Overview
3.1
This chapter considers questions regarding diversification, both in relation to export markets and the range of goods and services that Australia exports. It considers whether diversification is needed, how it might be realised, and steps the government should take to ensure appropriate levels of export diversification.
The need for diversification
3.2
The Perth USAsia Centre stated that trade diversification must be a priority for government, particularly in light of the evolving global environment:
… as immediate external shocks bring into sharp focus the economic risks associated with concentrated trade and investment relationships, diversification policies should now be accorded a much higher priority … diversification is not simply desirable, but essential for Australia to both weather existing external economic shocks, and build trade and investment relationships for sustained longer-term prosperity.
3.3
The Chamber of Commerce and Industry Queensland (CCIQ) similarly outlined the benefits of diversification in managing economic risks:
Market diversification is a critical element of risk management and will help to reduce the economic impact of any political, economic or public health shock emanating from one country.
3.4
Similarly, Australian Grape and Wine said that:
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. A flexible diverse array of market options would prove a more sustainable option.
3.5
The Infant Nutrition Council stated that while China will remain a key market for its industry, diversification is also important:
Given the size of the market and strength of the Australian ‘clean, green, safe’ brand, China will realistically continue to be Australia’s key trading partner in the region. However, the ability for industries such as ours to be agile and able to establish brand recognition and sales channels in other high growth markets will be critical to long-term stability and viability.
3.6
Along the same lines, Grain Producers Australia said that:
Market diversification reduces the vulnerability of the Australian grains industry should there be a break down in the relationship with any single market. Current export vulnerabilities have been highlighted by the:
Imposition of considerable tariffs on the sale of barley into China;
Imposition of significant tariffs on the sale of lentils, chickpeas into India;
Increasing environmental requirements for the importation of canola into the European Union (EU); [and]
Changing chemical residue requirements (Indonesia, Vietnam).
Paths to diversification
3.7
The evidence to this inquiry highlighted a range of options for Australia to move towards more diversified export markets, including:
Taking a strategic approach to diversification;
Seeking out new markets, particularly through trade agreements;
Capturing greater value from the products Australia produces through value adding and advanced manufacturing;
Adapting to a changing political and national security environment, and its implications for the Australia-China trade relationship in particular; and
Reassessing advice and assistance the Australian Government provides to exporters to facilitate diversification and better prepare them for the ongoing risks of doing business internationally.
A strategic approach to diversification
3.8
Dr Shumi Akhtar advised that COVID-19 had triggered an impetus to rethink Australia’s trade and investment relationships:
There's no better time than now to rethink, re-strategise and revise our existing rules and policies on foreign investment and trade. In order to safeguard Australia's continued economic prosperity and prevent the emergence of a vast threat to our sovereignty, we have to take decisive actions and make informed decisions on how we view our long-term bilateral and multilateral trade relations.
3.9
Similarly, the Cognoscenti Group stated that ‘narrow, market-based calculations should be replaced by a more strategic approach that takes better account of the need for sovereign capabilities to improve national resilience’.
3.10
Other submissions to the inquiry likewise argued that changes in the global geopolitical environment should bring with them a reassessment of our trading strategies. The Institute for International Trade (IIT) stated that:
… political risk must now be integrated into the thinking around supply chain risk management in the context of the Australia-China trade relationship. Notwithstanding the obviously beneficial impacts this complementary trading relationship has had on Australia’s economy and economic development, the geopolitical sands have shifted decisively, and a more adversarial, bilateral trading relationship is in the early stages of unfolding.
3.11
Mercury International Consulting (MIC) noted that, while the Government has taken steps to help businesses diversify (including through negotiating trade agreements), its efforts ‘appear to be ad hoc and there is no sign of any coherent strategy.’ MIC outlined that a strategic approach could combine:
… high-level settings with significantly scaled-up services to businesses in target markets. This would involve increased resources for agencies like the Department of Foreign Affairs and Trade (DFAT), Austrade and Tourism Australia to grow the profile of Australia in-market, and make it easier for businesses to enter those markets. It should also look at working with like-minded countries to leverage emerging technologies to streamline processes and strengthen the rules of the trading system.
3.12
Similarly, the Institute for Integrated Economic Research – Australia (IIER-A) advocated for a comprehensive strategy for trade and foreign investment:
Australia’s approach to trade and foreign investment has focussed on efficiency rather than a comprehensive strategy. The result of a short-term policy focus has left Australia increasingly vulnerable to foreign economic influence. In particular, the scale of our economic reliance on trade with China is leaving us vulnerable to Chinese economic policy manipulation. … We have, in effect, left our resilience, and therefore our sovereignty and security, to the largely foreign-owned market.
3.13
DFAT outlined what it saw as the respective roles of government and business in facilitating diversified trade relationships:
The government's contribution is to facilitate open trade and investment; to negotiate agreements to liberalise market access; to set rules and assist exporters and foreign investors to understand the market opportunities; and to provide sound governance and a trusted legal system … It is the role of business to make commercial decisions. They will seek to maximise their profits and manage their risks. In doing so, they'll consider a wide range of issues, which could include relative revenue, costs between different markets, the diversity of buyers and suppliers within and across markets, and the security of demand and supply and other sovereign and political risks.
3.14
Similarly, the Australian Trade and Investment Commission (Austrade) argued that it is not the government’s role to provide direction to Australian businesses in relation to diversification:
Ultimately … the government does not direct businesses to diversify. The decision about what product to sell and which consumers to pursue is a commercial matter determined by each individual exporter.
3.15
The Department of Agriculture, Water and the Environment (DAWE) expressed similar sentiments in relation to agricultural exports:
Rather than a lack of options for exporters, in most cases market concentration is the result of commercial decisions by individual exporters. Exporters seek the best returns available for their products in the knowledge that an overreliance on any one market could sharpen the consequences if there's a disruption. While we as a department recognise the commercial imperatives, we will continue to work on behalf of exporters and agricultural producers to help them reduce risk.
3.16
The Australian Strategic Policy Institute (ASPI) highlighted its concerns with this approach:
… [corporate decision makers will] just follow the money of the faster recovering economies and operate as if the previous global economy was in place. For Australia and South-East Asia and some European countries, this would mean increasing exposure to the Chinese economy, but that would simply create greater risk in the medium term, perhaps in quite nasty ways.
Box 3.1: ‘China And’ strategy for diversification
A number of witnesses put forward the concept of a ‘China And’ or ‘China Plus’ strategy as a viable path for diversification. This refers to Australia continuing to export to China while actively exploring opportunities to build new trade relationships and gradually increasing exports to other countries.
Dr Shiro Armstrong explained this concept and stated that:
… it's not China or other countries; its China and other countries. … that's the policy we should be pursuing, of expanding trade with other countries in a way that does not purposefully intervene and divert trade away from China.
Asialink Business similarly stated that ‘a “China plus” or a “China and” strategy is essential to underpin any national narrative related to diversification.’ The Australia China Business Council (ACBC) expressed similar sentiments:
… [Australia’s] national interests are best served by adopting a China-plus strategy—that is, a strategy where we reaffirm our existing trade relationship with China and at the same time actively seek diversification into new markets to respond to the changing economic environment. We believe that this diversification reflects an informed assessment of risks and returns and makes sense for both governments and business.
Trade agreements and deeper relationships with growing markets
3.17
DFAT took the view that furthering Australia’s trade liberalisation agenda is an effective way to encourage diversity in exports:
The government’s active free trade agreement (FTA) agenda will result in greater trade diversification in the future. Australia is currently in FTA negotiations with the EU, the Pacific Alliance (Chile, Colombia, Mexico and Peru), Regional Comprehensive Economic Partnership countries, and the United Kingdom (UK). In addition the Australian and Indian Prime Ministers have agreed to re-engage on FTA negotiations. Should all these negotiations result in FTAs coming into force, along with the [Pacific Agreement on Closer Economic Relations] Plus FTA … Australia’s FTAs will cover a further 39 economies, bringing the proportion of Australia’s two-way trade (goods and services) with FTA partners to around 89 per cent (based on 2019 trade). This compares to 70 per cent of trade in 2019 with current FTA partners and 27 per cent of trade in 2013 with FTA partners at that time.
3.18
The Productivity Commission (PC) explained that multilateral trade agreements are regarded as the best way to reduce barriers to trade, but are also the most difficult to achieve:
… multilateral agreements … are the way we should be proceeding. But practically speaking, in the last decade it's been very difficult to negotiate multilateral agreements. So, you're left in a second-best world.
3.19
The Infant Nutrition Council similarly stated that multilateral agreements are preferable in that they may facilitate access to smaller markets that would otherwise not be a priority for individual FTA negotiations:
… the pursuit of broader multilateral agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership will have the added benefits of diversification of exports, including to smaller and emerging markets not otherwise covered by bilateral agreements.
3.20
The Australian National University (ANU) Energy Change Institute argued that multilateral agreements are a preferable way to pursue trade diversification, as FTAs can function to concentrate trade by way of preferential liberalisation:
Trade agreements which preferentially liberalise trade in certain sectors, with certain partners, run a risk of increasing the concentration of export markets. This is particularly true if the preferential liberalisation applies to partners and/or sectors which are already major components of trade flows. Non-discriminatory liberalisation through regional or multilateral trade agreements can, however, be a powerful force for diversification.
3.21
The Northern Territory Government pointed to the benefits of FTAs:
Current FTAs provide Territory businesses with a platform to engage foreign markets and improve access to a wider range of products. The Northern Territory Government leverages FTAs to diversify and grow trade, noting the continued need to promote these opportunities to small and medium sized businesses.
3.22
In a similar vein, the Tasmanian Government noted that it:
… continues to support the Australian Government's efforts to grow trade and investment opportunities with both existing and emerging trading partners around the world. In particular, we strongly support its agenda to progress FTA negotiations, such as the one underway with the UK, along with multilateral agreements with trading blocs.
3.23
Grain Trade Australia (GTA) expressed support for trade agreements in the following terms:
GTA supports bilateral trade agreements and considers them an effective trade policy tool. GTA acknowledges the achievements of Governments in both regional and bilateral trade agreements. We believe it is important these trade agreements continue to remain in place to:
provide a framework for trade,
continue to focus on improving market access,
reduce the impact of Non-Tariff Measures, and
foster tariff reductions.
3.24
Australian Grape and Wine pointed to a number of potential new markets into which Australia’s winemakers might diversify, but stated that Government assistance in accessing them would be a necessary first step:
… there are a number [of markets] which show a lot of potential as future high value or high demand wine markets, including India, Mexico, Russia, parts of South-East Asia and a number of the African nations. While there is significant potential for future growth in many of these markets it will require sustained effort and investment, and an improved trading environment (e.g. FTAs and improved regulatory arrangements) before this potential can be realised.
