Introduction

Australia’s longest-serving Prime Minister, Robert Gordon Menzies, is not renowned as one of history’s great economic reformers. Education, ANZUS, immigration, yes, but on the economy, the narrative that is often spun claims that the Menzies years fortuitously benefitted from the post-war boom times. So, it supposedly follows that post-War population growth and other lucky circumstances – rather than economic strategies of the Menzies era – generated low unemployment, and wage growth and prosperity.

Although that narrative sits well with the folklore of Australia as a lucky country, it misses a key economic contribution of the Prime Ministership of Robert Menzies. This essay highlights that the Menzies era marks the beginning of an important shift in Australia’s trade policy and market orientation. In the face of significant opposition, it was under Menzies in the 1950s that Australia recognised the economic imperative and geopolitical advantage of trade with Asia. Beginning with the 1957 Commerce Agreement with Japan, Menzies demonstrated the importance of finding new markets, pushing back against vested interests, and taking the long view. While Menzies retained much of the protectionist architecture of his predecessor Alfred Deakin’s Liberals, his rhetoric marked a shifting realisation that Australia’s future prosperity would require an economy based on free enterprise, open markets, and foreign investment.

In this way, Menzies laid the foundations for economic growth and the ongoing trade and economic liberalisation that followed. The liberalising reforms of the 1980s and 1990s and the raft of free trade agreements of the 2000s have continued Australia’s stellar economic record. Now, in the face of rising protectionism and an increasingly mercurial global economy, Australia’s liberal trade policy settings present risks to its prosperity. We should look back at the Menzies era and remember the importance of taking the long view and finding new markets and opportunities for trade. We need to, like Menzies, respond to geopolitical trends as we find them, adopt new geoeconomic strategies to deal with increasing strategic competition, and push back against the vested interests that make difficult policy choices even more so.

Menzies Redux

On 10 December 1949, Menzies led his youthful Liberal Party to its first electoral victory, becoming Prime Minister for the second time. Of the staggering 50 new Coalition members elected in 1949, 34 had served in World War Two. Animosity towards Japan continued to run high as stories of atrocities committed by the Japanese Imperial forces against Australians circulated throughout the country.

Menzies had already made clear his intention to move beyond wartime animosity and towards peace and reconciliation with Japan. As early as 1942, in his radio broadcast on ‘Hatred as an Instrument of War Policy’, Menzies said,

“if this war with all its tragedy breeds into us a deep-seated and enduring spirit of hatred, then the peace when it comes will be merely the prelude to disaster and not an end of it. … Peace must not only close the door on war; it must open the door to better things.”

Coming to power in 1949, the Menzies government’s focus was on post-war reconstruction. Menzies saw in Australia the potential to be a significant country, distinct from Britain, with a prosperous economy and educated middle class. To do this Australia needed a bigger population and to foster the rapid development of industries. The 1950s and 60s were, as the economist Henry Ergas puts it, “a golden age of Australian economic growth.” Between 1950 and 1965, Australia’s annual growth rate was 4.1%, the population grew by almost 40% (from 8.3 million to 11.5 million), and unemployment stayed around 3%. Jobs for new Australians were plentiful, and the good times were rolling.

Australia’s future lies with Japan

Menzies and his Trade Minister John McEwen recognised that a key component of Australia’s trade and strategic future lay with a prosperous and peaceful Japan. For Japan to reach its potential as a significant Pacific power, both in influence and economy, it would need trade partners like Australia which produced many of the commodities that an industrialising Japan would need (namely wool and minerals). Additionally, although Australia had plentiful natural resources, it had a relative shortage of domestic capital and so needed to attract international investment to fund ground-breaking resources projects. Shutting Japan out of trade, investment and regional engagements could leave it exposed to the influences of global communism or even allow militarism to take hold once again. The future of Japan concerned Allied efforts to shape the region so much so that the founder of the CIA, Bill Donovan, wrote to Australia’s Minister for External Affairs Richard Casey, urging the development of Australia’s coal mines to provide Japan with much-needed energy supplies. Not only would this assist the Japanese in their much-needed post-war industrialisation, but it would also dissuade Japan from purchasing coal from China and the USSR, thus potentially falling into the arms of global communism. Menzies’s vision was prescient. Japan is Australia’s second-largest export market at $46.4 billion in 2020 (10.6 per cent of total exports, comprised of natural gas ($14.2 billion) and coal at $11.7 billion).

Menzies was also concerned that to defend itself from threats from abroad, Japan needed to be successful and independent. Menzies was aware that leaving Japan weakened could mean the United States and its allies would need to prop it up indefinitely.

Another concern for Menzies was how to mitigate the risk for Australian exporters of losing the British market. Menzies could see Britain moving closer to joining the Common Market of the European Economic Community. Once this happened, Australia would lose an important market for its agricultural produce. Australia’s trade at that time was mainly with Britain and its dominions, which before the General Agreement on Tariffs and Trade had been attractive under the Imperial Preference arrangements. Together, Australia’s exports to Britain and the Commonwealth amounted to over 60% of all its exports in 1948-49. This figure plunged to just 34% by the end of the Menzies era in 1966. Conversely, exports to Asia almost tripled during that period, rising from 6.5% to 16.8%. 

