2011 Australian APEC Study Centre Conference

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1 Is Australia managing? The Impact of the Global Financial Crisis and The Outlook for Australia s Trade and Competitiveness AUSTRALIA S TRADE AND INVESTMENT PERFORMANCE IN ASIA Australia s future trade and investment performance in Asia will underpin our future economic prospects. This raises the question as to whether Australia is in a position to maintain and to grow our share of economic engagement with the wider Asian region. There continue to be important opportunities for Australian trade and investment in Asia. But we also face many challenges. I will touch some of the main opportunities for Australia from a business perspective. I will also point to some of the major challenges and barriers to Australia s competitiveness and to investing and doing business with Asia. I would also like to outline some priority steps that governments and business need to take to make sure Australian industry is well placed to take up the opportunities we have available. THE IMPORTANCE OF ASIA TO AUSTRALIA We all understand that Asia is already incredibly important to Australia s economy. East Asian Economy There is no doubt that our strong economic ties with our major trading partners in Asia were the basis of our mutual resilience during the global financial crisis. More trade and economic relationships with the East Asian region than anyone other than Indonesia. Australia s exports to Asia were worth more than $175 billion last year, with our total exports worldwide being $280 billion. The proportion of Australia s total exports going to Asia has gone from 50 per cent just five years ago to 60 per cent last year. We have also seen strong foreign investment growth in Australia from Asia /1

2 The proportion of direct investment from Asia has almost doubled in four years, with Asian nations now the source of 19 per cent of direct investment in Australia, when in 2006 Asia accounted for 10 per cent of the total. Foreign investment enables growth in our export markets because it is directed towards our key export industries. About one quarter of Australia s total merchandise exports go to China. Largest Share of Asian Market Our total exports to China have doubled since 2008, and are now worth about $70 billion a year. Added to this, China is now one of the fastest growing sources of foreign investment into Australia. At between $35 $40 billion over the last 5 years. At the same time, Japan remains our second largest trading partner and a vital foreign investor in resources and energy, manufacturing and food and beverage production. In fact investment from Japan has grown strongly over the last four years. Added to this, there has been strong growth in two-way trade with India. In addition, business regards India as a very important to Australia s future. Over recent years India has been one of our fastest growing export markets. It is now our 5 th largest trading partner. We have major resources and education exports to India. The recent calls for India to become a top five strategic partner for Australia reflects this. We need to take Indonesia seriously. Indonesian Per Capita income will double in next decade. Our education exports underscore the importance of the government s recent decision to streamline visa applications and lower the mandatory financial requirements for students intending to study at Australia s universities. There are also important opportunities emerging in countries such as Vietnam. Although it is not so well recognised, there are many Australian manufacturing and services businesses that are succeeding in Asia. In fact a number of our companies, including manufacturers and financial services institutions have invested in Asia and deliver their products and services from locally based operations. When it comes to policy, it is important that we fully consider and aim to enable the realisation of opportunities from all forms of engagement, and to leverage our existing strengths. While our trading relationships with Asia are strong, it is also the case that most of our trade comes from a small number of export products. The overall level of investment from Australian businesses in Asia is still relatively low. 2

3 WHAT ARE THE OPPORTUNITIES Asia s middle class is growing rapidly, and is amongst the fastest expanding middle class population groups in the world. When combined with the large population of Asia, it will drive the expansion of the global middle class. While today Asia accounts for less than 25 percent of the world s middle class population, the OECD sees this figure doubling in the next 15 years. The Asian Development Bank has estimated that by 2030 developing Asia s annual consumption will reach $32 trillion nearly 43 percent of total global consumption. Therefore, Asia s emerging consumers may eventually become a pillar of global consumption, just as the middle class in the U.S. and Europe have been for many decades. With the continuing growth and development of Asia, Australia has the opportunity to use our already strong trade and investment relationships in Asia to do two things: to continue to grow trade and investment by building on current strengths, including those in resources and energy, agricultural exports, education and tourism. to pursue new economic opportunities for example, financial and professional services, logistics. WHAT ARE THE MAJOR CHALLENGES Australia faces a series of challenges, starting here at home with our domestic competitiveness. Domestic competitiveness If we are to continue to grow trade and investment links with Asia, the domestic competitiveness of Australian industry is critical to future success. Currently we face domestic constraints and the costs of trading are higher than they need to be. Infrastructure and skills shortages constrain capacity and place limitations on productivity improvement. Our taxation system, including our corporate tax rate, needs further reform to be competitive. Ensuring that we have a flexible workplace relations system is also essential to maintain our exporting strength. We must also continue to make sure that our foreign investment rules enable our industries to continue to attract foreign capital. Greater global competition We also face global challenges where there are two driving forces: China and India and others are seeking alternative suppliers putting pressure on Australia; 3

