OVERSEAS TRADE: by Colin TeeseNews Weekly
Australia trading at a loss - myth and reality
, October 22, 2005
Australia's trading account seems to be in permanent deficit, and we are accumulating ever-increasing foreign debt, warns Colin Teese, a former deputy secretary of the Department of Trade. These twin problems are connected with the unique problems of the structure of Australia's export trade.Unless you don't care about the implications of trade deficits, the figures for August look bad. Those of us who keep records, mentally or otherwise, will recall that the July figures were, well, okay - still in deficit, but, with a 2.4 per cent lift in the value of our exports, it was possible to hope that the corner might have turned.
Some observers confidently predicted just that outcome. The August figures, those same pundits assured us, would be better still: reflecting, as they must, the full benefit of the continuing strong demand for our coal and iron ore exports.
Those expectations have not been realised. In fact, for 43 successive months, we have been importing more than we export. Our trading account seems to be in permanent deficit.
The numbers for this month show a decline
in the value of exports of 3.4 per cent, which wipes out all the advance of the previous month, and then some.
At the same time, we should note that imports over the same period also fell - by 1.3 per cent. Now this latter point has been little remarked upon, but it deserves a comment in its own right - if only because of what it tells us about the state of overall growth in our economy.
If, as we are constantly being told, good times are built around the strength of trade flows, then we are in deep trouble.
If trade is so important to our economic well-being, then a fall in the value of both imports and
exports surely tells us that the engine driving our growth is slowing noticeably.Dismal news
This month's dismal news is actually worse than it appears because it presumably includes all of the gains we had a right to expect from the lift in commodity prices and the strong demand for coal and iron ore.
One suspects that it was these latter facts - along with the hope of recovery in our manufactured exports - which encouraged the governor of the Reserve Bank, Mr Ian Macfarlane, to join the chorus of optimists looking for a much improved trade performance in August.
Where, we might reasonably ask that group, would we be without the current minerals boom? And why are not the major engines of export growth - coal and iron ore - in the midst of a price and volume boom, moving our trade balance into surplus?
The fact is we cannot hope, in this day and age, to ride comfortably on the back of our commodity exports, any more than we should have hoped, half a century earlier, to ride on the back of our wool exports.
Nevertheless, ours remains an economy whose prosperity depends heavily on commodity exports. In the wake of a commodity price and demand boom, should we not have every reason to expect big gains to feed into the trading account? Of course - and so they do.
But, for a small economy heavily dependent on commodity exports, there are uncomfortable and inescapable side effects from a commodity boom, and these impact adversely on the rest of our export industries - and especially on the manufacturing sector.
Demand and price fluctuations for commodities are an ever-present characteristic over which we have no control. And yet our economy must live with the consequences of these fluctuations.
When commodity demand and prices are strong, they push up the value of our dollar. That imposes an immediate and inescapable burden on other export industries. Their overseas customers must pay more for Australian goods, because the value of our dollar is increased. They find it harder to compete. In fact, they are actually harmed when a world economic boom drives up commodity prices.
When the commodity boom subsides and our dollar falls, the rest of our exporters can compete better; but by then the world economy has slowed and competition is tougher. So if you are a manufacturer in a small commodity-exporting economy, you are doomed always to be competing with the rest of the world when the going is toughest.
Our commodity exports, important though they are, must be regarded as something of a mixed blessing. Of course, we could and once did manage our economy in a way which blunted the adverse effects of our commodity exports on the rest of the economy - and especially on our manufacturing industries.
We don't any more. That being so, we can't blame our manufacturing companies if they take the necessary steps to protect their position. Why should they invest in servicing export markets when movements on the exchange rate - which they can neither control nor anticipate - can close off their access to those markets and wipe out the value of those exports?Undermining manufacturers
But that is not the end of it. The Government has made life in the domestic market more difficult. Its free trade policies have offered overseas competitors almost unfettered access to our market for manufactured goods - including those in direct competition with our local manufacturers. The effect of this policy has been to seriously undermine the stability of the domestic market for local manufacturers.
With no stable base left for their operations at home, and facing a difficult time in overseas markets, manufacturers increasingly are getting the message: "We aren't wanted here." They do what common sense and survival dictate: they move offshore.
Forget about the Government or the Reserve Bank trying to "talk up" the prospect of increasing manufactured exports - or, for that matter, anticipate the jobs that might flow from it. Concentrate on the facts.
Manufacturing is now about 11 per cent of our gross domestic product. We are now sitting near the bottom of the OECD table for manufacturing in developed countries. We once were, and still should be, around 18 per cent. As to employment: 50,000 jobs are disappearing from manufacturing industry each year, for precisely the reasons already explained.
These various considerations, taken together, explain why - even when commodity prices and exports are good - we can't bring our trading account into balance. We can't ride on the back of commodity exports.
Moreover, these same factors - excessive commodity dependence, inability to provide a stable domestic environment for manufacturing industry, and an excessively permissive policy towards imports - also explain why, quite apart from the trade imbalance, we are faced with an ever-increasing foreign debt problem.
Unable to compete at home or in export markets, most of our manufacturing industries are compelled to move offshore. We are importing what once we would have made for ourselves. Our consumer-based domestic economic growth depends on imports - because of the winding back of our manufacturing industry.
We are not earning enough from exports to pay for the imported consumer goods we need - accordingly, we must borrow the balance from offshore sources.
We don't seem to be able to balance our trading account, and we are accumulating an ever-increasing foreign debt. Yet, incredible as it may seem, the Government does not recognise these as connected problems, deriving from the fact that the structure of our export trade gives rise to special problems.
It will be said by some that offshore borrowing is necessary and we have always done it to promote faster growth in our economy. And so it is.
Correctly, we have in the past borrowed offshore in order to develop new industries. That practice should continue. Investment in new productive capacity is good for the economy and pays for itself over time.
But borrowing for investment is not the cause of our present indebtedness. Today we are borrowing to consume, with no apparently improved capacity to pay for the borrowings.
Complex though the problem is, the way out is simple and obvious. Either we reduce imports or we increase exports to the point where what we import is able to be paid for by what we sell in export markets. Ultimately, no other solution is possible.
We know that the level of current consumer consumption is necessary to sustain an acceptable level of growth. We also know that, given existing manufacturing industry policies, neither domestic output nor exports can be increased. We also know that commodity exports, upon which we so much depend, are subject to fluctuations beyond our capacity to control.
The element over which we do have control, and which could solve the problems of trade imbalance and foreign indebtedness, is that of manufacturing industry.Benign neglect
At the moment, the Government's attitude is one of benign neglect. Under the present policy of free trade, it is insisted, the operation of market forces will and should decide what happens to our manufacturing industry.
Whether or not you believe that market forces can and should decide the future of our manufacturing sector is no longer the real issue. We will, sooner or later, reach a point where we will no longer be able to continue to sustain desirable consumption levels on the basis of offshore borrowing.
At some point, interventions in the market will be forced upon whatever government is in power - regardless of its ideological inclinations.
The sooner that fact is realised and acted upon, the easier it will be to make the necessary corrections.
- Colin Teese is a former deputy secretary of the Department of Trade.