Australia’s export performance—should we be worried?

Since the 1980s, when Asia economies surged ahead in trade and growth and Aus­tralia lan­guished with appar­ent­ly unac­count­able low trade per­for­mance, Aus­tralians have been sus­cep­ti­ble to a sort of moral pan­ic about trade and exter­nal debt. Our then Trea­sur­er (Paul Keat­ing) ful­mi­nat­ed in 1986 about ‘banana repub­lic sta­tus’ if we didn’t bury the pub­lic-debt moun­tain. In fact, trade per­for­mance picked up in the late 1980s. It was only the wal­low­ing exchange rate, and its impact on debt-ser­vice, dur­ing the 1990–92 reces­sion that for a while seemed to bear-out Keating’s warn­ing. The psy­chic impact was more last­ing. Pri­vate­ly, it appears, many Aus­tralians real­ly are afraid of becom­ing ‘white trash’ in Asia, con­demned to a com­mod­i­ty-linked spi­ral of immis­er­iz­ing growth.

It is pret­ty clear that net exports have been a small (~1%) drag on the val­ue of out­put mea­sured as final domes­tic con­sump­tion. It also seems that the recent trend, since 2001 has been monot­o­nous­ly neg­a­tive. The trend looks dif­fer­ent in cur­rent prices, but the ‘chain vol­ume’ mea­sures are a more robust illus­tra­tion of what’s going on because they abstract from the sub­sti­tu­tion effects of changes in the rel­a­tive prices of goods and ser­vices year-year.

There are sev­er­al like­ly con­trib­u­tors to the neg­a­tive trend in net-exports:

  • The exchange rate—dom­i­nat­ed by the trend ver­sus the US dollar—is prob­a­bly one expla­na­tion, as the chart illus­trates. The Aus­tralian dol­lar has been backed by high­er inter­est rates than com­pa­ra­bly sta­ble cur­ren­cies in the past few years. Of course, this means exports are more expen­sive for our cus­tomers and imports less expen­sive than they would oth­er­wise be.
  • The strong pace of recent eco­nom­ic growth is anoth­er part of the expla­na­tion. The high lev­els of capac­i­ty uti­liza­tion—indi­cat­ed by his­tor­i­cal­ly low lev­els of unemployment—combined with the export- and domes­tic-sup­ply impacts of a decade-long drought, have seen con­sumers sat­is­fy­ing more of their demand from imports (a good thingsince the alter­na­tive would, cer­tain­ly, have been high­er lev­els of infla­tion).
  • The dete­ri­o­ra­tion of net export per­for­mance dur­ing a peri­od of high prices and demand for min­er­als exports points to seri­ous short­falls in export sup­ply capac­i­ty espe­cial­ly in trans­port infra­struc­ture, plan­ning, invest­ment, and reg­u­la­tion that need to be addressed.

For more on these con­trib­u­tors to recent trends, see the Decem­be 2007 record of the IMF’s Arti­cle IV con­sul­ta­tions with Aus­tralia and the RBA’s Assis­tant Governor’s address on the Aus­tralian Eco­nom­ic Out­look in March, 2008.

Should we be wor­ried by the net-export trend? If there were a rea­son to think that it will per­sist for decades, cer­tain­ly. But the expla­na­tions for the trend are cycli­cal or sto­chas­tic (drought) and there­fore unlike­ly to per­sist. Chances are very good that the cur­rent trend will turn around again. Admit­ted­ly, the deficit does not look cycli­cal when viewed in chain-val­ue terms, but seen in cur­rent dol­lars the cycli­cal char­ac­ter is more obvi­ous.

Is there a good prospect that changes in export poli­cies and pro­grams will con­tribute much to a turn-around in the recent neg­a­tive trend in net exports? No. There is some plau­si­ble evi­dence that export pro­mo­tion agen­cies, for exam­ple, have a pos­i­tive impact, up to a point. But there is no rea­son to think that they can improve per­for­mance on the order of one-per­cent of GDP. At least, not with­out switch­ing demand in ways that are bound to have even more neg­a­tive impacts on growth and pro­duc­tiv­i­ty (like import bar­ri­ers, for exam­ple, or exchange manip­u­la­tion). Most of the fac­tors iden­ti­fied above are not, in any case, very sus­cep­ti­ble to pol­i­cy set­tings. The impor­tant excep­tion is the need for action on infra­struc­ture. There is also a strong case to return to the micro-eco­nom­ic reform agen­da that has lain all-but-aban­doned since the mid-1990’s to improve pro­duc­tiv­i­ty incen­tives in ser­vices and to remove hid­den pro­tec­tion in goods sec­tors.

