Why making everything at home is a bad idea

The reason you and I can buy new clothing for cheap is not because of the sales ending today. While those discounts are nice, even without them, you can buy everything from shoes to a new blender for low prices, all thanks to trade.

When everything goes smoothly – the latest gadgets arrive in Australian ports and get trucked to stores around the country, while Australian wine travels to its various destinations around the world – trade is not something we think about that much.

But the war in Ukraine, China’s trade embargo on Australian goods like wine and beef, and the first two disruptive years of the pandemic have shaken worldwide trade networks and upended everyone’s understanding and belief in the global trade system.

WTO director-general Ngozi Okonjo-Iweala says the retreat from globalisation risks making the global economy more fragile.Credit:Arsineh Houspian

The head of the World Trade Organisation Dr Ngozi Okonjo-Iweala gave the annual Lowy lecture on her first visit to Australia last week, and delivered a stark warning about the risks of moving away from the global network of trading as geopolitical tensions rise.

“Over the past decade, governments have in several instances, unfortunately, weaponised trade and economic interdependence as a way of handling big and small power rivalries and disagreements,” she said.

“In Australia today you are living this reality in your region.”

Despite that, Okonjo-Iweala said strong international cooperation and trade is more important than ever.

Let’s start with what global trade has meant for you and me. A joint WTO, World Bank and IMF report found it reduced the cost of household spending by two-thirds for poorer families in rich countries. For those who are well off, and spend less money on imported goods, it reduced their consumption costs by a quarter. That’s a considerable discount even by Black Friday sale standards.

Okonjo-Iweala points out open trading markets have allowed Australia to shift markets as the economic tide changes. From the UK in the 1960s and Japan in the 1970s, today, our largest trading partner is China. But since its block on Australian imports at the start of the pandemic, Australia has started to look elsewhere.

Trade Minister Don Farrell is in the process of ratifying or finalising three major free trade agreements, with the UK, India and the European Union, and has repeatedly said it is important for Australia to diversify its trading partners and rely less on one or two larger relationships.

Okonjo-Iweala said this sort of diversification is key to the next era of globalisation, and also makes trade harder to weaponise.

There are trade-offs – smaller-scale trade is less efficient – but after the start of the pandemic with its supply chain shocks, businesses are likely to be more willing to swap greater efficiency for greater resilience.

The vaccine shortages of 2021, and the scramble for masks and ventilators the year before showed just how vulnerable the world was with a handful of countries producing the bulk of those goods.

That goes for other products as well. Ukraine produces the greatest share of the world’s sunflower oil, which is the most popular cooking oil globally. The Russian invasion of the country is one of the reasons food oil inflation is currently up 19.3 per cent over the last 12 months.

Okonjo-Iweala said trade is critical for food access and affordability.

“One in five calories consumed around the world is traded across borders … and this share has been rising,” she said.

“Put it this way: the recent opening of the Ukraine Black Sea grain corridor, and the way it brought prices down, shows us that situations can be more often than not worse without trade.”

What she’s saying is that countries will be worse off if they trade less and decide to try manufacturing everything at home.

If we think about the pandemic experience again, Okonjo-Iweala points out that what gets overlooked is the fact that some COVID-19 vaccines were made in supply chains involving up to 19 countries. If one country had tried to do that by itself, it would have been worse off – producing less, for a higher cost, she said.

A large-scale move to reshore production for everything – from clothing to cars – could also make supply security worse, and this is where climate change comes in.

“Locally concentrated supply chains would be more exposed to localised shocks, which are becoming more frequent with extreme weather events,” Okonjo-Iweala said.

Sounds a bit familiar, doesn’t it? If Australia tried to make everything onshore, you can imagine the impact of regular, severe weather on supplies of everything from medicines to coffee.

So globalisation is not dead, it just needs a rethink. Okonjo-Iweala calls it “re-globalisation”, but all that really means is just having more diverse trading partners, and ensuring those trade relations are equal.

Sure, that will come with more work, but it will provide better security into the unknown future.

Ross Gittins is on leave.

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