Overview
2.1
Australia is a trading nation, and in recent decades its exports have been driven by growth in demand from East Asia and particularly China. This growth has significantly contributed to Australia’s prosperity. At the same time, the concentration of Australia’s export markets may reduce economic resilience and could also expose Australia to political and security risks.
2.2
Australia has capitalised on its natural advantages to grow its exports, particularly in the resources and agricultural sectors. While this has been highly profitable, a low level of economic diversity in Australia’s exports may create longer-term challenges for economic growth.
Concentration of Australia’s export markets
2.3
The Department of Foreign Affairs and Trade (DFAT) outlined how China had become a prominent trading partner for many countries, including Australia, in the past 20 years:
Over the past two decades the biggest trade opportunities for many countries, including Australia, have been with China, driven by the size of its population, favourable demographics and its rapid economic development (starting with its opening up to foreign investment in the late 1970s and underpinned by its accession to the World Trade Organization in 2001). At least 60 countries in 2018 counted China as their number one merchandise trading partner. For most of this century China’s growth in demand for resources has been unparalleled.
2.4
DFAT further advised that Australia’s exports to China have been assisted by the China-Australia Free Trade Agreement (ChAFTA), which entered into force in December 2015:
The value of Australian goods exports to China grew by 98 per cent in the four years following entry into force, compared to growth of 56 per cent in overall goods exports. Over the same period the value of Australian services exports to China grew by 76 per cent, compared to growth of 40 per cent in overall services exports.
2.5
The Perth USAsia Centre advised that ‘most of Australia’s export industries rely on a single large market’, with the average market share (weighted) of the largest buyer being 49 per cent. The Centre further outlined aspects of the concentration of Australia’s export markets, including that:
China is the top market for fourteen of Australia’s leading export industries, far more than any other partner;
Several exporters face monopsony conditions: where a single buyer accounts for the majority of sales. In thirteen industries, the top market is larger than the next four largest markets combined;
Single market dependence is most pronounced in mining, particularly for iron ore, gold, bauxite, and nickel. By contrast, the agriculture and manufacturing sectors generally have more diversified markets, albeit with some sub-sector exceptions (such as aircraft parts, wool and cotton); and
Only five industries – coal, beef, wheat, medical instruments and precious metals – have genuinely diverse markets without a clear dominant player.
2.6
Professor James Laurenceson also pointed out that over the last decade China had been responsible for 60 per cent of the $180 billion increase in Australian exports. Professor Laurenceson explained that this boom was due to the growing Chinese middle class, which was willing to pay a premium price for high quality Australian exports such as wool, wine and education.
2.7
In describing Australia’s trade profile, the Small Business Association of Australia highlighted Australia’s extensive trade relationships, as well as the relative dominance of a few trading partners:
Australia's trade profile is quite extensive. We trade with some 100 countries of which many are minor players. The dominant export partners (top 15) represented 73 per cent of our export income in 2019 and 80 per cent by value came from Asian countries. … China and Japan [are clearly] the dominant players with the bulk of our exports going to China.
2.8
The China Policy Centre noted that, throughout its history, Australia has often had a single trading partner dominate it exports:
… having one country dominating its international trade is nothing new for Australia. It is not an anomaly. The United Kingdom (UK), the United States (US) and Japan have all played that role vis-a-vis Australia in the past.
2.9
Professor Laurenceson was of the view that market concentration has arisen as a result of market forces:
The current pattern of Australia’s trade markets and foreign investment profile stems from decisions made by hundreds of thousands of businesses spread right across the economy – agriculture, manufacturing and services – evaluating and weighing the opportunities and risks they face. Businesses are incentivised to carefully judge these opportunities and risks because it is their money, time and good-will on the line. This market-driven, outward-looking engagement overwhelmingly serves the national interest.
2.10
The China Policy Centre also stated that the significant market concentration of trade has given rise to mutual dependence, at least to some degree:
While Australia is less relatively important to China than the other way around, Australia supplies goods that are essential for China’s continued development. Seen from the perspectives of policymakers in Beijing, China is also reliant on Australia.
2.11
An example of market concentration was provided by Australian Grape and Wine, which advised that the wine industry’s export profile was dominated by a few partners:
In the past 12 months to March 2020, the Australian wine sector exported around 728 million litres of wine valued at $2.67 billion. This wine was shipped to 119 different export markets around the world. … Australia’s top five markets in value: China, US, UK, Canada, and Singapore account for around 82 percent of the total value of these exports at almost $2.2 billion. This means that the remaining $470 million is split amongst the remaining 114 export markets. Further to this point the top two markets of China and the US account for over half of the total value of all exports at around 55 percent.
2.12
International education is also reliant on the Chinese market. In May 2020, 26 per cent of Australia’s international students came from China, followed by India (17 per cent), Nepal (eight per cent), Vietnam (four per cent) and Brazil (three per cent). The Department of Education, Skills and Employment further stated that:
Like the US and the UK, Australia’s largest cohorts of students come from China and India. However students from China make up a larger proportion of Australia’s total number of international students, indicating a greater reliance on this market in Australia than in the US or the UK.
Economic benefits of market concentration
2.13
Dr Scott Waldron pointed out an obvious benefit of market concentration for Australian businesses – it has been profitable:
China has been Australia’s top export destination for agriculture, forestry and fisheries products since 2010–11 and the sector was worth $17 billion in 2019 … through exports of 60 products. Tens of thousands of Australian farmers and agribusiness firms have benefited from the trade due to underlying complementarities that thrive under stable conditions.
