ANTHONY BUBALO:
Andrew is a triathlete, he's written a gazillion books. He has his own podcast. I also a few years ago helped edit one of his books, Choosing Openness. And editing his books is like taking a tour of his brain. And touring Andrew’s brain is a bit like, just imagine a Saturday afternoon in your favourite bookshops with enormous amounts of information, wonderful kinds of stories and anecdotes. And so it is a real pleasure. Just to have Andrew here, but to sit with him and have a fireside chat – we don’t have a fireside but we will have a chat.
ANDREW LEIGH:
Thank you Anthony. That was really generous. I'm glad we have a waterside chat rather than rather than a fireside chat here, sittings next to these wonderful Bloomberg aquariums.
BUBALO:
So I want you to put your, one of your former hats on. You’re a former professor of economics at the Australian National University. Because we wanted to talk today about openness, globalisation and open borders and the value of those things. So let's start with why is openness, important for posterity, not just for the world, but also for Australia?
LEIGH:
So most of us in this room, don't cut our own hair, fix our own cars, or grow our own food. We rely on the principle of comparative advantage to focus on the things we do well, and we buy the other things in from people in society. And that principle that holds up for individuals in a modern economy holds up to for medium sized countries in a global economy. If you're a country of a billion people, you can hope to do everything. If you're a country that comprises 0.3 per cent of the global population, then you can't. You need to specialize in what you do best. Trade has been one of the central drivers of prosperity and, if you look at Australian history, the moments on which we have been fastest growing are the moments where you've been most open. At the end of the end of the 19th century, and the end of the 20th century the Australian economy performed much better than we did in that closed period of the interwar era.
BUBALO:
So now everyone's talking about de-risking and de-coupling. You know from high fences around technology, reshoring industry policy, all those things? Is that just talk or are we actually seeing that starting to happen?
LEIGH:
Now, it's certainly a risk. I mean, it's been a risk for a while with the rise of populism, which has tapped into a deep-seated fear of foreigners. Don't forget that for the vast majority of human history, we lived in groups of about 150 where being frightened or ferocious towards foreigners was a rational strategy. It's only with the rise of modern cities, that engagement with people who aren't similar to us has turned out to be really good economically. And that's that populist trend has also tapped into other challenges that have gone on in the global economy. We've seen the European Union adjusting state aid rules. The ‘Made in China’ policy, the ‘Make in India’ policy and the US Inflation Reduction Act are all reflecting a desire to move away to some degree from the open rules-based international order. And again, that trend is most dangerous to a medium sized economy. An economy of hundreds of millions of people or billions of people can afford to do much more onshore. An economy like Australia's is most at threat from a world which splits and becomes hostile towards the open trading regime that's been a key source of our prosperity.
BUBALO:
Is this something about the way we live in the modern era. What’s been seen as one of the most important speeches by a US official on the global economy was delivered by the National Security Adviser by Jake Sullivan, and the speech focused very much on promoting national economic resilience, protecting critical technology. We get this ‘high fences’ terminology. What does that mean, for the global economy? And what does it mean for Australia?
LEIGH:
There’s a couple of things going on. One is around the subsidizing of manufacturing and the return of industrial policy, and another is around securing critical mineral supply chains. I think it's really important for us to bear in mind as we go through the biggest energy transition in Australian history, that the climate doesn't care who builds batteries. I drive a Chinese-made Tesla, that is a vehicle which would have been significantly more expensive if China was unable to get access to the raw materials in order to build that vehicle. As a result of driving an electric vehicle, my household’s emissions are lower than they would otherwise be.
Critical minerals are heavily traded. The United States imports 80 per cent of critical minerals, the European Union imports 98 per cent of critical minerals. And I worry very much Anthony about a world in which we cut off the supply chains for critical minerals, because that's only going to make the clean tech transition more expensive. So I can understand why Indonesia banned exports of nickel ore in 2014. But a consequence of that has been to make it more challenging for other countries to get the reliable supply chains. Reliability is really key here, it was a point that Helen [Stylanou] made earlier. If you're making long term investments, you need the confidence that you're going to be able to secure those supply chains. And I worry in recent years that some of the developments that we've seen from both developed and developing countries, imperil the reliability that firms need to make these long term clean tech investments which are critical to decarbonising the planet.
BUBALO:
There is a bit of a gap between the rhetoric and the reality, I mean obviously, one of the reasons some of the key reasons we're talking about the international trading environment and the technology is China. This morning, we heard that lithium, is a critical technology, our exports to China are going to hit record levels this year. So is there a bit of a gap? I mean, there's a lot of talk. But is it not actually translating to the businesses that’s going on regardless?
LEIGH:
Australia's prosperity has been built in large part on our economic engagement with China. It is the chief destination for our exports, the chief source of our imports. It was before the pandemic the major source of international tourists and international students. Australia is enmeshed with the Chinese economy in the same way that we were enmeshed with the UK economy for the first half of the 20th century, and the US economy for the second half of the 20th century. And we have an interest in ensuring that China plays a part in decarbonisation. China's access to materials that allow them to build low cost batteries, low cost solar panels, low cost electric vehicles, ensures that we get those technologies, but also that other countries get access to those technologies as well. It is a good thing for the Great Barrier Reef that fewer Chinese citizens will be driving petrol vehicle cars in a decade’s time and more will be driving electric vehicles. Again, not only does the climate not care who builds batteries, the climate doesn't care where the emissions are being produced.
