Tuesday, February 18, 2014

Australia's China Dependence and Whether India Could be the Next Big Thing

"No country will ever replace China at number one in economic importance to Australia". So says Geoff Raby, a former ambassador to China. One could imagine an Australian High Commissioner in the United Kingdom saying the same thing in the 1930s or perhaps even the 1950s. Perhaps they might have said it about Japan in the 1970s or 1980s. The difference, many point out, is that China is a considerably larger entity than the UK ever was. For a very long time - since the beginning of the industrial revolution - population size was not the most important variable for economic power. Now that China has unleashed its economic potential, however, the consensus seems to be that China will soon become (and remain) the world's largest economy.

As China becomes richer, optimists argue, it will demand more than just Australia's resources, moving onto tourism, education and business services. They might even buy environmental services form Australia if we could find a way to encourage the industry's development in Australia.

Whatever the future possibilities, China's growth hitherto has benefitted Australia significantly. As the chart below shows much better to have been China dependent since 2007 than dependent on 'growth' in Europe or the United States.

No doubt Australians could have benefited further if there were a decent mining tax regime on a Australia's 80 per cent foreign owned mining industry. But such good news comes with a little bit of bad news if you worry about the impact of the associated high exchange rate on other areas of the tradeable economy or the vulnerabilities that come with an over-reliance on resources and on a 'single' country. And reliant we are on both.

Australia is now the most China dependent economy in the world. This is mainly because Australian resources have helped to generate a Chinese growth rate of around 10 per cent a year for 30 years. For the mathematically inclined among you that means its economy has doubled in size every 7 and a bit years. If it could just keep doing this for another 10 years then Australia's economic vulnerabilities would surely be a thing of the past.

Indeed, our policy-makers appear to be true believers in the China dream. There is widespread faith in the economic policy skills of Chinese Communist Party leadership and their ability to keep managing their economy to benefit Australia. And why not I suppose. It's worked so far. I can't help but feel, however, that the CCP leadership has produced an economic structure of over-investment and under-consumption that will eventually have to rebalance. Picture a rubber band being stretched further and further. The question is really about when it snaps and who it recoils on most. Just because it hasn't broken yet doesn't mean it won't. Eventually.

These charts got me thinking: who could be our next great trading partner? India is often mooted as a likely candidate but the relationship has long been seen as either 'emerging' or 'underperforming'. Policy-makers and commentators like to talk about the 'potential' of the Australia-India relationship, before arguing that 'much needs to be done' and that the relationship shouldn't 'be taken for granted'.

For Australian exports to India to increase rapidly in the near future, India would need to embark on a massive infrastructure spend like China has done in recent years. There is considerable scope for infrastructure development in India, but not the funds nor the inclination. It's important to remember that China's long-running economic growth and export prowess provided the wherewithal for its amazing investment surge (that may now be on the wane).

The most recent trade data on Australia's exports to India have not been encouraging, with exports declining by 12.9 per cent. However, the trade relationship has improved markedly over the past ten or so years. Coal and gold exports have declined in recent years. Copper has increased from 2008-09, but dropped off last year. Vegetable exports have also increased and could be a future possibility for major growth. Service exports are an important source of growth in trade between Australia and India, especially education. According to DFAT: "there were 37,400 Indian students studying in Australia as at the end of March 2012: India was the second largest source country for overseas students in Australia, after China.

In 2012-13, Australia's biggest exports to India were:
  • Coal $4.75 billion
  • Gold $2.98 billion 
  • Copper ores & concentrates $1.12 
  • Education-related travel $1.2 billion
  • Vegetables $404 million

Major imports were:
  • Personal travel excl education $555 million
  • Medicaments (incl veterinary) $183 million
  • Passenger motor vehicles $180 million
  • Information technology $177 million
  • Pearls & gems $173 million
  • Jewellery $141 million

Australia was India's 31st most important export destination and the 14th largest source of imports in 2012-

Our biggest overall export by far these days is iron ore and concentrates. In 2012-13 we exported nearly $42 billion worth to China. Australia only exports a relatively small amount of iron ore to India because it too has significant reserves of iron ore. In recent times, however, Indian iron ore production and exports have been negatively affected by a series of bans aimed at cracking down on illegal mining. This has been good news for Australian producers.

Australia ran a massive surplus with India of around $10 billion in 2012-13, down from over $14 billion in 2009-10. Total exports to India were $11.5 billion in 2012-13 compared to $78 billion for China. We run a surplus of $33.5 billion with China up from $2.3 billion in 2008-09. 

The following tables show recent key merchandise (goods) trade items with India and China. 

India is Australia's 7th most important destination for services exports. It is the 17th most important source of services imports. The trend over the last 5 years has been a decline of 8 per cent.

The latest trade in services publication covers transactions up to the end of 2012. The most important services export, education-related travel expenses fell from $3.01 billion in 2009 to $1.28 billion in 2012.

The graph below shows recent trends in Australia's key trade relationships as a point of comparison of Australia's trade with India. The dotted lines represent imports, the continuous lines are exports.

India might become Australia's most important trade relationship in the future, but it is unlikely to happen anytime soon. Despite recent economic growth and increasing trade, India remains a poor country with a low level of trade compared to China.

Continuing economic growth will be most important for the future of bilateral trade. Increasing wealth in India would translate into increased services exports, especially travel and education, and perhaps financial and business services. Increasing growth would also mean greater incentives to spend on infrastructure, which would benefit the Australian resources sector. There would also be an enlarged marker for Australia's agricultural producers. 

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