastic or protracted as they were. This has even caught the attention of Scott Morrison, who has tasked the Covid 19 Coordination Commission to examine where disrupted supply chains could be replaced by Australian manufacturing.

On a side note, trade tensions between China and Australia have escalated during this Covid period. It should be noted China make up 25% of our manufactured imports, however our two nations political and social views are not necessarily aligned. An expansion of local manufacturing can serve to restore our economic sovereignty, which can be threatened if we depend too much on nations who have conflicting political views to our own.

Hence maybe there is reason to believe that we should make Australia make again!

Australia is a service based economy, we have moved on from manufacturing…

Instead of relishing in any residual nostalgia we may have for our nation’s manufacturing history, we should look to the future shaped by our service industries and the global market.

Firstly, Australia should avoid spreading its bets thinly and focus on our comparative advantage as a services-oriented economy. Since the 1980s, Australia’s economy has progressed substantially as a constellation of “helpers”, “servers” and “professionals”. Australian Business Council statistics demonstrate the quintessential role of services in pumping out an average annual economic growth of 3.4% over two decades, while making up 21.6% of our exports. To stay competitive, we should focus on strengthening our comparative advantage in health and education, rather than reinvigorate an anachronistic manufacturing sector.

Moreover, we should continue to leverage the flexibility and cost-efficiency afforded by global supply chains. That is, if they do it better, why should we ignore this? For example, statistics from an analysis by The Conversation reveal the cost of manufacturing a car in Asia is a quarter of the cost of an Australian-made car. This is unsurprising considering our escalated labour costs and the larger employment sectors of Asian economies. We should mutually benefit from exchanging with emerging economies that enjoy lower labour costs, instead of focusing economic attention on manufacturing sovereignty.

Finally, the huge expenditure needed to incentivise innovation and the re-skilling of a workforce fit to make new products will be more injuriously risky to our economy than beneficial. Australia will inevitably suffer costly growing pains – workers will need to be allocated, skill levels raised, and physical infrastructure built. Furthermore, research by McKinsey and Company points to the threat of a US monopoly on innovation on Australia’s international competitiveness. In essence, Australia should avoid playing the losing game, the shift needed to pump out large scale manufactured goods remains naively idealistic.

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