2.14
Similarly, MUSIAD Sydney noted a large reason market concentration has arisen is because it has led to greater profits:
Many argue that [the] Australian economy is too reliant on China, because China's net trade with Australia provides tens of billions of 'profit' each year of exports over imports. As a booming economy, China has been willing to pay more for Australia’s commodities than any other country.
2.15
Along the same lines, the Australian Fresh Produce Alliance (AFPA) said that concentration can arise simply because one customer is willing to pay more for a product:
Diversification is not always the most profitable approach if a particularly large customer pays a premium – as has often been the case in trade with China.
2.16
The Australian Cotton Shippers Association acknowledged that cotton exporters are reliant on China, but that market concentration had delivered benefits for the sector in the form of higher prices:
Without a doubt, Australian cotton exports are reliant on our major market China. For the past 10 years China has been the single largest buyer of Australian cotton. This demand has been welcomed by the Australian cotton industry. It has resulted in higher prices for raw cotton, improved net farm incomes, improved the wealth of local farming communities, and played a part in increasing land and water values.
2.17
The Department of Agriculture, Water and the Environment (DAWE) advised that many agricultural products attract premium prices in China:
… in relation to China, the price premium for many agricultural products is so high that it's led to many agribusinesses making the judgement that the risk [of market concentration] is worth taking.
2.18
The Institute for International Trade (IIT) pointed to the benefits that East Asian markets (especially China) have generated for Australia’s resource exports, as well as the economy more broadly:
Resource exports, particularly coal and iron ore, have been central to Australia’s economic success and wealth creation, with East Asian economies in general, and Chinese demand in particular as a crucial driver of that success. The benefit of this latter relationship has been its scale, stability (until recently) and growth over time, with exports reaching a record $153 billion AUD in 2018-19, and two-way trade reaching $253 billion AUD.
2.19
Mercury International Consulting (MIC) described Australia’s exports to China as the ‘bright spot in an otherwise bleak outlook for the Australian economy’, and that it expected exports to China ‘to continue to surge.’
Long term trading relationships
2.20
The Australian Meat Industry Council (AMIC) stated that market concentration enables producers to develop longstanding relationships, which can make it easier to preserve trading relationships in the face of difficult external circumstances:
Trade concentration is often a reflection of the deep and longstanding relationships that industry participants have forged with customers in-market, which demonstrates Australian exporters are long-term, reliable suppliers that consistently deliver a safe, wholesome and quality product, regardless of short-term trade disruptions or price fluctuations.
2.21
In addition, concentration can offer considerable business benefits. AMIC said that accessing a single market consistently can give meat producers operational benefits (e.g. standardised packaging and cuts of meat, consistent storage and transport requirements) as well as allowing producers to focus finite business development funds and activities in one market. Concentration may also allow greater market penetration, which could provide a better return on sector-wide marketing efforts. Finally, concentration in a given market can help producers make a stronger case to government for assistance in reducing barriers to trade in that market.
2.22
GrainGrowers further noted that Australian grain growers have built a reputation for high quality and reliable supply within key markets:
A key advantage in predominately supplying a single market is a greater ability to communicate Australia’s value proposition. With relatively few major destinations, the value proposition for Australian grain can be communicated and reinforced, allowing deep market penetration.
2.23
Mr Simon JianDan also pointed to the benefits of country reliance ‘where there is longstanding trust and cooperation’ between the countries:
To a business person, trade between Australia and New Zealand, or between Canada and the US lacks the complexity often associated with international trade. The ability to use the laws of the nation you are trading with, to remedy a dispute is relatively straightforward, and politics is unlikely to lead to any effect on business.
Challenges associated with market concentration
Reduced resilience
2.24
The Perth USAsia Centre characterised Australia's trade relationships generally as 'deep but narrow' and stated that this concentration had made the country vulnerable to economic shocks. The Centre outlined the potential impact of this, in addition to Australia’s dependence on a limited number of industry sectors for exports, on the economy and stated:
By their nature, all open economies are exposed to external shocks. However, a lack of diversity exacerbates this effect. When external economic ties are heavily dependent on a small number of countries and/or sectors, any immediate shocks that occur in those markets have an outsized influence on the economy as a whole.
2.25
The Perth USAsia Centre went on to highlight that Australia is particularly exposed to trade fluctuations in China:
Australia’s concentrated export portfolio makes it uniquely exposed to trade shocks emanating from China. China not only accounts for 38 percent ($150 billion) of its exports, but is also the top market for fourteen of its top-30 export products. Most of Australia’s leading export sectors – including iron ore, coal, natural gas, base metals, education, tourism, beef, horticulture, seafood and cereals – rely heavily on the Chinese market.
2.26
DAWE outlined how COVID-19 had highlighted the disadvantages of market concentration and stated:
The key disadvantage of trade concentration is that it sharpens the consequences of a disruption in a key market, such as increased competition, a down-turn in demand or changes in government policy. The impact of COVID-19 has highlighted the vulnerabilities from reduced demand and disruptions to global supply chains. It is also possible that concentration may lead to a commodity becoming the target of trade distorting measures by a trading partner wishing to apply pressure on government decision making.
2.27
DAWE added that these risks are minimised when mutual dependence is a factor and explained:
The likelihood of a targeted trade disruption is reduced where there is mutual dependence, such as Australia’s live cattle exports to Indonesia and Vietnam or in the case of a range of Australia’s exports to China.
