Australia-US Trade and Investment: A Partnership in Review
Speech by the Minister for Trade Senator Bob McMullan at the International Business Roundtable UCLA
Los Angeles, 1 August 1995
The US is an important trade and investment partner for Australia, with both counties benefiting from the economic partnership
- in 1994 Australian exports to the US were $A4.6 billion (7% of total Australian exports or 0.6% of US imports)
- imports from the US were $A14.8 billion (22% of total Australian imports or 2% of US exports)
- Australian direct investment in the US was $A10.4 billion, and US direct investment in Australia $A34.7 billion.
An understanding of the bilateral relationship requires an assessment within the regional and multilateral context. Both countries have worked hard to gain the benefits from harnessing the forces for trade liberalisation and facilitation.
We have both worked, often together
- multilaterally through the GATT/WTO
- and increasingly, through our joint efforts in APEC.
Australia places a high priority on the productive co-operation we have developed with the US in the WTO and through APEC
- both forums are at a vital stage of their development and it is essential that we continue to work together as closely as possible to ensure that the WTO fulfils our shared aspiration for it and that APEC builds the economic bridge we both wish to see across the Pacific.
Over and above this we want them both to
- deliver practical outcomes for business and the wider Australian and US communities through greater trade and investment, more jobs and higher standards of living.
The multilateral trading system, based on MFN principles, has been and will remain the cornerstone of Australia's trade policy.
However, a source of some academic controversy in Australia is that our approach, within APEC in particular, is consciously flexible and pragmatic.
We are prepared to take advantage of bilateral and regional opportunities to advance market access opportunities for Australia which do not undermine the multilateral trading system.
Within this context of a dynamic and fast moving regional and multilateral agenda for trade liberalisation, it is important not to take the bilateral relationship between Australia and the US for granted. It is arguable that in recent years it has not had the attention it deserves.
On the Australian end, a number of negatives have dominated public perceptions of the relationship
- particularly because of restrictions on access for agricultural products in the US market, and the effect of US agricultural policies on Australian exports to third country markets - the perceptions have stayed the same as the relationship has moved on.
The growing bilateral trade deficit has also been increasingly perceived as a problem
- that deficit has increased from $6.1 billion in 1990, to $10.2 billion last year, with exports from Australia to the US decreasing by $5.8 billion to $4.6 billion
: a deficit which on a per capita basis is actually larger than the trade deficit the US has with Japan.
We are by no means fixated on the deficit because Australia views trade flows more broadly
- while we run a deficit with the US, we run substantial merchandise trade surpluses with some other countries. For example, Australia has a merchandise trade surplus with Japan of around $A4 billion.
But the deficit was attracting attention in Australia and the underlying reasons for it deserved attention.
With this in mind, and in order to broaden perceptions of the overall trade and investment relationship, I commissioned the review.
I released the resulting report on 17 June, a date chosen very much with my current trip to the US, and my meeting with USTR Kantor on 18 July, in mind.
We subtitled the report "A Partnership in Transition" because we believe there is more we can do to resolve traditional and emerging problems and to target new areas for co-operation.
While we will need to continue to give serious attention to areas where we continue to have differences
- we can, at the same time, do more to build on the common ground which has led both countries to derive substantial benefit from the trade and investment relationship.
The Report noted that
- 80 per cent of Australian imports from the US are capital goods or intermediate manufactures, important inputs to internationally competitive sectors of the economy
- in a number of key primary products, exports have been switched from the US to other markets, particularly Asia. This has been driven by commercial factors
- underlying growth in manufactures and services exports remains strong and Australian small and medium enterprises have successfully exploited a diverse range of niche markets in the United States for innovative and sophisticated products and services. But SMEs continue to face regulatory barriers and lack of market recognition of Australia's capabilities
- two way investment flows make a substantial and positive contribution to the economic relationship. US investment in Australia is focused on the manufacturing sector. In line with the trend towards globalisation, Australian investment in the US is also increasing - for example in the building materials sector in the rapidly growing south east region centred on Australia.
The Report also disclosed, however, the way in which the relatively few barriers that exist in the otherwise liberal US trading environment work disproportionately to disadvantage Australia.
These impediments prevent Australian access to the US market in some areas where Australia has a clear comparative advantage
- traditional areas like
: dairy, meat and sugar
- and also more recently recognised problem areas such as
: high tech shipbuilding, particularly fast ferries
- and a range of manufactured goods.
