Alan Duncan, Daniel Kiely | Trading Up report shows opportunities for Australia in decarbonising

The BCEC's Trading Up report calls for increased export diversification, leveraging Australia's strengths in production that meets the world's growing "green" or decarbonisation agendas.

The report shows that the prosperity of the Australian economy through the COVID pandemic owed a great deal to international trade and the strength of the resources sector, fuelled by high commodity prices.

But maintaining this positive economic growth narrative depends crucially on how Australia positions itself against the changing face of global trade, particularly through our trading relationships with key export partners.

Diversification and product differentiation are key to maintaining Australia's competitive advantage and ensuring that emerging trade opportunities are seized, including those arising from a global shift toward decarbonisation.

The scale of investment in the green economy across the United States and Europe is enormous.

For example, the US government has allocated a package of about $2 trillion through the Inflation Reduction Act, the Bipartisan Infrastructure Law and the CHIPS and Science Act to support projects that promote clean energy transformation and critical infrastructure.

The EU Net Zero Industry Act, the Japanese Green Transformation Policy, and the Indian Production Linked Incentive Scheme, as well as the Canadian Growth Fund and Refundable Investment Tax Credits are some of the global schemes also designed to support investment in clean energy transformation and decarbonisation projects.

These programs will certainly affect global investment and trade incentives through the reallocation of capital and financial resources to capture the supports.

The magnitude of the opportunity for Australia from these programs is immense - and so too is the risk of missing out.

This emphasises the importance of ongoing work by state governments to deepen relationships with key trading partners.

But it also highlights the imperative for the Commonwealth government to secure free trade agreements that are not just to Australia's benefit, but that don't advantage some state jurisdictions at the expense of others.

The Australian economy has benefited substantially from trade and the active pursuit of free trade agreements.

Estimates from the Trading Up report show that trade agreements with China, Japan, and Korea and Thailand collectively have added an estimated $472 billion to Australian exports since the agreements were enacted.

But BCEC's Trading Up report also foreshadows a growing level of protectionism from a number of trading partners and preferential domestic economic support for key industry sectors.

The rising level of protectionism poses risks to open economies like Australia, and especially export-oriented states such as Western Australia.

Australia's response to the Inflation Reduction Act is a prime case in point.

The IRA legislates more than $520 billion to support US investment in renewable energy and decarbonisation technologies, and provisions within the Australia-United States Free Trade Agreement could mean that support through the IRA could extend to critical energy resources such as lithium.

Given our rich endowments of critical minerals, this would put Australian companies in the box seat to access IRA credits and incentives without relocating to the US.

But the Australian government needs to ensure that support for the country's critical minerals industries to capitalise on opportunities through the IRA doesn't come at the expense of the development of higher value add "green" industry sectors.

There has been a sharp increase in the index of Australia's exports of green products from 2018 onwards. This is in line with the growing trade and investment in environmentally friendly goods and technology in leading economies.

Green goods accounted for less than 30 per cent of Australia's total merchandise exports in 2015, with the share rising to more than 40 per cent in 2021.

But what about the level of knowledge and complexity embedded in Australia's current export products and emerging green products?

Economic complexity captures the production capabilities and technological sophistication of an economy. Complex economies are harder to compete against and take longer to build.

And there is substantial evidence that regions with higher levels of economic complexity tend to grow faster, which is why economic complexity is commonly used as a device to explain differences in income levels across nations or jurisdictions.

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Australia ranks relatively poorly on a global comparison of economic complexity across all export products.

But a very different picture emerges when one looks at the rankings for green products.

New research demonstrates that Australia - and especially Western Australia - are among the most complex economies globally for critical minerals, decarbonisation, and renewable energy technologies.

The findings shed light on the optimistic future of the national economy in green trade and growth and establishes that Australia is well positioned to be the engine room of prosperity in a decarbonised world.

But while the global transition to net zero offers tremendous opportunities for Australia's export and economic growth potential, success is in no way guaranteed.

Now is the time for the Australian economy to look out, and trade up, securing the future of the nation's economic growth, and the prosperity of generations to come.