2.28
The Tasmanian Government noted that while the state has benefited extensively from international trade, it is aware that concentration is not without risk:
… Tasmania has benefitted - and continues to benefit - from trade with China: this is not expected to change into the future, however growing geopolitical tensions within our region and the onset of COVID-19 has brought to the fore an awareness to both businesses and governments alike that the need to maintain a broad field of trade partners offers the best insurance against shocks to the global economic order.
2.29
The Chamber of Commerce and Industry Queensland (CCIQ) also noted that Australia’s reliance on China as an export market exposes industries to risk in the event of market shocks or disruptions:
… the dominance of a single market amplifies Queensland’s susceptibility to economic and international trade shocks. When the COVID-19 virus outbreak in China resulted in the collapse of Chinese demand, Queensland-based lobster exporters saw their markets effectively disappear overnight. Furthermore, the current trade issues between China and Australia on beef and barley will have a massive impact given that beef is Queensland’s largest manufacturing sector and largest non-commodity export, with a value of about $5 billion a year. Queensland is less dominant as an exporter of barley, but this is still a valuable export commodity impacted by the current trade issues with China.
2.30
AFPA advised that the impact of having a single large market is something businesses need to consider:
The reliance on one market or customer, at a national or individual business level, presents a range of risks which need to be managed. If a key primary customer is not able to maintain a level of demand it will have a supplier seeking other customers.
2.31
AMIC also took the view that market concentration exposed exporters to the risk of losses should access to that market be disrupted, which would then have serious flow-on effects:
… there is still the potential for significant systemic shocks and financial loss that can arise from a market suddenly closing, as product produced specifically for one market is often not easily diverted to another market without incurring heavy costs … it can result in a short to medium term glut of Australian meat on the international market, which will result in heavy discounting, reduced processing in Australia and severely reduced farm gate returns.
2.32
Similar concerns were raised by Australian Grape and Wine, which noted that planning for and managing the risks of market concentration should be a key focus for its industry:
This trade uncertainty is centred upon Australia’s key wine export markets, highlighting the need to not only capture the export opportunities that exist today, but to plan for and manage the potential for shocks to export markets in the future. Diversifying Australia’s export footprint in a strategic and considered way will be a critical part of this future planning. … We have had clear warnings for some time that relying too heavily on a single market with limited ability to shift is a highly risky strategy for business in the current trade environment which can see countries close or slow trade overnight.
2.33
The Export Council of Australia (ECA) similarly emphasised that:
Exporters need to factor into their planning risks associated with the economic slowdown of key trading partners, natural disasters occurring—whether environment related or health related—and the fallout from trade wars.
2.34
The China Policy Centre argued that working with risk is up to the management of individual businesses:
If individual businesses wish to rely on China for supply or demand, then it is up to the individual businesses to manage these risks. Business failures are part and parcel of doing business.
2.35
However, Dr Scott Waldron pointed out that such a risk-management process is unrealistic for many businesses, and that instead there is a vital role for peak industry bodies and governments in helping Australian businesses navigate international trade:
It is of course impossible for individual managers or many thousands [of] farmers to individually accurately assess risks from China, or to negotiate access to Chinese markets. The actors rely on a thick institutional environment for these services. These include: peak farmer bodies and industry bodies funded from levies and matching public sources; state government (agriculture, trade, development, that have whole units dedicated to promoting trade and investment); and federal government departments in Canberra and overseas (Austrade, embassy and agricultural attaches, DAWE, [Australian Bureau of Agricultural and Resource Economics]).
Political and security risks
2.36
The Institute for Integrated Economic Research - Australia (IIER-A) noted that in pursuing export opportunities, Australia may be exposed to political and security risks:
In the case of exports, we find ourselves in a position where our largest trading partner, China, is also the main security concern for our nation. … If we are to maintain an acceptable balance between our sovereignty, security and economic wellbeing, then we must recognise firstly that economic over-dependence on any one country in terms of exports or imports is a risk to our sovereignty and security.
2.37
MIC similarly stated that:
The long-anticipated tension between having the same country as Australia’s main economic partner and primary security concern has become a reality. The Chinese Communist Party (CCP) sees its imports from Australia as leverage. Leverage it is not afraid to use. The last few years have seen disruptions to Australian exports to China of coal, beef and wine, tariffs on barley and CCP warnings about Australia to Chinese tourists and students.
2.38
The IIT also considered that economic decisions made over many years have left Australia in a high-risk position:
Reliance on the Chinese market has baked in a set of strategic dependencies that Australia’s political leadership, as well as security analysts and agencies increasingly view as a high-risk liability in a context of growing US-China geopolitical competition; a position which has been amplified by China’s recent willingness to apply economic pressure in response to Australian political positions on matters that Beijing disapproves of by blocking Australian exports into its domestic market.
2.39
Professor Clive Hamilton stated that Australia’s trade exposure to China is already having real-world consequences:
Ambassador Cheng Jingye’s brazen threat of 28 April to punish Australia economically over a political disagreement was a stark warning that Australia’s high level of economic reliance on China exposes us to Beijing’s use of ‘sharp power’ to pursue its political and geo-strategic ends.
2.40
Professor Laurenceson further highlighted the ‘genuine risks’ for Australia’s economic engagement with China, which included that ‘Australian companies could find themselves the targets of economic coercion orchestrated by the Chinese government in retaliation for political disagreements with the Australian Government.’