By even very conservative estimates, these barriers cost Australian exports over $A1 billion a year.
And, of course, there are aspects of US trade policy which act seriously to diminish our trade opportunities in third countries
- EEP has cost Australia's wheat growers $A150 million a year.
Nevertheless, the Report established that the major part of the deficit stems from rational choice, and a low level of complementarity in Australian exports with US imports.
Australia's increasing economic engagement with Asia, which has diverted Australian exports away from the US, is an outcome of market choice.
The simple fact is that, in some products, it has been to Australia's short and long run economic advantage to switch products to markets in Asia because of the dynamic economic growth of Asian economies, the decline in regional transport costs, and the increasing profitability in these markets.
The Report, in highlighting a number of new areas where Australian firms face barriers to entry to the US market
- also illustrated some of those areas in which we believe that progress is achievable.
Mickey Kantor and I have included three of these areas on a bilateral market access checklist:
- priority one for us is access for high speed ferries
- and during these twelve months we hope to develop a strategy for handling professional services - where we have particular problems with the recognition of Australian qualifications for lawyers and accountants by US states
- and standards conformity recognition for manufactured goods;
The Report also looked at investment - a key element in contemporary economic relationships
- as I said earlier, the stock of US direct investment in Australia amounted to $A34.7 billion in 1994.
Much of this US investment in Australia underscores Australia's advantages as a regional base.
Australia is uniquely positioned to offer foreign companies a competitive and cost-effective presence in Asia
- more than 130 multinational corporations have established regional bases in Australia
: including major US companies such as Kraft, Kelloggs, Microsoft and Novell
: and the Government is actively encouraging more US companies to make Australia their regional headquarters.
Australia offers an excellent skills base, a more than competitive office market, low cost, high quality telecommunications, excellent support services, a favourable time zone, economic and political stability, and a first rate living environment for international managers.
This emphasis on inward FDI has been the norm in Australian economic history.
BUT
For Australia, traditionally a capital-importing nation, outward foreign investment is a relatively recent development.
The small size of Australian companies by world standards has been an important - but not the only - factor responsible for the low level of outward investment.
Policies which insulated the Australian economy from global market forces through the 1960s and 1970s were also the culprits in holding back the internationalisation of Australian industry
- what we failed to not recognised then was that regulated and highly protected industries do not have any incentive to become internationally competitive - and in the 1980s and 1990s this won't do - if it ever would.
In addition, being located on the doorstep of the world's fastest-growing economic region - East Asia - has given Australia real incentive to liberalise the economy, a process which we have been engaged in since 1983.
And we have achieved some very substantial progress
- freeing up the financial sector and floating the currency
- opening up the telecommunications monopoly and the aviation sector
- reforming the labour market
- and substantially lowering tariff and non-tariff barriers.
These changes have made Australia a more competitive country
- with increased export capacity
- coupled with Australia's increasing integration with Asia - they have made us an even more attractive destination for foreign investment.
BUT they have also provided the incentive and the capacity to seize the regional and global investment opportunities which economies of the future will require.
Despite our deepening integration with our East Asian region, the US remains the principal destination for outwards investment from Australia.
This two-way flow of investment is adding weight and balance to the economic relationship.
A relationship which is moving into new areas - onto a new plateau.
On the basis of recent experience, including this month in Washington - the key elements of this relationship over the next few years - perhaps the next decade appears likely to be:
- budgetary and multilateral constraints gradually easing the bilateral strains generated by agricultural export subsidies and market access issues
- growing emphasis on bilateral activity to solve regulatory barriers to Australian manufactured exports
: reflecting the overall change in Australia's export profile
- increased emphasis on services and intellectual property in the trade balance
- enhanced two-way investment building on the already substantial stack of investment - particularly in manufacturing and IT
- co-operative activities within APEC to gain mutually beneficial market access to the fastest growing economic region in the world
- a need for sustained co-operation at the multilateral level in the WTO, the OECD and similar bodies
: a need I hope we can meet - but about which there must be some cause for doubt - although I remain optimistic overall.
The current account deficit is moving to centre stage in the Australian political debate.
The trade relationship with which we have the largest merchandise trade deficit will therefore be under scrutiny.
It will be a pity if the various market access and other trade differences which will inevitably continue to arise cloud the relative openness of our economies to each other and our substantially shared interests at the regional and multilateral level.