Navigating Australia’s Friendshoring Future

In mid-November, Australian Prime Minister Anthony Albanese traveled to San Francisco in the United States for the Asia-Pacific Economic Cooperation (APEC) summit. The theme of the summit was “Creating a Resilient and Sustainable Future for All,” a concept that Albanese stated Australia “actively supports.” The concept of resilience as discussed at APEC is primarily concerned with secure and trustworthy supply chains, but this has serious political and geopolitical implications.

As a country with a relatively small domestic market and small manufacturing base, Australia is heavily reliant on trade, making the resilience of its supply chains a critical national interest. Albanese pointed out at APEC that one in four jobs in Australia are tied to its export industries, yet alongside this, Australia needs to be able to source the materials and products that it needs in order to fuel those export industries.

Exposed by the COVID-19 pandemic, and threatened by a reliance on China (and its whims), supply chains have become a major geopolitical concern. These problems have also come alongside a shift in economic thinking. Previous economic strategies that prioritized cost and efficiency popularized outsourcing and offshoring of many industries. What was lost in jobs was deemed to be returned in cheap and plentiful goods.

Yet there has been a realization that the loss of strong manufacturing capabilities within Western countries has led to an increase in political instability. Australia has avoided some of the more troubling domestic political developments that have befallen the United States and Europe; however, there is a keen sense – at least within the governing Labor Party – that provisions need to be made to prevent such political headwinds.

The problem for Australia is that it has some natural disadvantages that make it difficult for it to become a manufacturing power, or even to regain the manufacturing capability that it once had. Australia’s distance from the rest of the world makes shipping expensive, as does its high-wage economy. At present Australia has the lowest level of manufacturing self-sufficiency of any Organization for Economic Cooperation and Development (OECD) country.

This makes Australia highly dependent on other countries for many of its necessities. For Australia to gain greater resilience in its supply chains, a concept like “friendshoring” is more viable. This is the idea that the supply chains for Australia’s essential goods are within countries that Australia can have a high degree of trust in, thus ensuring that its necessities are not disrupted by any global shocks or political manipulation.

While friendshoring may be required for now, Australia needs to think about what products will be essential in the coming decades and ponder how Canberra can not only secure access to these goods, but find a way to economically leverage them domestically as well.

As a major producer of critical minerals, Australia will undoubtedly play a crucial role in the regional supply chains of the green energy transition. Canberra has already set itself the task of making sure that Australia isn’t simply a quarry and that the processing of these minerals can also be conducted within the country. Government support for this industry may be necessary to counter China’s dominance in this space.

However, alongside this, there is also a far greater ambition that Australia should set for itself. While manufacturing goods that have to compete with other countries on cost will most likely not be an option for Australia, the country does have the ability to become a high-innovation economy whose goods are only able to be made in Australia.

Australia is a highly educated country with a sophisticated and well-developed research capability. However, currently it struggles to translate these assets into economic advantages. It is one of the strange aspects of the country, which has all the necessary attributes of an advanced innovation economy, but without any great innovative output.

Much of what Australia will be able to produce and secure in the future will be guided by the strategic competition between the United States and China – which was the dominant theme of the APEC summit. Australia’s partnership with the U.S. will be central to how Australia finds its economic security, particularly with its massive exports in coal and gas likely to diminish as renewables take energy ascendency.

Pillar II of the AUKUS agreement is centered on the co-development (with the United Kingdom) of the technologies of the future, and establishing the supply chains to service them. Canberra’s hope will be that the political instability in Washington partially created by previous economic ideas of offshoring and outsourcing is able to be warded off.