Global supply chains better for Australian economy than protectionist trade policies: ABARES

New research from the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) has found that Australia will continue to benefit from international supply chains despite the risks posed by global economic shocks.

The disruption of COVID-19 has highlighted some the risks of global trade, the new research report noted. However, protections such as trade barriers and subsidies can weaken economies, according to ABARES’ acting executive director Dr Jared Greenville.

“For Australia, protectionist measures would only marginally reduce the impact on GDP in a pandemic-like event, but they have the potential to cost the economy $1 trillion over 30 years. There are better insurance policies out there,” he said in a statement on Monday.

ABARES’ latest research has examined two global policy options: the existing interconnected world of global value chains (GVCs), and a hypothetical localised world where protectionist measures are adopted and substitution between imported goods and locally produced goods is less common.

The study found that, despite the risks, an interconnected open global trading system with global supply chains is better for the Australian economy and agriculture sector, as well as the world.

“This is because attempts to localise supply chains come at a real cost to economic growth and income,” it said.

“In other words, there are significant long-term costs with trying to avoid disruptions caused by global shocks, like the COVID pandemic, which far exceed the costs incurred during the actual shock. Furthermore, should a global pandemic occur, the costs in a localised world remain significant and are similar to those seen in a more globalised world, casting doubt over the utility of such a policy shift in insuring against such events.”

The research found that localised production provides “very little benefit for the economy”, while implementing protectionist trade policies or domestic subsidies to address trade risks are “unlikely to yield net benefits”.

Greenville said localising supply chains or ensuring local reserves of some products “should be assessed on a case-by-case basis”.

“Growing local supply chains and production should focus on enhancing competitiveness with protectionist trade and domestic support policies avoided,” he said.

The report has argued that maintaining GVCs post-pandemic will help global recovery and bring the greatest benefits to Australian agriculture. Meanwhile, policymakers should continue to consider ways to reduce possible disruptions from global shocks.

“Where disruptions have affected sectors, other policies that help directly manage the risks are likely to represent a better response than attempts to localise supply chains,” it said.

“Policies aimed at promoting a globally competitive industry are desirable, such as those that reduce the costs of doing business, reduce trade costs and promote innovation.”

ABARES noted that policymakers could find other ways to mitigate supply risks during uncertain times, “where it is found that private risk management dictates a higher risk appetite than is socially desirable”.

“This could make the case for holding stocks of particular products, as is already done with the National Medical Stockpile. These more targeted policies should be designed at a supply chain level and in relation to the frequency and size of the shocks,” it said.

The bureau has outlined several key messages to inform the policy debate around the organisation of supply chains following COVID-19, including:

• Australian agricultural value-added and Australia’s GDP are higher in the long term under interconnected GVCs than under localised policies;
• Losses from foreign shocks to agricultural value-added and GDP are not substantially different under interconnected GVCs or localised policies, meaning that localised policies do not actually insulate Australia; and
• Adopting localised policies as insurance against adverse shocks would come at a longterm cost to the Australian economy of around $1 trillion (the difference between the net present value of Australia’s GDP under interconnected GVCs and that under a localised policy scenario between 2020 and 2050).

This article was first published by The Mandarin.