2.41
At the same time, Professor Laurenceson also considered that risks associated with Australia’s economic engagement with China, such as a downturn in China’s economy or businesses being targets of political coercion, were ‘frequently overblown.’ Professor Laurenceson added that ‘there are likely to be more effective ways of managing [these risks] and at a lower cost than forcing a diversification in economic ties away from China.’
2.42
In a similar vein, ITS Global emphasised that trade disruptions will occur every now and again as part of a normal trading relationship:
Trade is not simple and easy. If it were, free trade agreements would not help or be needed. It is not possible to avoid all trade disruptions. Exporters and politicians cannot expect zero problems in the trading relationship. This is something that must always be navigated, regardless of the market.
2.43
Professor Rory Medcalf noted that measures the government has implemented since 2017 in the areas of countering foreign influence and interference had made it easier ‘to sustain a trading relationship with China’. Professor Medcalf further stated that there is:
… a broad recognition that, on the whole, [countering foreign interference legislation] positions Australia to have a sustainable trading relationship with China and to resist economic coercion … because that coercion can no longer be amplified through political influence.
Challenges for the international education and training sectors
2.44
Universities Australia highlighted that international students are a huge benefit to the Australian economy and a key part of Australia’s international soft power efforts:
International education delivers huge benefits to Australia. It is now our nation's fourth-largest export sector, after iron ore, coal and natural gas, contributing $40 billion to the economy in 2019. The benefits are not just economic. International education enriches our campuses and delivers a worldwide network of informal ambassadors for Australia. It enables us to build enduring relationships both within our region and further abroad, acting as a really important conduit of soft power.
2.45
The National Tertiary Education Union highlighted research from the Scanlan Foundation Research Institute, which identified that reductions in Australian Government funding for tertiary institutions has meant that universities have come to regard foreign students (especially those from China) as a means of recovering lost revenue:
Since the partial de-regulation of university funding in the 1980s, overseas students are no longer tools of diplomacy but revenue sources for higher education institutions. This is especially the case with People Republic of China students, whose numbers have grown exponentially.
2.46
Professor Hamilton was of the view that Australian universities had become reliant on revenue from China, which had ‘compromised the fundamental principle of western universities—that is, academic freedom.’ Professor Hamilton further stated that the CCP in particular has used its financial influence over Australian universities to promote its ideas and discourse and that:
… universities are a special target of CCP influence operations because the party places an enormous emphasis on the struggle over ideas, perhaps attaches more importance to the struggle over ideas than we in the West do. The CCP believes it can achieve global pre-eminence only if it wins this battle of ideas, and to this end it's developed a vast program aimed at what it calls discourse control, a large part of which is directed at Western universities.
2.47
Professor Hamilton also raised Confucius Institutes as a particular area of concern. Confucius Institutes have been established in many universities in Australia, through partnerships between Australian and Chinese universities. Professor Hamilton advised that these institutes are ‘run by people appointed by the Hanban—that is, the agency in China that runs Confucius Institutes around the world’, and that they teach programs that are ‘consistent with the CCP view of the world, of history and of Chinese culture’. Further, he stated that ‘universities have found excuses not to place their Confucius Institutes on the register of foreign influence organisations.’
2.48
When asked about why Confucius Institutes have not been registered under the Australian Government’s Foreign Influence Transparency Scheme, Universities Australia stated:
Universities have looked very diligently and very carefully at the regulations underneath the … Foreign Influence Transparency Scheme, and the Confucius Institutes do not seem to fall under the regulations in that legislation. If they did, they would be declared as such. … I understand that my members have looked very carefully into whether they should be declaring Confucius Institutes under those laws. The advice they have is that they are not covered under those laws.
2.49
The case of Drew Pavlou, a student who had been suspended from the University of Queensland and had also been publicly critical of the CCP, was highlighted as a possible example of Australian universities’ aversion to the expression of anti-Chinese sentiment.
2.50
The International Coalition to End Transplant Abuse in China noted that some of Australia’s medical institutions and universities have provided training to Chinese surgeons from hospitals implicated in the forced transplant system, and that financial incentives may be causing institutions to turn a blind eye to forced transplants:
… at the University of Sydney, fees from Chinese students totalled $500 million dollars in 2017, representing 20 per cent of its total annual revenue. Protecting these relationships may impose significant conflicts of interest for Australian universities. Specifically, these lucrative relationships may be compromised if there is honesty and candour in addressing ongoing crimes perpetrated by the CCP, leading to a reluctance to criticise or even investigate allegations of human rights abuses.
Challenges for the agricultural sector
2.51
DFAT outlined the impact that recent rising trade tensions between Australia and China have had on some agricultural exports:
… the imposition of antidumping and countervailing duties on barley have effectively closed that market for the majority of Australian exports of barley. … In relation to impacts on our meat establishments: in May there were four establishments that were suspended due to some technical noncompliances and a further establishment was suspended in August. Reports from the meat industry are that, with those establishments being suspended, they anticipate that trade is now down 46 per cent year-on-year. So that has had an impact on those establishments and the overall trade with China.
2.52
DFAT advised that China’s Government is able to bear losses in the course of trade tensions. Specifically, in relation to China’s ban on imports of Australian barley, it said that:
In relation to malting barley, the Chinese maltsters had quite a heavy reliance on Australia for that malt. They now need to source malt from other countries. Most of those countries don't have a free trade agreement so they'll be buying barley at a higher price and they'll probably be getting it at a lower quality as well.
