Covid-19, globalisation and Australia's vulnerability

As children, David and I loved our spinning top. Made of tin, it had a plunger that you pressed down sending it spinning wildly across the floor. It's long gone now, finally breaking from over-use.

Just at the moment, I feel like that top, spinning around in response to events. It makes we wonder what the longer term effects of covid-19 might be. Will there be basic change, or will the top having spun simply fall over a little distance from where it began its journey?

I think that a few things are reasonably clear.

At global level, the epidemic has continued the process of US withdrawal from world leadership. Like most countries, US politics is inward looking, focused on domestic issues and responses. The sheer size of the US has made this focus particularly strong, although you only have to look at the Australian media response on particular issues to know that it applies here too.

I have to be very careful in my comments on the US for, like most of us, my views are coloured by my reactions to President Trump. The US decision to withdraw at least temporarily from the WHO at a time of crisis forms part of a pattern of retreat. Whatever the WHO's weaknesses may be, it is the only global body capable of providing a degree of global coordination at a time when many countries are turning inwards, focused on domestic threats.

I would like to think that the US withdrawal will force other countries collectively to step up, but I think that's naive, at least in the short term. A fair bit of the discussion has centered on a US v China trope, including suggestions that China will use the opportunity to try to extend its international reach. Maybe, but I suspect that this is a second order issue. The real issue is the overall impact of the virus including government responses.

At this point we simply don't know how far the virus will spread globally with countries at different stages in the outbreak. We don't know what the final human and economic impact will beyond the fact that it is and will continue to be enormous. We have never had a shutdown like this before.

Comparisons have been made with the Great Depression. That's fair enough in providing a rough measuring block in terms of unemployment and resultant social misery. It's fair, too, in that policies adopted for national purposes fed on each other to create a downward spiral, replacing a previously globalised trading system with national autarky. There is also an uncomfortable similarity in that US actions based on something very similar to the Make America Great Again rhetoric played a major role in worsening the Depression.  All this said, there is one key difference.

The Great Depression was a result of economic forces whose impact was accentuated by conflicting national trade and economic policies. This economic shutdown results from conscious decisions made on health grounds. The immediate economic effects may be somewhat similar, but the causes are different, as are the economic responses, with governments seeking as best they can to cushion at domestic level some of the more dire economic and social impacts.

While this domestic focus is understandable, I think that the most important issue is the decline and potential collapse of the global economic order that has underpinned growth since the Second World War, in so doing lifting hundreds of millions of people out of poverty.

There has been considerable debate about the virtues of globalisation and freer trade and investment. Globalisation has been in retreat for some time, attacked from left and right. Now covid-19 has turned retreat into at least short term rout.

We can see the impact if we take the Australian trade data as an entry point. The data comes from a DFAT (Department of Foreign Affairs and Trade) publication Trade and Investment at a Glance, 2019. 

Starting with services exports, our top two exports are:

• education-related travel services: $32,434 million, third ranking in total exports at 8% of total exports
• Personal travel (excl education services): $21,580 million, fifth ranking in total exports at 5.4% of total exports. 

These exports have been effectively stopped in their tracks.

Australians are great travellers. This is reflected in the import figures with personal travel (excl education services) totalling $42,496 million, Australia's largest import category at 10.7% of total imports.

In terms of very crude arithmetic, we spend $42.496 billion on international travel including accommodation etc, get back $32.434 billion. In the short to medium term, some of the spend on international travel will go to the domestic market as distancing rules are relaxed, although from two years out international travel is likely to expand again. In the meantime, the tourist destinations especially reliant on Australian tourists will be hurting.

While personal travel spend will re-balance to some degree, the damage to our education exports is likely to be much longer lasting. We are not alone here. In the UK, 2020 education exports are expected to be down between 80 and 100%. Our ability to rebuild our education exports are not being helped by Mr Morrison's domestic focus which effectively treat international students as collateral damage.

Turning now to merchandise exports, our top merchandise exports are:   

• iron ores & concentrates: $61,357 million, first ranking in total exports at 15.2% of total exports
• coal: $60,356 million, second ranking in total exports at 15% of total exports
• natural gas: $30,907 million, fourth ranking at 7.7% of total exports
• gold: $19,393 million, sixth ranking at 4.8% of total exports
• aluminium ore & concentrates (incl alumina): $9,448 million, seventh ranking at 2.3% of total exports
• beef: $7,963 million, eight ranking at 2.0% of total exports.

These top merchandise exports are dominated by minerals dependent upon industrial activity elsewhere in the world.

We can get a further feel for this if we look at the graphic which shows the broad sectoral composition of Australian exports in 2017-2018.

You can see the dominance of minerals and fuels.  The services exports which form the second largest component are heavily influenced by education and tourism Without having analysed the remainder in detail, I think that they depend in large part on travel and the movement of people to service international market places are have therefore also been heavily affected by covid-19 restrictions.

Australia has benefited greatly from globalisation including the rise first of Japan and then the Asian tigers followed by China. Now with globalisation in reverse we are exposed. If you take coal out, we are very badly exposed. Those sectors of the economy that depend upon taking in each other's washing, the consumption expenditure that forms such an important part of GDP calculations, are all vulnerable.

I think that it pays us all to think about how we actually preserve global trade, investment flows and indeed the movement of people as we come though this to the mutual benefit of all.