3.25
Canegrowers noted that the exclusion of export sectors from FTAs can cause market concentration elsewhere:
Unfortunately, sugar has been excluded from the trade agreements Australia has reached with the United States of America (US) and China. The exclusion of sugar from these trade agreements limits Australia’s access to these markets and has contributed to the increase in concentration of Australian sugar exports that has occurred in recent years.
3.26
Grain Producers Australia noted that given Australia’s already liberalised economy, it lacked much by way of leverage when negotiating new agreements, which makes them less likely to be effective:
There has been little transparent reporting regarding the success of these agreements or whether the promised tariff reductions have actually been achieved within the ‘agreement’ timeframes. Due to being one of the first countries in the world to deregulate our agricultural industries and remove production supporting subsidies and tariffs, Australia has had very little to negotiate with.
3.27
The Perth USAsia Centre cautioned that Australia shouldn’t wait for a trade agreement to come into force to drive new trade relationships, and noted that Australia’s ‘major economic relationships – Japan, Korea and China – were all developed without bilateral FTAs.’
3.28
The CCIQ highlighted countries that should be prioritised for diversification:
After China, Japan, India and South Korea are Queensland’s next [three] largest trading partners and their trade with Australia is also driven by market size, trade complementarity and geographical proximity. This makes these factors the baseline for exploring export market diversification.
3.29
The ACBC highlighted the opportunities of trade with Asia:
… the single greatest opportunity for the Australian economy lies in Asia. Even allowing for the impact of COVID-19, Asia remains on track to top 50 per cent of global Gross Domestic Product by 2040 and drive 40 per cent of the world's consumption, representing a major shift in the world's economic centre of gravity.
3.30
The Perth USAsia Centre argued that there are a number of countries in the region that Australia should work with to develop deeper trading relationships:
… to face these challenges, we must diversify our relationships. We must reorient our trade and investment relationships with the growing economies in our region, particularly India, Indonesia, Vietnam and across South and South-East Asia. COVID has delayed but not disrupted the major drivers of economic growth in those major economies—that is, young, large, urbanising populations—that all fed into forecasting predictions that India, by the middle of this century, would be the second-largest economy in the world, Indonesia would be the fourth-largest economy in the world and Vietnam in the top 20.
3.31
The Perth USAsia Centre also highlighted that the recent Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) created significant opportunities for trade diversification, although it will require additional bilateral diplomacy to have full effect. DFAT similarly stated that Indonesia presents strong potential for Australia’s trade, and that the IA-CEPA ‘ensures that Australia is well-placed to deepen economic cooperation and share in Indonesia’s growth.’
3.32
Vietnam was also highlighted as an ideal candidate for increased economic ties. The Perth USAsia Centre stated that Vietnam has ‘complementary economic needs, a stable business environment, and a high growing economy driven by a large population, youthful demographics, and rapid urbanisation and industrialisation.’ In relation to the opportunities for Australia in Vietnam, DFAT stated that:
In August 2019, the Prime Ministers of Australia and Vietnam agreed to develop an Enhanced Economic Engagement Strategy, with the aim of becoming top ten trading partners and doubling bilateral investment. The Strategy is being developed in consultation with industry over the next 12 to 18 months.
3.33
India was highlighted as potentially the most significant option for trade diversification. DFAT stated:
The 2018 India Economic Strategy observed that there is no single market with more growth opportunities for Australian business to 2035 than India, which is projected to become the world’s third largest economy by 2030. On 4 June, Prime Minister Morrison and Indian Prime Minister Modi … announced elevation of the bilateral relationship to a Comprehensive Strategic Partnership (CSP). As part of the CSP, the Prime Ministers decided to re-engage on a bilateral Comprehensive Economic Cooperation Agreement.
3.34
The Perth USAsia Centre also referenced the Australian Government’s India Economic Strategy, and recommended the implementation of the strategy’s recommendations ‘as a priority.’
3.35
The IIT stated that India had ‘high potential’ as an option for Australia’s trade diversification. The IIT noted that trade between the two countries has increased substantially in recent years, that Australia and India share many trade complementarities, and that while India should not be regarded as the ‘next China’, there are strong economic, security and geopolitical factors that will likely make it one of Australia’s key partners in the future.
3.36
The Australia Arab Chamber of Commerce and Industry pointed out that Australia was underrepresented in markets in the Middle East and North Africa (MENA) region:
In 2018-2019 total exports to the MENA region [were worth] A$11.2 billion accounting for only 2.7 per cent of Australian exports. In an export market worth in excess of A$1 trillion, Australia is significantly underrepresented.
3.37
Agsecure put forward the concept of ‘regional self-reliance’, which would involve ‘the creation of a much closer working relationship between Australia and our nearest neighbours.’ Such an agreement could involve New Zealand, Pacific nations, Papua New Guinea, East Timor, Indonesia and Singapore. Agsecure outlined why this arrangement was beneficial:
Now more than ever it is in Australia’s strategic interest to draw its nearest neighbours closer to increase regional stability and security, and by supporting each other’s common drive toward increased prosperity. Together, the population of this region exceeds 325 million people, it’s projected to reach 365 million within a decade and we are richly diverse. We are a group of nations that can complement each other’s needs and achieve economic efficiencies at a regional level – relying less on other, more volatile relationships and supply chains further abroad.
3.38
ASPI suggested that Australia prioritise:
… relationships that are strategic, technological and economic with the Quad Nations—that is, India, Japan, the US and Australia—with the Five Eyes, with the EU, and with Indonesia, South Korea, Singapore and Vietnam.
