THE FLINDERS UNIVERSITY OF SOUTH AUSTRALIA

FACULTY OF SOCIAL SCIENCES

SCHOOL OF POLITICAL AND INTERNATIONAL STUDIES

HONOURS PROGRAMME IN INTERNATIONAL RELATIONS

HAS REGIONAL TRADE HELPED OR HINDERED AUSTRALIA’S ECONOMIC DEVELOPMENT?

KARL COTLEANU

28 FEBRUARY 2002

THIS THESIS IS SUBMITTED IN PARTIAL FULFILMENT OF THE

REQUIREMENTS OF THE DEGREE OF

BACHELOR OF ARTS (HONOURS)

Table Of Contents

Synopsis iii

Acknowledgements iv

Abbreviations v

Introduction 1

Chapter

1 Early Influences Shaping Current Regional Trade Relationships

7

2 Liberalisation and the Consequences of International Exposure

19

3 The Importance of Regional Trade to Australia’s Future Growth

38

4 The Regional Financial Crisis, Consequences for Australia’s

Economic Development

47

5

6

APEC and the Development of New Regional Trade Regimes

The Forces Driving Australia into the New Millennium

55

70

Appendix

Bibliography

75

78

ii

iii

Synopsis

Australia’s economic development has been largely determined by its early

international trade relationships. While the importance of the US as a trading partner with

Australia is not in question, the relationship with the UK and Japan offers a significant

contrast. The thesis will explore both the differences and the similarities in their trading

relationship with Australia and the extent to which these relationships have determined the

distinctive commodity based focus of Australia’s regional trade.

Regional trade has seen the dominance of Australia’s primary resources in its

exports, marginalising secondary industry and reducing demands for research and

development that thrive on technical innovation and change derived from predominantly

manufacturing based industries.

The core argument of the thesis suggests that while regional trade has helped

Australia’s economic development, the region’s appetite for commodities in its own

industrial expansion has hindered this growth somewhat. This is particularly so in more

advanced, technological and innovative industries, which are now the leading growth

sectors in developed economies.

The Treasurer and later Australian Prime Minister Paul Keating advanced that

unless Australia reforms its industries it is in danger of becoming a banana republic. This

theme is addressed throughout the paper though the reforms suggested demand both

domestic structural changes, and the rethinking of trading modalities amidst the decline of

APEC as new regional trading forums emerge in the aftermath of the Asian financial crisis.

iv

Acknowledgments

I would like to thank Richard Leaver for his early direction and although my efforts

were not always forthcoming, his kind offers of assistance were always there. I would also

like to thank my dear friend William Mackay whose own tenacity became one of my

greatest strengths.

v

Abbreviations

AFTA ASEAN Free Trade Area

ANZUS Australia, New Zealand and United States Treaty

APEC Asia Pacific Economic Cooperation

ASEAN Association of South East Asian Nations

ASEAN + 3 ASEAN + China, Japan & South Korea

ASEAN 4 ASEAN + Indonesia, Malaysia, Thailand, Philippines

CER Closer Economic Relationship

EAEC East Asian Economic Caucus

EEC European Economic Community

ETM Elaborately Transformed Manufacture

EU European Union

FDI Foreign Direct Investment

FIRB Foreign Investment Review Board

FTA Free Trade Agreement

GATT General Agreement on Tariffs and Trade

GDP Gross Domestic Product

IMF International Monetary Fund

NAFTA North Atlantic Free Trade Agreement

OECD Organisation for Economic Co-operation and Development

OPEC Organisation of Petroleum Exporting Countries

R & D Research and Development

ROK Republic of Korea

RTA Regional Trade Arrangement

TCF Textiles, Clothing and Footwear

UK United Kingdom

UN United Nations

US United States

WB World Bank

WTO World Trade Organisation

WWI World War One

WWII World War Two

Introduction

Over the last decade Australia has been riding on a wave of economic success.

While global economic indicators have shown the world’s largest economies are

languishing, Australia has continued to reap the rewards from a booming economy. It has

grown to become one of the top-performing Organisations for Economic Co-operation and

Development (OECD) countries of the decade. Yet what is the driving force behind this

wave of growth, and what signposts (if any) did Australia use to direct the economy toward

its current path? What, also of the future should this wave of success lose its current

momentum?

These questions are particularly relevant now that the economic malaise in Japan

(brought to bear by the pressures of economic liberalisation), and the slowing in the

economies of the United States (US) and the European Union (EU) may well see a slowing

of the Australian economy. This situation demands the asking of fundamental questions

about the directions the economy took to reach its current stage of development, and where

this course is guiding Australia’s economy now. In keeping with the theme of this research,

the thesis sets out to establish the extent to which regional trade has helped or hindered

Australia’s economic development. Essentially, Australia’s relationship with the region

has, and will continue to have, a substantial influence over the extent to which this

economic development progresses.

However, before Australia’s current level of economic development can be

understood in its regional context, some consideration of certain historical points of

reference are needed, which to some extent have signposted the way Australia’s economy

has advanced. It is for these reason, chapter one of the thesis engages the idea that

Australia’s regional relationships are predicated by contrasting themes. These begin with

1

2

Australia’s relationship to the United Kingdom (UK) as a former colony, and the effects

this has had on Australia’s relationship with its subsequent major trading partner, Japan.

The change in the direction of Australia’s trade and the subsequent recomposition

of exports towards the region was brought about, as much by the UK’s hegemonic decline

as it was by changes in the global trading environment itself. This had to a considerable

extent set in train the way Australia perceives both itself, its place in the international

capitalist market, and the way it continues to conduct its regional trade relationships today.

Furthermore, chapter one addresses Australia’s overall bias towards commodity-

based export industries which, it is asserted, continues to undermine the general thrust of

economic development, retarding growth in the manufacturing sector of the economy. The

decline in manufacturing would be much worse, save for the fact that research and

development (R & D) in manufacturing accounts for a considerable amount of technical

innovation and change. This in turn has a considerable flow on effect to other sectors of the

domestic economy (see table 8).

Moreover, the real problems in Australia’s economic development are highlighted

by the gross domestic product (GDP), which has declined against many of Australia’s

regional competitors since the mid 1960’s. Australia’s population is considerably smaller

than that of Japan’s and some of its other trading partners in the region. While relative

output was comparable to these nations, for the size of the population, there has been a

continual decline of Australia’s GDP with its trading partners to the present day.

The thesis further asserts that industrial decline in Australia was largely the result

of sectoral disequilibrium, rather than, the simpler explanation of Japan’s dominance in the

nations commodities sector. Though, it was assisted considerably, by the insular inward-

looking industrial policies inherited from the UK.

3

In chapter two, the thesis acknowledges that Australia’s inwardness and the levels

of protection it maintained in response to the General Agreement on Tariffs and Trade

(GATT) bear the hallmarks of its relationship with the UK. In fact, the over emphasis on

commodity exports rather than an overall diversification of the economy also bears witness

to this imperial relationship. Thus was hailed in the Labor Party’s strategy in 1983 for the

liberalisation of the Australian economy to the full force of international competition as a

countermeasure to this somewhat isolationist, inward looking economy. In some quarters,

liberalisation was seen as essential to economic survival, while in others the consequences

of international exposure were considered more costly, especially in light of the uneven

nature of regional liberalisation. There was, however, a tendency for Australia’s economy

to revert to the pre-GATT protectionist measures of the inter-war years. This is to some

extent reflected in the automotive industries’ continual thrust for protection, which

indicates a decided lack of emphasis by the parent firms for expenditure on R & D in the

Australian economy.

While liberalisation of the Australian economy had freed up the financial sectors,

this offered a considerable contrast to industries still highly protected from international

competition, such as the textiles, clothing and footwear (TCF) industries. These industries

represent the continued protection of inefficient producers in changing market conditions,

which insulated the economy from international competition.

These issues hark back to chapter one and the stifling of manufacturing in

Australia’s domestic economy as the nation continued an over-reliance on commodity

exports at the expense of technological innovation and change. This underpins the

structural problems in Australia’s economic development, which Paul Keating had not

fully addressed in his banana republic statements concerning the need for the Australian

4

economy to change. In many ways, this points to a lack of investment in education as a

precursor to Australia’s current problems.

Chapters one and two have been interwoven by a common thread linking

Australia’s over-emphasis on commodity exports and a subsequent decline in

manufacturing with falls in the level of technical innovation and change. Yet, what

relationship does this have to the importance of regional trade to Australia’s future growth?

Chapter three attempts to draw the argument out of aspects of the past, focusing on

those, which are more relevant to Australia’s current trading environment. Here the

emphasis is upon the many differences that Australia faces in its relationship with the

region, as the demands of its geography determine an intrinsic requirement to be included

in regional trade arrangements (RTAs). This chapter highlights the difficulties of such

ventures not just in the differences between Australia and the region, but also the nature of

competing capitalisms and competing ethnic rivalries occurring between, and within, the

regional economies themselves.

While such tensions are of paramount concern for transnational capital, which

searches for more stable environments for investment, the fact remains that the region is

still very important for Australia’s future growth. With this in mind, the chapter concludes

on aspects of increasing trade Australia is conducting with the region. There is much cause

to be wary here owing to the extent to which foreign direct investment (FDI), in terms of

both equity and levels of ownership, may well undermine new export industries for

Australia. This is primarily because much of Australia’s production is geared for domestic

consumption rather than export which require minimal input in terms of R & D

expenditure. Consequently, Australia’s economy is perceived as a commodity based, low

5

technology, branch economy in international money markets, with this perception leading,

in some part, to the nation’s insulation against the regional financial crisis of 1997.

In chapter four, the thesis qualifies why to some extent Australia may be considered

somewhat removed from the region, with many of these economies increasingly engaged

in technology related industries. These industries no longer require vast amounts of raw

materials in the manufacturing process as heavy industry did when the region began its

industrial expansion. This suggests that Australia’s trade diversion from the region to the

US and the EU during the Asian financial crisis was done with a view of trading with more

stable markets outside the region. This was evidenced by, growing strategic and economic

uncertainty in East Asia at the time. The argument further asserts that the ensuing currency

devaluation of Australia’s dollar as a direct result of the crisis was more favourable to extra

regional rather than intra regional trade. Combined with growing demands for regional

caucuses such as ASEAN + 3 which excluded nations such as Australia and the US, the

full impact of the crisis may yet unfold.

With this in mind, the chapter concludes on a more positive note assessing

Australia’s currency devaluation, financial market stability and openness as positive signs

for future investment. Much of this investment is tailored to the needs of large corporations

such as Holden and Ford, which already have a seemingly nationalised and established

brand name in Australia. Therefore, the opportunity of relocating to attractive markets,

where the consideration is not only cost competitiveness but also stable governments and

the availability of skilled workforces adds to the above considerations as worthy

inclusions.

In chapter five, the thesis raises concerns over APEC and the apparent failure of the

multilateral process, as regional economies rush to stamp their name on RTAs. The fact

6

that Australia has only been able to sign its name to one is disconcerting enough. Given

this consideration, there is some weight for an increasing bilateral relationship between the

US and Australia at a time when both western economies are feeling excluded from rising

regional caucuses. Whereas, the distant possibility of such a relationship is considered for

its merits and weaknesses, the ramifications for regional trade relationships suggest both

positive and negative effects for a small economy like Australia’s. By virtue of its linkages

with the world’s largest international economy, such a relationship could go some way in

according Australia recognition. Nonetheless, the possibility of inclusion in extra-regional

and intra-regional policy initiatives (not too distinct from arrangements under APEC), is no

guarantee of inclusion and could go the other way and see Australia excluded from these

very same arrangements.

7

CHAPTER 1

Early Influences Shaping Current Regional Trade Relationships

Traditionally, Australia’s export markets were dominated by the United Kingdom

and Europe (Figure 1).1 Australia’s colonial ties with the British Empire were the major

tenet for this trading relationship. As a relatively strong Imperial power, the UK had the

resources to service relationships with distant colonial outposts such as Australia, helping

to keeping this empire intact. Combined with a depressed Europe racked by two world

wars, this trading relationship saw Australia as a major producer of rural commodities

surge in demand.

Figure 1: Australia’s traditional export markets as a percentage of total trade

Source: Goldsworthy, D., Facing North, Vol. 1, Melbourne University Press, 2001, pp. 422-427.

1 Goldsworthy, D., Facing North, A Century of Australian Engagement with Asia, Vol. 1, Melbourne University Press, 2001, pp. 46-51.

8

By the 1950’s, rural exports composed 80 per cent of total export income, with

wool, wheat, and bovine products being the main export commodities, while

manufacturing and mining accounted for only 13 per cent of exports at this time.2

However, with the ever-increasing economic wellbeing of Europe, and the growing

unpopularity of Imperial powers (not to mention the cost of maintaining colonial outposts),

the UK began to offload its colonies in quick succession.

Moreover, severe protective measures adopted by the European Economic

Community (EEC) in 1958 and the UK’s subsequent entry in 1973 impacted harshly on

Australia’s total exports3. These factors, along with improvements in worldwide production

technology and the ensuing introduction of synthetics, saw the demand for Australia’s

primary resources, particularly wool, decline significantly.

By all accounts, this period represented a timely juncture in Australia’s economic

history. The increasing economic development of East Asia was owed mostly to US

expansion into the region. Furthermore, because of Australia’s diminishing continental

markets, the opening up of more lucrative markets closer to home have, initially bid well

for this fledgling nation.

This expansion took the form of economic assistance through US sponsored

organizations such as the International Monetary Fund (IMF) and the World Bank (WB) in

an effort to rebuild a shattered Japanese economy following its demise in World War Two

(WWII). Thus, a US economy flushed with funds in its war chest following its success in

WWII, and a Japan eager for economic superiority in light of its military demise, oversaw

what was to be the expansive development of East and South East Asia.

2 Howlett, M., 1990, Simplifying Senior Economics, Bernard Publishing, Pt Norlunga, p. 213.3 Howlett, p. 214.

9

It has been perceived that, owing to its geographical proximity to Asia and the

makeup of its already developed economy, Australia was in a prime position to take

advantage of regional expansion. Asia’s development saw a considerable demand for

Australia’s primary resources, particularly fuel and mineral exports, which were only 7 per

cent of total export income in 1953 and accounted for over 47 per cent of export income by

1989.4 These figures are impressive and so is much of the corresponding literature on

Australia’s trade with the region. However, what these figures fail to indicate are the terms

under which this trade was conducted.

Certainly, with the benefit of hindsight, it is much easier to be critical of

government and business initiatives, though the call to change the general dynamic of

Australia’s economic development has been a long-standing one. No more had this been

vindicated than by Australia’s former Treasurer (and later Prime Minister) Paul Keating.

When, in May of 1986 he boldly stated that unless Australia underwent some fundamental

changes in its economic structure it was in danger of becoming a “banana republic.”5

This is a pivotal focus for the research conducted in this paper, for the initiatives in

the economic development of Australia’s regional trade were congruent with keeping

Australia as very much a price taker in international markets.6 Instead of burgeoning

industries being developed and markets being established or a variety of productive

capacities being encouraged, the export of raw as opposed to processed materials has seen

this price taker attitude remain up until very recent times.

Moreover, the relative ease with which Australia traded its raw resources with the

region did little to help its economic development and did little to make it a regional

4 Howlett, p. 213.5 Broomhill, R. The Banana Republic? Left Book Club Co-op, NSW, 1991, p. 1.6 In economic theory the term price taker refers to competitors who cannot control the price in the market place. For more on this see Fischer, S. & Dornbusch, R. Economics, International Student Edition, McGraw-Hill Book Co-Singapore, 1983, pp. 220-224.

10

competitor. As can be seen in figure 2, the spikes and troughs indicate the volatile nature of

Australia’s exports that have occurred outside the boom-bust cycles experienced by the

world’s major economies. This highlights the impacts of an ongoing price taker attitude as

the Australian economy rises and falls at the apparent whim of international market forces.

The evolving price taker attitude has its roots in the mid 1960’s when American

global expansion into the region under Pax Americana had done much to fuel the region’s

demand for Australia’s raw mineral exports. As a result there has been a continual fall in

Australia’s commodity prices ever since. By the mid 1970’s the resultant worldwide price

inflation had seen a fourfold increase in the Organisation of Petroleum Exporting Countries

(OPEC) oil prices.7 While this resulted in higher prices for Australia’s fuel and commodity

exports, the inflationary effects generated eventually slowed demand and ended in a rapid

fall in commodity prices by 1979. The economic shocks this rapid expansion had initially

generated saw the global downturn bottom by 1984 with commodity prices left standing on

increasingly shaky ground.

A prima facie example of this is Australia’s coal industry, which had ridden the

fluctuating commodity wave since its inception in 1960. Having been kick-started by the

7 Calleo, D., The Atlantic Alliance and the World Economy, in Beyond American Hegemony, New York, Basic Books, 1987, p 93.

Source: AusStats, International Accounts & Trade, YearBook 1999. p. 2.

Figure 2: Ratio of exports to GDP

11

Japanese steel industry, the OPEC oil crisis itself generated huge demand for low quality

thermal coal, as nations heavily reliant on oil imports were forced to switch to less costly

equivalents. This pushed the price of low quality coal to new levels due to its significantly

increased demand by the 1970’s.8 However, excess capacity eventually saw these huge

price increases for coal eroded as oversupply generated a decline in demand, resulting in

changing price expectations.

In a bullish international market, the net gains for a commodity-based economy

such as Australia’s can be very high, and conversely when the market falls the erosion of

these net gains can occur rapidly. This highlights the volatility of commodities on world

markets, indicating how susceptible Australian production has been to these ever-

fluctuating market forces. Commodity prices have not stabilised in recent years either,

warranting at least some moves away from, or an overall diversification of, the national

industrial base.

Furthermore, it would appear that the composition of Australia’s trade has changed

markedly within a few short decades. Having gone from a strong primary base in rural and

agricultural production in the 1930’s, to a net exporter of fuel and mineral resources by the

mid 1950’s. Nonetheless, while these exports may seem to be a diversification of overall

commodities traded, what they represented was more of a horizontal shift in the base of

primary production itself.

Horizontal shift refers to the side stepping or sideways movement, in this context,

of Australia’s primary industries. For a long time in both the private and particularly the

government sector there has been a great deal of celebration over the diversified content of

Australia’s exports. However, upon closer inspection this overall diversification is derived,

in fact, from a very narrow base of production in the primary sector.

8 Journal of Australian Political Economy, Number 44, December 1999, p. 92.

12

This overall bias towards primary industry had impacted quite dramatically on

other sectors of the Australian economy. The resulting marginalisation of secondary

industry had not seen manufacturing feature prominently in Australia’s export earnings

owing to a decided lack of comparative advantage, particularly with the region in terms of

the costs of labour and subsequently high production costs.

There have been recent improvements in this area due to the ongoing

implementation of tariff reductions (see table 5). However, this begs the question as to why

had Australia not taken advantage of its comparative advantage in many areas of

production sooner. The most significant reason for this may well have been the hollowing

out of manufacturing industry in Australia by external forces.9 This hollowing out process

is also referred to as the ‘Dutch Disease’, which was first coined after the discovery of

natural gas in the Netherlands.10 The discovery of these natural resources had artificially

increased the Dutch exchange rate, resulting in export industries being squeezed or

hollowed out which was followed by a decline in Dutch manufacturing industries.

One example of these external forces at work in an Australian context concerns the

vigorous pursuit by Japan of Australia’s raw materials, which were cheap by comparison to

those in other world markets. The aftermath of WWII had robbed the Japanese of the

mineral rich coal reserves in Manchuria and the burgeoning trade with the US went

asunder during the Suez Canal crisis of 1956. This had seen US coal shipments to Japan

stilted, resulting in the purchase of Australia’s cheaper coal, which fitted in with Japanese

plans to shop locally.11 Thus was hailed in the expansive development of raw material

9 Byrnes, M., Australia and the Asia Game, Allen and Unwin, NSW, 1994, pp. 50-51.10 Corden, W.M., ‘Booming Sector Dutch Disease Economics: A Survey’, Working Paper in Economics and Econometrics, No. 079, Research School of Social Sciences, ANU, November, 1982, p. 2.11 Byrnes, p. 68.

13

exports from Australia, which became a substitute for the possible development of more

lucrative manufacturing industries in this otherwise developed economy.

Many of the benefits of manufacturing are often derived by technological

innovation and changes in production and their associated techniques. These practises can

lead to the establishment of complimentary industries, not to mention the adding of

significant infrastructure and ongoing wealth and job creation within the domestic

economy.12

However, in light of this process of hollowing out, many of the above practices

were circumvented. This is because the short-term benefits of extracting and selling raw

materials in their cheapest form without significant, if any, value adding whatsoever were

not weighed up against the longer-term costs to local industry and the economy as a whole.

By longer-term costs the thesis is not simply referring to the way in which the economic or

financial gains are spent, but to the ‘equilibrium consequences’ occurring in other vital

sectors of the economy.13 This is an important distinction to make because as some

industries may decline in the face of new or significant growth industries others will

expand.14 Examples of this have occurred in Australia’s wool and agricultural industries

that declined as mining exports grew in the boom years of the 1960’s and 1970’s.

Moreover, the expansion of the services and financial industries in the 1990’s in the face of

a declining mining sector has seen a similar situation occur.

One means of measuring the longer-term costs of this shortsightedness is in GDP

growth trends. These measure an economy’s output over time, and can establish levels of

growth, particularly when measured next to regional economies with which trade has been

conducted over a comparable length of time. Indeed, by 1960 Australia was perhaps the

12 Byrnes, p. 68.13 Corden, p. 2.14 Corden, p. 2.

14

most developed regional economy in terms of its GDP when output was compared with the

relatively small size of its population. Meanwhile, many of the regional economies were

coming from an agrarian base, only beginning their entry into basic forms of

manufacturing such as textiles, footwear, and clothing industries. At this time, Australia

was already well advanced in more complex manufacturing techniques, however, the

exponential increase in the output of regional economies-particularly Japan, China, and

South Korea-very quickly accelerated beyond Australia’s output (Table 1).

Table 1 Gross Domestic Product, regional comparisons ($US billions).