2.53
Dr Waldron stated that recent trade measures implemented by China ‘can be interpreted as “messaging” or “warnings”’. Dr Waldron added that economic coercion can be difficult to prove conclusively, but that it is nonetheless a real phenomenon:
It is of course very difficult to substantiate claims of economic coercion, because plausible deniability … can be maintained. However there is broad correlation between Australian government policy, and Chinese economic policy toward Australia.
2.54
Dr Waldron further noted that the tariffs imposed on barley by China in 2020 ‘stopped a $1.4 billion trade for five years with net losses of $250 million by 2025.’
Concentration of Australia’s export of goods and services
2.55
Some witnesses highlighted Harvard research which indicated Australia has a low level of ‘economic complexity’, which is measured based on the diversity of a country’s exports. The ECA stated that this reflects Australia’s reliance on resource and agricultural exports:
… the Harvard Growth Lab ranks Australia poorly in its economic complexity ranking. In this list Australia ranks 87th, just ahead of Burkina Faso and Paraguay. This aligns with feedback we have received from some members about the continuing overseas perception of Australia being primarily an exporter of rocks and crops.
2.56
Similar sentiments were expressed by Titomic:
Australia is in a precarious position due to its significant sovereign dependency on export of coal, [Liquefied Natural Gas], mineral resources and agriculture, where greater transparency is urgently needed to create sustainable value chains for Australia’s future strategic growth sustainability.
2.57
The Australian National University (ANU) Energy Change Institute agreed and noted that while Australia’s reliance on a few commodity exports may be advantageous in the short term, it is ‘detrimental to long-term growth prospects’ as ‘economic complexity (diversity) is one of the best predictors of underlying economic growth.’ The ANU Energy Change Institute added that Australia’s reliance on resource exports could leave it vulnerable if international demand for these commodities reduced in line with climate change commitments:
The heavy reliance on iron ore, coal and gas exports leaves Australia vulnerable to negative economic effects arising from climate-change related policy changes in overseas markets. The EU’s proposed carbon border tariff adjustment is an example of a policy that could have major consequences for the competitiveness of Chinese steel, and hence demand for Australian iron ore and coking coal.
2.58
The United States Studies Centre (USSC) argued that not only is Australia exposed by its market concentration, but that its mineral exports have served to conceal underlying economic weaknesses:
With mining and energy exports accounting for 58 per cent of Australia's exports in 2018-2019, Australia is arguably more over-exposed by its reliance on exporting natural resources than it is on a single trading partner. …The recession-free economy Australia enjoyed for nearly three decades hid a less than rosy economic picture: even before the recent economic downturn, economic trends in Australia were not headed in the same direction as the future global economy.
2.59
The Cognoscenti Group cautioned that China may decide to reduce its reliance on Australia’s resources:
… China is already developing strategies to lessen its reliance even on iron ore and coal. I think in three to five years’ time it may well have other options. I think for your worst case in this you would have to look at the possibility that a vast majority of the exports we send to China may be at risk if China decided to put them at risk. You can argue about how long it would take to develop iron ore mines in West Africa et cetera but that's where China is clearly wanting to go, because it doesn't want to have to be dependent on Australia for iron ore and coal in the future. … China needs our resources—yes, it needs some of our resources now like iron ore; there's no alternative right at the moment. But for a lot of the other products we sell to China there are alternatives, and China is going to look to those other countries.
2.60
The National Civic Council also noted Australia’s low level of economic complexity and that it ‘indicates the hollowing out of Australia’s manufacturing sector over the past 50 years.’
2.61
The USSC raised similar concerns and added that Australia faces challenges in terms of innovation, research and development:
… Australia appeared to lack many of the advantages of other advanced economies. For example, Australia ranks behind Uzbekistan, Uganda and Tanzania in global economic complexity ratings. In the Global Innovation Index, Australia’s ranking has fallen from 17th in 2015 to 22nd in the world in 2019. Indeed, whether it is Australia’s business expenditure on research and development, the level of Australia’s high-tech exports, or its business-research collaboration — Australia ranks near the bottom of Organisation for Economic Cooperation and Development countries, if not last.
2.62
Asialink Business stated that the resource and complementarity advantages Australia shares with its main trading partners are not enough to explain its low levels of economic complexity:
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.
Global supply of critical goods and inputs
2.63
The Cognoscenti Group explained that the COVID-19 crisis ‘has exposed the fragility of just-in-time supply chains and the folly of relying upon a single country for critical goods and infrastructure.’
2.64
In particular, the COVID-19 pandemic has highlighted the vulnerability of medical supply chains and challenges Australia may face in a future medical crisis. Arrotex Pharmaceuticals stated that:
The Coronavirus brutally underscored just how exposed Australian patients are to the mass disruption of the global supply of medicines. The rapid virus spread caused factory and border closes across our key source countries of China, the US and India. It has exposed our over reliance on China and India for the importation of 90 per cent of our medicines.
2.65
The IIT also noted that being dependent on a single country for essential goods was ‘risky’, and that ‘currently a large proportion of global supplies and intermediate and final goods are concentrated in China.’ The IIT added that the COVID-19 pandemic had ‘raised awareness of the need to reassess national supply chain risks.’
2.66
In terms of agriculture, the IIT noted that while Australia produces large amounts of food, parts of the industry are dependent on inputs (such as fertilisers and pesticides), which are often sourced internationally:
… a weak point in Australia’s food production supply chain became visible during March 2020. After drought-breaking rains across the country generated a spike in demand for essential farm inputs, such as chemicals for pestilence control and fertiliser, this demand was met with diminishing supply from China due to the latter’s virus lockdown.
