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Economic diplomacy: Budgeting for deglobalisation

Keeping up with the worldwide shift to industry policy is stretching boundaries of both economics and diplomacy.

DFAT has sought to make itself more relevant to domestic policy making in recent years as its funding has been constrained (Steven Trask/AFP via Getty Images)
DFAT has sought to make itself more relevant to domestic policy making in recent years as its funding has been constrained (Steven Trask/AFP via Getty Images)

Moving on

There has been quite a movement in Australia in recent times towards better coordination of the three main arms of international relations policy – defence, development aid, and diplomacy – to achieve national objectives.

It was underlined last year when the Strategic Defence Review suggested that the two less well funded latter parts of the triarchy deserved more support. And then the Foreign Minister enthusiastically talked up “investing in all elements of our statecraft including diplomatic power, trade and development.”

But that neat alliteration of the 3Ds doesn’t quite cut the mustard anymore in an era of deglobalisation and geo-economic fragmentation, as this week’s latest budget made clear in both language and largesse about the rise of economic security as an international relations priority.

The joint statement by the ministers for Foreign Affairs, Trade, and International Development made no reference to old world statecraft instead focusing on investing in “all elements of national power” and how “international trade and investment is critical to the Australian economy”. Remarkably there was no reference at all to development aid which consumes the lion’s share of the Department of Foreign Affairs and Trade (DFAT) budget allocation and is actually up slightly more than might have been expected from last year’s forward estimates.

While economic security might be the international relations theme of the moment, the budget also quietly sets up a revealing hierarchy of public diplomacy priorities.

It is not until the budget’s statement of risks that the expanded boundaries of what might be loosely called foreign policy in an era of economic sovereignty and supply chain resilience becomes clear. DFAT emerges as the responsible department, from a budget perspective, for the controversial government decision to pick a winner two weeks ago in the global race to develop Quantum computing.

Perhaps in the discreet way of a department which houses an intelligence service, the DFAT statement of risks says that the Export Finance Australia investment in PsiQuantum with loans and investments is “commercial-in-confidence” and “not for publication”. However, earlier in the more enthusiastic discussion of the government’s Future Made in Australia program in the same budget paper, the Quantum investment is listed as $466 million.

So, in the new post 3D era, building a computing capability in Brisbane that few people can even explain is DFAT’s second biggest financial risk in the world after helping Telstra buy a mobile phone service in the Pacific two years ago.

Australia’s baby BRI

The Export Finance Australia role in funding the promised first commercial scale Quantum computing project has only underlined the rise and rise of this once obscure agency.

Not only does the erstwhile Export Finance Insurance Corporation take responsibility for the biggest initiative from the March ASEAN-Australia Summit – the $2 billion Southeast Asia Investment Finance Facility (SEAIFF) – in this budget, but it also gets a new role in financing projects under the Future Made in Australia initiative.

DFAT has sought to make itself more relevant to domestic policy making in recent years as its funding has been constrained. But in a classic case of the tail wagging the dog, its subsidiary agency has been prospering as a financier of priorities from critical minerals development to defence exports, in addition to traditional export insurance. That is all on top of its emerging role as a de facto development finance institution and Australian bulwark against China’s Belt and Road Initiative in the Pacific.

The budget papers underline this rise and growing domestic policy relevance more starkly than ever saying EFA’s mandate will be expanded “to provide public support for projects where public investment can strengthen the alignment of economic incentives with Australia’s national interests and incentive private investment at scale.”

The new role in boosting economic security by expanding the use of EFA’s National Interest Account is still a work in progress but could come to rival the agency’s existing functions given the spending under the new industry policy. For example, and while it is unclear exactly where all the money is coming from, the government’s latest commitments to domestic production of solar panels, batteries and new computing already rival the size of EFA’s still unused Southeast Asian investment promotion fund.

Treasurer Jim Chalmers addressing the Press Club on 15 May (@AlboMP/X)
Treasurer Jim Chalmers addressing the Press Club on 15 May (@AlboMP/X)

The new Labor RBO

When the Biden administration’s Inflation Reduction Act and associated industry policies are forecast to cost as much as a trillion dollars over time, the $23 billion headline figure for Australia’s core industry policy response in the budget looks comparatively modest.

This is only reinforced by the way the biggest share of spending will go to tax credits with a 2039 cut-off date for producing commodities where Australia has a comparative advantage in areas such as green hydrogen and critical minerals, in contrast to the more controversial upfront subsidies for selected future industries such as batteries.

But the Treasury discussion paper, released separately from the actual budget, underlines how Australia is making a watershed shift towards a more interventionist industry policy in response to the global competition between the United States and China to dominate new industries. It says:

Australia’s economic prosperity is linked to the fortunes of the global economy, which is becoming increasingly fragmented. Strengthening critical global and domestic supply chains, including in some cases through a higher degree of domestic capability, will help to respond to these changes and improve our long-term economic security.

But while the analysis in the paper highlights the Chinese dominance of many energy-related new technologies, it does not characterise this dominance and the industry policy responses in other countries, led by the United States, as necessarily negative for Australia. Instead, it argues that: “It is likely these subsidies will lead to lower geographic concentration for specific technology in the future, and Australian consumers will benefit from any improvement in supply chain diversity and competition, subsidised by international taxpayers.”

Despite all the election-oriented rhetoric and budget spending, Australia only appears to be preparing for a modest sort of deglobalisation.

Rugby rox, China matters

While economic security might be the international relations theme of the moment, the budget also quietly sets up a revealing hierarchy of public diplomacy priorities.

The gradual reconstruction of DFAT’s foundations, councils and institutes into new more focused “centres” cranks up with the creation of the new Centre of Australia-ASEAN Relations announced at the March Summit, which joins the Centre for Australia-India Relations and the National Foundation for Australia-China Relations.

The ASEAN Centre gets $23.6 million* over four years overtaking the Indian Centre ($16 million) which has been promoted as a key part of the new engagement with India. Meanwhile the China Foundation gets $29.9 million despite both the ASEAN region and India being talked up as more important security and possibly future economic interlocutors.

And it is striking that amid mixed messages from the government on future China economic relations with a tougher foreign investment regime but a softer approach to wind turbines imports, the China market still matters. So, the budget has a new program to help agriculture exporters get back into the country after the export restraints and extended funding for Chinese group tourism – just when Qantas has cut its direct flights to China due to poor patronage.

However, rugby still rules in soft diplomacy. Just the non-official development aid part of boosting sports ties in the Pacific, including the possibility of a PNG rugby team playing in the Australian domestic competition, will get $65 million over four years. That is four times the value of public diplomacy directed at 1.4 billion Indians and one million Indian background Australians.

* This figure was corrected following publication from $24.6 million.

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