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Why Australia’s trade relationship with China remains at ground level

Despite strong export data, Australia’s trade relationship with China isn’t as developed as we think. AAP

AUSTRALIA IN ASIA: In the seventh part of our series, James Laurenceson looks at the challenges in doing business with China.

The headline numbers surrounding Australia’s exports to China make for impressive reading.

Australian Bureau of Statistics data show that in 2010, the value of merchandise exports had reached $58.4 billion, with services adding another $6 billion. This made China by far our most important export destination.

The level of merchandise exports reflected an average annual growth rate over the past five years of 29.1%.

Australia’s apparent export success also meant that it was one of the only high-income countries to be recording a trade surplus with China, reaching $27 billion.

The optimism surrounding our trade relationship with China stands in stark contrast to that of the US, where the Senate passed legislation intended to make Chinese exports less competitive.

But despite these encouraging numbers, our export performance to China is far less impressive than many people think.

In terms of merchandise exports, all we have really cracked is the ability to export minerals, in particular, iron ore – and not a lot else.

In 2010, minerals accounted for 67.3% of the total. This concentration has been growing over time, and the higher up the value chain you go, the more disappointing our export performance has been.

Consider the fact that mineral exports to China have been growing at an average annual rate of 39.2% over the past five years, compared with just 3.7% for elaborately transformed manufactures.

Whichever way you look at it, this latter figure is ordinary in the context of a Chinese economy that has been growing at an average annual rate of around 10%.

Exports of services to China are also heavily concentrated in just two areas, tourism and education.

These issues are significant for several reasons.

Is Kevin Rudd too optimistic? AAP

First, they imply that our export “success” mainly reflects our natural resource endowments. It is not as a result of hard won competition stemming from technical innovation and value-adding.

For example, while Australian engineers may well be at the forefront of mineral extraction technology, we largely do well at exporting iron ore because so few other countries have such high-grade iron ore in the ground to begin with.

Second, an export strategy that relies on natural resource endowments, such as minerals in the ground, comes with a use-by date attached, albeit one that might not be reached for some time.

Third, development economists have long noted that primary sectors of the economy such as mining offer fewer linkages to the rest of the economy than do other sectors such as manufacturing.

If mining did offer strong linkages with the rest of the economy, the discussion of Australia’s two-speed economy would largely be mute.

Fourth, the success of exports from the mining sector comes at a cost to exports from other sectors, such as manufacturing, through higher input costs and a stronger Australian dollar.

Might the Chinese government’s stated desire to rebalance the economy toward domestic consumption offer broader success for Australian exporters, as Kevin Rudd’s “Australia-China 2.0” vision intimates? Probably not.

As I have previously written on The Conversation, China has been trying to rebalance its economy for some years already, so far without success.

The change in consumption patterns that an increasingly affluent and urbanised Chinese consumer population implies does not correspond to areas in which Australia has obvious competitive advantages.

Iron ore will still be needed for urban construction, and education and tourism will also thrive. But this represents more of the same, only on a larger scale.

China’s domestic market for things like architectural, financial and environmental services will also expand, and no doubt success stories will emerge from some Australian companies. But in these areas Australia will face vigorous international competition and will be unable to rely on its unique natural advantages.

There are also forces at work that will act to further increase the prominence of mineral exports, such as Chinese investment in Australia’s mining sector.

All of the above is not to suggest that primary products should not feature prominently in our exports to China. Every country exports those products that are in global demand and that its companies can produce profitably at prevailing international prices.

Australia’s resource endowments are such that it is somewhat inevitable that primary products will dominate.

Given our limited pools of labour and capital, and the modest size of our domestic market, it would be fanciful to imagine that our exports could ever be dominated by manufactured goods in the same way that China’s and Japan’s are.

Similarly, there can be little doubt that the rise of China as a destination for our exports is a good news story for the economy as a whole.

The point is that the growing volume of exports to China shouldn’t be portrayed as reflecting the fundamental competitiveness of our economy.

The slow pace of growth with respect to exports of elaborately transformed manufactures should be raising alarm bells amongst policy-makers. The risks associated with a growing concentration of minerals in total exports also need to be recognised and planned for accordingly.

This is the seventh part of our Australia in Asia series. To read the other parts, follow these links:

- Part one: Is Australia ready for the “Asian Century”

- Part two: Australia in Asia: How to keep the peace and ensure regional security

- Part three: The lucky, lazy country shows how not to win friends in Asia

- Part four: How Australian aid in Asia can benefit those at home

- Part five: Learning to live in the Asian Century

- Part six: Colombo plan: An initiative that brought Australia and Asia together

- Part seven: Why Australia’s trade relationship with China remains at ground level

- Part eight: Finding the balance between India and China in the Asian ‘concert of powers’

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