The fight against vested interests

Even before founding the Liberal Party in 1944, Menzies had railed against the toxic influence of vested interests in politics. He had resigned as Minister without portfolio in 1929 on a matter of principle, refusing to support the Victorian government of Sir William McPherson successively underwriting a poorly run business at the behest of the Country Progressive Party. Menzies believed it wasn’t good enough for politicians merely to manage a country according to the whims of business lobbies, pressure groups or organised labour; they must do so according to a set of guiding principles. Sick of politics dominated by pressure groups, Menzies’s Liberal Party was established by a set of individuals, not organisations or businesses, committed to a defined philosophy, and deliberately designed to minimise the pressure of vested interests.

When it came to tackling protectionism, the biggest challenge for Menzies was the Australian manufacturing industry, predominantly located in Menzies’s home state of Victoria. Australia was, after New Zealand, the most protected economy in the world during the 20^th century. Menzies recognised the politics of protectionism was murderously tricky to navigate, but that Australia’s future lay with a strong export-driven economy given our agricultural potential, natural resources and small population.

Even as early as 1942, Menzies recognised that the world was moving in the United States-led direction of trade liberalisation and that Australia would have to be ready for this:

“We in Australia should not take these things for granted. We should prepare our minds to understand that while the development of the industrial resources of Australia is something dear to our hearts and, as we think, good for everybody, we cannot expect when the war is over to live in a little watertight compartment of our own.”

While he was no Reidite free trader, in government Menzies was, as David Kemp has argued, ‘prepared to let protection erode and come under challenge’. He recognised that Australia’s economy ‘rested upon our great exports and upon the willingness of foreign countries to buy them’. Without trade, Australia would not prosper and grow.

Leading trade with Japan

Ceding some protectionist policies would be necessary for Australia to increase its exports to Japan. This became the inspiration for the Commerce Agreement with Japan, with negotiations starting in October 1956 and the Agreement swiftly signed in July 1957. The Agreement would relax Australia’s tariffs on Japanese goods in exchange for expanding Australia’s exports to Japan (at that time, mainly wool and wheat). The Agreement would improve the balance of trade for Japan, although it would remain in Australia’s favour.

With the prospect of an influx of Japanese imports due to the Commerce Agreement, Menzies and McEwen’s intentions didn’t necessarily correspond with those of the Australian people. Menzies remarked in his memoirs ‘A Measure of the Years’ of the ‘hostility in Australia, among both manufacturers and the general public, to the making of any special agreement with Japan which might increase Japanese exports to Australia’.

Public animosity towards Japan in the 1950s remained strong, with many experiencing firsthand the atrocities of Japanese soldiers during the war. Japanese products were viewed by many Australians as low quality, produced by cheap labour, and designed to undercut Australian-made goods.

As expected, the scare campaign against the Commerce Agreement was significant. The Associated Chamber of Manufacturers called the Agreement a “blueprint for unemployment”, while Crunda Knitting Mills put a full-page advertisement in the Sydney Morning Herald with a banner reading “UNEMPLOYMENT – It’s up to you, Mr Menzies”. The ACTU collected 30,000 signatures from employees in the clothing and textiles industry who opposed the Agreement, while 5000 union members marched through Sydney in protest.

The opposition Labor Party strongly opposed the Agreement with Opposition leader Dr H V Evatt labelling it a form of “economic aggression”, while his firebrand colleague Eddie Ward said it was a “criminal action against the Australian nation".

Even though the politics were against it, Menzies, McEwan and Casey, took the long view that trade with Japan was in Australia’s interests. This was Australia’s first step towards serious trade with Asia and was followed by similar agreements with Malaya in 1958 and 1959.

What also followed was an influx of foreign investment into Australia, not just from the United States but from Japan. It wasn’t until 1 December 1960 that the Menzies government issued the first export licence for iron ore, overturning a 22-year ban. Japanese trading houses like Mitsui invested heavily in the development of Australia’s mining and resources industry, setting Australia up to move from an export economy based largely on agriculture to one based on mining.

Lessons from history

What are the lessons from history as Australia charts this next chapter in our trade relations with Asia and the world? Australia’s structural reforms of the 1980s and 1990s, coupled with the Howard government’s concerted effort to sign free trade agreements through the early 2000s have created a strong set of liberal economic settings for Australia. Australia’s 28 consecutive years of economic growth were the envy of the world, cut off only by the Covid-19 pandemic.

But the increasing strategic competition in the Indo-Pacific region and rising protectionism point to the end of easy trade wins in Asia. China and Russia’s actions have led to major disruptions in global trade. We are seeing a bifurcation of the global economy based along ideological lines – the United States, Europe and Australia have imposed sanctions on Russia, and restricted Chinese investment in telecommunications and critical infrastructure. Southeast Asia, Africa, and the Middle East take a more benign view. Coupled with the resurgence of protectionist voices in the United States, where depressed manufacturing communities have lost faith in free trade and the benefits of a globalised economy, the global rules-based liberal economic order is under huge pressure. As an open economy, Australia is at significant risk from the geoeconomic consequences of this shift.

