Features | Economy | Oceania

Trade Funk

Export statistics only tell half the story about the foreign earnings of Australian companies and are no longer a sufficient measure in a globalised economy.

Export statistics only tell half the story about the foreign earnings of Australian companies and are no longer a sufficient measure in a globalised economy. The companies in The Diplomat Global 100 together earn $218.9 billion around the world. According to the Australian Bureau of Statistics, official exports for the same period are $214 billion. However, also according to the ABS, 50 per cent of the official statistics are accounted for by foreign companies operating in Australia. The Diplomat Global 100 foreign revenues include Australian-owned exports and in-country earnings of public companies only. It is therefore possible to surmise that Australian exports and foreign earnings combined total at least $326 billion.

Add to this private companies and New Zealand revenues, which  The Diplomat Global 100 does not count, and the level of foreign investment revenue grows further still. Moreover in 2007, national exports grew by just 2.5 per cent when over the same period foreign earnings in The Diplomat Global 100 grew by 15.3 per cent, making the clear case that it is offshore investment that is driving most of the growth for Australian companies.

While Australian exports reflect a bias to Asia, the foreign revenue of The Diplomat Global 100 splits in nearly equal thirds between Europe at $76 billion, Asia at $65 billion and the Americas at $63 billion.

The industry split of revenue from each region differs markedly, reflecting very different regional priorities for Australian business and for the nation. Although mining tops the list for Europe as well as Asia, Europe’s position as the top source of foreign revenue for The Diplomat Global 100 reflects its importance as the global centre of finance. At total revenue of $19.4 billion, Europe is the largest offshore market for Australian financial services. No doubt London, and the UK more generally, are significant. Services and manufacturing also feature strongly at $16.7 billion and $12.8 billion respectively. Agribusiness is marginal at $2.2 billion.

By contrast, and perhaps not surprisingly, the Americas represent the most important market for manufacturers with $21 billion in foreign revenues. This makes sense given the United States is the biggest consumer market in the world. Second is services at $18.8 billion and mining at $13.3 billion.

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These figures are considerably different to official export figures of just over $20 billion for the Americas in total, suggesting again that the cash flows for Australian companies emanating from globalisation are considerably in advance of national export figures.

For instance, Australian miners are significant players in South American resource markets where they are responsible for up to a third of Chilean exports and a substantial proportion of Peru’s exports. Moreover, in the United States, before the shakeout in the listed property sector, Australian companies were estimated to own well over 10 per cent of American retail floor space. Of course, not all of the revenue emanating from these assets flows back to Australia but the profits certainly do, helping boost the capital account.

Foreign revenues from Asia are the most revealing. A whopping $49 billion comes from the mining sector – nearly four times the mining revenues of the Americas, and over double the sales in Europe.

By comparison the rest of the mix is very modest; services are $6.2 billion, manufacturing is $5.2 billion, finance $3.7 billion and agribusiness $1.2 billion. On a global basis, Australian business remains firmly fixed in traditional patterns of trade. We ship our commodities to Asia and invest in developed economy services in Europe or the Americas.

The great challenge will be to shift this pattern as the developing nations of Asia develop more sophisticated financial markets and legal systems, as well as wealthier and more urbane consumers.

So far, the signs are not good. The findings in a recent study by the Export Finance and Insurance Corporation (EFIC), called the Global Readiness Index (GRI), found that 65 per cent of Australian businesses with offshore investment plans were targeting either Europe (36 per cent) or the US (29 per cent). Perhaps more encouragingly, China featured at 28 per cent.

Policy

The policy implications for this spread of Australian business are many. But perhaps the most significant is that our major arms of government involved in international business development remain largely driven by export-oriented models of global engagement.

They pay little attention to globalisation, which is different from trade. Trade is exporting from Australia, globalisation is locating operations in other countries. Does it still serve Australian business when almost a third of Australian-owned global revenues are now derived from investments made by our globally integrated enterprises? A much higher proportion of these globalisation revenues are originating in the service industries than in export statistics. Given services make up 70 per cent of the Australian economy, it makes sense to put the national effort there.

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EFIC’s GRI also found that over half of businesses investing offshore do so to facilitate exports through the establishment of sales and marketing offices. Moreover, there was strong evidence of increasing sophistication in company strategies with almost half establishing an offshore presence to service that market. And 32 per cent were doing so to service a third market, a clear shift toward exploiting the arbitrage advantages of globalisation.

These findings support the view that behind-the-border issues such as access to local finance, market and company data for acquisitions, in-country staff and skills, clarity in legal, tax and investment regimes are emerging as the next round of challenges in policy assistance. While the policy objectives will necessarily be ambiguous because globalisation supersedes the national interest, and policy is supposed to reflect the national interest, the phenomenon has become so powerful it is not something any government can afford to ignore.

