Australia’s trade profile
1.1
Trade has long been a driver of Australia’s prosperity. The Department of Foreign Affairs and Trade (DFAT) outlined that the Australian economy has been trade-oriented since its beginnings, and that ‘without trade, our standard of living would be substantially lower, the prices we pay would be significantly higher, and our choices of goods and services would be more limited.’
1.2
The Perth USAsia Centre also emphasised the value of Australia’s trade and stated:
In 2018, Australia conducted $853 billion of two-way trade with foreign partners, equivalent to 46 percent of Gross Domestic Product (GDP). This was composed of $662 billion of merchandise trade and $190 billion of services trade.
1.3
The Minerals Council of Australia outlined wider benefits of trade and said that:
Australia has benefitted from the opportunities created by trade and investment liberalisation. Trade boosts growth, supports jobs, improves living standards and forges more competitive local industries. Trade accounts for 42 per cent of Australia’s economic output and one in every five jobs relies on trade.
Australia’s export sectors
1.4
DFAT described Australia’s trade profile as reflective of Australia’s ‘comparative advantages’, and as such was ‘weighted towards resources, energy and agriculture.’ DFAT further explained that Australia exports:
… certain products, particularly mineral and other raw materials, often at lower cost and more reliably than our competitors. Other products (including some agricultural and food products) are competitive in export markets at higher prices because consumers value their quality or environmental or ethical production attributes. These advantages stem from our geographic location, resource endowments, specialised knowledge base and skilled labour force.
1.5
As well as outlining Australia’s comparative advantages, DFAT stated that ‘Australia has a comparative disadvantage in the production of mass-produced consumer goods as a whole ([due to] relatively high labour costs, [and a] small domestic market).’
1.6
The Chamber of Commerce and Industry Queensland (CCIQ) observed that Australia’s exports are ‘highly concentrated, with a major focus on commodities such as iron ores and concentrates, coal and natural gas.’ The Minerals Council of Australia highlighted that ‘in 2019, the resources sector generated $289 billion of export revenue (59 per cent of total export revenue)’.
1.7
Australia’s agricultural sector is also highly export-oriented. The Department of Agriculture, Water and the Environment (DAWE) advised that approximately 70 per cent of the value of Australian agricultural, fisheries and forestry production was exported in 2018-19, which was worth over $54 billion. DAWE added that this reliance on exports differs to other countries and stated:
Unlike other traditional competitors with large domestic markets, such as the United States of America (US) and the European Union (EU), Australian [agricultural, fisheries and forestry] producers rely on exports, meaning they are particularly exposed to global price movements and trade distorting practices.
1.8
DAWE noted, however, that there is significant variation between the export profiles of different agricultural commodities, and that:
… over the three years to 2016-17, exports accounted for 98 per cent of wool and cotton, 76 per cent of beef, 71 per cent of wheat, 41 per cent of dairy and 18 per cent of horticultural earnings … In 2017-18 half of the total value of Australia’s seafood production was exported, however the proportion is much higher for some seafood products, such as rock lobster.
1.9
In addition to energy, resources and agriculture, Australia also has a significant services export sector. This was led (prior to the disruptions of the COVID-19 pandemic) by the education and tourism sectors, as well as business and professional, financial and communications services.
Table 1.1: Australia's top 10 exports (2019), A$ million
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|
|
|
|
|
1
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Iron ores and concentrates
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96 173
|
19.5
|
|
2
|
Coal
|
63 956
|
13.0
|
|
3
|
Natural Gas
|
48 654
|
9.9
|
|
4
|
Education-related travel services
|
40 336
|
8.2
|
|
5
|
Gold
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23 372
|
4.7
|
|
6
|
Personal travel (excl education) services
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22 580
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4.6
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|
7
|
Beef
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10 809
|
2.2
|
|
8
|
Aluminium ores and conc (inc alumina)
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9830
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2.0
|
|
9
|
Crude petroleum
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9505
|
1.9
|
|
10
|
Copper ores and concentrates
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6161
|
1.3
|
Source: DFAT, Submission 43, p. 5.
1.10
The Department of Home Affairs highlighted the value of Australia’s education and tourism exports and stated that:
International education is Australia’s fourth largest export. In 2018-19, Australia’s international education sector employed 250 000 people and was worth $37.6 billion to the Australian economy. Tourism provides a major economic contribution to Australia, with 8.7 million international visitors injecting $45.4 billion into the economy in the year ending December 2019.
1.11
Asialink Business also advised that Australia’s services sector ranks highly in terms of value added and stated:
Australia's largest export category in terms of value-added is the services sector. These exports deliver substantial returns to Australian companies, and to the government in the form of tax revenue. Few Australians realise the importance of services exports, and traditional trade statistics tell only part of the story.
1.12
The United States Studies Centre at the University of Sydney pointed out that while tourism and education dominate services exported to East Asia, service exports to the US were more ‘future-focused’:
… unlike Australia’s Asian trading partners, with whom services trade is dominated by foreign students and tourism, US services trade with Australia is dominated by future-orientated industries, most visible in three key areas: intellectual property charges (the use of patents, trademark and copyrights); other business services (comprised of Research and Development services, professional and management consulting services and technical, trade-related services); and telecommunications, computer and information services.
Australia’s export markets
1.13
As a consequence of Australia’s economic liberalisation and its increasing integration with the global economy, recent market trends in Australia have been shaped by global economic forces.
1.14
In previous decades, the United Kingdom (UK), US and Japan have all been significant trading partners for Australia. In recent years, the growth of East Asian economies has seen increasing demand for Australian exports, particularly the rise of the Chinese economy and its growing middle class. As outlined in the table below, 32.6 per cent of Australia’s exports went to China in 2018-19, while the next four countries received 29.2 per cent combined.
Table 1.2: Australia's Top 10 Export Markets 2018-19
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1
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China
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134.7
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18.5
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153.2
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32.6
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|
2
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Japan
|
59.1
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2.6
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61.7
|
13.1
|
|
3
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Republic of Korea
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25.6
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2.2
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27.8
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5.9
|
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4
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United States
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14.7
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10.0
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24.7
|
5.3
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|
5
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India
|
16.2
|
6.6
|
22.8
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4.9
|
|
6
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New Zealand
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10.0
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6.0
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16.0
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3.4
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|
7
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Singapore
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10.6
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5.4
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16.0
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3.4
|
|
8
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Taiwan
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12.4
|
1.5
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13.9
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2.9
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|
9
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United Kingdom
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7.9
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5.6
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13.5
|
2.9
|
|
10
|
Malaysia
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8.9
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2.6
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11.5
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2.5
|
|
|
Total top 10 markets
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300.1
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61.1
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361.1
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76.8
|
|
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Total exports
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373.1
|
97.1
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470.2
|
100.0
|
Source: DFAT, 'Trade and Investment at a Glance 2020', p. 16.
1.15
The Department of Industry, Science, Energy and Resources highlighted how international demand has driven Australia’s export profile and stated that:
While much of Australia's increasing specialisation in minerals exports is due to strong demand from China for Australian ores and minerals, the proximity to the Asia-Pacific region has also been beneficial and a key driver in developing Australia's comparative advantage in mineral exports.
1.16
The Export Council of Australia similarly noted that Australia's trade is demand driven, reflecting the realities of the market:
… the current situation reflects the reality of the global marketplace. We sell our products to markets where there is demand. With China’s annual real GDP growth averaging 9.5 per cent between 1979 and 2018 (and still performing strongly), and a GDP representing more than 11 per cent of the global economy, it is a market we cannot ignore.
1.17
DFAT explained that Australia is far from alone in its reliance on China as a trading partner, pointing out that at least 60 countries counted China as their main merchandise trading partner in 2018 and that the growth in China’s demand for resources in the last two decades had been ‘unparalleled’.
1.18
Representative bodies for the cotton, fresh produce, infant formula, wool, barleyand education sectors, for example, all highlighted the dominance of the Chinese market for their exports. Factors driving this demand included Australia’s reputation as a producer of safe, high quality food and ‘world class’ educational services.
1.19
The CCIQ elaborated on the drivers of China’s demand for Australian goods and services and stated:
China has the world’s largest population and, according to the World Bank, has experienced average economic growth of nearly 10 per cent per annum since economic reforms were initiated in 1978. China also has a massive and fast-growing urbanised middle class driving the consumption of high-quality food products and education and tourism.
Additionally, economic complementarity and geographic proximity are major export drivers. Australia, and Queensland in particular, is a major producer of coal ... and Liquefied Natural Gas (LNG) ... while China is the world’s largest consumer of both. Given that Australia is geographically closer to China than other major producers of coal and LNG, with Queensland being particularly close, there is major trade complementarity with China.
Australia’s foreign investment profile
1.20
As outlined in Table 1.3, the US is Australia’s largest source of foreign investment by a wide margin, followed by the UK. DFAT explained that historically, ‘Australia’s need for foreign investment arises from a gap between national investment and national savings’, while also noting that since the June quarter in 2019, Australia has run a current account surplus.
Table 1.3: Australia's Top 10 Investment Sources 2018 ($ million)
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1
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United States
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214 291
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939 476
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2
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United Kingdom
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98 747
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574 788
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3
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Belgium
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5380
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316 902
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4
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Japan
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105 898
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229 346
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|
5
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Hong Kong
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16 350
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118 761
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|
6
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Singapore
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28 025
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85 402
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7
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Netherlands
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49 262
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81 491
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|
8
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Luxembourg
|
8918
|
78 439
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|
9
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China
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40 105
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63 588
|
|
10
|
France
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28 741
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50 193
|
Source: DFAT, 'Trade and Investment at a Glance 2020’, p. 40.