Region 1960 1970 1980 1990 2000

Japan 44,439 203,301 1058,911 2964,055 4752,900China N/A 80,864 298,418 362,656 1099,800Australia 16,809 37,270 149,892 295,701 398,100South Korea N/A 11,744 62,627 239,773 457,000Singapore 0,707 1,870 11,947 35,430 91,000Hong Kong N/A 3,753 27,551 70,414 163,200Taiwan N/A 6,214 41,401 157,775 310,100

Thailand 2,554 6,441 32,159 81,250 121,900

Malaysia 2,178 4,200 24,464 42,544 89,300

Indonesia 8,671 10,417 82,235 103,783 153,300

Philippines 6,436 6,166 34,829 43,454 75,000

Source: M. Byrnes. Australia and the Asia Game, p. 49. DFAT country/economy fact sheets 2001.

15

Not only did the relationship with Japan incur this hollowing out process. To a

lesser extent, the relationship with the UK had a similar effect. In the 1940’s and 1950’s

Australia was said to have been “riding on the sheep’s back”, which is a euphemism for the

nation’s dependence on agricultural production. Again, this raw material export

represented a low value added product, as had later been the case with Japan in the export

of coal and later iron ore. Yet, this decline was not merely a symptom of Japan’s

expansion, so much as, colonial submission in the first instance under the banner of the

UK.

This is not to imply that Australia was merely an extractive colony as was Malaya

or Burma; clearly the penal colony gave way to free settler colonies and a considerable

degree of autonomy developed. However, what the argument suggests is that Australia’s

dependence on primary production, be it in the agricultural or mineral sector, resulted in

the stalling of manufacturing development, by curtailing investment in technological

innovation and change. Furthermore, this had come about, not as a deliberate attempt to

undermine these industries, but as a direct result of sectoral disequilibrium, which saw

mining overshadow the development of these other sectors in Australia’s economy.

It has often been suggested that Australia’s manufacturing industry was in better

condition than Japan’s when the Japanese started to nurture their interests in Australia’s

primary resources.15 This was owed largely to the fact that Australia was somewhat

insulated from Asia by virtue of its preferential trading relationship with the UK at the

time. By all appearances, this relationship gave the impression of Australia as largely self

sufficient in terms of its manufacturing and industrial capacities, as a result of this

preferential trade arrangement.16

15 Byrnes, p. 68.16 Byrnes, p. 68.

16

This had seen the development of manufacturing in Australia propelled along by

the exigencies of WWII, which had nurtured a thriving aircraft and automobile

manufacturing industry.17 The benefits of this had seen the establishment of

complementary industries in Australia supporting larger manufacturers. There was also a

burgeoning steel industry, of which the provision for Australia’s extensive coal reserves to

fuel the steel furnaces had established a potentially readymade domestic market.

However, the end of the war had seen many manufacturing industries fall into a

general state of decline. Instead of taking advantage of already existing technology and

infrastructure, and possibly developing them for domestic production and export, many of

these industries, particularly the aircraft industry, had practically collapsed by the end of

the 1960’s.18 This saw an extensive brain drain as local expertise either faded into oblivion

or went overseas to countries such as Canada or Brazil, whose governments supported the

development of domestic aircraft industries. Subsequently these countries are now ranked

among the biggest aircraft manufacturers in the world.19

This decline in manufacturing brought about from sectoral disequilibrium was,

perhaps largely assisted by Australia’s insular inward-looking industrial policies inherited

from the UK, where a government culture of “hands-off” relations with industry had seen

manufacturing develop along more pragmatic lines. Government support for potential

leading industries was decidedly lacking, and left manufacturing to fend largely for itself,

in a market dominated by, and largely catering to primary industry needs.20 The impacts of

maintaining these vibrant and innovative industries meant that Australia would have to

unleash itself onto the open trading system, which it was not inclined to do.

17 Aviation red tape just plane crazy, The Australian, Friday, 19 Oct 2001, p. 26.18 Aviation red tape, p. 26.19 Aviation red tape, p. 26.20 Journal of Australian Political Economy. Special Issue, Australia Reconstructed: Ten Years On, No. 39, June, 1997, pp. 17-18.

17

The establishment of an open trading system was a deliberate attempt by GATT to

reverse the protectionist stance derived during the inter–war years.21 In this way, it was

assumed that interdependence through trade would establish more harmonious relations

between states. Australia’s opposition to this stance was reflected in the high levels of tariff

protection it maintained in response to GATT, reflecting a need for insularity and certainty

in an increasingly destabilised world, or for that matter, the region.

Australia’s decline in manufacturing also coincided with Japan’s dominance

as Australia’s number one export market by the early 1970s. The UK was clearly

Australia’s key export market in 1960, and within a decade, Japan had overridden

the UK as the principal market for Australia’s exports (Table 2).

Table 2 Australian exports and imports ($Am)

1950-51 1960-61 1970-71 1980-81 1990-91 2000-01ExportsJapan 123.1 323.0 1,190.9 5,227.6 15,894.0 23,502.6UK 641.2 400.1 493.8 715.3 1,963.0 4,645.6US 297.7 144.9 519.4 2,147.0 6,136.0 11,675.3

ImportsJapan 31.2 130.9 573.6 3,629.3 9,526.0 15,370.6UK 713.8 681.1 887.2 1,584.5 3,532.0 6,321.3US 121.8 434.1 1,041.7 4,169.0 12,586.0 22,355.4

Source: M. Byrnes, Australia and the Asia Game, p. 51 & DFAT country/economy fact sheets 2001.

By 1980 this export share increased to a ratio of 7 to 1, although the Japanese

economy has been in a deep and prolonged recession since the early 1990’s. Moreover, its

share of Australia’s exports has still been a staggering ratio of 5 to 1, when compared to

the substantially reduced export share of the UK at this time.

21 Economic Papers, Economic Society of Australia, Vol 14, No. 1, March 1995, p. 1.

18

Therefore, it can be said that Australia’s exports to the UK had rapidly diminished

as international markets reprioritised their trading needs. This had seen Japan focus on

Australia’s extensive mineral reserves for its own, and the region’s, continued industrial

expansion. These events occurred at the expense of Australia’s manufacturing industries,

which continued to decline against a backdrop of easier profits gained in the resources

sector.

19

CHAPTER 2

Liberalisation and the Consequences of International Exposure

Australia has continued to reap the economic benefits of extracting its mineral

resources and exporting much of the raw materials to long established markets. While this

bade well for commodity industries undergoing rapid periods of growth owed by and large

to Japanese industrial requirements, when commodity prices began to fall in the mid

1970’s it distorted problems in Australia’s manufacturing industries. This made Australia’s

long-term inability to be an exporter of manufactured goods all the more obvious by

highlighting the distortions between local industry and the changing requirements of

international capital.22 Australia’s place in the international capital market was undermined

by its dependence on commodities for economic development. Initially this dependence

was underpinned by Australia’s relationship with the UK as a supplier of agricultural

produce, and then it switched over to Japan as a major supplier of mineral resources.

These factors, combined with the global downturn of the mid 1970’s, saw

Australia’s declining terms of trade and a rising current account deficit resulting in

significant balance of payment problems for the economy (Table 3). International money

markets responded to these concerns by displaying a loss of confidence in the Australian

economy, which were seen as being racked by ever increasing levels of foreign debt.23

All this came on top of substantial economic reform instigated by the Labor

government of the day, which began to open the Australian economy to the full force of

international competition in 1983. This liberalisation of the economy began with the

floating of the Australian dollar on the international market, and a wide range of

microeconomic reforms, particularly in the banking and financial sectors of the economy.

22 Broomhill, p. 2.23 Broomhill, p. 3.

20

Practices in these sectors were considered outmoded, inefficient and very much anti-

competitive.

Thus, liberalisation saw a rapid influx of foreign capital into Australia, making

access to funds, and therefore borrowing’s, much easier. The problem, of course, was that

much of these funds, instead of going into productive investments in the domestic

economy, went offshore (to pay for imports) and into the growth of unproductive and more

speculative investments.24 The economy overheated with increasing levels of both public

and private sector foreign debts leading to higher interest rates, a measure introduced to

curb spending.

Table 3 Australia’s Balance of Payments ($ A million)Figures for the current account 1979-1988

Calendar year 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

Exports, fob

Imports, fob

Trade balance

Invisibles, net

Current balance

16635

14375

2260

-4528

-2268

18930

17700

1230

-4830

-3600

18462

20489

-2027

-5267

-7294

20471

22992

-2521

-5735

-8256

21644

21618

26

-6557

-6531

25965

27016

-1051

-8798

-9849

31953

33835

-1882

-10887

-12769

33159

36289

-3130

-11388

-14518

37461

38145

-684

-11443

-12118

41823

43088

-1265

-12326

-13591

Source: OECD Economic Surveys Australia 1989/1990, OECD France, February 1990, p. 114.

Moreover, it was the inefficient use of these borrowings and a seemingly scant

regard for Australia’s economic development that saw Paul Keating retort with scathing

sentiments in May of 1986. He said that unless Australia underwent some fundamental

changes, and “we started living within our means,” we were in danger of becoming a third

world country, or as the popularised phrase has been quoted, a “banana republic.”

Furthermore, Keating’s bombastic comments were directed at Australia’s

entrepreneurs and corporations who failed to capitalise on the increased availability of

capital, which by all accounts was seen as a means for increasing domestic investment, 24 Broomhill, p. 5.

21

furthering capital accumulation, and enhancing national wealth, and savings. It was not

intended as a free for all for corporate raiders such as Alan Bond, nor was it intended for

gambling on speculative investments, or investments offshore, which did little if anything

to enhance the national economy.

Having said this, Paul Keating’s entreaty had not taken into account that the

economy’s problems were essentially structural in origin, rather than the inability of the

polity to live within its means. Essentially, this is because in a country like Australia,

exports are primarily commodities and imports are mostly manufactured goods. The large

divergence in exports and imports results in greater terms of trade volatility than in

countries where exports and imports are similar.25 The global downturn in commodities

had peaked in Australia by 1986, with the current account deficit at $A3.13 billion, which

was down from its previous peak in 1982 of $A2.52 billion.26 Because of this, imports of

elaborately transformed manufactures (ETMs) and other manufactured goods required in

the restructuring of Australia’s economy left a significant shortfall. This occurred between

the prices generated from these falling commodity exports and the costs of importing

ETMs, resulting in the ever-escalating current account deficit. Evidence of this is clearly

indicated in OECD economic surveys, which state;

“… Slower aggregate labour productivity growth may have reflected the combined effect of a decline in real labour costs and a rise in the cost of capital as real interest rates rose…This factor may have lowered labour productivity growth by half of a percentage point per year (by one-third) during the period 1980 to 1988.”27

The tailing off of the overheated Australian economy came from the recessionary

impacts of this flurry of capital expenditure between 1983 and 1986, and culminated in

“the recession we had to have” (Paul Keating’s other famous comment from the period).

25 OECD Economic Surveys Australia 1989/1990, OECD France, February 1990, p. 46.26 OECD Australia, 1989/1990, p. 114.27 OECD Australia, 1989/1990, p. 55.

