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Australia: Embracing the global opportunities … part 2, trade
Much of Australia’s economic success has been underpinned by trade, particularly its exports of commodities. The rise of Asia has driven strong demand for resources and high commodity prices, and this, plus massive investment in mining capacity in Australia earlier in the century, has supported strong national income growth. The value of Australia’s resources exports – led by iron ore, coal and gas – has risen by a stunningly large 750% over the past 20 years. But ‘peak demand’ for these three key products is on the horizon and there is limited appetite for new large scale investment in these areas. Although exports of these products will underpin income streams for many years yet, Australia’s next export and investment story needs to start taking its shape. What will that be?
In this three-part series, we are looking at the ways in which global connectivity has been a key driver of Australia’s economic success and where the future opportunities lie. In part 1 we looked at migration (see Embracing the global opportunities … part 1, migration, 26 August 2024).
Here we cover trade, which has clearly been a critical engine of Australia’s growth story.
Resources exports to Asia have been at its core. Australia has been an enormous beneficiary of Asia’s emergence, the demand for commodities this has created and, of course, the fact that the country has a rich natural endowment of these materials.
Australia’s current export basket makes these facts blatantly clear. Here are some statistical observations.
First, commodities account for the bulk of Australia’s exports, at 74% by value. Second, Australia is the world’s largest or second largest exporter of many commodities – including, iron ore, LNG, thermal coal, coking coal, gold, lithium, zinc and wool. Third, just three commodities – iron ore, LNG and coal – account for 47% of the value of Australia’s exports.
Fourth, 80% of Australia’s goods and services exports go to Asia. Fifth, within this, North Asia dominates, accounting for 58% of Australia’s goods and services exports. Six, the vast majority of Australia’s exports to China (which are 33% of the total) are minerals and fuels, which account for 87% of those exports.
Finally, Australia’s imports – largely of manufactured goods and intermediates (including fuels) – are also predominately from Asia.
Clearly, Asia, China and commodities are the key parts of the trade story.
However, the global economy is changing, with an increasingly complex geopolitical environment, shifts in trade policy and increasing demands of climate change. It is likely that we have already passed peak steel, given China’s property sector weakening, and peak coal and gas usage are on the horizon, due to the energy transition.
Australia’s next export story needs to start taking its form, with a pivot needed over time to the next driver.
We see this as likely to be driven by the global energy transition and demand for critical minerals and hydrogen.
Australia has great opportunities in these areas. Australia has lots of empty space, lots of sunny days and many locations that have significant wind resources. It has the world’s largest natural reserves of lithium and uranium, and ranks in the top five for a range of energy transition inputs including rare earths, cobalt, and manganese, and exports key conventional metals, including copper, nickel and zinc. Australia is set to become a key hydrogen exporter, while the use of renewables locally can also help to make the production of more-traditional resources exports less carbon-emitting.
Services exports and some movement up the value-added chain are also set to play some role.
Australia also has an opportunity to increase its trade with India and ASEAN countries, which are fast growing and where Australia’s current trading relationship is quite small and narrow.
To underpin both of these pivots, policy ought to focus on making Australia as attractive as it can be to investors, including foreign capital. Tax reform, labour market reform and streamlining of the investment approval processes are key for supporting investment in the resources sector. Services exports need pro-growth migration policies, with care taken to support Australia’s fourth largest export which is education services.
Direct industry policy support is set to play a role, with the government’s ‘Future Made in Australia’ programme. However, as Australia’s government-run, but independent Productivity Commission (2024) has noted, there are risks to this type of policy, which can “distort the allocation of Australia’s scarce resources towards activities that Australia is not best placed to undertake”.
Although using government funds for directly subsidising investment in industrial capacity is one potential approach, another is to aim at improving the competitiveness of the economy so as to attract investors.
Taking advantage of growth opportunities in ‘South Asia’ may be best supported by building on already strong people-to-people connections that come about due a large local diaspora of migrants from India and ASEAN. Turning these connections into skills and technology transfer, and greater business linkages to these economies, may be a key pathway to broadening the base of Australia’s trade with ‘South Asia’.
Australia is a trading nation and policy measures ought to focus on best supporting its trade connections.
Of course, financial connections are important too, which is the part of the story we look at next.
