Making a splash: The economic impact of AUKUS

The controversial $370 billion pact between the US, Australia, and the UK, or 'AUKUS', is being sold as a boon for the economy and nation-building exercise that will amplify defence capabilities and strengthen regional security. But is it all it's cracked up to be?

The landmark deal which the three countries entered on 16 September 2021 mandates Australia deliver nuclear-powered submarines over two stages spanning 30 years, reportedly costing taxpayers between $250 billion and $368 billion.

Prime Minister Anthony Albanese is selling AUKUS as a bonanza for employment that will create around 20,000 jobs in the Australian Defence Force and public sector. These include tradies, operators, technicians, engineers, scientists, submariners, and project managers.

South Australia and Western Australia will be major beneficiaries. South Australia will likely construct the submarines, creating some 8500 jobs. About 4000 of these will design and build infrastructure for the new submarine construction yard in Port Adelaide. Between 4000 to 5500 jobs in the state will build and maintain them.

John Quiggin, a professor of economics at the University of Queensland, told a recent Financial Standard podcast that Australia appears to be spending a lot of money without a clear strategic rationale or discussion from the government.

"Will these submarines operate essentially under US command in the context of a conflict, which will presumably be with China?" he said.

"We don't usually talk about going to war with people, but also, the lack of discussion has been such that there's no real understanding of what good these submarines would do us."

AUKUS has received strong bilateral support, coming to fruition from sweetheart deals made by both political parties and jettisoned on the public without much warning, starting when former Prime Minister Scott Morrison reneged a $90 billion contract with France to replace the Collins-class submarines. He then turned to the UK and US and made them an offer they couldn't refuse.

The multi-generational endeavour, according to University of Technology Sydney's (UTS) Australia-China Relations Institute director James Laurenceson, "was struck in complete secrecy and presented to the Australian public as a fait accompli."

"My first point of critique of AUKUS is that its genesis did not meet the standards that we, the Australian public, have every right to expect in a healthy liberal democracy," he told a recent UTS panel discussion on AUKUS.

Despite the controversies surrounding how AUKUS came to light, on October 10, Labor and the Coalition turbocharged the mega-project by pushing the Australian Naval Nuclear Power Safety Bill 2023 through both houses of parliament without debate.

The bill essentially lays down the framework to promote and regulate the nuclear safety aspects and certain activities relating to building the warships, which from the early 2030s, the US will deliver three US Virginia-class nuclear-powered submarines to Australia.

Meanwhile, the UK and Australia will deliver their own version of the submarines known as SSN-AUKUS based on UK's design. The UK will drop its first SSN-AUKUS in the late 2030s and Australia will follow suit in the early 2040s.

What's worrying for Greens senator David Shoebridge is that the bill allows for the "dumping of US and UK intermediate-level waste and other high-level nuclear waste from their nuclear submarines."

It effectively creates "nuclear dump zones" off the coast of Perth and Port Adelaide, without any community consultation or local support.

"Everyone can see AUKUS is sinking, the question is now becoming how much environmental and financial damage it will do before it hits rock bottom?" Shoebridge said.

Over-reactor?

Critics of AUKUS, including former Prime Minister Paul Keating, argue that it throws away Australia's sovereignty and underscores the US's aim of strengthening its 'primacy'.

Keating said AUKUS "is really about, in American terms, the military control of Australia."

"The Albanese government with their policy is likely to turn Australia into the 51st state of the United States," he told the ABC in August.

The US is flexing its military muscle in Asia Pacific more than ever, establishing outposts in the form of naval bases and airfields strategically encircling China and Taiwan.

In its former colony, the Philippines, the US demarcates nine naval bases and airfields, a New York Times analysis shows. It has 10 launchpads in Japan and seven in South Korea, and last year formalised a new security agreement with Papua New Guinea.

The US government's spend on defence has skyrocketed 62% since 1980, climbing from US$506 billion to US$820 billion in 2023, non-profit USAFacts evaluated, peaking in 2010 at US$964.4 billion when former President Barrack Obama was in charge. Congress has shelled out US$175 billion to the Ukraine since Russia's war in 2022.

Some 30,000 civilians since have been killed or injured, the UN Human Rights Office of the High Commissioner counted in February.

Brown University's recently published Cost of War report estimates the US dropped US$17.9 billion in military aid to Israel since the October 7 Hamas attack and a further US$5 billion to combat Yemen's Houthis commercial attacks on ships in the Red Sea as a mark of solidarity with Gaza.

"[The $US22 billion] is a preliminary estimate because the US government has not been very transparent, so we had to dig around different sources to figure out this estimate," the report's co-author William Hartung told ABC Radio.

The Hamas attack killed about 1139 people and 250 were taken as captives, according to popular Israeli news site Haaretz. An Al Jazeera report found dozens of foreigners and dual citizens from more than 20 countries were also killed or went missing on that day.

According to the Gaza Health Ministry, the US-backed Israel war on Gaza, now in its second year, has killed more than 42,000 Palestinians, the majority of whom are children and women.

International medical journal the Lancet analysed this as a massive undercount, predicting the death toll was as high as 186,000 in July due to Palestinians dying from indirect health implications such as malnutrition, and severe food, water, and medical supply shortages due to Israel's blockage.