22

While this subsequent recession affected the domestic economy as monetary policy was

tightened, it had little impact on inward-bound foreign investment, which continued to

thrive with access to finance available from abroad.

The extent of this foreign investment is an important consideration when talking

about Australia’s economic development. Inflows of FDI after WWII impacted

significantly on patterns of ownership and the overall structure of firms themselves, which

in turn had a severe impact on Australia’s economic development. In 2001 foreign

investors owned more than one-quarter of the equity, and a controlling representation of

some 15 per cent in Australian firms. However, the level of foreign ownership has

remained steady at 28 per cent over the last three years.28

Australia’s federal government under its arm of the Foreign Investment Review

Board (FIRB) established in 1976 had regulated FDI in Australia. One substantial method

of control was the requirement for at least 50 per cent equity participation by Australian

firms in any national FDI. However, perhaps owing to large infrastructural costs in the

mining sector, this requirement was waived if the investment was not deemed detrimental

to national interests.29 Therefore, Australia had simply to reap the harvest while foreign

investors had to worry about the more complicated and costly tasks of infrastructural

expenditure and the conversion of primary goods into finished products.

In this way, Australia has become dependent on foreign capital for

manufacturing investment. This had hindered Australia’s economic

development by retarding R&D in crucial areas of production that may

otherwise have taken place, if value adding were high on the agenda for

the parent companies. Essentially, this strategy had the appearance of

28 Henderson, I. Foreign investors cooling their heels, The Australian, Monday, January 14, 2002, p. 5.29 Howlett, pp. 251-252.

23

an act of faith in the ability of foreign firms to deliver financial rewards

to successive Australian governments, rather than a seasoned plan for

Australia’s future economic development. This is particularly so in terms

of research conducted on the level of technological input for both

Australian and Foreign firms in 1993-94. It was established, to some

extent, that there was more interest by Australian firms in exports and R

& D expenditures than there was by foreign owned firms (Table 4).

Table 4 Foreign and Australian firms/manufacturing, by ownership and technology intensity. Sales, exports & R & D 1993 –94.

R & DIntensity

ForeignShare of Sales

Exports/Sales(%)

R & D/Sales(%)

Average Sales($Am)

Australia Foreign Australia Foreign Australia Foreign

High53.0 24.4 11.6 6.2 4.9 8.9 87.8

MediumHigh 65.4 12.6 12.7 2.5 1.6 7.4 119.3MediumLow 26.3 26.0 20.8 1.7 0.9 7.4 34.0

Low 25.6 16.4 14.0 1.0 0.6 12.0 69.6TotalManufac 36.7 18.7 14.3 1.6 1.4

Source: Sheehan, & Grewal., The Global Knowledge Economy & Regional Concentration of Manufacturing in Australia, CCSES, Victorian University of Technology, Working Paper No. 19. July 2000, p. 11.

The propensity for Australia’s firms to be involved in research was more so, in high

technology and R & D intensity areas. Here Australia’s share of exports/sales was more

than double that of foreign firms, while R & D commitment itself was also somewhat

larger. Average sales for these foreign firms were significantly greater than Australian

firms, and it is quite clear that much of the production was geared for the domestic

Australian market. As such this was seen to warrant little by way of R & D input. Judging

by the very high level of foreign share of sales (being well over fifty percent in the high

24

and medium high technology categories), this could significantly undermine the much

smaller Australian firms. This could affect the demands for production and ongoing

commitments to R & D itself.

Regardless of the arguments for and against foreign investment in Australia, it is

quite clear from these figures that significant levels of foreign ownership in Australian

firms invariably translates into significant influence by the parent company over its local

operations. Nowhere is this more clearly observed than in Australia’s automotive industry,

where handouts by the federal government in the form of industry grants do little to make

the industry more globally efficient or cost competitive.

Moreover, the pervasive threat by the foreign parent companies to bring about the

loss of thousands of jobs in the industry if assistance is not received has seen the doubling

of government handouts to the auto industry in the last two years alone. This has resulted

in a 2 billion-dollar industry pool funded directly by a freeze on car tariffs at 10 per cent

from 2000 to 2005.30

Conversely, these subsidies have won the parent a place in global trade and have

secured jobs in Australia. Yet, what will the long-term costs be if these industries cannot

remain competitive without industry assistance, while workers are not prepared for smarter

and more competitive jobs and industries themselves?

Mitsubishi in Adelaide has stated that it could only guarantee its plants remaining

open for production until 2004 - 5 provided they were profitable.31 This profitability comes

at the expense of higher import costs for motor vehicles, of which Mitsubishi itself is an

importer of small and medium-sized four wheel drives. This profitability also comes at the

expense of continued capital outflow to the parent company in the form of profits and

30 Marris, S., Handouts to car industry near double in two years. The Australian, Friday, December 21, 2001, p 2.31 Howard must just say no to Mitsubishi, Editorial et.al, The Australian, Thurs, December 13, 2001, p. 10.

25

dividends, resulting in the retarding of domestic industry, which maintains these inefficient

and anti-competitive practises.

Moreover, owing to the considerable distance to markets, and the overall size of the

economy, the fact remains that Australian auto firms are comparatively small by

international standards. For these reasons firms in Australia tend to be seen, and function

as branch offices with little scope, need or demand for R&D. 32 Clearly, this has proven to

be a hindrance to Australia’s economic development. While such attitudes may well be the

preserve of the foreign parent company, it is an attitude that can ill afford to prevail among

domestic industry elites and the federal government. Else, regional trade may not be in a

position to help drive Australia’s economic development.

It has long been the case that Australia has had an enormous comparative advantage

in terms of its natural resources, be they agricultural or mineral. While Asia conceded the

advantage of engagement with Australia to fuel its regional expansion in the 1960’s, this

comparative advantage went very much in reverse in the face of Asia’s subsequent cheap

manufacturing imports. Australia’s inability to compete with this flood of manufactured

goods saw the implementation of tariffs and other extensive barriers to protect home

industries.33 These tariffs, along with substantial levels of FDI, have impeded economic

development in Australia and threaten the development of future leading industries.

Moreover, these imperatives highlighted conflicting notions within the Australian

government bureaucracy, with the old guard clinging onto Cold War notions that the

region still posed a considerable threat to Australia. Ever since 1938, Australia had banned

the exports of iron ore, fearing these products may well come back as planes bombs and

32Sheehan, P. & Grewal., B. The Global Knowledge Economy and Regional Concentration of Manufacturing in Australia. Centre for Strategic Economic Studies (CCSES), Victorian University of Technology, Working Paper No. 19. July 2000. pp. 9-10.33 Switzer, T. Economic Nationalism: it’s Back to the Future, The Institute of Public Affairs Review, Vol 53, No 2, June 2001, p 7.

26

torpedoes.34 Indeed, with Japan importing iron ore from China and captured mines in

Manchuria, this fear may well have been founded at the time. This seeming foresight came

to pass after the shelling by the Japanese of Darwin, as they advanced to dominate the

region during WWII.

This threat was a consequence of strategic rather than economic considerations,

though the latter had been the original basis for the bans. In 1938 Australian Prime

Minister J.A. Lyons told the Japanese Consul-General that the embargo was not aimed at

them, but was in the interests of conserving Australia’s (then much smaller) reserves of

iron ore for domestic blast furnaces.35 With Japan’s production of iron ore hitting 20

million tonnes by 1960 and its appetite for the ore set to double within the next few years,

Australia eventually lifted its ban in December 1960.36 Perhaps the embargo would have

remained, if not for the fact, that between 1940 and 1959 Australia’s known reserves of

iron ore increased from around 260 million tons to some 370 million tons.37 The eventual

lifting of the ban may have been considered a step in the right direction for Australia’s

regional trade. Though the continuation of the White Australia Policy in the 1960’s was

still an ongoing reminder of apprehensions about an unknown quantity in the form of

Australia’s near neighbours, and unfounded fears of the regions links to communism.

However, these ongoing fears were encapsulated in the form of import protection

from the region’s cheaper imports, and did not come into play when selling Australia’s

exports to Asia. 38 The economic threat only came once exports had gone full circle to

become cheap imports, which threatened to undermine domestic manufacturing industries,

the assumed impact of which was to harm national wealth and jobs.

34 Byrnes. p. 89.35 Blainey, G., ‘The Cargo Cult in Mineral Policy’, Economic Record, Vol. 44, No. 108, 1968, p. 471.36 Byrnes, p. 89.37 Blainey, pp. 476-477.38 Switzer, p. 7.

27

It is a prevailing fallacy, which has influenced both public and private debate for

many decades, and does little except harm economic relations between Australia and the

region, as many of these issues are reported widely in regional media. The fact remains that

Hollowing Out and the Dutch Disease (in particular) offer a more accepted view of factors

which influence the B of P and structural change. Such influences are derived more from

the rapid growth in mineral exports than they are, from even very large tariff changes.39

This is primarily because the introduction of a tariff reduces the quantity of imports

purchased, moving the B of P into surplus, which then places downward pressure on the

price of traded goods. In other words the manufacturing sector, which must compete

strongly with imports, is forced into an equivalent position of a devaluation of the

exchange rate to restore equilibrium as a result the sector itself is not affected by the

changes. However, what is affected by the tariff change is income distribution, which is

effectively redistributed from the export sector towards the government sector receiving

the revenue from the tariff.

There is no better case in point for highlighting the negative effects on Australia’s

productivity than tariffs established in TCF Industries, which suffered the greatest impacts

from large tariff changes. Between 1968 and 1993 increasing tariffs were implemented,

which peaked in 1991. These gave TCF‘s the highest level of protection over all

manufactures in Australia; “… the levels in 1991/92 were 46% for textiles, 84% for

clothing and 91% for footwear, compared to 13% for all manufacturing.”40 While TCF

assistance has now almost halved from what it was in 1991/92, it is still comparatively

39 Gregory, R. G., ‘Some implications of the growth of the minerals sector’, Australian Journal of Agricultural Economics, 20(2), 1976, pp. 71-73.40 Economic Papers, Economic Society of Australia, Vol 20, No. 2, June 2001, p 2.

28

high when compared with all manufacturing assistance, which is lower than 5% in 2001

(Table 5).41

Table 5 TCF & Manufacturing levels of assistance, per industry, (in percent). Effective Rates of Assistance (ERA).

1960 1970 1980 1990 2000-01

All Manufactures N/A 34 24 13 5.0

Textiles N/A 50 55 46 17Clothing N/A 96 135 84 25Footwear N/A 107 161 91 25Motor Vehicles & Parts N/A 50 96 60 19

Source: Australian Parliamentary Library Research Paper 71999-2000.

These ongoing tariffs are the result of government intervention, which has

protected inefficient producers in changing international market conditions, leaving

domestic industry unresponsive to the changing climate. The resultant effects insulated the

economy in such a way that it:

“… Inhibited adaptation to changing circumstances arising from rapid advances in technology and increased globalisation. For example, government protection policy encouraged the Australian manufacturers to focus on import replacement, leaving a continued reliance on agriculture and minerals for export earnings.”42

In other words, Australia simply developed an over-reliance on commodity exports

and used any surpluses to acquire new technology from abroad rather than develop

technology locally to meet Australia’s own industrial requirements.

