A look to the future

Stephen Walters considers Australia’s future export prosperity and explains why it increasingly lies in the services sector.

Just 50 years ago, Britain was the largest single destination for Australia’s merchandise exports, reflecting our colonial history and membership of the Commonwealth. In fact, back in the 1960s, Britain took a whopping two-thirds of Australia’s exports, with many exports also destined for other European nations.

Now, the UK’s portion of our exports is just 3 per cent, a reflection of how much the focus of Australia’s trade relations has shifted to the rapidly developing economies of Asia. In fact, seven of our top 10 export destinations now are located to our immediate geographical north, a region that takes as much as 75 per cent of our goods exports.

Brexit may open new doors for more Australian trade with the UK, but Britain first must untangle its formal relationships with its major trading partners in Europe. Talks are already underway to secure a free trade agreement between Australia and the UK, a reality that would have been impossible if the UK remained a member of the European Union.

There were major tectonic shifts in our trade patterns from the 1960s, but the geographic mix of Australia’s merchandise exports has changed little recently. China and Japan remain the major destinations for our merchandise exports – as they were a decade ago – although China now ranks number one, not Japan. China currently takes 35 per cent of our exports, twice as much as Japan’s share. These are mainly iron ore and coal but also, increasingly, liquefied natural gas (LNG). China’s current export share is triple that of a decade ago, thanks in part to the massive fiscal stimulus China put in place after the global crisis of 2008–09. Much of this was in the form of commodity-intensive investment in infrastructure that saw exports to China soar.

Japan still receives a lofty 15 per cent of our exports, albeit down from 20 per cent a decade ago. This ratio will almost certainly continue to slide because Japan’s economy will almost certainly shrink over the next few decades as its population ages and dwindles. This decline is inevitable, absent a material lift in Japan’s intake of overseas migrants, which seems unlikely. No other country receives more than 10 per cent of our merchandise exports – Korea ranks third with an eight per cent share, followed by India (six per cent), and the US (four per cent).

For the foreseeable future, Australia will remain among the world’s largest exporters of commodities. We are already the largest exporter of coking coal and, within a few years, will become the largest exporter of LNG. We are also among the world’s biggest exporters of iron ore, and remain a major seller of agricultural produce.

But the pattern of Australia’s exports is likely to shift materially in coming decades. Healthy demand for coal, iron ore and LNG will persist as long as emerging economies modernise and industrialise. Development requires energy-intensive inputs that Australia is well-placed to provide. Service exports, though, are likely to become an increasingly important component of our export mix.

A study by the World Bank found that around two-thirds of the world’s middle class will live in Asia in 2030. That is, more than three billion of the world’s increasingly affluent citizens will be living on our doorstep in our major export markets – more than five times the current number. The near inevitability of this demographic shift poses great challenges for Australian exporters, but also opportunities.

A growing middle class in Asia will demand even more high-protein food, first class education for their children, better quality health care and, perhaps most beneficial of all to Australia, the opportunity to travel. Overseas tourism is already Australia’s third largest source of export revenue, when merchandise and service exports are combined.

Australia is well-placed to provide all of these services. Our long-standing scarcity of water, though, means we should be sceptical about bold claims that Australia can become the food bowl of Asia. This is a worthy aspiration, but one not likely achieved in the near term. The threat to global trade from the troubling lurch towards protectionism in the US and Europe makes it all the more important that Australia continues to push for free trade in our region and elsewhere. Service exports could benefit greatly and are, therefore, a key focus of the latest round of negotiations.