On September 23, the invasion expanded into Lebanon, killing more than 500 people, the Lebanese Health Ministry said.

Israel has been the largest recipient of US aid since 1946, according to the Council on Foreign Relations, of more than US$300 billion, well ahead of Egypt (US$168bn), Afghanistan (US$158bn), and South Vietnam (US$149bn).

Obama approved the largest military aid to Israel of US$38 billion spread over 10 years in 2016. Israel receives such grants under the Foreign Military Financing program that it must then use to purchase American-made military weapons, technology, and services.

In the eight years he was in office, starting from 2009, Obama inherited the Afghanistan and Iraq wars. He also launched airstrikes and military raids in at least seven countries - Afghanistan, Iraq, Syria, Libya, Yemen, Somalia, and Pakistan - outlets such as CNN and the LA Times report.

"The [Obama] administration built secret drone bases and other facilities in Africa and the Middle East, and added troops and warships in the western Pacific. It also moved troops and equipment to eastern Europe to counter a resurgent Russia," the LA Times wrote. The Guardian reports he authorised over 10 times more drone strikes than George W. Bush. Obama won the Nobel Peace Prize in 2009.

"It clears up a lot of confusion when you understand that the US empire is not a national government which happens to run non-stop military operations," Melbourne-based political journalist Caitlin Johnstone writes.

"It's a non-stop military operation that happens to run a national government."

What is it good for?

Another Brown University study found the Pentagon spent US$14 trillion on the war in Afghanistan between 2001 and 2021, sparked by the September 11 attacks.

One quarter to one third of contracts in recent years went to five major publicly listed companies: Lockheed Martin, Boeing, General Dynamics, Raytheon (RTX), and Northrop Grumman.

There is profit to be made during periods of armed conflicts. The Ukraine-Russia war, Israel-Hamas war, and geopolitical tensions between the US and China serve as flashpoints for something potentially more ominous. Defence companies' biggest clients - governments from all over the world - are not only stockpiling their hardware they are also purchasing the latest software.

But war is not only profitable for companies directly involved in defence, the second order effect is wealth managers taking advantage of wartime conditions on many fronts.

Most of Australia's superannuation funds have no qualms about investing in controversial weapons manufacturers like BAE Systems, Lockheed Martin, and Elbit.

Betashares, VanEck, and Global X all launched defence armament and technology-focused ETFs around the first-year anniversary of Hamas' attack.

It's no surprise that the MSCI World Aerospace and Defense Index continues to outpace the MSCI World, shooting up 45.3% in the year to September versus 32.4%, and has done so in the last three years.

As Australia beefs up its war chest, pledging $55.7 billion in the 2024-25 Budget, a sum that is projected to grow to $100 billion in 10 years' time, it is beset by tensions in the Middle East nearing boiling point and the US unabashedly postulating China as an economic and military threat.

US secretary of the air force Frank Kendall said last month: "I've been closely watching the evolution of [China's] military for 15 years. China is not a future threat; China is a threat today."

Meanwhile, China's economic success story, since it opened itself to the world in 1978, saw GDP growth average over 9% per year and lift 800 million people out of poverty, according to the World Bank. Whilst GDP growth has cooled in recent years, the US is adamant on containing its biggest rival.

The Stockholm International Peace Research Institute estimates China's defence spending was 59% of what the US spent in 2022, being US$806 billion.

Laurenceson said while China's military spending has increased, so has its GDP.

"Don't forget, in cost-adjusted terms, China's GDP is now 30% bigger than the United States. So, despite having an economy that's nearly one third larger, they've actually got defence spending that's only just a little over one-half that of the US level," he said.

Quiggin said Australia's trade relations with China is reflective of the period of hostility in which AUKUS was signed. This comprised several export restrictions on local produce like wine, beef, and lobster (which China announced this month it will lift).

"I think we have a problematic relationship [with China], and of course, we have a problematic relationship with the US, particularly as US politics becomes less stable in the event of a Trump administration, for example," he said.

Another major criticism about AUKUS is it has no clawback mechanisms for Australia should the deal fall through.

"There's no way the UK is going to walk away from the deal. It's just jam for them," Quiggin said.

"The US, on the other hand, potentially has a bunch of reasons why they might choose to act differently. Nothing we can do about that. I think that's, of course, true of our defence relationship with the US in general. If the US decides it has different priorities, there's very little Australia can do about it. But certainly, I think there's very little protection for us against things like cost escalation, delays, and so forth."

The Congressional Research Service (CRS) released a lengthy report dated October 10 that cast doubt on the merits of the mega-project, specifically on its joint work under pillar one of the Virginia-class submarines.

It might be more worthwhile for Australia, the CRS suggested, if it invested in its own military capabilities, such as long-range anti-ship missiles, drones, loitering munitions, and B-21 long-range bombers.

If the costs for Australia of Pillar 1 potentially dent the nation's overall military budget for its other capabilities, "there could be a net negative impact on Australia's overall military capabilities for deterring potential Chinese aggression," the research body said.

The hysteria surrounding AUKUS is immutable and continues to rage even as some predict it will never even come to fruition.

All in all, Quiggin said AUKUS "is a big mistake".

"We could have got the same military benefits from the French deal much cheaper, but almost certainly, there's very little evidence that spending a lot of money on submarines is essential policy," he said.

Listen to the podcast on AUKUS here: