Australia’s trade and investment links with Asia are set to strengthen in the coming years, with Asian nations continuing to be the country’s largest export markets, according to a recent HSBC report.
According to Paul Bloxham, Chief Economist for Australia and New Zealand at HSBC, more than 80 percent of Australia’s exports will head to Asia by 2020, in comparison to 73 percent now and only 50 percent in 2000. Australia’s current top four export destinations –China, Japan, Korea and India- are all in Asia. In fact, exports to China, Japan and South Korea alone account for more than 60 percent of Australia’s exports and nearly half of Australia’s overall trade. Malaysia is expected to become Australia’s fifth largest export market by 2030.
Against a backdrop of massive diversity in Asia, the features that many of the countries share – growing middle classes, large-scale urbanization and industrialization, young populations, improving infrastructure– are driving rapid and robust economic growth in the region and stimulating demand for products and services from Australian businesses.
“The shift in the global center of economic activity to Asia presents a once-in-lifetime opportunity for Australian businesses to tap into immense new markets,” said Dr. Craig Emerson, former Minister for Trade and Competitiveness, in 2012.
“As growth in countries such as China, India and Indonesia moves to greater reliance on domestic consumption, increasingly affluent consumers will demand the high-quality food, manufactured goods and services that Australia provides so well.”
Thus far, Australia’s resource sector has fared particularly well from the country’s close proximity to Asia. According to the HSBC report, the sector will continue to thrive for the foreseeable future with LNG exports more than quadrupling by 2020 and iron exports increasing by more than 50 percent during the same period. Much of this growth will be driven by China’s voracious appetite for Australia’s commodities – currently more than half of China’s iron ore imports are provided by Australia – which is expected to become yet more rapacious even as GDP growth slows. In addition to China, Australia will continue to benefit from Japan’s alternative energy requirements and other Asian country’s growing infrastructure demands.
Going forward, Australia’s agriculture and food-related exports are forecast to grow by 45 percent by 2024, due in no small part to the expected doubling in demand for food in Asia by 2050 and increased concerns about food safety in the region. The areas particularly likely to gain include dairy, red meat, sugar and edible oils, as well as organic goods. A report released in 2012 predicted that Australia could earn an additional US$1.6 trillion by 2050 from its agricultural exports alone if it caters to Asia’s increasing demand for food.
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However, despite the positives, Australia-Asia trade is currently rather lopsided. For example, exports to China constitute 36.1 percent of all Australian exports, whereas exports to Australia only constitute 1.7 percent of Chinese exports. Similarly, exports to Australia constitute only 2.4 percent, 1.7 percent and 0.7 percent of Japan, South Korea and India’s exports, respectively. Furthermore, Australia was ASEAN’s 9th largest trading partner in 2012, with fewer ASEAN exports to Australia than Taiwan, Hong Kong or India.
It is therefore clear to see that there is lot of room for bilateral trade to improve further, and it is a similar story for investment. Considering exports to Asia make up such a large proportion of Australia’s trade, it is somewhat surprising to see how underdeveloped the investment ties are between the two sides. Overseas direct investment (ODI) into Asia accounted for a minimal 6 percent of overall Australian ODI in 2012, whereas Asian countries were the source of 11 percent of total investment into Australia in 2013, in comparison to 58 percent from Europe and the U.S.
To date, Australia has been an important destination for Chinese ODI, and cumulatively between 2005 and 2013 Australia was the second largest recipient of investment after the United States, with a total of US$57.25 billion.
However, despite the impressive sounding statistic, it is worth putting this in perspective – the nine year total of Chinese investment into Australia works out to be only 10 percent of Australia’s one year total of inward FDI in 2013. 2013 marked the first year that Chinese investment in Australia was not overwhelmingly based in the mining sector- the most invested sector was power transmission, with 40 percent of investment, followed by mining (24 percent), gas (21 percent), commercial real estate (14 percent) and agribusiness (1 percent).
The recent proliferation of free trade agreements (FTAs) between Australia and Asian nations should help to promote and diversify investment ties within the region in the future. Australia already has FTAs in force with ASEAN, Malaysia, Singapore and Thailand and this year has also signed FTAs with Japan and South Korea.
Australia is currently engaged in negotiations for three bilateral FTAs – with China, India and Indonesia – as well as the regional Trans-Pacific Partnership. These deals will all help to expand trade and investment links between Australia and Asia and ensure that both sides make the most of the unprecedented opportunities on offer.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email asia@dezshira.com or visit www.dezshira.com.
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