Commercial and workforce capability
3.39
Asialink Business noted that Australia lacks an ‘Asia capable’ workforce of sufficient size, arguing that capability issues are ‘among the greatest impediments to planned expenditure or expansion into Asia for Australian businesses’. Asialink Business stated that:
Critical individual capabilities include a sophisticated understanding of the markets in our region, extensive experience operating in Asian markets (at least two years), long-term trusted relationships, proficiency in one or more Asian languages, the capacity to deal with government, and cross-cultural competencies. Organisational capabilities include a leadership team committed to an Asia strategy, customised products and services, a tendency towards local autonomy in organisational design, customised Asian talent management, and platforms to share learnings.
3.40
Asialink Business went on to note that there is ‘a significant dearth of the critical capabilities in the Australian workforce’, stating that ‘over 90 per cent of boards and senior executive teams in the ASX 200 lack the critical individual Asia capabilities to do business with the region.’
3.41
ITS Global pointed out that the trade relationships on which exporters depend do not arise quickly or easily:
Understanding an export market’s complex political and business culture, gaining the trust of business partners, and – most importantly – businesses spending time and resources in those economies is what makes trade relationships work, and will have a measurable impact on successful exports.
3.42
The CCIQ recommended that in-country expertise be a key area of investment for governments in order to facilitate export relationships in countries into which Australia may wish to diversify:
… when you actually physically enter a market, having somebody on the ground who the Australian government is working with and who can form those high level business connections makes a huge amount of difference, particularly since in many of those markets you form a relationship first before you start doing business. So investing in that kind of expertise and looking at it as a long game is really the one area that I would say we could focus on for practical, low-hanging fruit.
3.43
Dr Armstrong explained that the Government has a significant role to play in supporting the development of critical workforce skills and capabilities:
… where there are barriers to doing business in these countries, where there's a lack of understanding from Australian businesses and consumers about our South-East Asian or South Asian neighbours, I think there's a big role for government to help overcome those barriers and upskill our businesses and population to engage more with our neighbours.
Value adding and on-shore manufacturing
3.44
A criticism of Australia’s current export profile is that it fails to adequately capture value from Global Value Chains (GVCs). Australian exporters are instead concentrated in primary materials in the lower-value, or ‘upstream’, parts of the value chain. This can provide short-term benefits but may not support longer-term national prosperity. As Dr Emma Aisbett from the ANU stated:
In the short term, allowing the market to decide what we export is the quickest way to raise national income. However, export profiles dominated by primary, upstream industries—like Australia's current one—fail to capture much value add and tend to be associated with longer term, lower growth prospects and the generation of fewer high-quality jobs.
3.45
The Advanced Manufacturing Growth Centre (AMGC) made a similar point, noting that Australia’s participation in GVCs is at the low-value end. The AMGC said that Australia’s levels of the more profitable ‘backward’ GVC linkages – in which Australian exporters use foreign inputs to create higher value products for export – are amongst the lowest globally.
3.46
The ANU Energy Change Institute likewise said:
While participation in global supply chains supports economic growth, they do so more for countries downstream than they do for countries at the very upstream (raw material) end. Australia with its dependence on raw-material exports currently sits at the very upstream end of many important global supply chains … Growth prospects improve when countries can successfully diversify and move downstream in global supply chains.
3.47
Asialink Business argued that even when compared with countries with similar resource endowments such as Canada, Brazil and Russia, Australia has not developed much advanced manufacturing capability. Asialink Business added that ‘growing value-added manufacturing in Australia will be essential’, and pointed to value-added food and agriculture, e-commerce with key Asian markets, and a continued growth in service exports to Asia as areas of focus.
3.48
The AMGC pointed out that manufacturing was often described as a sector, when in fact it is a capability which ‘cuts across every other sector in which something is being made.’ The AMGC further stated that manufacturing ‘is the whole value chain, starting with research and development then design, logistic production, distribution, sales and services’. The AMGC advised that for Australia’s long term economic growth, it needed to ‘have a strategy to be a smart country which can make more complex things.’
3.49
National resilience is another reason to focus on redeveloping onshore manufacturing capability. As the China Policy Centre stated:
On strategic goods such as medical supplies, recent events have shown that trade diversification would not help Australia. Countries after countries, including Australia’s allies and partners, have restricted exports of essential medical supplies as the COVID-19 crisis unfolded. In this type of situation, Australia cannot rely on other countries, even those that have close bilateral and economic relations with Australia. National stockpiles and domestic manufacturing are more effective ways to address this issue than trade diversification.
3.50
The ACBC cautioned that:
If [the] government does decide to implement policies to support the development of domestic industries and capabilities in strategic sectors, we believe it should do so having regard to the fact that any restriction of the free flow of goods and services will always entail costs to Australian consumers and, thus, should be kept to the essential minimum level. Australia's economic prosperity as we emerge from hibernation will continue to rely on a strong and open global trading environment underpinned by the Australian government's strong commitment to the World Trade Organisation and its framework of rules.
3.51
The IIT expressed similar hesitation in relation to efforts to boost Australia’s domestic manufacturing capabilities:
… rebuilding manufacturing capacity in Australia … is a challenging proposition, and one not obviously supported by comparative advantage. Assuming it could be done, markets will still need to be found in which Australian manufacturing exports would be competitive.
3.52
Even in areas as critical as national security, Australia’s relative lack of advanced manufacturing capability can present problems. Titomic noted:
Titanium is a critical material used in aerospace, defence, nuclear, marine and medical industries. However, the current titanium supply poses national security risks for the US and the Western world. Japan, Russia and China are the largest suppliers of titanium metal to the US and other developed nations. Australia has an untapped role to play in offsetting those national security risks. We have the largest reserves of raw input titanium feedstock mineral sands in the world, a 280 million tonne resource that can create a commercially high value and sustainable value chain of pre-production input and post-production output.
