Export Monitor April 2014

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Trifecta of trade negotiations...

On 7 April 2014 the government clinched a free trade deal with Japan. It started the year aiming for deals with three close Asian trading partners — China, Japan and Korea. So far its score is two out of three, since it concluded negotiations on a free trade agreement with Korea in December 2013. It will continue to fast track the free trade agreement with China. These agreements offer unprecedented access to Australia’s key export markets and new opportunities in both scale and scope for Australia’s overseas business.

The Japan-Australia Economic Partnership Agreement will see 97% of Australia’s exports to Japan receive preferential access or enter duty-free. Exporters of beef, cheese, horticulture, wine and seafood will be the chief beneficiaries. For instance, negotiated tariff reductions are expected to deliver an additional $5½ billion of Australian beef sales over 20 years.

The Australia-Korea Free Trade Agreement provides duty-free access on 84% of Australia’s exports (by value) to Korea, increasing to 99.8% after full implementation. The Agreement is expected to deliver over $5 billion in additional income to Australia between 2015 and 2030, with exports to Korea expected to be 25% higher than they otherwise would have been by 2030.

To complete the ‘trifecta of trade’, the government is now eager to conclude talks that have been going on for nine years with China. Public statements from Chinese Premier Li Keqiang also indicate a willingness to ‘accelerate’ negotiations. Australia is pursuing greater access to Chinese agricultural and services markets (e.g. finance, health and ageing, and environmental management), which are expected to provide the next boon for Australian businesses.

...cover markets that buy over 60% of Australian exports...

Exports to Australia’s three largest export markets — China, Japan and Korea — totalled $167b over the year to February 2014. This represents a 350% increase from a decade earlier (Chart 1).

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The concentration of Australia's export destinations has also increased dramatically over the past 10 years. China. Japan and Korea now account for over 60% of merchandise export sales compared to 36% in 2004 (Chart 2).

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Demand for commodities has driven this record trade exposure to North Asia. JP Morgan has estimated that a 1% increase in real GDP growth in China generates a 0.6% impulse to Australian exports (1). They suggest that this sensitivity will only increase in coming years following an anticipated surge in output capacity that will ease existing supply constraints facing commodity exports (2).

It is therefore reassuring that the IMF’s recent World Economic Outlook 2014 suggests that rebalancing of the Chinese economy does not mean that China’s consumption of commodities will peak — at least not until the country’s per capita income doubles from current levels. Global commodity consumption is predicted to continue to rise, but at a slower pace for low-grade commodities (copper, coal and iron ore) and an accelerating one for higher-grade commodities (aluminium, tin, zinc and cleaner primary energy fuels) (3). This implies positive spillovers for Australian exporters of higher-grade commodities.

As canvassed in last month’s Export Monitor, China’s demand for agricultural imports will also grow as per capita incomes
rise, spurring demand for protein-rich foods, and offering new opportunities for Australian exporters.

...helping to improve Australia's international competitiveness

As mining investment falls, net exports are an increasingly important driver of growth (accounting for almost 90% of real GDP expansion in 2013). It is therefore worrying that Australia slipped six spots in the World Economic Forum’s Global Enabling Trade Report 2014. Australia fell to 23rd place in the trade competitiveness ranking, which assesses the quality of policies, infrastructure and services facilitating exports in 138 economies.

Australia ranks no lower than 24th in six of the seven pillars — which look at the performance of infrastructure, border administration and the general operating environment. However, we are heavily penalised by a low score in the foreign market
access pillar (134th), reflecting the high tariffs faced abroad by Australian exporters. Recent trade agreements brokered with
major export markets should lessen this impediment to Australia’s international competitiveness.

Exporters are sanguine about improving international trade conditions

Consistent with strengthened global activity and improvements in the UK and US economies, the IMF reports that world trade
growth picked up strongly in the second half of 2013. The World Trade Organisation expects this trend to continue — latest
forecasts for 2014 trade growth were recently upgraded to 4.7% (below the 20-year average of 5.3% but more than double the
2.1% increase of 2013). Australian exporters are also increasingly bullish on the trade outlook aided by loose monetary policy and some depreciation of the Australian dollar.

The Sensis Business Index released in March suggested that while the proportion of SMEs exporting fell marginally in the past quarter, for those that did export the value of exports rose. SMEs are also expecting improved export values in both the short and medium terms. The proportion of SMEs expecting growth in the value of exports for the current quarter was up 12 percentage points to a net 35% (4). The proportion of SMEs expecting to increase the value of exports in the year ahead rose to a comparatively high net balance of 46% (Chart 3).

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The latest ACCI–Westpac Survey of Industrial Trends also suggested improved actual and expected export deliveries for
the March quarter. The net balance of respondents reporting an increase in export orders has now been positive for three
consecutive quarters. That’s the best run since early 2011. But ACCI notes that while global trade has increased, the Australian dollar is ‘high by historical standards and the pressures of structural change remain intense’.

HSBC’s Trade Confidence Index found that Australian businesses expect international trade conditions to considerably improve over the next six months. The Index reached its highest level in 2½ years in March. The survey found that Asia will continue to overwhelmingly be Australia’s key trade destination and exchange rate volatility the biggest trade challenge.

Cassandra Winzenried, Senior Economist
cwinzenried@efic.gov.au

Roger Donnelly, Chief Economist
rdonnelly@efic.gov.au

The views expressed in Export Monitor are Efic’s. They do not represent the views of the Australian Government. The information in this report is published for general information only and does not comprise advice or a recommendation of any kind.  While Efic endeavours to ensure this information is accurate and current at the time of publication, Efic makes no representation or warranty as to its reliability, accuracy or completeness.  To the maximum extent permitted by law, Efic will not be liable to you or any other person for any loss or damage suffered or incurred by any person arising from any act, or failure to act, on the basis of any information or opinions contained in this report.  

1 JP Morgan 2014, Global Data Watch: How resilient is Australia’s external sector? April.
2 China’s demand for iron ore is roughly double Australia’s current production potential.
3 Lower-grade commodities are those demanded intensely during the initial investment-led phase of growth, which is characterised by rapid urbanisation, industrialisation and increases in infrastructure. Highergrade commodities are associated with the consumption-led phase of growth where higher incomes drive demand for higher-quality goods, namely consumer durables which use more tin, aluminium and zinc.
4 Net balance is defined as the difference between the percentage of SMEs with a positive outlook and the percentage with a negative outlook.