The EFIC survey also found that protectionism was a negligible issue. Indeed, trade barriers are more significant for businesses that stay at home, those with no offshore facilities nor any plans to create them. With multilateral trade talks stalled, and FTAs long and controversial to negotiate, greater priority could be given to relatively straightforward bilateral investment treaties or BITs.

Roger Donnelly, chief economist at EFIC, says BITs offer a “method whereby governments can reduce the risks associated with developing market investments. They can offer a much more direct and easy path for dispute resolution.”

Australia has negotiated very few BITs by comparison with other OECD countries. For example, Germany has already established over 200. BITs would be of direct benefit to service firms seeking to charge their foreign growth through acquisition; they would be of equal benefit for the mining sector, with its increasingly global exploration and investment effort in the developing world; and would potentially help manage the increasingly aggressive reciprocal investment flows of sovereign wealth funds.

Austrade is currently undertaking an internal review. This should culminate in expanded globalisation services and performance indicators that encourage outward FDI. Or, a new parallel body to deal with globalisation should be established.

Witness instead the Swedish approach to globalisation and trade. It has the Swedish Trade Council which makes virtually no distinction between the value of exports and foreign investment, the National Board of Trade to focus on policy recommendations to the goverment, as well as Open Trade Gate Sweden, and the Invest in Sweden Agency for reciprocal investment flows. There is also Sida, the national development agency.

True, Sweden has been operating in global markets effectively for far longer than Australia but the quality of government infrastructure is more advanced. Information on the performance of Swedish firms in overseas markets and about those markets is more advanced than anything available in Australia. If governments are expected to stay away from using funds to support Australian businesses in their globalising – to avoid “picking winners” – they can still usefully invest in infrastructure to help facilitate it.

Another example is the Korea Institute for International Economic Policy (KIEP), a government funded think tank which monitors how international trade issues affect Korean companies.

The Institute has 148 staff, including 44 PhDs and 51 researchers, and collects real-time information on two major economies through its affiliates, the Korea Economics Institute of America in Washington D.C. and a KIEP office in Beijing.

KIEP has run a trilateral joint economic research project between China, Japan and Korea since 1999 and is currently working on a China-Japan-Korea free trade agreement.

Australia needs a similar body to work out how it can integrate itself more tightly into the Asian region and place Australian companies within the regional supply networks. Goals like these take years to accomplish and require a sustained intellectual effort to pick the right strategies and execute them successfully.

Australia’s small population makes it likely that the need to globalise will become more pressing. According to the EFIC survey, 84 per cent of businesses cited increasing the size of their market the major contributing factor in their decision to venture offshore. Only 24 per cent cited cost reduction as a major motive and this declined the larger the surveyed business. The Australian government should not be afraid to support companies investing offshore.

Strategy

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Australian policy also needs to wrestle with the strategic questions raised by globalisation. For instance, is the current trade pattern of commodities to Asia and investments to the “Anglospehere” likely to be healthy or even sustainable over the longer term?

Australian companies’ Asian investment is only very slowly reflecting the increasing importance of Asia as an export destination. Stronger people-to-people links are stalled. Our biggest miners are increasingly reliant on China, but their staff levels within that country remain tiny. Are we satisfied to let this continue? Or is it necessary to offset these market trends with a greater all round engagement that will help the bilateral relationship weather the travails of commodity price fluctuation?

Moreover, the commodity boom itself is driven by a globalisation process that has shipped a huge swathe of global production to the developing world, leaving many developed economies dependent upon service industries, particularly finance, for growth.

The finance sector is an area of comparative advantage that could be globalised. The Prime Minister recently announced an agreement with the US Securities and Exchange Commission to achieve mutual recognition for the two nations’ securities regimes by the end of this year. The intent is to remove barriers that make it difficult for Australian companies to raise equity capital in America.

This kind of strategic effort has been lacking in other industry sectors. The impact will not just be easier access to US capital for Australian companies, it will help make Australia a useful gateway for Asian companies looking to gain access, reflecting the Rudd government’s stated intention to make Australia a regional finance hub.

The capital markets, and legal and education systems of the developing world remain immature and over the long term represent an enormous opportunity for Australian investment and the application of Australian skills. These are tough markets with much local knowledge and persistence required, based on people-to-people links. But it will be worth the effort. The demand for education will be huge as wealth grows, increasing societal sophistication will drive demand for legal services and the need for finance skill will be strong as emerging economies set out to deepen their capital markets and move beyond a heavy dependence on banking.

The EFIC GRI also underlined that the single largest barrier to international expansion is the lack of local business and market knowledge. Sensitivity to cultural differences and other countries’ ways of doing things was also a prominent barrier. If Australia is to take advantage of the developing economies on its doorstep, it is vital that Australian policy address the waning Asian studies and language capacity of the nation (including Middle Eastern studies). This is not a political question; it is a matter of strategic priority.

© 2008 The Diplomat Analytic Unit