BUBALO:
Another issue and you mentioned it earlier, that was that manufacturing policy suddenly seems to be back on the agenda in Western economies, highlighted in particular by the massive US Inflation Reduction Act. What does that mean for Australia? How do we compete with bigger economies that have much bigger levers to pull when it comes with the policy? And what does it mean for things like, you know, the global competition for talent?
LEIGH: The inflation Reduction Act is a huge challenge for many of us economists. Albert [Park] and I were talking about this when we met in Canberra recently. One of the big shifts is in seeing the growth of manufacturing as being essential to a high functioning economy. And there are certainly good manufacturing jobs to be had. But I think we want to be careful about the misplaced nostalgia because you can simply bring back the economy of the 1950s. Increasingly now factories are jobless and where they have workers they are highly skilled workers because the machines are incredibly expensive. And the old story that manufacturing jobs always paid better than services jobs has now ceased to be true. So in the United States manufacturing jobs pay 5% less on average than services jobs.
The story that you've got to have a strong manufacturing sector also doesn't hold true as a as a rule. Yes, some countries have prospered through manufacturing, think Germany. Other countries like Australia with smaller manufacturing sectors have also prospered as well. If you plot across the last 30 years OECD countries’ growth versus the size of the manufacturing sector, there's no relationship. So there's paths to prosperity through manufacturing, there's paths to prosperity outside manufacturing. And we need to be very careful about the notion that manufacturing is the only way of generating good jobs, or indeed that in the United States context, that there is some possibility of a return to the car manufacturing structure of Detroit to the 1950s. That's just not how cars are made these days. Tesla factories in the United States have very, very few workers. And that's increasingly the case for many other forms of manufacturing.
BUBALO:
What about migration policies? What more can we offer?
LEIGH:
Migration has always been critical to Australian prosperity. One of the things we've done really well – as you know, better than anyone in the room, Anthony – is ensuring that our immigration system is tailored to the macroeconomy. So as Australian unemployment has gone up, at times, we've scaled back on migration, and that's ensured that public support for migration is much stronger here than it is in Europe, for example. We’re looking at migration settings to ensure we've got them right. To ensure that the point system is kept up to date, to make sure that people aren't bringing in workers who would otherwise supplant Australian workers, but instead bringing in workers who are going to be creating new opportunities for Australians. Those settings haven't been well recalibrated post-pandemic and a big task for Clare O'Neil and Andrew Giles, as Home Affairs and Immigration Ministers respectively, is to try is to ensure we get that right. The United States has an economy, which is a magnet for talent, you see a lot of Silicon Valley firms started by migrants. But its migration settings haven't always been as good as many American businesses would like them to be.
BUBALO:
Geopolitics is not the only reason why the world seems to be stepping back from globalization, COVID is clearing having an impact, but also, there's that sense that there are states in the system, but also segments of our populations that do not see the benefits. Whether that is just a perception, whether it's true, you can have an argument about it. But clearly, there's that sense that this globalisation thing happened and it didn't improve my life. We’re talking about segments of our population is Australia, Europe, in the US, but also states in the global south. So what's the argument to be made to those states and to those segments of our populations, who seem to have lost faith in a worldwide market, or domestic context?
LEIGH:
In a domestic context, I'm in favour of openness because I'm a social democrat. I believe we want to raise living standards. Openness is a great way of doing that. I'm also a social democrat, because I believe in openness, I don't think you can support an open economy without recognizing that that has distributional consequences. And it's really important that the gains are well shared. When the Whitlam government cut all tariffs by 25% in 1973, they were also aware of the need to support workers who were affected by those changes. The steel plan, the car plan, the textile plan pursued under the Hawke government as tariffs came down were a reflection of that philosophy.
But internationally, the story for the countries in our region would be to look at the Tiger economies, look at the Tiger Cub economies. The story of countries in our region that have done best is that they've prospered most at times of openness; when they’ve pursued engagement with the region. The increasing engagement through the Asia Pacific region is one of the notable trends in recent decades. It's important that Australia is a part of that.
It's great to have Richard [Yetsenga] here. ANZ has been one of our best financial institutions when it's coming to engaging with the region. We need more Australian firms doing that outreach and recognising the benefits of engaging with the region. Nicholas Moore’s Southeast Asia Economic Strategy is part of thinking through all of the dimensions of that. What does it mean for language skills? What does it mean for visas? What does it mean for what our diplomats are doing offshore? How do we engage in a full court press to ensure that we get the gains from Asia prospering, but also that we engage there? I'll be attending the OECD meetings in Vietnam in a couple of weeks. One of the reasons that I'm going over there is to support Indonesia's bid to be a full member of the OECD, which I think would be great for Indonesia, and great for the OECD.
