Australia’s phenomenal resource endowment has once again seen it through a difficult period in the global economy, with supercharged commodity markets siphoning some of the stimulus spending by the world’s major economies into Australian pockets.

It was the same during the global financial crisis 12 years ago, when Australia was almost the only advanced nation to escape a recession, thanks mainly to the demand from China for Australian minerals generated by its massive budget stimulus spending.

There was a time when the global smart money considered Australia a hopeless case, dependent on digging up rocks when the future belonged to nations with their own microchip fabrication plants. During the technology boom of the late 1990s, Treasurer Peter Costello had to resist pressure to subsidise the building of one.

The key economic measure is the terms of trade, which is an index that compares the prices of exports with the prices of imports. Ever since the end of the Korean War, it had held pretty constant—rising by 15% or 20% during booms and falling by about the same amount in slumps, but always returning to a long-term average level.

In the late 1990s, it was believed that Australia faced a long-term and irreversible slide in its terms of trade as the world shifted from a material economy of things to a digital economy of information.

But for the past 16 years—since around 2005—the world has been paying ever higher prices for Australia’s resources, while the manufactured goods Australia buys from abroad have been getting cheaper. During that period, the terms of trade have been 60% above their long-term average, and right now they are about double that average. Every shipload of exports is buying about twice as many shiploads of imports as it did before 2005.

Few Australians understand the transformation of the economy that has flowed from the minerals boom. Australia’s earnings from resources and energy are now only slightly below Saudi Arabia’s earnings from oil. Australia has become the pre-eminent supplier of mineral resources to the world. It is the largest exporter of iron ore, liquefied natural gas, coal, bauxite (and alumina) and mined gold. It is the third biggest exporter of copper.

The increases in the volume of shipments have been extraordinary. Since 2004, iron ore exports have gone from 200 million tonnes to 900 million tonnes, coal exports from 220 million tonnes to 400 million tonnes, and LNG from 8 million tonnes to 80 million tonnes.

Australia’s coal industry is challenged by concerted global action on climate change, while LNG’s status as an ‘intermediate step’ along the path to greenhouse neutrality is increasingly questioned. However, industrialisation, and hence resource use, has a long way to go in a world where nearly half the population still lives on less than US$6 a day.

Australia may have a small population (ranking 55th, just below North Korea and above Taiwan), but its resources give it a disproportionate value, particularly to the major economies of Asia.

Australia has other strengths. It possesses one of the largest agricultural estates, with 62 million hectares of planted pasture, cropping and horticulture and another 290 million hectares of scrub pasture. France, by way of comparison, has 18 million hectares of arable land. About three-quarters of Australia’s agricultural production is exported.

Both Australia’s farmers and its miners operate with some of the world’s best economies of scale, deploying the latest technologies and benefiting from the strong educated workforce and institutional infrastructure that is lacking in so many otherwise resource rich nations.

Perhaps most importantly, both its mineral and agricultural commodity exports are supported by the institution of free global markets, with prices struck at arm’s length between buyers and sellers, ensuring a balance of supply and demand. With allowance for quality variations and shipping costs, all suppliers of a commodity are paid the same, which is the price needed to ensure demand is met.

It is an institution so woven into the fabric of the global economy that it is taken for granted, but the contrast is the monopolisation of commodities by either consumer or producer interests.

Oil was controlled by a cartel of Western oil companies, known as the ‘seven sisters’, which held 85% of global oil reserves and paid derisory returns to the countries where they were located until the OPEC exercised its muscle, nationalising reserves in the 1970s.

The United Fruit Company similarly supressed the returns to the host nations of its banana plantations, as did the British East India Company the returns to India and China from their tea in the 19th century.

A concerted, though ultimately unsuccessful, attempt by the Chinese state-owned company Chinalco to take over Rio Tinto in 2008–09 was motivated by the belief that if the consuming country controlled the iron ore mines, it would be able to lower the price.

Free trade is underwritten by the global trade rules of the World Trade Organization. Those rules are calculated to ensure that small countries have the same access to a fair return for their goods and services in the global trading system as large countries.

US President Donald Trump and his administration rejected the disciplines of the WTO and sought to use America’s power as the world’s largest economy to impose its will on trading partners. Its effort was aimed at China in particular, but also attacked allies in the European Union, Japan, South Korea and elsewhere. ‘The future does not belong to globalists. The future belongs to patriots,’ Trump told the United Nations in 2019.

Australia’s Prime Minister Scott Morrison echoed these sentiments a few weeks later in a speech denouncing the ‘negative globalism’ of multilateral institutions imposing their mandates through an ‘unaccountable internationalist bureaucracy’. He ordered the Department of Foreign Affairs and Trade to undertake an audit of the global institutions and rule-making processes that Australia was party to.

Although the audit report was kept secret, it defended the network of global institutions. Foreign Minister Marise Payne said the audit had ‘affirmed that multilateral organisations, especially international standard-setting bodies, create rules that are vital to Australia’s security, interests, values and prosperity’.

While a superpower like the United States can dictate its own terms to others, the presence of globally agreed frameworks provides vital insurance for smaller nations. This message has been absorbed by the Morrison government, in the wake of both the unilateralism of the Trump administration and the coercion Australia has faced from China.

Heading to the G7 meeting in the United Kingdom earlier this month, Morrison said he would be pressing for reform of the WTO’s dispute-settlement mechanism, which he sees as fundamental to resisting economic coercion from China. ‘The most practical way to address economic coercion is the restoration of the global trading body’s binding dispute settlement system. Where there are no consequences for coercive behaviour, there is little incentive for restraint,’ he said.

The WTO’s ability to deliver binding rulings in trade disputes was undermined by the Trump administration, which brought its dispute settlement to a halt by refusing to approve new appellate judges. The Biden administration is yet to shift policy or articulate what it wants, while divisions remain between the US and Europe. China’s assent will be needed for any reform.

The risk for Australia is that the global institutional infrastructure on which it relies for fair prices for its goods and services and fair access to foreign markets might fall victim to superpower rivalry and governments more focused on the short-term interests of their domestic constituencies than the global good.