ACBC on trade diversification – “China Plus”

16 Jul 2020
Posted By: ACBC National

Joint Parliamentary Inquiry into Diversifying Australia’s Trade and Investment Profile

Introductory comments by David Olsson

President and National Chairman, Australia China Business Council

I appreciate the opportunity to address this Inquiry and do so in my capacity as National President of the Australia China Business Council.

For those of you not familiar with the ACBC, the organisation was established over 40 years ago, shortly after the establishment of diplomatic relations between Australia and the People’s Republic of China. We are a member-based, not for profit association with branches in every state and territory of Australia.

Our mission is to support strong and sustainable trade and investment between Australia and China for the benefit of our members and the Australian community.

In my opening remarks I will focus on some of the factors that have contributed to dominance of China in our trading relationship and explain why we believe government policies should not be directed to diverting or diminishing our trading relationship with China.

Instead ACBC is advocating that our national interests are best served by adopting a China Plus strategy – a strategy where we reaffirm our existing trade relationship with China AND at the same time actively seek diversification into new markets to respond to the changing economic environment.

We believe that diversification that reflects an informed assessment of risks and returns makes sense for both government and business, but a forced diversion of trade away from China will always come at a cost to business and, by extension the community, so we need to be clear about what the countervailing benefits might be.

I would like to offer three points to support this view:

  1. The first is that in times of economic uncertainty, we need to maintain a long-term approach, focusing on the areas that continue to provide global demand and strong returns.

We are being reminded constantly that the single greatest opportunity for the Australian economy lies in Asia.

Even allowing for the impact of COVID-19, Asia remains on track to top 50 percent of global GDP by 2040 and drive 40 percent of the world’s consumption, representing a real shift in the world’s centre of gravity.

This is of course no surprise. We have shifted the focus of our export markets geographically from Europe to Asia, and then within Asia, to Japan, and China and other Asian nations.

We have also changed the composition of our exports, moving up the value chain from the low value-added materials to high value premium products and services, that command high returns.

And right now, we are moving decisively to adopt digital and on-line export mechanisms.

These pivots have been made with a careful consideration of where the best long-term opportunities lie and have served us well.

Government has provided the lead and provided policy support, but it has been companies that have seized the opportunity and converted the policy intent into a reality.

Whether a company chooses to export its products and services to China – or to other markets – is ultimately a commercial question based on an assessment of a whole range of factors.

The disruption of global supply chains and logistics caused by COVID-19 has highlighted the importance of managing concentration and soveregn risks.

But these are business risk that all organisations operating internationally face and should be managed in the overall risk framework.

China is seen by many as a challenging market, but tens of thousands of Australian exporters have done their due diligence, weighed up the risks and decided that China is a growth market for premium products and services and that it offers the greatest opportunities and the highest returns.

New sources of demand outside China will undoubtedly emerge over time and, as a nation, we need to be prepared to take those opportunities as they arise.

However, in the near to medium term, it is difficult to envisage how any other market can offer the same breadth and depth of opportunity to Australian exporters as China.

So, our observation is that we need to be very careful about implementing policies that divert Australian companies away from high value markets where they would otherwise see themselves as being able to reap significant rewards which in turn benefit the Australian economy.

  1. My second comment is about the need to manage strategic trade risks.

The COVID-19 experience has highlighted the fact that some goods and services markets may be considered to have strategic significance that warrant government intervention in trade arrangements.

The government has cited this factor in recent policy changes relating to critical infrastructure in the context of foreign investment and cyber security. The same applies to many defence procurement decisions.

The current COVID-19 crisis will also affect government thinking about local reserve and capability requirements in critical industries, such as pharmaceuticals and medical supplies and equipment.

This thinking needs to extend beyond a China focus, as substituting one dependency for another is not a genuine solution.

If government does decide to implement policies to support the development of domestic industries and capabilities in strategic sectors, we believe it should do so having regard to the fact that any restriction on the free flow of goods and services will always entail costs to Australian consumers and should thus be kept to the minimum essential level.

Australia’s economic prosperity as we emerge from ‘hibernation’ will continue to rely on a strong and open global trading environment underpinned by the Australian government’s strong commitment to the WTO and its framework of rules.

Australia benefits by encouraging support and respect for WTO processes by all parties because this enables trade diversification.

  • My third point is that we need to deal with the world as it is.

The reality is that the demand for the commodities such as coal and iron ore will often come from the very largest buyers on the international market.

Australia’s largest exporters of these products have world class expertise and capability in predicting where that demand will come from. Right now, our major commodity exporters remain positive about the outlook for demand, and strong pricing, for exports to China.

Until there is significant change in international patterns of economic activity, there are unlikely to be alternative markets at scale that can offer similar or better returns.

Other products and services, especially where Australia is a small producer in global terms, can more readily be sold to multiple markets, especially as digital and e-commerce channels become more common place.

Government and business have a role to play here. Improved knowledge and assistance in those other markets could be deployed via Austrade and private organisations to help them to manage those risks and enhance their ability to compete in those markets.

And by the same token, we believe that there is also a need to continue to provide similar assistance in existing large markets, such as China, to help them create more sustainable and diversified commercial arrangements there.

So, to wrap up in relation to our trading relationship with China, ACBC believes that the emergence of China as an immensely significant market and economic partner for Australia in the past two decades should be a source of celebration.

It has brought increased prosperity to Australia through increased employment, wages and tax revenues, as well as to ordinary people in China.  The deflationary impact of China imports has contributed greatly to increased Australian productivity by lowering production costs.

Whatever our differences, Australia and China share many interdependencies and common interests and have contributed to one another’s prosperity.

Australia and China each have much more to gain in coming decades from constructive political dialogue to resolve issues in contention, by continuing to seek opportunities for mutual benefit, and from continuing close trade and investment ties and a valuable web of people-to-people contacts and relationships.

This doesn’t mean that we should not seek to increase the diversity of our export markets and broaden our global trade and investment relationships.

It is sensible that we seek to do so, but we should not do so at the expense of our trading relationship with China.

Rather we should be focussed on policies that support the creation of jobs and industries in Australia, particularly in those sectors that allow them to engage in international markets, AND at the same time engage China and the global system in protecting openness, rules and engagement. 

David Olsson

National President and Chairman

Australia China Business Council