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Is Australian prosperity too dependent on the rise of China?

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According to the latest rankings released by the Australian Bureau of Statistics, China is again our number one trading partner. But it raises the question: Do we have too many eggs in the China basket?

It’s official: we are ‘hugging the panda’ again. China is again our number one trading partner in the new rankings released by the Australian Bureau of Statistics (ABS).

In the financial year 2008-09, China accounted for $83 billion or 14.7 percent of our total trade in goods and services, with Japan in second place at $75.3 billion (or 13.4 percent of total trade). China was also our top source of imports, while Japan remains Australia’s top export destination. In fact, four out of our five top export destinations are in Asia. They are Japan, China, Korea and India, followed by the United States. The ‘Big 4’ account for just under $140 billion or nearly half of our total exports.

GRAPH: Australia’s trade in goods and services by top 10 partners, 2008-09 (A$ million)

It really is the Asia-Pacific century, certainly for Australia, if not for the whole world. The recent Global Financial Crisis (GFC) left Asia relatively unscathed compared to the US and Europe and even some of the other emerging economies such as Brazil and some of the Middle East markets fared relatively well.

The emerging market story — and the performance of the economies outside the G8 — could well shape the new global economic order. We’ve already seen the rise in prominence with the G20. It could well be the shape of things to come in terms of global governance, as the Bretton Woods institutions come in for some re-engineering to better suit the new global balance of economic power.

But in the case of Australia, have we got too many eggs in the China basket? According to recent public statements from the Reserve Bank of Australia (RBA) Governor Glenn Stevens, we’ll have to watch the relationship carefully, not just in terms of China but also India and the whole Asia-Pacific region.

It will be a matter of managing the next resources boom carefully, and ensuring that we use the boost in national income from the favourable terms of trade wisely, and watch carefully for the emergence of ‘bottlenecks’ or other ‘capacity constraints’ on the supply side.

Overall, the RBA view of China is benign. In fact, as pointed out by RBA Assistant Governor (Economic), Phil Lowe, Australia was the only developed country not to record a drop in its export volumes over the year. In a year when world trade volumes have declined by 20 percent, that is no mean feat.

But what are the risks? Some commentators, such as visiting China expert Arthur Kroeber, believe that China is “still on track to achieve economic growth rates of 8.5 percent this year and next.” Kroeber, the US-born founder of the influential China economic newsletter ‘Dragonomics,’ sees Beijing’s stimulus package as “definitely a long-term proposition in terms of impact” although he believes China will have to accept “the trade-off of higher inflation rather than a forced appreciation of the exchange rate.”

And what about Japan? Australian National University (ANU) economist and long-term Japan watcher Peter Drysdale believes such ‘trade league tables’ underestimate Japan’s influence economically in the region and especially with Australia. He says Japan’s obviously strong trade links with Australia are supported by Japan’s investment ‘footprint’ in Asia and the trading role played by Japanese corporates and their affiliates. For example, according to Drysdale, “over the past eight years, exports to Asia from Japanese forms based in Australia rose from A$1 billion to A$6 billion.”

An interesting point too about the data is the Association of South East Asian Nations (ASEAN). As a group of 10, ASEAN accounts for just under $83.2 billion or 14.8 percent of our trade. According to the new PricewaterhouseCoopers Melbourne Institute Asia link Index, there’s a great future for ASEAN in services, as they contribute “29 percent of Australia’s total exports to ASEAN”, with the new agreement between Australia New Zealand and ASEAN — AANZFTA — adding momentum to trading activity to our near north.

But it’s important not to get too carried away with trade statistics and these types of rankings. League ladders should really be left to footy tipster and the like. Ultimately, we live in an interdependent world in terms of trade and investment and focussing too much on who out-ranks whom leads us to miss other key points, such as the importance of Europe in terms of inward investment in Australia, or the role that the United States plays in innovation and R&D, or the strategic value of Japanese and Korean companies in developing global supply chains.

Yes, the rise of China and India is important to understand, as is the importance of the emerging economies in Asia, the Middle East, Africa and Latin America. But, ultimately, trade and investment flows between all continents will help the world recovery and lock in Australia’s future economic prosperity.

*Thanks to Frank Bingham of the Department of Foreign Affairs and Trade for his assistance

Tim Harcourt is Chief Economist of the Australian Trade Commission (Austrade) and the author of THE AIRPORT ECONOMIST www.theairporteconomist.com.

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