This seeming indolence or complacency shows a considerable weakness in

Australia’s fundamental policy initiatives. Instead of selling raw materials in the form of

coal and iron ore to Asia, Australia might have been better off building up competitiveness

in its domestic industries. In hindsight, this may have saved Australia from its current level

41 OECD Economic Surveys Australia, No. 14. August 2001, p. 83.42 The Australian Economic Review, Vol. 34, No. 2, June 2001, p. 126.

29

of exclusion, which the government seems to be facing, particularly in its trade

negotiations with ASEAN and other regional forums.

Moreover, Australia with a considerably more diversified economy, could have

enhanced its regional bargaining power and seen a much more fruitful and dynamic

relationship with its regional trading partners. Certainly, (as Blainey postulates) if

Australian governments had held the reigns and taken control (of the core) an earlier

development of mining industries may have heralded in better deals with the Japanese. The

likelihood of greater earnings in the 1950’s, an era of ‘brooding pessimism’ over

Australia’s B of P problems may have lifted economic attitudes and policies as a stimulus

to growth.43

Therefore, Australia’s inability to be more competitive with the region highlights

more a sense of insularity from externalities developed from its relationship with the UK.

This translates into apprehension of the Asian way of doing business, and a desire for

commercial linkages with those that have similar cultural affiliations such as the EU and

the US. Though Australia may be left wanting if it assumes such preferences will create the

pretence of a more even playing field. The imbalance or unevenness in the so-called

playing field is reflected in Australia’s technology needs, which are increasingly met

through imports from the US that are active in all of Australia’s major technology import

categories (Table 6).

Over the last decade, these imports have continued to grow substantially

contributing to the nation’s trade deficits. Imports of computer parts and accessories were

$A2.5 billion in 2000, up 91 per cent from 1991, with automatic data processing machine

imports (including personal computers, disk drives, and monitors) worth $A5.5 billion in

43 Blainey, p. 476.

30

the same year.44Telecommunications equipment worth $A6.4 billion was imported, and

was also one of the major commodities contributing to import growth in 2000.45

Table 6 Australia’s major source of technology imports 2000-2001

MainImport source

Technology Import Category (A$m)Computer

parts & accessories

Automatic data

processing machines

Telecommunications

equipment

Aircraft parts &

accessories.

USJapanChinaUKOther

715 429 169 544 636

901 635 359 3,345

1,400 622 554 3,473

1,700

687 513

Total 2,493 5,240 6,049 2,900 Source: DFAT country/economy fact sheets 2001 & Composition of trade 2000-01.

The $A17 billion combined for these technology imports represents some 15.6 per

cent of the commodity share of total Australian imports that year.46 Australia’s major

source of technology imports and the major exports highlight the differences in the types of

trade Australia is engaged in (Table 7). This divergence in trade illustrates the

predominantly primary base for exports and the overall dependence of the Australian

economy on technology imports to meet domestic industry needs.

Table 7 Major Australian exports and imports, 2000-2001 (A$m).

44. Department of Foreign Affairs and Trade, 2000: Major Export Markets in 2000, (Main Features) in Composition of Trade 2000. <h ttp://www.dfat.gov.au/publications/stats-pubs/cot.pdf >, accessed August 2001.

45 Major Export Markets in 2000.46 Department of Foreign Affairs and Trade, Feature article: Major commodities traded by Australia, 1991 to 2000, http//www.dfat.gov.au accessed July 2001.

31

Exports Imports

Coal

Crude petroleum

Non-monetary gold

Iron ore

Aluminium

10,818.5

7,607.1

5,110.2

4,911.2

4,734.4

Passenger motor vehicles

Crude petroleum

Telecommunications

Computers

Medicaments (inc. veterinary)

8,578.9

8,205.8

6,049.1

5,240.1

3,508.8

TOTAL 33,181.5 TOTAL 31,582.7

Source: DFAT country/economy fact sheets-Australia 2001.

These examples set the stage for the way in which the international community

views Australia today. Consequently, Australia continues to be seen as a bulk producer of

commodities, foreshadowing a lack of demand for full-scale manufacturing, let alone the

development of technology related industries here. Such a narrow export base may well be

viewed with scepticism by economies endowed with a greater diversification of national

production. This is no more so than in the telecommunications, computer and commercial

aircraft industries, which require a higher level of local expertise and ongoing technical

innovation and change to manufacture.

Current Australian government published trade statistics indicate little more than a

hint of any such marginalisation of secondary industry. Accordingly it is shown that

manufactures now account for over 30 per cent of Australia’s merchandise exports at $A31

billion, up 23 per cent from 1990.47 At first glance this appears to be an impressive figure,

though it is diminished by the fact that growth in manufacturing has declined from its peak

in the early 1990’s (Table 8).

Table 8. Sector contributions to market sector multifactor productivity48 growth47 Feature article: Major commodities traded by Australia, 1991 to 2000.

48 The term multifactor productivity… ‘is defined as the productivity of the main primary factors of production – labour and capital – in generating value added.’ The market sector excludes those market

32

Percent per year and percent 1981-1982

to1988-1989

1988-1989to

1993-1994

1993-1994to

1999-2000

Multifactor Productivity

Growth Contribution Growth Contribution Growth Contribution

Agriculture 1.1 10.7 4.3 25.8 2.5 9.0 Mining 3.9 30.9 1.9 13.7 0.8 3.5Manufacturing 1.6 78.2 1.8 53.9 0.5 7.0Electricity, gas and water 3.0 16.4 4.0 16.4 1.0 2.3Construction -0.8 -13.5 -0.4 -4.2 1.3 7.2Wholesale trade -0.9 -15.5 -2.1 -23.1 5.6 30.1Retail trade -0.7 -11.3 0.5 5.3 0.9 5.2Accommodation, cafes,And restaurants -2.7 -16.5

-2.0 -8.0 0.5 1.0

Transport and storage 1.0 16.1 0.6 6.9 2.1 12.8Communication 4.1 14.0 6.3 19.4 3.3 7.8Finance and insurance 0.2 2.9 0.0 -0.3 3.7 21.9Cultural and recreational services -2.6 -12.4 -1.7 -5.9 -4.1 -8.0

Market sector 0.6 100.0 0.6 100.0 1.7 100.0This is in part due to the prosperity of regional economies engaged in the

Competitive pressures from the liberalisation of manufacturing imports had initially

seen improvements in the sector. Although secondary industry exports have contributed to

Australia’s trade deficits in the last decade, while “… many of the positive effects of earlier

trade liberalisation on productivity growth had run their course.” 49 Astonishingly the

mainstay of Australia’s initial exporting foray into the region via the mining sector is now

one of the poorest performers. This highlights the ineffectiveness of raw resource

extraction and the decided lack of value adding associated with these industries.

activities which are not value added such as… ‘property and business services; government administration and defence; education; health and community services; and personal and other services, including ownership of dwellings.’ 49 OECD Economic Surveys, No. 14, August 2001, pp. 82-83.

Source: OECD Economic Surveys, Australia, August 2001, p. 82.

33

This is in part due to the prosperity of regional economies engaged in the

manufacture of semi conductors and other components for technology related industries,

which no longer use coal in the manufacturing process. Conversely service industries such

as those in finance and insurance, transportation and storage, wholesale trade and

communications are the new engines of productivity growth in the Australian economy

(Table 8).

When compared with other sectors of the Australian economy manufacturing,

mining and agriculture have come down from, what were very high levels of productivity

growth. Manufacturing itself now contributes, only about 7 percent to productivity growth,

down from previous high levels of 54 and 78 percent respectively. Yet, what is not overly

apparent is the extent to which manufacturing contributes to R & D in Australia.

Manufacturing industry contributions have a direct spin-off to other sectors within the

Australian economy. This contributes a great deal indirectly to the overall multifactor

productivity gains in these new growth sectors (Table 9).

Table 9 Australia’s R & D expenditures x industry, 1996-97.

Industry Expenditure($A millions)

Percentage of Total

MiningManufacturingWholesale & retailFinance & insuranceProperty, business servicesScientific researchOther

546243420194514152183

13.259.04.92.312.53.74.4

TOTAL ALL INDUSTRIES 4124 100.0Source: Journal of Australian Political Economy, No. 45, June 2000, p. 23.

Moreover, although R & D expenditure in manufacturing contributes positively to

the development of other industries in the Australian economy, the fact remains that

34

Australia is still viewed as a bulk producer of commodities. Previously high levels of FDI

and ownership in Australian equity and the decided lack of R & D input by these same

firms, is countenanced by the relatively small R & D input of Australian firms. Though,

this is not enough to counter-balance negative sentiments about Australia’s global

economic position.

Clearly, this is evident in Australia’s dollar value on overseas markets where the

currency is considered greatly under valued, falling as low as $US 0.49 cents in recent

months. The consensus of Australia as a commodity-based economy is reflected in this low

price and could see it fall even further.50 The need to meet the challenges of moving

Australia’s industries into more technology related areas echoes Paul Keating’s call that

the nation may very well succumb to the vicissitudes of a banana republic if it fails to

advance.

While Keating’s concerns led to structural reform in Australia’s industries, this had

to some extent seen education put on the backburner. Moreover, this had been the case ever

since Barry Jones was minister for Science and Technology in the mid 1980’s, and now

more recently, as the Knowledge nation Taskforce Chair in 2001. Jones continues to

stipulate the importance of gearing the nation towards more value added, and innovative

industries, of which education is very much the precursor.51 While Keating’s statement had

become a central issue in political and economic debate of the times, Jones’s call to arms

was considered more academic than an immediate requirement.

Nonetheless, one of the main items on the agenda for Australia’s recently held

federal election, which coincidentally the opposition party had pinned its election hopes

50 Australian Broadcasting Commission, 2001, Cortis, K. Goldman-Sachs Asia. Interview, Compare Tony Jones, ABC’s Lateline, <http://www.abc.net.au/lateline/s323755.htm>, accessed September 2001.

51 National Australian Labor Party, Home Page, Barry Jones – Launch of the report of the ‘Knowledge Nation’ taskforce, < http: www.alp.org.au/kn/kn_report_ 020701.html> accessed July 2001.

35

upon, was “Knowledge Nation”. Alternatively, to use the incumbent government’s terms

of reference this also became known as “Backing Australia’s Ability”, which was launched

in January 2001.52 The urgency with which both major Australian political parties

addressed this agenda and labelled it their own initiative highlights the necessity for such a

strategy and its implementation.

Moreover, the main agenda it underscored was the need for the reallocation of

resources to meet changing national interests, which among other needs, included

encouraging educational investment in information technology and associated industries.

With growth in these imports significantly outpacing those of Australia’s major exports in

recent years, enhancement of national wealth and job creation has proven a considerable

incentive for advocating this investment strategy, albeit better later than never. As an

election promise, such a proposal is commendable, though it may be difficult to rise above

the rhetoric and achieve any noteworthy outcome.

Barry Jones, in his role as Science and Technology minister some 15 years ago,

insisted on the need for such a program; however 15 years on, his fears have not been

allayed. This is primarily because federal politics in Australia has a tendency towards

pragmatism rather than vision. Government policies that have no immediate impact

therefore go largely unnoticed by the Australian public.

