Treasurer Jim Chalmers speaking at the Lowy Institute, 1 May 2024. Lowy Institute/Adam Hollingworth)

Treasurer Jim Chalmers speaking on economic security at the Lowy Institute, 1 May 2024. Lowy Institute/Adam Hollingworth)

Australian industrial policy more liberal and less distortionary than most

Australia followed the crowd as a new wave of industrial policies swept the globe. Six months on, it is useful to hold the government to account.

Robert Walker

2 December 20244 min read

“A future made in Australia, doesn’t mean a future made alone,” declared Treasurer Jim Chalmers in a May speech to the Lowy Institute, in a stout defence of the government’s plan to introduce a flagship industrial policy program. The Future Made in Australia Act (FMIA) would be the country’s response to growing climate and economic security challenges as it joined the pivot towards industrial policy by the major economies of the world.

One could have easily written this rhetoric off as lip-service. Australia was simply following the crowd as a new wave of industrial policies swept the global economy. Six months on, it is useful to hold the government to account. Newly released data from Global Trade Alert, which tracks global industrial policies in the world’s major and middle economies, provides clarity on the government’s claims.

One thing is clear: Australia’s industrial policy looks more measured than most.

Australia is the seventh most frequent user of industrial policy globally (see chart below), yet spent only about US$18 billion on subsidies in 2023, ranking as the eleventh largest spender. Subsidies were only equivalent to 1.02% of GDP, making Australia the twenty-third largest spender relative to the size of its economy.

As the chart shows, roughly half of total industrial policy interventions by Australia are classified by Global Trade Alert as “liberalising”. These are interventions that open markets to trade, whilst “distorting” interventions preference domestic actors. India, Brazil, ASEAN+6 countries and Argentina also have significant shares of liberalising policies, and although this might be expected in less open economies (because those countries have more policies to liberalise), Australia is still notably more liberalising than the major economies. In fact, Australia appears to be the only advanced, open economy to be engaging heavily in liberalising industrial policy.

The vast majority of Australia's liberalising interventions are import tariff changes conducted under the Tariff Concession System. Basically, if you are a manufacturer and need something that no Australian producer can provide, the government will waive import tariffs (which are already low, at 5%) as a form of support.

This is not a new policy. Many tariff concession interventions have been in place for years. The original system was set up in 1992. But the number of concessions provided to domestic manufacturers has skyrocketed. Only 36 liberalising changes to tariffs were recorded between January 2017 and May 2022, when the Albanese government was elected. There have been 508 since then. The government has clearly identified liberalising industrial policy as a useful form of support to domestic manufacturers.

The new data suggests a tension between openness and the ambitions of market-shaping industrial policy with which Australia will continue to grapple.

So, Australia’s industrial policy openness is not driven by the new flagship FMIA program. The government has committed to spending US$15 billion (A$22.7 billion) in subsidies under FMIA, which will be overwhelmingly classified as distortive. Yet spending has not been overzealous so far. In fact, Australian subsidy spending (announced and implemented) actually declined in the first three quarters of 2024 compared with the first three quarters of 2023.

The new data also provides estimates of the total value of trade impacted by industrial policy interventions. For Australia, the total value of trade impacted since 2017 by liberalising interventions amounted to US$213 billion compared to US$518 billion affected by distorting policies. So, for every dollar of trade Australia liberalised, it has distorted more than two. Since the introduction of FMIA, the ratio has fallen to just 1.6. This is counter to the expectation that the FMIA would push Australia’s economic policy to become more distortive.

Looking globally, China distorted US$82 trillion worth of trade while liberalising only US$3 trillion. The EU distorted US$9 trillion and only liberalised US$1 trillion. The US distorted US$38 trillion and only liberalised US$1 trillion. Subsidies in China, the EU and US totalled US$155 billion, US$736 billion, and US$293 billion respectively. Australian industrial policy appears restrained by contrast. Both subsidy spending and the relevant trade impacts are relatively minor when compared to the major economies.

In fact, when looking at Australian subsidy spending in 2023, the majority was spent through the Clean Energy Finance Corporation and the Australian Renewable Energy Agency. Both are key to financing the energy transition in Australia, arguably an essential public good and worth targeting with subsidies.

The new data suggests a tension between openness and the ambitions of market-shaping industrial policy with which Australia will continue to grapple.

Australia is walking a fine line, attempting to balance the needs of an open trading economy while engaging in industrial policy to shape its economy. However, whether this continues is certainly not assured. The government should take heed of how industrial policy programs have tended to expand rapidly in scope, cost and mission elsewhere, and only seek interventions where necessary.

So far at least, Australia appears to be committed to building a future, not alone, but with others.