3.53
Titomic argued that the development of a critical minerals capability in Australia would:
… deliver significant advancements across higher education, resource management, mining, emerging advanced technologies, rare earth industry development, hydrogen, space industry development, plastic repurposing, start-up and early-stage small and medium enterprises (SMEs), grants and government funding, and mostly importantly jobs. We also know the return on this investment will be significant; in terms of sovereign independence, economic prosperity, new value-add export opportunities, and importantly job security for the next generation of young Australians.
3.54
Submissions also noted that emerging industries offer some of the best opportunities for the development of domestic manufacturing and export. The ANU Energy Change Institute argued that:
Given the climate-related policies being introduced in many countries, demand for ‘green’ products is growing in many markets. Given Australia’s large land mass, and bountiful sun and wind, these markets provide an excellent opportunity to diversify Australia’s export base. In addition to green steel, green hydrogen and ammonia are realistic opportunities for Australia. Federal and state governments are beginning to realise these opportunities and act on them.
3.55
Dr John Pye from the ANU noted the prospect of foreign investment from European countries like Germany or Sweden in the development of ‘green steel’ production facilities, and the potential benefits this could offer for Australia:
I wanted to highlight the rapid activity and investment … in the space around green steel production in Europe at the moment. This is being rapidly accelerated in Sweden and Germany especially. They're developing this technology and prototyping systems. They even have their eyes on developing next-stage systems in Australia, because they see the huge potential for Australia to bring together the iron ore resources and the amazing renewable energy resources that happen to be in the same place. We're probably unique in the world for having those two things together, and there's perhaps a really big future competitive advantage that we might have in that space.
3.56
ASPI considered that Australia’s industry sectors needed to adapt to a changing world, especially by entering growing and data-enabled industries like biotechnology:
… Australia needs to get into the data and technology game. Large-volume resource and energy trade will continue as a source of wealth, but it will be a diminishing one and it will need to be enabled by data as well. One big area of trade and investment diversification for Australia is in biotechnology.
3.57
Similarly, the Interactive Games and Entertainment Association (IGEA) stated that Australian Government industry policy should focus more on industries with emerging growth potential. The global video games market was expected to be worth more than $250 billion in 2020, an annual increase of nearly 10 per cent. IGEA recommended that, at a minimum, current support from Austrade for the sector continue and in addition recommended:
… that the Government increase its resourcing of Austrade to enable them to expand its programs and partnership not only with our industry, but with other 'industries of tomorrow' that alongside games will collectively carry the burden of driving Australia's export growth in the future, as Australia's traditional legacy industries inevitably slow or decline.
3.58
IGEA further noted that digital industries such as video game development are free from many of the concentration and disruption risks faced by more established Australian industries:
As video games are largely developed, published, and distributed digitally, they are a true weightless commodity that do not need to be shipped and are exported directly and instantaneously to their customers all around the world…. Unlike many of Australia's other industries, [Australia’s video games exports are] not reliant on just one or two segments of the world, and the high diversification of our game exports reduces market and trade risks.
3.59
Even in traditionally concentrated sectors, opportunities exist to diversify exports in innovative ways. METS Ignited argued that Australia has the opportunity to diversify its exports in the mining sector by focussing on:
… the commercialisation of our technology capability across integrated technology value chains - an innovation-led ecosystem that comprises a unique and differentiated skills capability that we have yet to fully capitalise upon.
3.60
Along similar lines, the Resource Industry Network advised that:
The Australian mining industry is probably amongst the most advanced in the world. The technologies that we are dealing with are industry best practice. Other countries around the world are looking to those sorts of technologies to create that step-change forward for their industries and to move them into the levels that we have in Australia … The technologies that are coming into the industry at the moment are strongly identifying with safe practices, with safe environmental practices, and better and more productive mining methodologies. Once you add to that the factors of automation, data collection for improvement of that equipment, and autonomy—so, moving humans away from dangerous situations—I think the market is absolutely phenomenal, with opportunities for Australian businesses to move forward with that, not only on the equipment side of things but also on the services side of things.
Adjusting Australia’s trade mindset
3.61
The linkages (and sometimes conflicts) between trade, political issues and national security considerations were explored by some inquiry participants. ITS Global stated:
Foreign affairs cover broader political relationships between countries. Trade relations cover any number of technical issues, from customs and quarantine to tariffs and regulatory arrangements that impact on businesses engaged in economic exchange. Conflation of the two issues by policymakers, officials, think-tanks and news media, is not helpful for exporters that are focused on moving their goods and services across borders in the most economically efficient way.
3.62
Industry representatives made similar points. The Minerals Council of Australia, for example, stated that commenting on national security was not part of its role, and that national security was ‘a matter for government.’ Grain Trade Australia similarly advised that national security was not its domain.
3.63
In relation to the management of risks associated with Australia’s trade relationship with China, DFAT stated that it was:
… working generally to analyse our risks. We are very much committed to continuing the trade relationship, which is to our mutual benefit, and we are working through those trade issues … Of course, other agencies are involved in defence planning and updating the defence review, but we see these issues as separate.
3.64
Similarly, the Department of Education, Skills and Employment stated that ‘broader strategic and geopolitical tensions’ were beyond its role.