Allbeit the case, Australia’s dilemma of inefficient, uncompetitive industries,

overall market decline in manufacturing as a share of GDP, and increasing levels of

technology imports, attests to the requirements established by Barry Jones and others that

the nation must change its emphasis to enhance Australia’s economic development. This

52 OECD Economic Surveys, No. 14, August 2001, p. 184.

36

view is further reinforced by OECD statistics, which show Australia’s R & D to GDP ratio

at 1.5 per cent, having slipped significantly below the OECD average of 2.2 per cent.53

Australia’s historical origins and past relationships have shaped and moulded the

economy into its current position. For many commentators it was Keating’s influence over

the economy as Federal Treasurer in 1983 and the subsequent opening up of the economy

to international competition that heralded in the watershed years. These years had seen

Australia basking in the success of its resources boom with Asia until the price, food, and

fuel shocks of the mid 1970’s. As a consequence of this, changes were needed to revamp

the nation’s structural malaise, which had exposed a weak manufacturing sector.

Yet, while Australia’s problems were inherently structural they were also

institutional in origin, with the weaknesses in the manufacturing sector resulting from a

poorly developed entrepreneurial class. In Australia, the dominant capitalist class had

always existed more or less in the shape of those who owned the primary resources, rather

than as an indigenous crop of local capitalists who were manufacturers.54 This has

influenced the extent to which Australian industry has been involved in R & D and the

ongoing level of participation in technical innovation and change.

This presents significant ramifications for regional trade, with which Australia must

compete in order to extend its global reach. If Australia is to advance within regional

trading arrangements and fortify complementarity within these groups, it must address

these structural, and in particular the institutional problems, or else it may well see itself

largely excluded from inter-regional trade.

Therefore, the outcomes of Australia’s early trade relationships have consequences,

not just affecting past relationships, but also affecting those in the future. Not the least of

53 OECD Economic Surveys, No. 14, p. 107.54Broomhill, P. 41.

37

which concerns the extent of Australia’s ongoing interaction with the region, and the

overall importance of regional trade to Australia’s future growth.

38

CHAPTER 3

The Importance of Regional Trade to Australia’s Future Growth

An important consideration in any argument about economic development concerns

the nature and type of development that is taking place. The neo-classical, and more

recently, liberal models of economic development predicate Australia’s relationship with

the EU and the US, which are characterised by predominantly western societies. However,

if we are talking about Australia’s relationship with East Asia (particularly Southeast Asia)

then we are talking about economic development that has occurred along somewhat

dissimilar lines. Here, ostensibly authoritarian regimes headed by military dictators have

attempted to obtain legitimacy by shrugging off their military uniforms and entering the

public arena, while maintaining close links with the military.

In many ways, what managed to sustain dynamic regional growth had been the

complicity of foreign capital, transnational corporations, and foreign governments with the

ruling elites of the region who acted in cooperation with powerful domestic cartels.55 Such

relationships provided regional stability because the ruling elites also controlled, or in large

part acted in cooperation with, the defence establishments and their leaders. Australia’s

relationship to foreign capital has been predicated by stability incurred through “… stable

institutions and sound conventions within a tried and tested constitutional system.“ 56

For these reasons, the Australian economy may be perceived as a somewhat safer

haven for investment than that of its regional neighbours. Moreover, Australia and the

region differ in terms of the origins of internal stability, and as such their attractiveness to

foreign capital and investment. There are also considerable differences in terms of their

orientation towards R & D and the varying levels of technical innovation and change that

55 Jayasuriya, K. The crisis of open regionalism and the new political economy of the Asia-Pacific, in Policy, Organisation & Society, Vol. 20, No. 1, 2001, p. 90.56 Flint, D. Opinion, The Australian, Wednesday January 9, 2002, p. 11.

39

have taken place. As discussed in the previous chapter, the input of foreign investment into

R & D is significantly less than that of domestic industry. This has caused some concern

because of the high levels of foreign ownership, particularly in the resources sector of the

Australian economy. However, in the region, particularly Southeast Asia, much of the

technical innovation and change has occurred through technical transfer (often called the

flying geese model of development). This has come from Japanese industries outsourcing

technology to take advantage of cheaper labour and infrastructural costs in the region. In

effect, this created a situation where the region did not have an indigenous crop of local

capitalists who were manufacturers, and neither did Australia for that matter. Moreover

like Australia, the region may well suffer from a drought in technical innovation and

change by virtue of the R & D sector not containing an indigenous crop of capitalists

motivated by any economic need to develop leading domestic industries. Again, the

outsourcing of R & D by foreign organizations with little input from the host economies

has seen this situation prevail in Australia and the region.

However, what many fail to consider in an argument such as this is the variety of

competing capitalisms in the region. Take for example the Diaspora of Chinese capitalism

throughout Southeast Asia; it has been argued that their relative successes have not simply

been the result of imitation or copying of the west, but may be considered a desirable

alternative model.57 However, this Diaspora, while quite large, occurs throughout the

region in small units when compared to the extensive corporations of the Japanese

overseas. This often meets with hostility from host nations as the Chinese concentration of

economic power is much maligned by indigenous populations.

57 Tracy, C.L. & Tracy, N. The Dragon and the Rising Sun: Market Integration and Economic Rivalry in East and Southeast Asia, Flinders University, 1994, pp. 3-7.

40

With competing capitalisms, differing models of economic development and

strategic instability the region may be considered highly volatile. This in itself creates a

somewhat uncertain investment environment for Australian firms, who would be more

inclined to trade outside the region (with the EU and the US) because of confusion over the

regional environment. Therefore, the idea that regional trade has enhanced Australia’s

economic development and the overall importance of the region to Australia’s future

economic growth is counterbalanced by considerations, not only of economic performance

but also of political and strategic concerns. It is these considerations that have seen

organizations such as the World Trade Organisation (WTO) and the IMF encourage trade

linkages between developing and developed economies and the broadening and deepening

of relationships through regional RTAs (Figure 3).

Figure 3: The number of RTAs notified each year 1948-1999

Source: World Trade Organisation – Regionalism: Facts and Figures www.wto.org

Inactive Dec 1999 Active Dec 1999

41

The recessionary period of the late 1970’s and 80’s had seen a tapering off in

membership of RTAs. This was the result of a propensity for nations to retreat into more

protectionist frameworks in recessions, in order to protect their markets from outside

interference. Likewise, in periods of economic growth such as the long boom of the 1960’s

and 70’s there has been a propensity for RTA creation and in the 1990’s this trend for RTA

membership has continued. While figure 3 refers ostensibly to the global context, the

region is highly integrated into this format, with 13 Asia Pacific regional nations engaged

in talks on bilateral and sub-regional FTAs, and a further 43 RTAs having been ratified.

These constitute almost half of the 130 FTAs in force, with the US having just two RTAs

and Australia involved in just one with New Zealand.58

Regional trade may have considerable importance to Australia’s future growth, not

just in terms of regional demand or market access, but also in terms of regional stability as

a foundation for drawing in large players such as the EU and the US. Many of the benefits

of trading with near neighbours are derived from reduced transportation costs and the

facilitation of shipping movements. Perhaps more importantly, such arrangements help to

create and maintain harmonious relations between trading nations. After all, if nations are

involved in some form of regional trade arrangement, it may help to reduce the likelihood

of any tensions or frictions from either developing or escalating into more volatile forms of

conflict, for fear of jeopardising mutually beneficial trade arrangements.

Arrangements, which allow for an exchange of ideas and culture, often facilitate the

movement of people, such as company representatives, and can help to promote fruitful

political exchanges. Essentially, what this represents is the opening up of borders and the

lifting of barriers to trade and investment. Indeed, this is very similar to the rationale for

58 Leaver, R., Is Australia Being Economically Excluded from Asia? Policy, Organization & Society, Vol. 20, No. 1, Special Edition, An American – Australian Free Trade Treaty, Flinders University, 2001, pp. 141-142.

42

the establishment of GATT that was predicated by fears of protectionism and trade

tensions during the inter-war years.

This philosophy has been paramount in the fast tracking of China’s entry into the

WTO, and allowing China to have the Olympic Games even in the face of recent massive

human rights abuses by the ruling political regime. It is perceived that an isolationist China

with nuclear weapons and an ever-growing economic clout not just in the region but the

world would be more receptive to the United Nations (UN), World Bank and IMF concerns

if it were a part of the open trading system than if it were not.

Australia owes much of its current economic success to its relationship with the

region, in particular Japan, which was a major source for Australia’s exports from the

1960’s onwards. With Australia’s reduced access to the EU and restricted access to North

Atlantic Free Trade Agreement (NAFTA), the opening up of the region was perhaps

Australia’s saving grace in terms of economic survival.59 Japan is still Australia’s number

one trading partner today and while Australia is not as important as a source of imports for

Japan as it was in the 1960’s, Japan is still Australia’s most important destination for

exports. 60

This is perhaps no better exemplified than in a report drafted by the Australian

Bureau of Statistics to highlight the necessity of bilateral trade between the two countries.

61 To add to the veneer this report gives a glowing picture of Australia’s trade with the

region. It also clearly shows that Australia’s interests lie with the region in terms of the

significant growth in trade with Japan and ASEAN (Figure 4).

59 Is Australia being economically excluded from Asia, p. 152.60 De Brouwer, G. & Warren, T.,, Strengthening Australia – Japan Economic Relations, Department of Foreign Affairs and Trade, April, 2001. <http://www.dfat.gov.au/geo/japan/aus_relations/ser_report.pdf>, accessed May 2001.

61 Brouwer, & Warren.

Figure 4: Australian exports of goods and services.By destination, 1990 and 2000

43

Source: Australian Bureau of Statistics (www.abs.com.au)

China as an export destination appears significantly less important than the other

nations and regions represented. However, its overall percentage growth in terms of initial

trade from 1990 to 2000 is substantially greater than all the rest, which makes it appear

quite noteworthy. Moreover, to say that Australia’s exports to the EU outweigh those of

the US, while it may be true, fails to indicate that the EU is a trading region in much the

same way as ASEAN. Thus, it fails to differentiate between trading nation and trading

region, leaving out much of this important criterion as the basis of its overall modelling.

Merchandise/goods exports are the largest sector of Australia’s overall export trade

at $A119.5 billion in 2000, and when services are added to these, they represent an

impressive export base.62 Services are becoming one of the fastest growing sectors in the

Australian economy. As a share of total exports, services stand at 36 per cent or $A32.8

billion in 2000. Therefore, the addition of service exports to the level of

62 Department of Foreign Affairs and Trade: Composition of Merchandise Trade in Composition of Trade Australia 2000-01. < http://www.dfat.gov.au/publications/stats-pubs/cot.pdf > accessed September 2001.

1990

2000

30

25

20 15

Aus

tral

ian

dolla

rs, b

illio

ns

1990

2000

JAPAN ASEAN EU USA CHINA

10

5

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44

merchandise/goods trade has a substantial impact on released government statistics.63 Yet

the overall chemistry between goods and services is different, in terms of manufactured

goods compared to the intellectual property rights and the fewer tangible assets that

comprises of services generally. Any divergence in terms of their calibration pales when

we consider that there is a great deal of complementarity between them. Moreover, much

of the service industries rely heavily on manufacturing for their continued development.