There are two fur­ther obser­va­tions to be made about the out­look for future trade per­for­mance:

Terms of Trade: IMF estimateFirst: Australia’s terms-of-trade have improved dra­mat­i­cal­ly and may stay strong for some time. A sur­vey of Australia’s long-term TOT shows they have not, on the whole, been unfavorable—much less immis­er­iz­ing—despite the his­tor­i­cal com­po­si­tion of our exports (com­modi­ties) and imports (man­u­fac­tures). There has been a much larg­er degree of diver­si­fi­ca­tion in export com­po­si­tion than the pop­u­lar imag­i­na­tion allows. Recent­ly, too, there has been a dra­mat­ic improve­ment in our TOT—by about 40% since 2003—due, most­ly, to the Chi­na effect (the chart is from the IMF Arti­cle IV con­sul­ta­tions ref­er­enced above).

An improve­ment in our terms of trade, even if it dete­ri­o­rates over time, is equiv­a­lent to uni­lat­er­al lib­er­al­iza­tion by our trad­ing part­ners. In oth­er words, we get more bang for the export buck. It lifts the exchange val­ue of our exports, increas­ing our income in the short run. But it does not con­tribute direct­ly to our pro­duc­tiv­i­ty growth in the sense of rais­ing out­put per hour of man­pow­er employed.

Sec­ond: Our export performance—indeed, our trade per­for­mance generally—is unlike­ly ever to match that of our region­al trad­ing part­ners. It is unde­ni­able that Australia’s trade-to-out­put ratio is low by com­par­i­son with, for exam­ple, OECD economies of the same eco­nom­ic size. With a trade share of GDP of less than 0.5%, we rank near the bot­tom of the OECD line-up with the giant economies of USA and Japan. But the expla­na­tion for this phe­nom­e­non prob­a­bly has less to do with the com­po­si­tion of trade or the moral-fibre of Aus­tralians than with geog­ra­phy. Aus­tralia (and New Zealand) are fur­ther from the cen­ters of world pro­duc­tion and con­sump­tion than any economies of the OECD economies or the emerg­ing trade giants of the BRICs. Until 1990s, our trade-dis­tance from cen­ters of glob­al pro­duc­tion was increas­ing.

Account­ing for the fac­tors in the grav­i­ty trade equa­tion sug­gests that Australia’s com­par­a­tive trade per­for­mance is actu­al­ly quite strong. These fac­tors, which are ordi­nar­i­ly out­side the con­trol of pol­i­cy, plain­ly have a role in deter­min­ing many eco­nom­ic out­comes in a coun­try. In Australia’s case, geo­graph­ic remote­ness increas­es the costs of trad­ing, which in turn low­ers the extent of inter­na­tion­al trade and pro­vides vary­ing degrees of nat­ur­al pro­tec­tion for Aus­tralian in dus­tries.”(Bat­ters­by & Ewing)

A Reserve Bank staff paper look­ing at the gen­er­al ques­tion of ‘open­ness’ (export/GDP ratio) reached sim­i­lar con­clu­sions about Australia’s dis­tance-lim­it­ed per­for­mance: it’s at least as strong as would be expect­ed giv­en our geo­graph­ic iso­la­tion. Indeed, it’s a lit­tle stronger than would be expect­ed, pos­si­bly because of geo­graph­ic size (diverse land-based endow­ments) and a lib­er­al trade pol­i­cy. Final­ly, grav­i­ty mod­els also sug­gest that Australia’s pro­duc­tiv­i­ty gap to the Unit­ed States, for example—we strug­gle to reach and rarely exceed 80% of USA pro­duc­tiv­i­ty lev­els—may be explained by the dis­tance effect.

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