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:
First: 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.
No Comments