ASIA
05 June 2019
Australia's trading place in the world
Australia's trading place in the world looks increasingly vulnerable and fragile, argued John West at the Australian Leadership Retreat, organised by Australian Davos Connection.
Looking back over the post war period, Australia has had a dream run as a trading nation, selling our natural resources to the successive rising economies from Asia. We started with the Korean War wool boom, then selling natural resources to Japan, followed by Korea and Taiwan, then Southeast Asia, more recently China.
As these countries have seen emerging middle classes, Australia has benefited from growing tourist dollars. And in the case of China, we have also benefited from students and also substantial real estate investment.
This dream run has also benefited greatly from Australia’s trade diplomacy. I would like to congratulation Andrew Robb, in particular for being the world champion when it comes to negotiating FTAs with Asian countries.
But as I argue in my recent book, Asian Century...on a Knife-edge, we may not be able to count on dynamic Asia in the future to the same extent that we have in the past. Indeed, while Asia has enjoyed a stunning economic performance over the past half century, it is far from guaranteed that this will continue.
Asia faces many challenges. Economic reform has ground to a halt over the past decade. Asia's most successful countries face poor demographics with rapidly ageing populations. And most Asian economies suffer from weak governance and shallow democracy, even where it exists.
Look at the case of Japan, Asia's first miracle economy. It has only been growing at about 1 per cent a year for the past few decades, and looking ahead, its potential growth would only be around 3/4 of a percent. Its ageing population has dragged it down, as has a failure to get serious about reform. South Korea now seems to be falling into a similar stagnation trap. And countries like Malaysia and Thailand have fallen into middle-income traps.
Now on China. As Ken Courtis reminded us yesterday, economic growth basically boils down to demographics and productivity. And in the case of China, working age population has been falling for a number of years, and productivity growth has slowed substantially and the level of productivity remains miles behind the US.
China needs reform, but the Chinese Communist Party is frightened of reform, because it is frightened of social and political instability. We have talked a lot about Donald Trump. Old Donald could be a strategic gift for China if he pushes it to open up. But we cannot count on that. In short, in my view, China is headed towards a period of much weaker growth. And China's growth even today is most likely much weaker than its dodgy statistics would suggest.
Thus, Australia's future trade with China will be much weaker than in the past. And given our fragile political relations with China, we are vulnerable to being sanctioned when China is not pleased with our behaviour. China can turn on and off its imports with the flick of a switch, especially for students, tourists and as we have seen recently for coal.
Now looking at the state of Australia’s trade. In my view, Australia's "trading place", to use the title of this session, is very unbalanced and very vulnerable. We are highly dependent on China. But our trade with Asia's other emerging giants of India and Indonesia is peanuts. We are highly dependent on a few commodities and students.
Australia's outward FDI to Asia is also weak, and we are clearly missing out on opportunities. I see this in the Philippines, the home of my wife, where Australia's presence is minimal.
What is the answer to Australia's trade predicament?
Australia's exporters need to make much greater efforts to penetrate the Indian, Indonesian and other Southeast Asian markets. This means in part making a much greater effort to understand these markets. In other words, improving our Asian literacy and competence.
Australia also need to make greater efforts to strengthen our services exports beyond education and tourism. There has been much analysis of this issue by the OECD and my good friend Jane Drake-Brockman, who is President of the Australian Services Roundtable.
But when we are thinking about exports, we also need to think about the domestic economy. Because exports are the product of the domestic economy. Over the past couple of days, we have many interesting ideas in sessions on advanced manufacturing, SMEs and entrepreneurship, and technology.
In these sessions, I have heard many promising stories about Australian business doing exciting things. But I have also heard many proposals for doing a lot better.
Issues include:
-- education and human capital -- some argue that our education systems are not well designed for fostering creativity.
-- life seems to be very difficult for SMEs and entrepreneurs -- for example, banks typically lend to people who don't need finance, but are reluctant to lend to riskier entrepreneurs..
-- it was also suggested that many Australian entrepreneurs have a parochial mindset.
-- we need to make better use of our skilled migrants. Australia is proud of our skilled migration programme, but too many skilled migrants are unable to find jobs in their field.
-- some argue that we need a national manufacturing strategy -- but we should not seek get back low-value-added motor vehicle assembly, but engage is higher value-added segments of the supply chain.
