Inquiry into Diversifying Australia’s Trade and Investment Profile

13 November 2020: Asialink Business has provided a submission to the Joint Standing Committee on Trade and Investment Growth on diversifying Australia's trade and investment profile. As the National Centre for Asia Capability, we understand the importance of trade and investment to the Australian economy, particularly as it relates to our engagement with the Indo-Pacific region.

This inquiry is most timely, given the profound challenges being faced by the global economy as a result of the COVID-19 pandemic, including major disruptions to trade and investment flows.

Ongoing trade tensions between the U.S. and China also remain high with potential impacts on our regional trade and investment relationships.  Notwithstanding the current difficulties, it is essential to remain forward-looking with a focus on ensuring Australia is well-prepared to rebound in the post-COVID-19 recovery phase, which could last for several years.

Background

Australia ranks 22 in the world for exports (value by USD), 14 in the world for receiving foreign investment and number 17 in the world for providing foreign investment. The US and UK are the biggest investors in Australia, followed by Belgium, Japan and Hong Kong (SAR of China). Looking at five-year trend data, investment from Hong Kong (SAR of China), Norway and France have grown significantly.

When we look at the numbers more closely, 68 per cent of Australia's exports fall under the top four categories by trade value: mineral fuels/oils, ores, gems and meat. These rankings are reflected in Australia's competitiveness, with the IMD's 2020 Competitiveness Index ranking Australia 45 for international trade and 57 out of 63 for export concentration by partner.

Based on the work that the Massachusetts Institute of Technology (MIT) has undertaken with the Observatory of Economic Complexity, Australia ranks 73 out of 137 countries in economic complexity. Harvard Kennedy School's Center for International Development presents results which are even more concerning, ranking Australia 93 out of 133 countries – with Senegal at 92.

For clarity, it is helpful to compare Australia's export diversification, or lack thereof, to the top two export driven markets; China and the US.

For example, China had USD2.49 trillion of export revenues in 2018. China's top four categories by trade value of electrical machinery, mechanical appliances, apparel and clothing (inc. knitted) and apparel and clothing (exc. knitted) made up 52% of its total export market. Based on MIT's work, China ranks 30 out of 137 in economic complexity.

The U.S. generated USD1.55 trillion of export revenues in 2017. The U.S.' top four categories of mineral fuels/oils, mechanical appliances, electrical machinery and vehicles made up 44 per cent of its total export market. Based on MIT's work, the U.S. ranks 9 out of 137.

However, exports by category or even sector are only one metric by which to understand diversification. Looking at diversification by market, Australia's top five trading partners are China, Japan, the U.S., The Republic of Korea and the United Kingdom. 27.5 per cent of total trade is with China, accounting for 34.4 per cent of all our exports. Our next largest trading partner, Japan, accounts for less than 10 per cent of total trade, and around 13 per cent of exports.

Australia's trade and investment landscape is dominated by non-value-added commodities exports. It is not enough to cite Australia's strengths as the reason for our lack of diversification. Most notably, Canada, Brazil and Russia also have significant export markets based on their natural resources and are Australia's primary competitors in China; however, rank much higher in economic complexity. All three countries have much larger advanced manufacturing sectors than Australia, including in aerospace and automotive.

Our trading relationships with the rapidly growing markets of Vietnam and Indonesia, prime destinations for companies looking to diversify their economic engagement in Asia, are less than 2 per cent of total trade each. We make five recommendations to drive increased diversification in Australia's trade and investment profile:

  • Recognise the importance of foreign investment for Australia's continued growth and prioritise efforts to increase investment flows from Asian markets.
  • Recognise the importance of Australian investment into Asian markets as a means of building market presence and realising new opportunities.
  • Strategically approach increased trade and investment with a diversity of markets.
  • Seek to diversify Australia's export mix with an increased focus on advanced manufacturing, digital and services, reducing the current reliance on a narrow band of commodities and services.
  • Equip the Australian workforce with the skills and capabilities to engage with Asian markets.

Access a copy of our full submission with detailed recommendations here.