While computers, telecommunications, transportation, servicing of equipment, and R & D

enhance the efficiency of many of the service industries they still owe a significant amount

of their growth to their manufacturing origins.

Why then, is it that manufacturing as a percentage of GDP is declining in most

OECD countries? If manufacturing is the basis of the service industry requirements/initial

inputs, then why does it not grow concurrently?

Again, as in subsequent chapters, these questions formulate the basis of the

hollowing out process or the contrast between the booming sector and its resultant Dutch

Disease sector affected industries. The primary reason for this occurring in Australia (and

other OECD countries) is widely accepted to be the result of inefficiencies within domestic

manufacturing industries themselves. Their declining share of GDP is most certainly the

result of decreased income elasticity of demand for manufactures due to rising income

levels.64 This effectively leads to reduced demand for domestic manufactures, though it

does not necessarily translate into a reduced demand for manufactured goods per se’.

Again, what this gets down to is competitiveness, with imported manufactures dominating

the market, because of far better elasticity of demand among Australia’s regional 63 Department of Foreign Affairs and Trade, 2000: Australia’s trade in services in Composition of Trade 2000. < http://www.dfat.gov.au/publications/stats-pubs/cot.pdf > accessed August 2001.

64 Toner, P., Manufacturing Industry in the Australian Economy, in Journal of Australian Political Economy, No 45. June 2000, p. 21.

45

competitors. Thus, prices for imported goods are cheaper than those of domestic

manufacturers, which are unable to compete on a price per unit basis with these smaller

income, higher output economies.

Therefore, to suggest that manufacturing is in a fatal decline would be erroneous,

since considerable service industry growth requires domestic manufacturing input. This

input is needed particularly in R & D expenditure and accounts for the concern over

foreign investment and the lack of R & D spending in manufacturing industries dominated

by this sector. Moreover, owing to the considerable weight of the services sector in export

growth during recent years, manufacturing growth particularly in R & D cannot be

overstated as a complimentary adjunct to the development of the services sector.

From the perspective of the Dutch Disease, this argument has considerable merit, as

the core model suggests that the lagging sector may decompose into other industries.65 In

other words, these non-boom industries can still expand, as manufacturing has done via the

growing requirements of the services sector for manufacturing input, in terms of

maintenance, and technical expertise, and many aspects of technical innovation and

development. All this can occur even though the sector overall, may, in fact be

contracting.66

Therefore, emphasis on the role of manufacturing in service industries, through R

& D, has particular relevance here, as it highlights many important contradictions in the

issue of whether or not regional trade could help or hinder Australia’s economic

development. This is primarily due to the dramatic increase in Australian service exports to

the region as a response to increasing demand for Australia’s technical expertise and

professional services. This is evidenced by Australia’s services trade with APEC which has

65 Corden, pp. 12-13.66 Corden, p. 12.

46

increased from $ A 6,306 million in 1989-1990 to $ A 17,550 million in 1999-2000,

an increase of some 64 percent within the decade.67

However, R & D restrictions incurred by foreign ownership pressures for a more

extractive economy could very well undermine Australia’s regional involvement. While

this possible undermining of the Australian economy is not entirely caused by these

factors, its origins are embedded in the perception of Australia as an extractive,

consumption based, low technology economy. These continuing perceptions could very

well see future regional trading relationships degraded and see Australia retreat from

ongoing trade liberalisation. Such a situation has already occurred in the automotive, and

TCF industries, with foreign owner perceptions as well as those of the domestic industry

itself being more concerned with continuing production, and saving jobs. This has occurred

at the expense of technical innovation and change, resulting in further assistance and

ongoing tariff barriers.

Therefore, while regional trade has been and will continue to be important to

Australia’s future growth there are a number of internal contradictions in the scope and

likely improvement of trade relationships with the region. While stable government and a

skilled workforce go in Australia’s favour attitudes towards R & D do not. The downward

pressure on manufacturing makes this all the more difficult as inelasticity of demand

makes for a poor bedfellow with the high costs of R & D expenditure. This is made all the

more acute by foreign investment, which would rather produce existing technology

cheaply here and develop it more advantageously elsewhere.

67 The APEC Region Trade and Investment 2001, DFAT, Australia, October 2001, p. 196.

47

CHAPTER 4

The Regional Financial Crisis and its Impact on Australia’s Economic Development

The Australian federal government’s often-projected view that the regional

financial crisis had little impact on Australia’s economic development is not entirely

sound. In fact, the crisis had significant long-term consequences for the economy, some of

which may be difficult to quantify or measure in terms of economic indicators, as they are

yet to unfold, though the trends are now becoming apparent. This is no more so than in the

ongoing reinforcement of international opinion that depicts Australia’s economy as a

commodity based, branch economy.

Since the onset of the Asian financial crisis in 1997, there have been substantial

changes occurring in both the nature and patterns of regional trade that have emerged.

Australia has seen a considerable shift in trade away from the region toward that of the US

and the UK. An apparent transfer in trading allegiances is not all that surprising in light of

the fact that in 1998 Australia had its first trade deficit with APEC in a decade, and its first

trade deficit with ASEAN since the 1970’s.68

Immunity to some aspects of the regional crisis highlighted how removed Australia

was from the region. While complementarity was important as Asia expanded in as far as

Australia’s resources helped develop regional economies, they now highlighted how

Australia’s regional integration is made all the more problematic as these economies are

now increasingly engaged in technology-related industries. This leaves Australia’s bulk

commodity based export economy with few options but the distant possibility of the

opening up of the Americas to its trade.

68 Department of Foreign Affairs and Trade, 1999, Composition of Trade Australia 1998. < http://www.dfat.gov.au/publications/stats-pubs/cot.pdf > accessed July 2001.

48

Moreover, with the insolvency of many banks and businesses in the region after

1997, demand for Australia’s commodities had been substantially reduced. This reduction

in demand was the result of massive capital flight out of Asian economies, which saw

Australian exports to the region fall by more than 7 per cent in 1998-99. Compared to the

previous year, exports outside the region had risen by over 3 per cent in the same period

(Table 10).69

Table 10 Australia’s exports to the region and outside the region, 1995-96 to 1998-99 - selected countries ($A millions)

Australia’s Export

Destinations.1995-1996 1996-1997 1997-1998 1998-1999

Intra-Regional(selected countries)

ROKSingapore

TaiwanHong KongIndonesiaMalaysiaThailand

6,6153,5563,4523,0522,7162,2891,779

7,1343,4103,6203,1053,3052,3321,693

6,3973,6974,1804,1382,7512,0971,390

6,3203,4174,2033,0712,1191,8591,306

Extra-Regional(trading group + selected countries)

APECASEAN

EUUKUS

57,92511,7398,4642,8294,619

59,67812,2738,1712,3575,526

64,21011,51410,2363,0407,794

61,35510,41611,6294,4737,984

Source: AusStats: Feature Article – Australia’s export markets, 1991-92 to 2000-01. Cat No. 5422.0Moreover, there were substantial increases in Australia’s exports to the EU, the UK

and the US between the periods 1995 –1999. To some extent this trade diversion indicated

that Australia was turning away from the region by trading with preferred markets,

69 McDougall, D., Australia and Asia – Pacific Security Regionalism. Contemporary South East Asia, Vol 23, No 1, April 2001, p. 91.

49

predicated by the customs and beliefs which tie Australia’s largely western orientated

culture to value systems outside the region.

However, while this may in some part be the case, significant falls in the value of

the Australian dollar because of the crisis made Australia’s exports more attractive to new

markets outside the region. This provided a significant boost for exporters and greatly

assisted in the positive terms of trade outlook. If not for these factors the economy may

well have taken a severe battering as the depreciation of the currency at the time took some

25 per cent off its value with the dollar, dropping as low as 55 cents. This was lower than

its all time low in 1986 of 57.5 cents, alluding to Paul Keating’s concerns that Australia

takes heed of his banana republic characterisations.

While the overall economy itself appeared largely unaffected by the crisis, this was

not just a result of openness, or liberalisation. It was due, perhaps, more to Australia’s

dependence on commodities and its low technology manufacturing base, which made

Australia much less vulnerable to the economic shocks, which shook the region in 1997.

To elaborate further, it is certainly true that Australia lacks any comparative

advantage with the region in terms of high technology fields. Japanese FDI gave rise to a

regional division of labour, which was efficient and cheap when compared to labour costs

here, and had seen large increases in technological capabilities, particularly in Thailand,

Malaysia and the Philippines.70 Certainly, this over-dependence on FDI from an

extensively depressed Japanese economy had left these and other regional economies

highly vulnerable. With a slowing US market ASEAN in particular, was left with an

oversupply of goods.71

70 The Far Eastern Region, The Journal of East Asian Affairs, Vol XIV, No 2, Winter 2000, p. 347.71 Peng, D., The Changing Nature of East Asia, Pacific Affairs, Vol 73, No 2, 2000, p. 171.

50

This was further compounded by the nature of regional economies, which were

geared to production (export orientated) rather than consumption (domestic demand). The

subsequent increases in the current accounts deficits of these countries saw cracks

appearing in the very institutions that supported industry with its capital requirements, and

saw fundamental weaknesses in terms of accountability and transparency of these same

institutions.

While it is not the purpose of this thesis to articulate the causes of the 1997 crash,

some understanding of the factors involved bear directly upon differences in capital flows

and types of trade between Australia and the region. They can also determine the likely

future direction of these trade flows and ultimately the extent to which they will influence

Australia’s economic development.

It was inevitable that Australia’s commodity markets in the region would be

affected by the crisis. By 1999 coal exports had fallen some 12 percent to $US 5,414

million down from $US 6,179 million in 1998 as regional economies slowed in the wake

of the crash of 1997.72 This accelerated into a crisis of structural proportions for the

economies concerned, inflicting reduced demand for manufacturing, particularly, in

technology sectors and automobile industries, and saw the collapse of the construction

sectors that were fuelled largely by hot money.

The crisis resulted in substantial capital flight from the affected economies, with

some fundamental distinctions between Australia’s economy and those of the region

underlying why the impact of the crisis on Australia saw this nation substantially

unaffected by these events. This is an important distinction when talking about Australia’s

relationship with the region, especially when we consider trade outcomes in the aftermath

of the crisis.

72 The APEC Region Trade and Investment 1999, DFAT, Australia, October 2000, p. 13.

51

Australia’s economy is substantially larger than many of the regional economies

affected by the financial crisis, therefore any downturn in the international market will tend

to have a larger impact on these smaller economies. In Australia, exports had comprised

around 16 to 20 percent of GDP leaving some 80 percent of GDP for domestic demand and

consumption (Table 11). However, owing to the export-orientated nature of regional

economies, domestic demand is substantially low, while exports comprise close to, or more

than 50 per cent of GDP. Therefore, any downturn in export demand will significantly

affect GDP allowing a higher likelihood for the domestic sector to be undermined, and an

increasing chance of capital flight, as had been seen during the crisis. Australia has a

decided comparative advantage in its primary sector, which the region does not have, and

with the crisis affecting mainly technology stocks, Australia’s economy largely escaped the

havoc created by regional events.

