hey big spender
The first loans granted under the Morrison government’s new program to support the production of vital minerals give another insight into the importance of Australia’s relatively low-profile funding in dealing with Chinese economic influence.
Trade Minister Dan Tehan earlier this month announced loans worth $239 million to mining companies EcoGraf Limited and Renascor Resources in response to “the explosion in global demand for smartphones, electric vehicles and other technologies” that rely on rare earth components.
This discussion of technology might have seemed very diplomatically neutral. But that has circumvented the way the EFA now plays a much larger role in future spending on burgeoning government programs to bolster China than it currently does under its own traditional function of trade finance and insurance. This is despite securing its own capital boost for more Indo-Pacific infrastructure lending.
In recent years, the former Export Finance Insurance Corporation has been given various roles in implementing the $1.5 billion in loans under the Australian Infrastructure Finance Facility in the Pacific (AIFFP) from 2018, the $3 billion Defense Export Facility from 2019 and now the $2 billion Critical Minerals Facility. This is in addition to older roles advising on lending policy to the National Housing Finance Insurance Corporation and the $5bn Northern Australia Infrastructure Fund, which is itself embroiled in geopolitics with its own minerals funding. reviews.
The EFA’s latest annual report describes its broader new function as “giving effect” to the strengthening of the Australian Pacific, the trilateral infrastructure partnership with the United States and Japan, export strategies for critical minerals and defense and the provision of essential operational support to the AIFFP.
The three new funds now have about $8 billion with different missions and spending horizons, but they were all created over the past four years as the government sought ways to respond to a more assertive China.
Geopolitically sensitive spending has only really kicked off in recent months with almost $1.8 billion in government support for Telstra to buy Digicel Pacific (for which EFA also received new equity investment power) to push back a mooted Chinese purchase, then the $580 million for Papua New Guinea ports (where China only touted new aid last week) and now critical mineral loans (which are meant to help break China’s hold over the production of some of these resources.)
Korean companies are striving to become global producers of critical mineral-intensive technologies such as magnets and batteries, while Australia is already the largest producer and exporter of lithium battery components.
Although the $8 billion will not be fully spent for years, it compares to the exposure of CFC’s commercial loan portfolio across hundreds of export and commercial investment projects of approximately $1.7 billion. dollars at the end of the last fiscal year. This provides an interesting measure of how the nature of Australian government support for offshore business activity has moved significantly away from traditional export insurance, primarily due to the challenge from China. And changes to the way aid is managed and redesigned add to that change.
In the case of EFA, it is a hybrid arrangement where the agency must make a profit and produce a dividend for the government on its trading account. But the government is using its national interest account at the EFA to house geopolitical loan spending and, in effect, keep it out of the federal budget, where conventional development assistance counts. So, for example, some recent emergency loans to support the PNG budget have been housed in the National Interest Account unlike the old days when Australia injected money into the PNG budget through aid spending.
There are going to be longer term issues around accountability, performance measurement and the private companies that deserved this government intervention in regional affairs when over $8 billion has been allocated.
But as reported here in November 2019, it amounts to a more nuanced and practical response to China’s Belt and Road Initiative (BRI) than the political scoreline that marked Victoria’s now canceled Memorandum of Understanding with the flagship project of Chinese regional geoeconomics.
The second dimension of the first two critical mining loans is that they also quietly cemented the geostrategic relationship with South Korea.
When President Moon Jae-in visited Australia in December, most of the attention was, unsurprisingly, devoted to Australia’s billion-dollar deal to purchase self-propelled howitzers from Hanwha to be manufactured in Geelong, possibly paving the way for an even larger purchase of armored personnel carriers from the same company.
But EcoGraf Limited and Renascor Resources have each struck deals to sell critical minerals to Korean manufacturers – and other countries.
Korean companies are striving to become global producers of critical mineral-intensive technologies such as magnets and batteries, while Australia is already the largest producer and exporter of lithium battery components and has perhaps the second largest reserves of cobalt.
Korean officials called for more cooperation with Australia in October last year, just after the announcement of the Critical Minerals Fund and during Moon’s visit, an agreement on cooperation in the chains of supply of critical minerals was signed as well as an agreement on the development of clean hydrogen.
In line with Moon’s more cautious approach to its near neighbour, China received little mention during these announcements. Nevertheless, Korea wants to avoid seeing its ambitious expansion into these new technologies undermined by a repeat of the ban on rare earth exports that China imposed on Japan in 2010-2014.
But Moon was still quite ambitious, saying:
Our two countries share the view that establishing a stable mineral supply chain is important not only for both countries, but also for the global economy… We will systematically cooperate throughout the development cycle resources, including mineral exploration, development, production and mining disaster. management.
Much attention was devoted to Australia’s supply chain cooperation with Japan and India – and perhaps more at Friday’s Quadrilateral Security Dialogue meeting in Melbourne. But the Korean agreements imply a real comparative advantage for each country that should underpin the desired greater bilateral geopolitical cooperation.
And for two countries with a more delicate geopolitical relationship with China than the United States, they represent a less confrontational approach to dealing with China’s propensity to coerce rare earth exports than the threat of the United States Congress to ban defense manufacturers from buying Chinese rare earths.
Australia’s effort to establish closer economic and strategic relations with South Korea with the Defense Agreement, commitment of new resources and support for Seoul to join the Comprehensive and Progressive Trade Agreement for the Trans-Pacific Partnership was a welcome opening to a country with a more nuanced approach to China.
But it also seems timely with news that South Korea is close to or has passed its former colonial ruler, Japan, in one of the key measures of relative national economic success – gross domestic product per capita.
Japan’s Center for Economic Research set that hare in motion with a forecast in January that South Korea’s nominal GDP per capita would overtake Japan in 2027 in a highly symbolic transition that is unlikely to help these two former partners of Western security to put aside their deep historical grievances about the colonial era.
The powder keg and dirigiste quality of the bilateral relationship – which should worry partners like Australia – has already been underlined this year by Japan’s decision to apply for World Heritage listing for certain historic mines that have been operated with Korean forced labor at the beginning of the last century. Korea filed a diplomatic protest.
But meanwhile, Japanese economist Richard Katz calculated that using actual data based on World Bank purchasing power parity, Korea has already surpassed Japan’s GDP per capita and is moving away. Indeed, its productivity grew faster while Japan’s output per worker remained stable.
Moreover, Katz points out, “unlike Japan, Korea passed on the fruits of its productivity growth to its workers. Over the three decades from 1990 to 2020, annual real wages (excluding benefits) barely increased in Japan, while they nearly doubled in Korea. Korean workers now enjoy higher wages than their Japanese counterparts.
South Korea, of course, still faces some of the same structural and demographic challenges that Japan has, or is facing. But it’s still a good time for Australia to pay more attention to Asia’s fourth largest economy.