3.65
Many witnesses, however, took the view that Australia should adjust its approach to trade to recognise that security and sovereignty are tied up in trade relationships as much as in foreign affairs. This is especially the case as Australia’s major trading partner does not treat these issues separately. The Cognoscenti Group argued that:
… China doesn't see trade as somehow hermetically sealed or separated from geopolitics and politics. It sees it in its totality ... If the political relationship is now under real pressure then it follows that the trade relationship is going to be very difficult to maintain at its current levels.
3.66
The Cognoscenti Group continued:
… when we look at risk in Australia, it's been too narrowly defined … it's all about the risk to the bottom line. That's a reasonable response from a commercial point of view. But what the argument is now about is: is that a sufficient definition of risk at the national level? My argument is that, no, it's not, because it doesn't take into account broader questions of the national interest.
3.67
The Perth USAsia Centre noted that the COVID-19 pandemic demonstrated that the interactions between trade and foreign policy were increasingly acute, and that as a consequence Australia ‘can no longer divorce [its] strategic and political relationships from [its] economic relationships.’
3.68
The Export Council of Australia 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.
3.69
The IIER-A stated that a strategy was needed to manage changing conditions and respond to shocks:
To address the risks and vulnerabilities … we need an integrated national sovereignty / resilience framework, strategy and action plan. We need to determine how we better react, prepare for, adapt to changing conditions and, where feasible, prevent disasters and crises. Of course, our resilience is interdependent with that of our regional neighbours. We need to also address how we can assist them to improve their resilience as well; an interdependent partnership will be a foundation for building resilient and trusted supply chains.
3.70
ASPI similarly stated that ‘economic success isn’t now going to be all about being able to offer the lowest cost and most efficient centres of production’. ASPI further noted that the Australian Government has already taken steps to override purely economic considerations in areas like telecommunications, and that similar changes in other areas are likely:
The steps we've seen so far with this from Western governments have been on the protective side. The state steps in to say what it doesn't want … The flipside hasn't started to happen yet, with us saying, 'Actually, if we don't want Chinese tech firms in our core digital infrastructure, which are the jurisdictions that we trust and which are the trusted partners and jurisdictions with which we will actively welcome and encourage investment?' … There needs to be a flip away from relying on FTAs to a trusted-partnership approach that's based around confidence out of the pandemic and an alignment of values and interests—both those things.
3.71
Professor Medcalf stated that ‘prosperity and security are interdependent over the long term.’ Professor Medcalf further argued that the Australian Government should be preparing for changes that are likely to occur over the next two decades, which may include a greater role for government in the economy:
… we need to be ambitious in trying to develop a vision of … the Australia of, say, 2045—and the extent to which it's still going to be reliant on resources dominated trade and have a dependence on China, and, of course, on a carbon economy. Should we be preparing for a more diversified and resilient economic future, a future propelled by emerging and critical technologies, the very technologies that will be at the core of US-China rivalry and decoupling? And, if that is the case, we're going to need to accept a greater role for government and national security considerations broadly defined in shaping that economy.
3.72
Professor Medcalf also advised that ‘the business community generally does not perhaps yet appreciate that it is, in fact, the front line of a lot of the national security tension with China.’ Professor Medcalf added that Australia ‘was beginning to make progress’ in terms of the government sharing security assessments with the private sector.
3.73
Similarly, Dr Akhtar stated that:
Government will sometimes have far more insight and information than the general public has, especially if it is in relation to a national security threat. In that event, I think it is quite plausible for government to intervene and perhaps even take the opportunity to alert some of our businesses in the community to the risks they are likely to face and how it is going to impact the rest of society in Australia.
3.74
Professor Laurenceson agreed and added that:
… that there has to be a willingness on the part of government to understand that it's a two-way dialogue. So, yes, businesses do need to be informed about those national security risks, and risks emerging from shifts in the strategic environment, but it is also the case that oftentimes business people have access to information that the Australian government doesn't, so it needs to be a two-way street.
3.75
MIC argued that the Government must be more honest with exporters about the risks and threats that they face:
While ministers have made statements addressing economic coercion, we have not been able to find any other mention on trade portfolio websites. The ‘doing business in China’ sections of the Austrade and DFAT websites do not appear to mention the trade disruptions, nor does EFIC’s [now Export Finance Australia] ‘world risk development’ publication. … the Defence Strategic Update 2020, which does mention economic coercion, does not link it to China. If the government feels it cannot speak openly about the risks of doing business in China for fear of upsetting the Chinese Communist Party, it should establish an independent agency that is capable of delivering arms-length assessments (something like the PC or Parliamentary Budget Office).
Adjusting government support for exports
3.76
The Australian Government already provides many forms of support that could help exporters to diversify. In relation to agriculture, DAWE said:
… awareness of alternative market opportunities and strategies to manage dependence risks are being supported through government efforts. This includes activities to open new markets, raise awareness of alternative opportunities through market information and analysis, and support for trade development and promotion activities by both government and industry in alternative markets.
3.77
DAWE went on to point out that its efforts to overcome barriers in agricultural markets provided great value to exporters:
Tariff elimination and reductions through FTAs are complemented by the department’s work to negotiate technical market access requirements. … Technical market access covers all non-tariff and non-quota related regulatory requirements imposed by governments on imports such as biosecurity, food safety and traceability requirements. … Technical market access needs to be negotiated separately based on science and risk-based decision making. The process can be lengthy requiring a commitment of specialist resources to complete the risk assessment for imported goods, consult with domestic stakeholders and negotiate with trading partners.
3.78
DAWE also drew attention to its network of overseas agricultural counsellors in promoting trade in diverse markets:
The department’s network of overseas agricultural counsellors plays an important role in opening, improving and maintaining Australia’s agriculture trade in a diverse range of markets and meeting the challenges of the global trading environment. … The counsellor network supports agricultural export industries’ commercial priorities, provides in-market intelligence and works closely with other Australian Government agencies and Australian exporters to develop and consolidate market access opportunities and relationships.