I would now like to conclude. I called my little book, Asian Century...on a Knife-edge. I would also say that Australia’s trading place in the world is on a knife-edge. We need to reinvent ourselves as a trading nation. We can do this. But reinvention means tackling many challenges.
As these countries have seen emerging middle classes, Australia has benefited from growing tourist dollars. And in the case of China, we have also benefited from students and also substantial real estate investment.
This dream run has also benefited greatly from Australia’s trade diplomacy. I would like to congratulation Andrew Robb, in particular for being the world champion when it comes to negotiating FTAs with Asian countries.
But as I argue in my recent book, Asian Century...on a Knife-edge, we may not be able to count on dynamic Asia in the future to the same extent that we have in the past. Indeed, while Asia has enjoyed a stunning economic performance over the past half century, it is far from guaranteed that this will continue.
Asia faces many challenges. Economic reform has ground to a halt over the past decade. Asia's most successful countries face poor demographics with rapidly ageing populations. And most Asian economies suffer from weak governance and shallow democracy, even where it exists.
Look at the case of Japan, Asia's first miracle economy. It has only been growing at about 1 per cent a year for the past few decades, and looking ahead, its potential growth would only be around 3/4 of a percent. Its ageing population has dragged it down, as has a failure to get serious about reform. South Korea now seems to be falling into a similar stagnation trap. And countries like Malaysia and Thailand have fallen into middle-income traps.
Now on China. As Ken Courtis reminded us yesterday, economic growth basically boils down to demographics and productivity. And in the case of China, working age population has been falling for a number of years, and productivity growth has slowed substantially and the level of productivity remains miles behind the US.
China needs reform, but the Chinese Communist Party is frightened of reform, because it is frightened of social and political instability. We have talked a lot about Donald Trump. Old Donald could be a strategic gift for China if he pushes it to open up. But we cannot count on that. In short, in my view, China is headed towards a period of much weaker growth. And China's growth even today is most likely much weaker than its dodgy statistics would suggest.
Thus, Australia's future trade with China will be much weaker than in the past. And given our fragile political relations with China, we are vulnerable to being sanctioned when China is not pleased with our behaviour. China can turn on and off its imports with the flick of a switch, especially for students, tourists and as we have seen recently for coal.
Now looking at the state of Australia’s trade. In my view, Australia's "trading place", to use the title of this session, is very unbalanced and very vulnerable. We are highly dependent on China. But our trade with Asia's other emerging giants of India and Indonesia is peanuts. We are highly dependent on a few commodities and students.
Australia's outward FDI to Asia is also weak, and we are clearly missing out on opportunities. I see this in the Philippines, the home of my wife, where Australia's presence is minimal.
What is the answer to Australia's trade predicament?
Australia's exporters need to make much greater efforts to penetrate the Indian, Indonesian and other Southeast Asian markets. This means in part making a much greater effort to understand these markets. In other words, improving our Asian literacy and competence.
Australia also need to make greater efforts to strengthen our services exports beyond education and tourism. There has been much analysis of this issue by the OECD and my good friend Jane Drake-Brockman, who is President of the Australian Services Roundtable.
But when we are thinking about exports, we also need to think about the domestic economy. Because exports are the product of the domestic economy. Over the past couple of days, we have many interesting ideas in sessions on advanced manufacturing, SMEs and entrepreneurship, and technology.
In these sessions, I have heard many promising stories about Australian business doing exciting things. But I have also heard many proposals for doing a lot better.
Issues include:
-- education and human capital -- some argue that our education systems are not well designed for fostering creativity.
-- life seems to be very difficult for SMEs and entrepreneurs -- for example, banks typically lend to people who don't need finance, but are reluctant to lend to riskier entrepreneurs..
-- it was also suggested that many Australian entrepreneurs have a parochial mindset.
-- we need to make better use of our skilled migrants. Australia is proud of our skilled migration programme, but too many skilled migrants are unable to find jobs in their field.
-- some argue that we need a national manufacturing strategy -- but we should not seek get back low-value-added motor vehicle assembly, but engage is higher value-added segments of the supply chain.
I would now like to conclude. I called my little book, Asian Century...on a Knife-edge. I would also say that Australia’s trading place in the world is on a knife-edge. We need to reinvent ourselves as a trading nation. We can do this. But reinvention means tackling many challenges.