2.67
Grain Producers Australia also drew attention to its industry’s various import dependencies:
It is also important to understand the import vulnerabilities should we be too reliant on any one source of input for grain production:
Fuel – diesel price fluctuations and supply issues;
Chemicals/chemical actives.
2.68
The Cognoscenti Group highlighted Australia’s dependence on global supply chains for a range of critical products – especially liquid fuel:
Our dependence on global supply chains for critical commodities and manufactured goods pre-dates, and is more serious, than the shortages of medical equipment and pharmaceuticals illuminated by the pandemic. Liquid fuel is a prime example. COVID-19 has driven home Australia’s dependence on overseas supplies of crude oil and a range of critical, refined products. Although the government has taken steps to reduce that dependence by establishing a sovereign petroleum reserve in the US, we are a long way from where we should be.
2.69
The IIER-A argued that an exclusive focus on economic efficiency and profitability has led Australia into a state of dependence:
… we have incrementally defaulted to the cheapest cost with the result that today we import, for example, 90 per cent of our liquid fuels, 90 per cent of our medicines and rely upon foreign-owned/flagged ships for 98 per cent of our trade. The import dependency is further compounded by the failure of successive Governments to mandate any stockholding levels for these critical imports, unlike most other developed countries.
2.70
The IIT recommended a strategic approach to supply chain resilience:
Supply chain assurance for critical enablers of Australia’s security, such as food, medical and defence-related items, requires a strategy for supply chain robustness. This should include supply chains composed of more than one supplier and located in more than one national territory, meaning that concentrated domestic supply is also undesirable.
2.71
The IIER-A recommended that Australia map out its supply chains and capabilities, so they can be better understood. The IIER-A further stated that domestic supply industries will require support, and provided an example in the COVID-19 context:
We've had a lot of [small and medium sized enterprises (SMEs)] step up to the mark and start producing masks and other components for [Personal Protective Equipment], but when they talked to me they said … ‘We invested and produced it and that was fantastic. But, now that we've found the global market's opening up again, there is no policy,' according to these SMEs, 'for hospitals funded by the government or government entities to mandate that a proportion of those goods come from Australian industry.’
2.72
DFAT stated that COVID-19 had highlighted ‘potential vulnerabilities’ in critical supply chains and explained that it was exploring opportunities to make supply chains more resilient through the Australian Government’s $107.2 million Supply Chain Resilience Initiative. The initiative is designed to ‘build a comprehensive understanding of critical supply chains’ and to ‘identify supply options to address vulnerabilities in domestic and international supply chains for identified critical products.’
Drivers of market concentration
2.73
There are a range of factors that shape Australia’s current trade profile, which is highly dependent on a single market for exports. These include:
the lack of alternative markets for some goods;
the complexity of modern production chains;
the cost of entry into new markets; and
non-tariff barriers to trade.
Lack of alternative markets
2.74
Several submitters pointed to the lack of a replacement market to explain export concentration and Australia’s reliance on China, highlighting that the Chinese economy is unique in its size and level of demand. ITS Global stated that:
One executive recently stated, ‘It’s very well to talk about diversification, but there aren’t three more Chinas out there.’ Every exporting country has a biggest customer. It will take some time for other markets to reach the size and sophistication of the Chinese market.
2.75
This sentiment was echoed by Professor Laurenceson, who argued that:
Engaging with giant markets other than China would be wonderful – if only they existed. In the real world, Australia does not get to choose where the demand for its goods and services comes from. That depends on which countries want and have the purchasing power to pay for them.
2.76
In relation to the lack of alternative markets for Australian iron ore, the Productivity Commission (PC) highlighted that:
We have benefited enormously from China's transition, and it is far from clear that we could have otherwise shifted that additional supply to another country. For example, to maintain China's share of our iron ore exports at its 2005 level, and yet keep the overall level of iron ore exports in 2018, Australia would have to find markets for an additional $22 billion of iron ore. Given it's unlikely that either the Japanese or South Korean markets - other major destinations for iron ore - would be able to expand greatly, that would require an increase in demand from the rest of the world for these resources of more than 600 per cent over current levels of demand.
2.77
The IIT similarly noted that there is simply not another market of China’s size to act as an alternative export destination:
Reducing China-dependence in Australia’s export mix is a highly challenging proposition. Outside of India, there is no single national market of equivalent potential size that could demand Australian primary commodities on a comparable scale. Furthermore, Australian businesses, exporters in particular, are relatively familiar with other substantial east and Southeast Asian markets, none of which offers a ‘silver bullet’.
2.78
MUSIAD Sydney argued that export diversification will be difficult for Australia because of its reliance on mineral and raw material exports, demand for which is concentrated:
The challenge of finding trading partners for Australian exports has been partly caused by Australia’s over reliance on the mining sector, whose products are only in high demand by countries with manufacturing bases so large that their internal mining resources are not able to supply them. There is a small club of countries that fall into that category.
2.79
MIC advised that replacing the value of exports to China ‘is at best a long term prospect’, and will take a significant amount of time given the market’s size:
… Australia sells as much to China as its next five biggest export markets combined. To meaningfully reduce the share of exports to China—from say, from 33 per cent to 25 per cent— Australia would need to find new markets for $36 billion in exports. This is about the value of Australian exports to South Korea (third-largest export market) plus Indonesia (12th- largest)…. While exporting to China carries the risk of economic coercion, it’s better to wear that risk than not earn the revenue at all.