3.79
The Department of Home Affairs likewise drew attention to the Australian Trusted Trader (ATT) program, which streamlines export arrangements:
The ATT program, managed through the [Australian Border Force], is a trade facilitation and compliance program open to Australian businesses involved in the international supply chain … The program offers a continually expanding suite of benefits that facilitate trade diversity. Benefits include the removal of non-tariff barriers in over 90 per cent of export markets globally, streamlined import processes and recognised Trusted Trader status through Mutual Recognition Arrangements (MRAs) … Australia has signed MRAs with Canada, China, Japan, Korea, Hong Kong, New Zealand, Singapore, and Taiwan. Negotiations are underway with several other major trading partners.
3.80
Simon JianDan stated that the Australian Government acts as a ‘cheerleader’ for Australian exporters, but should do more:
Austrade should cease to be primarily a trade cheerleader and add to its role, liaison with industry about impending risks, e.g. informing grain producers well ahead of crop planting that China is likely to impair the market access for barley, and they should consider options like planting wheat or forward selling barley to a trading house that can themselves plan ahead and employ risk management strategies.
3.81
Dr Scott Waldron stated that government resources that have been used in the past to facilitate trade with China could now be diverted towards developing access to other markets, and to ‘improving Australia’s capacity to understand and forecast risks from China through market and policy intelligence.’ At the same time, Dr Waldron cautioned that ‘even a well-resourced and coordinated system cannot foresee the many risks that emanate from China.’
3.82
GrainGrowers supported increased funding for government research agencies, such as the Australian Bureau of Agricultural and Resource Economics, to support industry efforts to develop market intelligence, including forecasts of demand in key existing and potential markets. GrainGrowers also called for government support for the grain industry to establish new, and consolidate existing, trade relationships.
3.83
In order to support SMEs in COVID-19 recovery efforts, the Export Council of Australia called for the Australian Government to:
Increase funding assistance to support SMEs to explore new markets and alternative supply chains and undertake research and development;
boost information-sharing channels about opportunities arising from FTAs;
expand international development assistance ‘so that developing country partners can implement and consistently apply their commitments to trade agreements’; and
‘add export training to domestic programs designed to boost entrepreneurships and livelihoods, including those targeted at remote communities and disadvantaged groups’.
3.84
Professor Clive Hamilton suggested that there should be a reassessment of the kind of industry and political support offered to exporters who choose to operate in a given market in spite of known risks:
If Australian companies, Australian industries … are going to put all their eggs or a large number of them in [the] China basket then they have to take the risk. They have to absorb the penalty that might come with it either by taking out insurance or by taking other measures to protect themselves. But it's down to them and they should not expect and nor will they ever be given political concessions or compensation if they take a risk that they know about - sovereign risk - which then comes back to bite them.
3.85
The Cognoscenti Group emphasised the importance of government policy being holistic and integrated. The Independent Tertiary Education Council Australia similarly stated that, in relation to international education:
The coordination across government hasn't always been there … There is one thing that Australia doesn't have that the main competitor nations … do have. That is a single agency that is responsible for not only the marketing aspects but also the lead engagement aspects as well as engagement and liaison within the community. … Other nations have bodies like that that are the single peak agency for international education. Australia really doesn't have that. Austrade fulfils some of those roles and Education fulfils some of those roles. A range of bodies across the Commonwealth fulfil different aspects of those roles, but there's no single body.
Committee comment
3.86
Australia is and will remain a trade-focused country with an open market economy. Australia’s export relationship with China is important, and will continue to provide great value to the national economy for the foreseeable future. That being the case, however, a wide range of stakeholders, including individual businesses, industry groups, academics and the Australian Government itself, have identified increased diversification of Australia’s exports as a priority for the country’s ongoing economic and strategic interests.
3.87
Trade diversification should be a national priority for Australia. Where possible Australia should seek to diversify its exports through growth – that is by maintaining existing trade relationships while seeking out new markets. Doing so will enable Australia to reduce its vulnerability to economic coercion without unduly sacrificing its standard of living. A necessary component of any Australian strategy to diversify its exports is improved market access. To that end, the Australian Government should seek to lower barriers to trade for Australian exporters.
3.88
It is in Australia’s interest to support and promote open, transparent and rules-based global trade, particularly through multilateral trade agreements. Where circumstances do not permit effective multilateral trade agreements, bilateral agreements should be pursued in key export markets. To the maximum extent possible Australia should seek to lower barriers to trade in new markets, particularly with those countries within our region that possess the potential for future growth and trade complementarity such as India, Indonesia and Vietnam.
3.89
Australia should also take additional steps to help exporters capitalise on opportunities in markets with strong growth potential in Asia. Language skills and personal familiarity with growing export markets in the region are a key mechanism by which Australian businesses can capitalise on export opportunities. As such, the Australian Government should explore ways to strengthen Australian capabilities in this area.
3.90
COVID-19, rising geopolitical tensions and the increasing overlap between trade and security concerns, have changed the global trading environment. As such, the Committee believes that ‘business as usual’ is no longer an option for Australia, if it is to maintain its prosperity and security. This is particularly the case for sectors with higher levels of exposure to risks of foreign influence, such as the university sector, which was outlined in Chapter 2.