China, a market which Australian exporters have relied upon heavily for the last three decades, has broken many of its economic ties with Australia over a few short years. Many industries were caught completely unprepared for the swift change in Australia’s geopolitical environment – there were only so many lobsters Australians were willing to eat over their Christmas lunch, and ships laden with Australian coal floated off the coast of China for almost a year.

While some Australian exporters have managed to divert their exports to other markets, such as India, Japan, and South Korea, it has been more difficult to find new markets for exports like wine. Australia’s wine exports to China declined in value by 97% in 2021, and overall wine exports by 30%.

Strategic competition hasn’t just harmed Australia. It is also hurting those who seek to disrupt the status quo, namely China and Russia. Further, just because things are and will be difficult for China and Russia does not mean that their leadership will change course. For authoritarian regimes, the decision-making matrix does not mirror that of a democratic leader. Russia has strong economic ties with Britain and Europe, yet regardless of the economic consequences, it has started the first major war in Europe in 30 years with its invasion of Ukraine in February 2022. The Chinese Communist Party’s (CCP) aim is to maintain control of the country; economic considerations and consequences are of secondary importance. The CCP’s recent decisions illustrate the primacy of power, pride, and face over economics. For example, trade embargoes against Australian producers sought to ‘teach’ Australia a lesson, regardless of the local Chinese consumer’s desire to drink Australian shiraz. Similarly, purporting to deal with Covid-19 through an elimination strategy allows the CCP to keep control (or at least be seen to keep control) of the policy narrative and the population despite causing China potentially to plunge into a recession for the first time since the 1920s. Finally, talk of taking back Taiwan is about restoring national pride, which trumps the potentially catastrophic impact on economic growth that a war might have.

For Australia, it is imperative to take a long view in the face of the current challenges. This does not mean that Australia should join in moves towards protectionism or give in to pressure from China. On the contrary, Australia’s economy and history of trade liberalisation mean, in the absence of US leadership in this space, it is even more important that we advocate for open markets. This is particularly the case considering there is now bipartisan agreement in the United States against certain new free trade arrangements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. There is more need than ever for Australia to bring its creative diplomatic nous to the trade agenda, in particular when it comes to expanding the sphere of influence of liberal democracies among those whose preference is to hedge.

Menzies was a firm believer that trade between nations begets peace. In 1965, he remarked that “the greatest guarantee of peace in the world is that nations should trade peacefully, plentifully and profitably with each other. This is a tremendous foundation for understanding and therefore for peace”. Until recently, the Menzies view rang true. As the global economy became more integrated and interdependent, the prospect of war between close trading partners seemed like a distant prospect.

But Menzies was also a realist. He would recognise that while our globalised economy has created a web of interdependencies, rising strategic competition and great power rivalry means Australia can no longer hedge. It must make clear it is on the side of freedom, not authoritarianism. We need, however, to recognise the reality that the global economy is likely to become more and more bifurcated, Australia must look to diversify its markets, expanding not just who we export to but what we export. The recent signing of a trade agreement with the United Kingdom proves that what is old can be new again. The opportunities for Australia’s energy exports to Europe, particularly clean energy, are huge, as are those for Australia’s world-leading healthcare system. Australia also has a plethora of natural resources including precious metals, base metals, ferrous and non-ferrous metals, coal, oil, gas, hydrogen, and uranium. These resources have been, are and will remain a core component of global demand in an industrialised age. Australia’s developing relationship with India also presents another important opportunity for diversifying our export markets while working with like-minded liberal democracies. But this will require some degree of economic bravery, both from policymakers and exporters alike.

Conclusion

Menzies led a government from 1949 until 1966 that followed some of the Keynesian economic orthodoxies of the day, although he was careful to avoid government-funded pump priming of the economy. Despite significant opposition, Menzies and McEwen took decisions that responded to the geopolitical and economic conditions facing Australia. This required taking a long-range view of Australia’s interests, putting aside short-term political gain and withstanding pressure to stick with the status quo.

Australia is the world’s 13^th-largest economy and has considerable diplomatic and strategic influence. We cannot take for granted the relative size of our economy nor the continuity of our strategic and trade relationships. We should seek to influence our strategic settings to ensure they are most favourable to our interests, but we must not be blind to the trends we face.

In the ensuing years, we need to learn the lessons from Menzies. Take the long view, be nimble when it comes to diversifying our markets, and build a community of like-minded nations through our diplomatic and economic influence. As Menzies showed us in the 1950s, it will be imperative to withstand pressure, both from within and outside. By taking the long view and putting the national interest ahead of short-term political gain, we can secure the future of Australia’s economic prosperity and, most importantly, our freedom.

Georgina Downer is the Executive Director of the Menzies Institute. She has previously been a diplomat and a lawyer.