1.21
As outlined in Figure 1.1, the resources sector attracted the largest proportion of foreign direct investment. DFAT outlined the role that foreign investment has had in supporting a range of industry sectors in Australia and stated:
Foreign capital is an essential source of investment financing, including enabling Australia’s surplus endowment of resources to be extracted and exported. Foreign investment also brings knowledge and relationships that allow our agricultural, manufacturing and services sectors to expand to cater for international customers as well as domestic customers.
1.22
DFAT outlined that foreign investment generally falls into two categories:
Foreign Portfolio Investment — the purchase of equity (such as shares) and debt securities (such as bonds), where the foreign investor does not have any controlling interest or influence in the asset or company; or
Foreign Direct Investment — investment in an enterprise or asset where the foreign investor has control or a significant degree of influence over management. Generally, investment is considered to be ‘direct’ when an investor has 10 per cent or more of the voting power in the company. Direct debt investment is debt between related parties.
Global context for trade and investment
1.23
International trade and investment flows, as well as domestic economies around the world, have been severely impacted by the COVID-19 pandemic and the associated economic and health effects throughout 2020 and into 2021. DFAT advised that the impact on Australia’s tourism industry has been ‘extremely serious’, having lost an estimated $10 billion a month in revenue. DFAT further explained that since Australia’s international borders closed on 20 March 2020, international travel has been ‘reduced to almost zero.’
1.24
Australia’s international education sector has been similarly impacted by the border closures. As at 21 June 2020, DFAT advised that 20 per cent of the total number of student visa holders were outside of Australia.
1.25
Notwithstanding these impacts, DFAT also advised that Australia’s trade has remained ‘resilient’, and that Australia ‘recorded its two largest monthly trade surpluses in March and May 2020.’ More broadly, the pace of recovery for Australia’s exports and investment will largely depend on the level of success of international recovery from COVID-19.
1.26
Other factors that have also influenced the trade and investment environment include rising trade tensions. The Tasmanian Government outlined recent geopolitical tensions and stated:
The so-called ‘US-China trade war’ and drawn out Brexit negotiations are just two of the major economic tensions of 2019; add to this the broader growing geopolitical tensions - particularly within the Indo-Pacific region – all of which has underpinned growing economic uncertainty and instability globally.
1.27
The Cognoscenti Group stated that the COVID-19 pandemic has exacerbated US-China tensions. MUSIAD Sydney stated that these tensions have put ‘Australia in a challenging position’, as it balances its economic and security relationships with the two nations.
1.28
The PerthUSAsia Centre added that ‘geopolitical disputes are escalating the implementation of trade protectionist policies, and increasing the imposition of punitive trade measures.’ The Institute for International Trade also noted that trade disputes are common, and pointed to multiple examples of countries using trade terms as part of political disputes.
About the inquiry
Objectives and scope
1.29
On 26 February 2020, the Joint Standing Committee on Trade and Investment Growth (the Committee) resolved to inquire into the 2018-19 annual reports of DFAT and the Australian Trade and Investment Commission. The focus of the inquiry, entitled the Inquiry into Diversifying Australia’s Trade and Investment Profile, was to understand whether there is a need for Australia to diversify its trade markets and foreign investment profile.
1.30
Issues considered by the Committee as part of its inquiry included:
Australia’s level of reliance on any one market for exports and foreign investment, and the associated benefits and challenges of these arrangements;
the impact of global crises (including trade and political disputes, as well as the COVID-19 pandemic) on Australia’s trade and investment; and
the roles and preparedness of industry and the Australian Government in assessing and managing risks, securing new markets, and ensuring the Australian economy is not overly reliant on foreign investment.
Inquiry conduct
1.31
The Committee issued a media release on 28 February 2020 launching its inquiry and calling for submissions addressing the terms of reference. The Committee also invited relevant government agencies, industry and peak bodies, and businesses to make submissions.
1.32
The Committee received 164 submissions and ten exhibits. These are listed at Appendix A and B respectively.
1.33
Reflecting the high level of community interest in this inquiry, the Committee received 5638 form submissions, approximately two thirds of which contained additional comments. While the Committee was unable to publish them all, one form submission was published as an example, alongside a sample of ten which included additional text.
1.34
The Committee held seven public hearings between July and October 2020, which are listed at Appendix C. These hearings were held either in Canberra or via teleconference, due to travel restrictions and social distancing considerations associated with COVID-19.
Report structure
1.35
Chapter 2 examines the level of diversity in Australia’s export markets, and the range of goods and services that it exports.
1.36
Chapter 3 looks at the opportunities and challenges of diversifying Australia’s export profile, and suggests possible pathways towards diversification.
1.37
Chapter 4 provides an overview of foreign investment in Australia, the associated advantages, disadvantages and concerns related to this investment, and options for improvement to Australia’s investment mix.