2.80
The CCIQ acknowledged the need for Australian export diversification, but also noted that China’s unique size and economic demand poses challenges:
… diversification is something we fully support, but … it is a long-term, resource intensive exercise with an uncertain outcome. … there just aren't that many markets which have the profile of China that makes it so dominant in our export profile in particular.
2.81
Professor Medcalf similarly recommended a realistic approach to the time and effort it will take to achieve reasonably significant levels of economic diversification:
We should be encouraging government to look for every opportunity to assist Australian exporters and investors [to] turn their attention to our diverse neighbours in the Indo-Pacific region and our diverse Asian neighbours—for example, Indonesia, Vietnam, Japan, India, South Korea and so forth. We should also, though, be very realistic about the prospect of dramatic and rapid gains in those markets, particularly given the short-term havoc that COVID-19 has brought. This really needs to be a long game, and the argument that there's no easy substitute for the Chinese market is obviously a compelling one.
2.82
Dr Adam Triggs pointed out that attempts to diversify exports might impact Australia’s standard of living:
… the Chinese market is so large that even if you could diversify to some extent to other countries you still would suffer a loss as a consequence of that, because you simply couldn't make up that level of demand … the key question when people advocate that sort of diversification is: how are you going to fill that gap in terms of making sure we don't see a big drop in the standard of living for Australians and solvencies for the businesses which are in those industries as well?
2.83
Dr Shiro Armstrong similarly stated that cutting off trade with China would be ‘a path to a poorer Australia and a less influential Australia, and one that creates uncertainty for other countries dealing with Australia.’
Complex global production chains
2.84
The complexity of globalised production systems also makes the process of diversifying Australia’s trade links a difficult task. Global value chains (GVCs) are production processes that might involve components from several countries undergoing various value-adding processes before final production or assembly in another. GVCs can be hard to trace and disruptions to them can have unpredictable results.
2.85
ITS Global used the example of the automotive industry to illustrate the connectedness of many countries through GVCs, where changes in one country can have effects on others:
South Korea imports most of its iron ore from Australia. One third of South Korean steel is used in the automotive industry. Two-thirds of Korean cars are exported. Around half of Korea’s exported cars go to North America. Demand for Korean cars in the US therefore has a material impact on Australian iron ore exporters.
2.86
Professor Peter Drysdale advised that decoupling from the Chinese economy will affect trading relationships with many others as a result of complex GVCs:
… you can't think of cutting trade with China independently of our whole relationship with our Asian partners … On average—this is right across the whole range of Australian imports from China—about one-fifth of the total value of those imports is drawn from other countries through the value chain through which they come, through the investments of the Japanese and the Koreans, and through South-East Asia and so on. This is not a relationship that's separable from all our other relationships in the region.
2.87
An additional factor is the complex ownership and varied national bases of the multinational corporations who participate in these GVCs:
Further complicating matters is that locational decisions in GVCs are made by multinational companies, most of which are headquartered overseas and beyond the direct reach of Australian policy-makers.
Time, uncertainty and costs
2.88
Pursuing export diversity by entering new markets is a gradual process that brings with it a range of costs and risks for business. DFAT described this issue:
Seeking to develop a new market (or importing from a new supplier) has additional time and monetary costs. Businesses need to gather information, develop business relationships, tailor product specifications to the market preferences and regulatory requirements, and arrange transport, finance and insurance. Sometimes an additional cost of advertising is needed to build consumer awareness and demand. For almost 10 000 Australian exporters accessing Austrade’s Export Market Development Grants scheme over the last 10 years, the average expense in developing new markets for export was almost 15 per cent of the value of annual exports. Once trade is established and volumes grow, the ratio of transaction costs to sales declines rapidly. It is this fixed cost in establishing new markets that makes businesses reluctant to leave a market if they think that a disruption is temporary.
2.89
Dr Armstrong similarly noted the risks associated with diversification of Australia’s export markets:
Australian policymakers can choose to reduce trade with China by impeding exports and imports, or they can reduce the share of trade with China by intervening in the market to expand trade with other countries, including by diverting trade away from China. But these policy strategies necessarily incur costs.
2.90
Dr Armstrong further outlined potential costs of diversification:
If government policies are to make it difficult for businesses to engage in the Chinese market, or any other market, they will make businesses worse off and it is a pathway to lower incomes, smaller government budgets and the start of other countries losing confidence in Australia as a reliable economy with which to engage.
2.91
AMIC pointed out that even with new trade agreements coming into force, diversification is a slow, costly and risky process:
It must be recognised that diversification through further free trade agreements and breaking down of non-tariff barriers often occurs over protracted time periods, and pivoting an entire industry’s major trade reliance to other market/s can be challenging and costly, with no guarantee of success.
2.92
The IIT noted that in terms of some services exports, finding suitable markets can be challenging:
It is evident that commercial presence, or investment, requires relatively friendly host-country environments with an institutional environment not too dissimilar to Australia’s. Not surprisingly, therefore, Australia’s services suppliers predominantly locate in New Zealand, the UK, and the US. Diversifying away from these traditional markets presents challenges.
2.93
The PC added that diversifying the range of goods and services Australia exports may also carry costs for the Australian economy:
We've got a very strong comparative advantage at the moment, and a whole lot of resource endowments, and we've become much richer as a consequence of them. We've looked at the benefits of the terms-of-trade improvement for Australia's national disposable income, and they are sizeable. To shift away from those into complex goods, if that were to have the consequence of reducing those resource exports, we'd actually be worse off.
