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Trade Profile: Australia Takes on the Tyranny of Distance

7 MINS READAug 28, 2017 | 09:00 GMT
The iconic Sydney Harbor sits on Australia's east coast along the Tasman Sea.
(Shutterstock)

An unforgiving terrain and dearth of navigable rivers have encouraged Australia's small population to cluster in urban areas, such as Sydney, the country's most populous city.

Editor's Note

Global trade is changing. The kinds of multilateral agreements that characterized the postwar years have stalled out over the past two decades, prompting countries and economic blocs to try to negotiate smaller deals with fewer partners. Nations and blocs have more leeway under this new model to negotiate the trade agreements that best suit their interests and to avoid those that don't. Now, more than ever, the future of international trade depends on a country or bloc's defensive interests, offensive interests and underlying factors of production. Our fortnightly Trade Profiles aim to break down these factors to facilitate an understanding of where global trade stands today and where it's headed.
 
In the eighth installment, we focus on Australia.

A Snapshot of Australia
Australia's Economic Offensive and Defensive Interests

Economic Background

At its simplest, Australia is a continent that is also a country, a territory at once expansive and isolated. Open sea surrounds it on three sides, while vast tracts of desolate wilderness separate its habitable zones. Relative to its immense territory, moreover, Australia's population is disproportionately small. Its remoteness has proved a unique advantage for land-intensive industries such as agriculture. But overcoming the "tyranny of distance," as Australian historian Geoffrey Blainey famously put it, is a perennial challenge for the country.

Australia has the highest share of arable land per capita of any nation today at two hectares per person. With relatively few mouths to feed and plenty of space to cultivate, the country established itself as a major agricultural exporter early in its modern history. Shipments of wool from Australia — notoriously a former British penal colony — helped fuel the United Kingdom's industrial revolution in the 19th century. The superabundance of land supported wool and beef production, enabling them to grow into multibillion-dollar industries.

Australia's Sparse Population

By the same token, though, Australia's seclusion and harsh terrain made it difficult and costly to export goods from the country. Expensive products whose price tags could offset the costs of production and export, such as gold, lead, bauxite, iron and coal, took precedence as a result. The commodities sustained Australia during its days as a colonial outpost, and mineral resources make up a significant portion of its economy still today. Coal, iron and liquefied natural gas account for nearly 7 percent of Australia's gross domestic product and contribute more than 58 percent of total revenue for goods exports. 

Along with its wealth of natural resources, Australia's time as a British colony has served the country well over the centuries. The English-speaking population, strong institutions, educational system and wealth it inherited from the United Kingdom enabled Australia to develop a resilient, Western-style economy that easily fit into international trade networks. Known as the "lucky country," Australia escaped both the 1997 Asian financial crisis and the 2008 global financial crisis largely unscathed and hasn't experienced economic recession since 1991.

As a Pacific nation (albeit a far-flung one), Australia has oscillated between its historical links with the West and its geographic proximity to Asia in its international trade relations. It maintained close economic ties to the United Kingdom after the colonial period and into the early postwar era. The bonds began to weaken, however, when the United Kingdom started integrating with the European Union. By 1970, Australia's exports to the United Kingdom had fallen to just 11.8 percent, down from their peak of 38.7 percent in 1950. Asia's rising economies gave Australia an alternative closer to home. (Former Australian Prime Minister Robert Menzies once quipped that what the Western world dubbed the Far East "is to us the Near North.") In 1966, Japan became the country's largest export market. China, too, turned to Australian resources to power its burgeoning economy, and today, it consumes 32.6 percent of Australia's exports — up from 2 percent in 1991. In fact, all but two of Australia's top 10 export destinations for 2016 were in Asia.

While the market for its commodities abroad grew in the postwar years, surging demand for goods at home, coupled with an influx of immigrants and capital, spurred the development of Australia's manufacturing sector. The rise of its domestic automotive industry fueled steel, plastics, glass and rubber production, as well as oil refining. Higher incomes fed industrial growth with help from protections and subsidies, and by 1950-51, manufacturing accounted for a record 29 percent of Australia's GDP. The industry's share of GDP later fell to around 25 percent, where it stayed for the next two decades.

In the 1970s, though, Australia hit the rocks. Its economic malaise, stemming in part from the inflation and sluggish growth plaguing the global economy, was compounded by rising wages in the country and competition from Asia. To ease inflation, stimulate imports and encourage efficiency in its domestic manufacturing industry, Australia embarked on a painful liberalization process. The government persevered after its decision to lower tariffs by 25 percent in 1973 met with pushback from interest groups and sank the country into recession, pursuing even deeper reforms in the 1980s. Canberra, for example, floated the Australian dollar, privatized pensions, revised the tax code and overhauled the financial sector. By 1996, it had reduced tariffs on most goods to 5 percent. Those measures eventually paid off: Exports grew, efficiency improved and the services sector expanded to account for 61.1 percent of Australia's GDP today.

Trade Implications

Trade Strategy

Australia is one of the world's most open economies. The country understands that knitting itself ever more tightly into the global economy is the only way it can overcome its natural limits. To that end, Australia takes every opportunity to enlarge its network of trade pacts, whether bilateral free trade agreements or larger deals, in the interest of maintaining an economy of scale to mitigate the expense of transporting its exports. It has signed deals with numerous Asian states and staunchly defended the ill-fated Trans-Pacific Partnership. Though it will continue to reap the benefits of its trade ties in the Asia-Pacific, Australia will look farther afield to South Asia and even East Africa in the future as it pursues new markets for its goods. At the same time, it will try to amend its existing deals to secure better coverage in areas such as services.

Defensive Interests

As the country's manufacturing sector has declined in recent decades, Australia has taken steps to protect it. Its small population and high wages, after all, make it difficult to keep the sector competitive. Since toppling tariff barriers in the 1980s, Australia has resorted to anti-dumping measures to prevent cheap imported products, processed foods, plastic and paper goods, heavy machinery, and steel from flooding its market. Its skilled workforce, meanwhile, has encouraged the country to try to move up the value chain to focus on high-end goods, as well as innovation, and to integrate more closely into regional supply chains.

Offensive Interests

When it comes to agriculture, on the other hand, Australia is on the offensive. The country organized and often leads the 20-nation Cairns Group, which pushes for greater liberalization in agricultural trade. Australia's fourth-most important export, meat, is a top priority in trade negotiations. Already, its beef, goat and sheep are in high demand — particularly in Pacific nations that lack the capacity to produce these products. But staking a larger claim on growing consumer markets such as China will be critical for Australian meat, along with other agricultural exports including sugar, rice, dairy and produce.

Australia also takes an offensive approach to its services sector. Services account for 20 percent of Australia's exports, adding up to around $53.9 billion in 2016, and employ 80 percent of its workers. Unlike its manufacturing industries, moreover, the country's expertise-intensive services can hold their own on the global stage. Australia has long pushed to improve the sector's access to developed markets overseas, and it will try to further boost its service exports in the coming years to capitalize on Asia's growing middle class.

Given Australia's natural endowment of resources, the mining and hydrocarbon sectors constitute key pillars of its national economy. The country will aggressively seek overseas markets for these industries — which traditionally are not a main focus in trade negotiations — in the years ahead. To compensate for China's shrinking demand for raw materials, and for the volatility in the global commodities market, however, Australia will rely on increased services exports to balance out its trade strategy. 

Australia's Trade Pacts

 

 

 

 

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