BUBALO:
All of this is related also to a concept that we throw around a lot – the rules-based order. What rules? Whose rules? There's lots of discussion about all these rules. It's a term that's been appropriated by, you know, the political, the geostrategic community, the opportunity scholars, even though it actually has its origins amongst international economists. You can have it back actually. And inevitably, when we talk about the rules-based order, China comes up, but it's not just China that’s unhappy with the rules. Do you think the rules-based order need to change? If we preserve the benefits that it does provide?
LEIGH:
Absolutely. If you think about the issues we were discussing before around access to critical minerals, supply chains and ensuring that we aren't breaking the world into pockets of supply chains. You need a set of rules to fall back on as to when it's appropriate to say constrain exports. CPTPP, doesn't provide that. RCEP doesn't provide that. Ideally, that would be provided by the World Trade Organisation's dispute resolution mechanism. But, almost a decade ago, now, the Trump administration ceased supporting judges to be appointed to the top WTO dispute resolution body. That system is effectively now broken, because the Biden administration has maintained that policy.
That's something that a big country can live with. But a medium sized economy suffers greatly when the rules based international order breaks down. So for me, it would be about how do we revitalize the World Trade Organisation, not just so it's back where it was, but so it's operating even better, and ensuring that we get that resilience in the system. The ability of firms to ensure that they have strong supply chains, and the ability of firms to also be able to adapt if the technology changes. Sure, lithium batteries are doing very well now, what if sodium suddenly comes on stream? You don't want a set of rules and norms set up within countries based on a single technology, you want countries to be able to import and export as the technology and the economy shifts, and WTO reforms should be at the heart of that.
BUBALO:
I mean, coming back to China and the US, whether it's rhetoric or reality. Again, a consistent narrative, among companies, not just American companies, but also European companies are now weighing up whether it's worth de-coupling or de-risking the use of distance manufacturing. How do you decouple from a country's economy when they make up such a large percentage of the global economy. Is there a compromise there? Is there a sensible distance?
LEIGH:
Yes, it's hard to imagine what it would be like to walk through a US Walmart which imported nothing from China. For all of the rhetoric there are still many millions of ‘Made in China’ stickers throughout American homes as there are for Australian homes. And that has brought prosperity to both countries. It's been a reason why the pay packets for American workers have gone further. It's been a reason why hundreds of millions of Chinese have found their way out of poverty. That engagement is in the interests of both those countries. It's also in the interest of the world. And any country which is cut off from world trade is a country which has lower incentives to behave in a positive, constructive way in the rules based international order.
We’re speaking the day after Cheng Lei was released from China, I think that's a terrific development. And we have seen the removal of some of the trade barriers that affected Australian exports into China. At the same time, the Australian Government's maintained our stance on a range of human rights issues and a range of issues around international law. I think we are able to walk that tightrope, I wouldn't pretend that it isn't a more challenging exercise than a couple of decades ago. But there's no future for Australia in which the Chinese economy doesn't remain critical. So we need to be part of that constructive conversation, ensuring that a peaceful rules-based international order is maintained.
BUBALO:
Final question Andrew, at the heart of this forum Asia Briefing Live is this question of how does Australia secure its security and its prosperity. We’ve heard a lot about security. We had the Minister of Defence yesterday, talking about how Australia can secure itself. So here's an opportunity - what does Australia need to do to secure its prosperity?
LEIGH:
My father, Michael Leigh, was part of a generation of post-war scholars who engaged with the region. He's a researcher who worked in Malaysia and Indonesia and researched on Malaysia through the course of his career. I remember him saying to me, particularly in the 1950s, that scholars were doing two things: they were wanting to learn about the region, you think about Herb Feith setting up the Australian volunteering abroad programs, or Jamie Mackie drafting the pamphlet ‘Control or Colour Bar’, critiquing the White Australia policy. So they were they were wanting Australia to be in the region, but they're also recognising that the region saw Australia's policies.
So whether that is tackling racial discrimination, ensuring that we've got more Asian Australians represented in Australian public life, we have too few Asian Australians in the judiciary in particular, but also too few in the public service. That sends a powerful signal to the region about who we are, just as the removal of the White Australia policy was critical for that generation. So too does ensuring the full inclusion of Asian Australians in our public life go hand in hand with our international diplomacy. And that international diplomacy needs to be enthusiastic, it makes little sense that we have so much of our investment going into the Anglosphere and so little in relative terms going into our region. And one of the things that trade tensions with China has meant is more diversification of supply chains through other countries in the Asia Pacific region. I think that's been that's been a healthier development. It's encouraged Australian firms to not just see engaging with Asia as meaning engaging with China, but also to recognise the importance of Vietnam, Malaysia, Thailand, India, and many other economies in our region. This is for me, part of Australia, recognising that who we are is a vibrant, multicultural democracy and taking those values into our public and public engagement of the region.
BUBALO:
Andrew, we’ll have to wrap it up there it's been great to have to take another stroll through your brain, please join me in thanking Andrew Leigh.