Non-tariff barriers
2.94
In many markets, ‘non-tariff barriers’ (NTBs) or ‘non-tariff measures’ (NTMs) may serve to limit or close markets to Australian products. DFAT defined NTBs as:
… any kind of ‘red tape’ or rule that unjustifiably restricts the flow of goods and services and is inconsistent with international trade rules … The removal or reduction of these barriers helps maintain access to existing markets and creates opportunities to diversify into new markets … Ultimately, resolution relies on trading partners removing the measures, and progress can be slow, given that NTBs are often applied for political or protectionist goals.
2.95
As an example, CBH Group highlighted NTBs imposed by the Indian government on Australian grains:
A recent example of an NTM that the Australian grains industry has encountered is the introduction by India of a list of weed seeds that are prohibited on import. That is, a nil tolerance, for the import of grain from Australia. The list of weed seeds includes weeds that are present in India, highlighting that this is not a phytosanitary issue, but an NTM. DAWE is currently assisting industry in seeking to have this list amended or a tolerance allowed in the future.
2.96
AMIC pointed out that a single meat carcass can be processed in such a way that parts of it might be exported to 100 different markets. The range of differing regulatory requirements in those various markets can be challenging for exporters:
Each of those markets have specific requirements and, in many cases, that's where those NTBs can arise … For example, overall, the burden of NTBs we estimated in 2017 to be about $3.4 billion, and they're in various categories. Some of those are in sanitary requirements, specifically for things like animal health; they may require a certain category of animal. In some markets there are shelf-life restrictions—products can only be packed for certain periods—allowable veterinary treatments, things like maximum permitted residue levels, and there are operational requirements, like processing standards.
2.97
The Infant Nutrition Council stated that ‘complex import regulations and market access rules provide a challenge for Australian exporters’. It noted that even with the existence of trade agreements, the resolution of NTB problems requires the agreement of both trading nations:
Whilst industry and government work closely with trade market authorities to navigate these complexities, and whilst there are provisions within ChAFTA for addressing NTBs when they arise, addressing market access issues (whether they be considered NTBs or not) requires good will on both sides.
2.98
In the fresh produce sector, complex protocols for securing export market access can be a significant burden on industry. AFPA stated that:
… more than 100 different products are grown in Australia. The challenge is that each product often needs a specific technical market access protocol from our export markets in order to trade … there is a different citrus, table grape, mango, and cherry protocol for each product and each product following requires a new protocol. The development of each new technical market access protocol is a long-term investment by both government and industry.
2.99
AFPA recommended that the Australian Government:
Adopt a whole of government approach to Technical Market Access, and share our expertise with key trading partners. The future growth of the fresh produce industry is dependent on technical market access into key export markets, this must be a priority for the Australian Government’s international engagement.
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Similarly, GrainGrowers recommended that DAWE and DFAT develop:
… a strategic, targeted and well resourced, long-term approach to addressing persistent NTBs restricting grains exports, including Minimum Residue Levels.
2.101
The National Farmers’ Federation (NFF) cautioned that ‘Australia's trade profile is determined primarily by factors which are not the outcomes of strategic or public policy decisions’. As such, the NFF recommended the Government continue to focus on eliminating tariff barriers and NTBs, but that it was also:
… important to acknowledge the limits of these adjustments and to recognise that attempts to direct Australian trade away from those markets which have natural complementarities will result in inefficiencies, making Australian industry worse-off.
Committee comment
2.102
Export concentration is a result of many factors, including East Asia’s economic growth, the growth in international trade facilitated by multilateral and bilateral trade agreements, Australia’s unique resource endowments and other comparative advantages, and its geographical proximity to high-growth markets. These circumstances operated to concentrate a large proportion of Australian exports towards high demand, high profit markets, the largest of which is China.
2.103
Market concentration can bring real benefits to Australian exporters. Australia’s high standard of living and national prosperity are in no small part due to its successes in developing longstanding trading relationships and partnerships in China. Stable trading relationships allow exporters to lower overheads by reducing costs in areas like regulatory compliance, packaging and market research, and frequently offer a price premium. Exporters sell their products where there is the most demand and where they can expect the best return. For many industries this has meant concentrating their exports in China.
2.104
However, market concentration also carries elements of risk. The Committee is concerned that Australia’s reliance on a small number of markets, particularly China, has left it exposed to economic, political and security risks. Taking greater steps to diversify markets for Australia’s exports will help to mitigate this risk, as well as opening up new opportunities for business.
2.105
The risk of foreign influence was highlighted as an area of particular concern in the university sector, which has become more reliant on revenue from international students enrolments, the largest proportion of which come from China. Diversification of funding options for universities should be considered, as well as further measures to lessen the university sector’s potential exposure to foreign influence.
2.106
Non-tariff barriers (NTBs) may also be contributing to market concentration, particularly in the agricultural sector, by impeding businesses from entering new markets. NTBs to trade should be a matter of priority for the Australian Government, so that market access for Australian exporters is not unduly impacted.
2.107
The Committee also heard that a large proportion of Australia’s exports come from a small range of sectors. Like market concentration, export concentration may reduce Australia’s economic resilience in the case of market disruptions or shocks. Identifying opportunities for diversity in our export goods and services, particularly in the technology and manufacturing sectors, will help Australia withstand any disruptions in a particular market or economy, and continue its trajectory of economic growth.