National security analysts have been quick to call for greater Australian economic resilience in the form of ramped-up domestic technical development and manufacturing. But this is a long-term path to a weaker economy and therefore weaker national security.
It is a common misconception that a country benefits from technology only if it creates it. In fact, Australians benefit from global innovation – even though where we haven’t done the innovating. The key problem in manufacturing self-reliance is that it means restricting access to that global innovation. If manufacturing technology must be developed locally, rather than imported or licensed, it will cost much more.
This link between international trade and benefits from global innovation was highlighted in a social media debate in May between economists Philippe Aghion and Paul Krugman, both Nobel Prize winners, who compared Europe’s apparent malaise with the United States’ tech boom. While Aghion argued that Europe’s malaise was due to the absence of a vibrant tech sector, Krugman suggested that the benefits of the tech sector had passed to Europe through trade and lower import prices.
The same argument applies to Australia. Like Europe’s, Australia’s per capita GDP at constant prices, a conventional measure of productivity, has been falling behind the United States’. This can be seen in the chart where the black line shows Australia’s per capita GDP relative to the United States. While there have been ups and downs, the ratio, indexed to 100 in the initial year, 2000, had slipped to 95.5 by 2025.
The pattern mirrors the economic malaise in Europe highlighted by Aghion and co-authors in a paper in May. They attribute it to protected markets, high costs of capital and too little tech investment.
Economic prosperity in a small open economy like Australia, however, also depends on export and import prices – the terms of trade. Critically, although domestic production growth has lagged relative to the United States, Australian per capita incomes have not.
This can be seen from the red line, which records Australia’s real gross domestic income (GDI) per capita relative to the United States. GDI is similar to GDP but includes the effects of the terms of trade on real incomes. It improves when our exports can buy more imports or when import prices fall, since those changes mean our purchasing power and hence real income have improved. The chart shows that despite the decline in volumes, Australian real per capita incomes have not fallen relative to the United States – in fact they have grown slightly faster.
This gap between changes in real incomes and real output reflects increasing prices for resources, energy and agriculture. But, critically, it also includes falling relative prices for manufactured imports, especially technology-intensive imports such as telecommunications, computers and pharmaceuticals. For example, while resource prices have grown on average by 3.8 percent annually since 2000, computer (‘office machines’, according to the statistician’s classification) and phone (‘telecommunications equipment’) prices have fallen by 4.7 and 5.5 percent per annum respectively, and pharmaceutical prices have fallen by 2 percent per annum.
This means that Australian industries have benefited through lower costs of technology-intensive imported capital goods. Global competition and rapid global innovation led to a fall in the average cost of imported capital goods of 1 percent per annum beginning in 2000, resulting in a 22 percent decline in imported capital goods prices over the whole period.
The precise numbers, however, are less important than the pattern and the economics that drive them. This century’s resources boom has allowed us to buy more imports per unit of exports, and global competition and innovation have prevented import prices from rising as fast. Australian firms and consumers have therefore benefited from steady global innovation – despite not having the United States’ scale in frontier tech sectors.
The problem with calls for greater self-reliance is that our prosperity has never depended on producing frontier technologies in Australia, but rather on having access to these technologies from global markets – which have mainly been paid for by primary exports. This is not due to a lack of willpower, but to simple economics. Advanced manufacturing productivity depends on research and manufacturing at scales that Australia cannot replicate in the domestic market.
Replacing imported manufactured goods with home-spun products would require subsidies to domestic producers to allow them to compete with global tech giants (which may also be subsidised) and cutting off domestic market access to imported consumer and capital goods. Even at our best we cannot hope to compete globally in research-intensive sectors such as semiconductors, artificial intelligence, pharmaceuticals and quantum computing nor in large-scale manufacturing such as automobiles. We can contribute to the tech frontier in bespoke areas – through research and education and by allowing private innovation to flourish – but we cannot replace it.
The controls and subsidies needed to protect domestic industry from competition would not only increase the price of advanced tech but also provoke retaliatory actions against our resource and agricultural exports, thus undermining our ability to fund tech imports. So self-reliance inevitably weakens access to the world innovation frontier through multiple channels.
That is not to say we couldn’t do more to raise Australian productivity. We can. There are bespoke manufacturing firms in Australia that already compete globally in areas such as mining and medical technology. Many of these sectors grew out of basic research expertise, and better integration of applied and basic research in Australian research has long been called for, as has more investment in education and digital infrastructure. The start-up sector, including defence start-ups, also faces regulation and high capital gains taxes.
The solutions are therefore in policy reform, investment in basic research and education and deregulation, not in trying to make manufactures that can be imported at far lower cost.
It is also not to deny that some strategic reassessment of domestic critical capabilities – such as oil, fertiliser, vaccines and personal protective equipment – is prudent. But the same logic does not apply to the wider manufacturing and technology sectors, because of the constraints around scale.
In this era of deglobalisation, when the post-war rules and institutions are steadily being dismantled, political choices that once carried little economic cost may now involve genuine trade-offs. Realpolitik and nuanced diplomacy will become more central to international economic policy, and our economic security and prosperity will depend on how well we manage these relationships.
Resources once devoted to complex multilateral trade negotiations and expensive legal disputes can be directed towards the practical maintenance of economic relationships through diplomacy and alliance management.
Manufacturing self-reliance is intended to reinforce national security. But strong economic growth, promoted by access to global innovation, helps to fund our security needs without increasing the per-capita defence burden. The prosperity also strengthens social cohesion and our democratic institutions. Neither economic security nor prosperity can be found by trying to replicate the world’s technology frontier. Instead, they depend on remaining connected to global markets and ideas.
Australia’s economic prosperity and security are therefore fundamentally tied to how we acquire and use global innovation, not who owns it or manufactures it. Maintaining global links has become messier, more transactional and riskier. But while the political landscape has changed, the economics of prosperity remain fundamentally the same.
Leave a comment