Australia’s trading environment faces radical change

Australia trading environment faces radical change

Australia’s prosperity and security fundamentally depend on trade. Whether it is through multi-billion-dollar export industries or connections to global supply chains for imports, no part of our economy or society isn’t deeply intertwined with trade.

Like many countries, Australia’s trade links to the world were significantly disrupted at the height of COVID-19. Shipping delays, product shortages and snap lockdowns threw global supply chains into chaos. It was a difficult reminder of how important trade is for Australia.

Fortunately, many of the acute interruptions of the pandemic are beginning to lift in 2022. But as Australia reconnects with the world, we are finding that the global trade system is rapidly changing.

Emerging technologies – particularly digital and clean energy – are shifting the focus away from goods and on to technology and services.

After the shock of COVID, businesses are moving away from hyper-extended supply chains to favour ‘resilient’ trade networks. Growing geopolitical conflict is also affecting the trade system, with trade sanctions and protectionism now a fact of life.

This new world demands a fundamental reappraisal of our trade strategy. To help navigate this transition, Ai Group has developed a policy report: Australia’s new trade agenda. This report ‘future casts’ five global-level trends that will shape the what, how and who of trade through the 2020s. It also maps how government and businesses can rethink their strategies for success.

The five trends that will define Australia’s trade future are:

Geopolitics and protectionism

During periods of political and economic disruption, many governments turn to trade barriers for national security reasons. Recent examples include the US-China trade war, trade sanctions on Russia following its invasion of Ukraine and food export bans during the COVID pandemic. These protectionist measures threaten the integrity of the open trading system on which Australia relies.

They can close off markets for our exports, raise the cost of our imports and disrupt supply chains for critical goods. Managing geopolitical risk effectively will be essential for trade success in coming years.

Digital transformation

The digitalisation of the economy is also transforming what and how we trade. Digitalisation creates new products to be traded, such as digital content and services delivered across borders. It also opens new methods for trade, utilising e-commerce platforms and paperless trading technologies.

As most trade rules were written in the pre-digital era, they urgently need to be updated for the technologies of today. Governments will need to collaborate and create new international agreements customised for digital trade. Businesses will need to ‘digital-proof’ their trade operations to remain globally competitive.

Carbon pricing in trade

As the world moves towards net zero carbon emissions, most governments are adopting carbon pricing mechanisms. But to prevent so-called carbon leakage – where polluting industries simply migrate across borders – they are also developing systems to price the embedded carbon in traded goods.

Carbon pricing in trade offers opportunities and risks for Australia. We will need to decarbonise many of our exports, particularly minerals and metals, to avoid paying carbon levies in key markets. But it will also open new opportunities for exporters who can demonstrate the use of renewable energy who will be able to command a price premium for low-carbon products.

Plurilateral trade clubs

As geopolitical tensions have increased, it has proven very difficult to strike new global trade deals. Many governments have instead looked to plurilateral agreements – amongst smaller ‘clubs’ of likeminded countries – to advance the trade agenda. Australia is party to ten such plurilateral agreements under negotiation now.

The emergence of these instruments will change the logic of trade from a ‘global’ to a ‘club’ outlook. Governments will need to decide which partners to work with, on which issues and in which club formats. Business will need to reconfigure commercial strategy to exploit opportunities these clubs create, particularly in the digital and clean energy sectors.

Supply chain resilience

While the pandemic was the initial cause of supply chain disruptions in 2020, political factors are now perpetuating the challenge. Rising protectionism for food, technology and pharmaceuticals are constraining global supply. Russia’s invasion of Ukraine has caused a global energy crisis. China’s ongoing COVID-zero policies are disrupting the factories central to global value chains.

Resilience, rather than pure efficiency, has therefore become an increasing focus in supply chain management. Governments are directing industrial policy toward securing critical products, such as semiconductors and critical minerals. Businesses are building more diversity into their supply chains and exploring ‘friend-shoring’ strategies to relocate production to more trusted partners.

Getting policy and business strategy right

Australia will not succeed as a trading nation if we maintain a business-as-usual approach to these emerging trends. Each poses risks to our existing trade relationships, which we are already experiencing in the form of supply chain disruptions. But they also open opportunities to develop new trade ties that can support 21st century industries.

The Government must reconfigure its trade diplomacy to these new realities. For two decades, Australia has focused on opening new markets for exports via bilateral free trade agreements (FTA). While this strategy has proven successful – we now have FTAs with all our main partners – it has also hit a natural limit.

It is time to look towards a new form of trade diplomacy focused on rule-making. Each of these trade trends in some way involve rules – over how digital trade is conducted, how carbon is priced, how protectionism is limited. And the emerging trade clubs, rather than the World Trade Organisation, will increasingly be the venue at which these rules are decided.

The most important thing Government can now do is ensure Australia has a seat at the table whenever new trade rules are being devised, and work with likeminded partners for the best results possible.

Business will need to adjust to a more complex and difficult trade environment. Since the 1990s, the trends of globalisation and liberalisation have made it progressively easier to be a trade-engaged business. But as protectionism returns and supply chains come under stress, more risk-attune trade strategies will be required.

There is no one-size-fits-all model for how business should adjust. The five trends affect different markets in different ways. But across all of them, the value of diversity will prove critical. Businesses with narrow trade relationships are more exposed to risk than those with broader ties. And diverse traders are better placed to exploit emerging opportunities.
Australia has pivoted its trade outlook before, and we can do so again. If we can get our trade settings right now, we can ensure Australia remains a great trading nation well into the future.

Read Ai Group’s policy report – Australia’s new trade agenda – here.

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