3.91
In the future, Australian governments will need to consider Australia’s aggregate export relationships in the context of current political and strategic conditions, and adjust the guidance they provide to the private sector accordingly. This will allow both exporters and governments to improve the way they assess and manage risk.
3.92
The Committee recommends that the Australian Government develop and release a plan for trade diversification, which includes:
a focus on maintaining relationships with existing close trading partners as well as expanding trade with other countries;
a plan for diversifying Australia’s range of export goods and services; and
enhanced diplomatic capability to identify and secure new supply chains and markets.
3.93
The Committee recommends that the Australian Government continue its plan to create greater trade opportunities for Australian exporters, including through:
delivering on its India Economic Strategy;
encouraging Australian businesses to make greater use of free trade agreements that are currently underutilised;
developing an Enhanced Economic Engagement Strategy with Vietnam; and
working with our trading partners to eliminate non-tariff barriers.
3.94
The Committee recommends that the Australian Government commit to building the Asia-capability of Australian exporters and investors, including:
greater development and/or utilisation of programs to boost Asia-literacy of businesses and training for jobs of the future;
promotion of outward investment in Asia; and
a post-COVID-19 international education plan.
3.95
The Committee recommends that the Australian Government increase its encouragement of key Asian languages and cultures for K-12 students, to create better understanding and Asia-capability for future generations.
3.96
The Committee recommends that the Australian Government:
promote to Australian businesses the benefits of the Regional Comprehensive Economic Partnership (RCEP) (signed 15 November 2020), to ensure businesses are equipped to utilise the agreement; and
continue to provide support to Australian businesses who wish to take advantage of the RCEP.
3.97
The Committee recommends that the Australian Government, including intelligence agencies, take steps to increase industry awareness of national security and national interest risks in relation to trade and investment, particularly for sensitive and critical sectors.
3.98
The Committee recommends that Austrade work with Australian exporters to help them:
factor into their planning the market risks associated with economic slowdowns of key trading partners, natural disasters and trade challenges; and
identify risks in relation to trade and investment.
3.99
The Committee recommends that the Australian Government provide further guidance to all board members of exporting businesses to ensure that they are aware of their obligations under the Corporations Act, to exercise a reasonable degree of care and diligence when deciding to undertake international trade.
3.100
The Committee recommends that the Australian Government:
work with the states and territories, industry and university sector to investigate new options to increase domestic funding for universities and university research;
in consultation with the states and territories, require universities to publicly disclose the receipt of funding (including for research) from foreign state-linked bodies or individuals; and
if the veto powers contained in the Australia’s Foreign Relations (State and Territory Arrangements) Act 2020 allow, consider restrictions on foreign state-linked funding to Australian universities where such funding is considered to not be in the national interest.
3.101
Australia should also pursue diversification by increasing its national manufacturing capability. Exporting a greater variety of products with an emphasis on future market trends will enable exporters to access new markets, thereby ensuring Australia is able to weather both changing trends and future crises in a more resilient way.
3.102
A diverse advanced manufacturing base will help exporters capture more value from global production chains they are part of, and increase Australia’s resilience to future crises. The COVID-19 pandemic has demonstrated the risks of over-reliance on the global economy for manufactured goods, particularly in the health and biotechnology sectors. Increased manufacturing capability in critical sectors of the economy will be central to Australia’s resilience in the case of future crises.
3.103
Australia is a small country, and cannot expect to manufacture everything it needs. It is also a comparatively high-cost country, which means its manufacturing sector must seek to compete on value rather than cost. As such, Australia should work harder to enable its manufacturing sector to produce export goods that capture more from the manufacturing value chain, from research and development to design, production, distribution, sales and services. Opportunities and national advantages exist in a range of markets, particularly advanced manufacturing, critical minerals, additive manufacturing, emerging technologies, interactive entertainment, biotechnology, data and professional services.
3.104
The Committee considers that the Government’s October 2020 manufacturing strategy represents a significant and important first step toward a reinvigorated national manufacturing base. Australia must also develop a comprehensive and integrated framework to assess its trade vulnerabilities and determine how investment in national manufacturing capability might mitigate them.
3.105
A greater focus on innovative and emerging sectors will also support Australia’s long term economic growth. This Committee has previously recommended greater support for the development of a video games industry in Australia, for example, and support for this and other future-focused industries should be prioritised. The growth of Australia’s services industry would also serve to diversify Australia’s export offerings.
3.106
The Committee recommends that the Australian Government:
encourage the Productivity Commission to research international best practice regarding government support for innovation and industry;
build links with other national bodies that are tasked with this mission; and
adapt and apply these learnings to Australia’s circumstances.
3.107
The Committee recommends that the Australian Government:
develop an industry and university engagement strategy to foster innovation and the commercialisation of research; and
partner with industry members and universities to implement the strategy, by providing adequate funding, guidance and support.
3.108
The Committee recommends that the Australian Government in partnership with the university sector seek to take advantage of our low COVID-19 risk to further engage with new and emerging education markets and promote Australian universities as high quality, safe institutions.
3.109
The Committee recommends that the Australian Government work with industry, unions and universities to significantly increase Australia's sovereign manufacturing capacity.
3.110
The Committee notes the Productivity Commission’s current review of Australia’s resilience to global supply chain disruptions, and further recommends that the Australian Government ensure that Australia has adequate domestic supplies of key resources, such as fuel and medical supplies, to lessen the impact of global supply chain disruptions in the event of a crisis.
3.111
The Committee recommends that the Australian Government:
provide incentives to stimulate the growth of ‘industries of tomorrow’ including inter alia Australia's video game development industry; and
provide similar support to that which it provides to Australia's film and television industry.