4 Businesses in North and South America and in Africa want to win new markets in Asia. Although we should keep in mind many of Australia s successful resources companies operate in South America and in Africa. Restrictions on investment and the delivery of services within Asia Another important challenge for business is the restrictions placed on investing directly and doing business within Asia. Foreign businesses face substantial restriction on the level of direct investment that can be made in many Asian countries, including China and India. In addition, our services sector faces significant restrictions in Asia. And services are of course a key to further profit. Major restrictions include: Limitations on licensing and the right to deliver services within many countries; Restrictions on the recognition of qualifications of professionals. Although a number of Australian businesses have made successful investments in Asia, the restrictions, especially in the services sector, mean that opportunities are limited. PRIORITIES FOR CONTINUING TO GROW AUSTRALIA S TRADE AND INVESTMENT WITH ASIA In the light of both the opportunities and challenges, policy settings support competitiveness and the removal of restrictions to increased trade and investment are required. The BCA strongly supports the federal governments Australia in the Asian Century white paper process. We see this as a very timely initiative that will bring government, business, academia and the wider non-government sector together to examine the policies and actions that are required to ensure Australia remains part of the Asian growth story. From the perspective of business, there are five priorities for meeting the challenges and taking up the opportunities from our engagement with Asia. These are: First, Australia needs to pursue a domestic economic reform agenda focused on lifting domestic productivity Making sure we become more competitive at home must involve: Working to make sure our taxation system is competitive especially our company tax rate compared to other countries. Ensuring effective infrastructure and capital project delivery including access to skilled labour, planning and regulation and community and political attitudes to growth. 4

5 Second, we need to lower the costs of actually trading and improve at the border regulation to support competitiveness. This means making sure that our port and customs regulations are the most efficient in the world. Also, there is a strong link between attracting foreign investment and securing exports. Therefore, Australia s foreign investment screening regime must strike the right balance. our foreign investment rules must be clear, consistent and to the greatest extent possible transparent and easily understood. the BCA has also recommended giving private sector investors from nations other than the United States and New Zealand access to the higher foreign investment screening threshold at just over $1 billion. Third, we must continue to work to remove restrictions on Australian businesses doing business in Asia. It is essential that policy settings reflect the importance of market integration and services as drivers of growth. Both governments and business can play a role. a key priority must continue to be the negotiation of free high quality trade agreements. the Trans-Pacific Partnership negotiations are particularly important because they can provide the basis for removing restrictions on investment and trade in the Asia Pacific region and is a step to the FTAAP At the same time, we should not be waiting for free trade agreement negotiations to pursue key priorities. Where the Australian Government can work with one or more governments in Asia now to remove restrictions on our investment and services we should do so. Re-energizing the focus on APEC is essential. Fourth, we need to learn from competitor nations I mentioned that one of the challenges we face is that competitor countries are moving to try to take markets from Australian industry. It will be important that we study and learn from policies and approaches used by competitor nations (including emerging economies such as Brazil.) Finally, we need to invest in building relationships in our capabilities to engage with Asia. It will be important that Australian governments and business work together on investing in our relationships in Asia. As we know, the building of relationships is very important when it comes to doing business with Asia. The ability to effectively develop relationships requires cross-cultural understanding and skills. It also requires a willingness to invest time and resources in building relationships with government and with people in business. 5

6 While many businesses already do this well, we need to extend the commitment and the capabilities of business in this area. CONCLUSION By way of conclusion, Australia has build strong trading and investment links with Asia, albeit the investment story is one of strong levels of investment from Asia in Australia rather than the other way round. There are, however, many existing and emerging challenges to both maintaining our level of engagement with Asia and to taking up new opportunities. In light of the challenges, it is my view that we must move faster enough to take up new opportunities that are available in Asia. The government s Asian Century white paper provides a timely mechanism for government, business, academics and the wider non-government sector to work together on what is a vital project for the nation s future. 6