Table 11 Regional comparisons between exports as a percentage of GDPExporting country 1996 1997 1998 1999 2000

Australia 14.8 15.5 15.3 14.2 16.6Japan 8.9 10.0 10.2 9.6 10.1

US 8.0 8.3 7.7 7.4 7.7ROK 25.2 28.6 41.9 35.4 36.4

Indonesia 21.9 24.8 51.2 34.4 40.5Malaysia 77.6 78.7 101.4 107.2 109.9Thailand 30.6 38.1 48.7 50.6 53.4

Source: Australian Bureau of Statistics (www.abs.com.au)

By comparison, the regional crisis had little impact on China’s economy apart from

some downward pressure on the domestic currency. Again, owing to China’s status as the

new powerhouse of the region, and given the comparatively larger size of its economy to

52

that of the region, the international shocks caused by the crisis left this economy relatively

unscathed as well.

Demands for stability that to some extent allowed China’s economy to weather the

regional financial crisis are currently being sought by regional economies. This belies a

concerted push by these economies for their own trading zone not unlike that of the EU or

NAFTA. There is considerable evidence of a shying away by the region from regional

forums such as APEC by virtue of the establishment of the ASEAN + 3 forum. This forum

evolved from an economic courtship between ASEAN and the largest economies in the

region (Japan, China, and South Korea) in the aftermath of the Asian regional economic

crisis. The emphasis for this forum has been on mechanisms to help counteract the impact

of any future regional crisis by the proposed introduction of a region-wide system of

currency swaps and talk of a common currency itself. It is assumed that such a mechanism

could alleviate some of the problems caused by the US dollar pegs and the subsequent free-

floating currencies that had previously wreaked so much havoc.73

An essential aspect to this forum was its restricted membership to East Asian

participants only. Since Australia is the only non-Asian nation in the region, it clearly

apparant that this gathering was very much to Australia’s exclusion. The Australian

government rejects this notion and prefers to see this as an alternative mechanism for

regional dialogue and cooperation to APEC, as East Asia’s own distinctive way of dealing

with economic issues in lieu of the crisis.74 However reassuring this statement may be, a

dialogue between North East Asia’s biggest economies and their ASEAN counterparts

would almost certainly suggest cause for much greater concern on Australia’s behalf. In

73 Bergsten, F. Tigers throw off shackles, The Australian, Monday, July 17, 2000, p. 44.74 Calvert, A. 2000, `Australia’s Foreign and Trade Policy Agenda. ̀ National Press Club Speeches by the Department of Foreign Affairs & Trade Secretary, Canberra, <http://www.defat.gov.au>, accessed June 2001.

53

light of the constraints placed on Australia’s economy by trading blocks in Europe and

America, a tight regional trading block would have devastating consequences for

Australia’s terms of trade, thus impacting harshly on Australia’s economic development.

However, since mid 1999 commodity exports have boomed as oil prices have risen,

creating demand for cheaper alternatives such as Australia’s extensive coal reserves. The

price of commodities has continued to fall increasing to levels better than those of the pre-

crisis period, with gains of 27.1 per cent over 2000-01.75 These increased levels of

productivity combined with Australia’s weak currency have reined in a prevailing mineral

boom. With the currency losing some 25 per cent after the regional crisis, this has since

leveled at about 14 per cent between 1999-2000 and 2000-01. This has added some 15 per

cent to the commodity price index making for very cost competitive commodity exports

from Australia.76

Australia is also shaping up to be a good place to invest for automobile

manufacturers. This is increasingly due to the uncertainty of the Asian market owing to

recent bankruptcies such as Korea’s second largest conglomerate (Daewoo in 1999), and

ongoing concerns about corporate governance and continuing levels of corruption.

Moreover, corruption, collusion, and nepotism are endemic to the point where their grip is

still relatively tight in regional economies. Such is the case that corporations like Holden’s

US parent are considering increases to its share in the Australian automotive market to

some 25 per cent within five years.77 Also, Detroit based motor company Ford, while

slashing some 35,000 jobs and closing several factories across the US, has not only

maintained a presence in Australia, but is expanding operations here. Ford has a $A500

million investment in a new vehicle line in Australia, and is planning to increase the

75 Phaceas, J. Dollar at coalface of recovery, The Australian, Wednesday, December 19, 2001, p. 30.76 Wilson, N. Mineral boom on dud dollar, The Australian, Wednesday, December 12, 2001, p. 38.77 Wilson, R. Holden’s right turn, The Australian, Thursday, January 10, 2002, p. 24.

54

workforce here by 430 over the next two years.78 Moreover, this accommodating situation

is in stark contrast to Mitsubishi (see chapter 2), where the foreign manufacturer cannot

guarantee it will continue operations without substantial government assistance, in light of

its own reduced international market share and falling profitability.

Australia’s good governance, relatively sound financial institutions, and stable

democracy count for a great deal as a place for foreign investment in light of the

continuing uncertainty in the region. Large US corporations such as Holden and Ford are

expanding operations here, although production is being slashed on their home soil. This

may well see Australia continue to increase its trading links outside the region as other

foreign corporations seek stable and more cost-effective environments to conduct business.

78 Hutton, R. & O’Connell, D. Ford goes into reverse, The Australian, Monday, January 14, 2002, p. 32.

55

CHAPTER 5

APEC and the Development of New Regional Trade Regimes

Australia was not completely without alacrity when it came to determining its

economic future. The establishment of APEC in 1989 as a forum for regional trade

negotiations was not the result of any so-called demands for the Asianisation of Australia.

Nor was it out of any need to change the pattern of trade with the region, or out of any

attempt by Australia to create its own trading block. What it represented perhaps more than

anything else was a means of binding the US to our region, rather than setting Australia

completely adrift in South East Asia.

Acting as buffer or a countermeasure to the barriers thrown up by trading blocks,

APEC had not become a formal type of economic integration as was the EEC and NAFTA.

It was based on a type of regional integration with less formal arrangements that became

known as open regionalism79. APEC gave Australia a platform within which to vigorously

pursue its own economic interests in the region. It achieved this by multilateral

negotiations over trade tensions caused largely by regional trade barriers, which were

almost at flashpoint, and threatened to undermine Australia’s bilateral trade interests in

North East Asia.80

The keynote here is that while Keating had espoused the importance of the

multilateral process, his government was itself very much concerned with the bilateral

content of its APEC relationships. Hence, even after the commitment to the Bogor

timetables, many of Australia’s decisions were predicated upon growing trade tensions

between Japan and the US. An increasing trade deficit with Japan had seen the US seek

some counterbalance to its declining balance of trade. While Japan did not seem to be

79 Peng, p. 171.80 Tracey, N., The APEC dilemma: problems along the road to a new trade regime in the Pacific, in Leaver., R. & Cox, D,. Middling Meddling, Muddling. Allen & Unwin, 1997, pp. 142-144.

56

forthcoming, a trade war was looming, with trade sanctions against Japanese imports into

the US being mooted in Washington.81

The consequences of a trade war between Australia’s largest trading partners would

be very costly for Australia. A trade war would result in reduced demand for Australia’s

commodity exports to Japan and a tapering off from automobile exports to the US. This

would impact harshly on Australia’s own terms of trade, not to mention the negative

impacts on GDP. Moreover, the long-term effects could see the region slip back into a

protectionist regime, precisely what GATT had tried so hard to avert.

Notwithstanding such an affront, APEC has failed to negotiate successfully with

the US on export subsidies applied to agricultural trade. According to an OECD report,

agricultural protection has remained much the same since its peak in 1988, with APEC

having little impact on the distortions created by such practices.82

With APECs initial successes in mind, it may be said that Australia has placed too

much emphasis on this forum in pursuit of regional economic interests. The placing of “…

the governments eggs in one basket, risks isolation in the world of economic blocs that

would be created if this preferred strategy failed.” 83

Moreover, the resultant effects of the Asian regional economic crisis have seen

affected economies shy away from the principles established under the auspicious Bogor

Declaration of 1994. Being one of the major success stories of APEC, the Bogor

Declaration foreshadowed the abolition of trade tariffs and overall protective measures by

2010 for Industrialised economies, and 2020 for those in developing economies. 84 Indeed

these rates of tariff removal may well be revised as no one is prepared to go it alone on 81 Tracy, The APEC dilemma, p. 143.82 Vaile, M. 2001, `Export Subsidies Still Distorting Agricultural Trade. ` Department of Foreign Affairs and Trade, Media Release, Australian Minister for Trade, Tuesday, 24 July, accessed July 2001. 83 Vaile, Export Subsidies, p. 147.84 ABS Stats, Special Article: Developments in Australian Exports-a longer term perspective.

57

tariff cuts. This position was elevated before the APEC Subic Bay summit that US

President Bill Clinton attended in 1996. His presence was much more than protocol and

coincided with US demands to reduce the trade deficit with the region through greater

regional engagement. Prime Minister Howard saw this as a means to capitalise on his push

for enhanced bilateral relations with the US. Howard then gave carefully worded sentiment

to the effect that the American notion of reciprocity may well guide Australia’s own future

tariff reductions within the APEC arena.85

Not only is there regional movement away from the principles of APEC’s Bogor

declaration, but it would also seem that Australia is prepared to desert its mainstay of

regional involvement for more comfortable relationships further afield. With the flurry for

regional economies becoming involved in RTAs, this was perhaps more indicative of the

inherent failure of the multilateral process itself. As evidenced by a concerted push by

regional economies into groups that characterised their own trading blocks/arrangements

owing to the disharmony between APEC’s leading nations.

The failure of this process undermined the principles that were the basis of APEC’s

establishment and indeed its continuation. Namely...‘the bargain between domestic

autonomy and international openness which took the particular form of open regionalism

(that characterised APEC’s inception) was being eroded by a combination of US and

global trade policy.’86 For obvious reasons this caused Australia even greater consternation

and concern as it has been left behind in the wake generated from the accelerated pace of

APEC’s disintegration.

By 1992, there were already 34 RTAs in existence with half as many again in the

pipeline. By 1995 there were 98 RTAs in existence, and as they currently stand in 2001

85Leaver, R. Australian trade policy under the Howard government implications for APEC, School of Political and International Studies, Flinders University, SA, 2000, p. 8.86 Jayasuriya, p. 99. (emphasis added)

58

there are already over 200 that have been notified by signatories to GATT.87 While

Australia has been a member of one RTA with New Zealand since 1983, it has only just

embarked on a second with Singapore, and this has left Australia with a considerable

amount of egg over its face. As APEC floundered, Australia found itself increasing isolated

in the region with less than a handful of RTAs in its grasp.

Moreover, it has been said in respect of RTAs;

”… No politician is happy unless he has put his signature on at least one of them. There is also an apparent strong compulsion to avoid being an outsider on economic grounds; the fact that an outsider’s competitors may have negotiated preferential access to its major markets suggests that the costs of not joining could be high.”88

This is because any widening or deepening of RTAs reduces costs to members,

while impacting negatively on the terms of trade of non-members who cannot compete

with the effective trade diversion from one of its own possible markets.

While Australia has since seen the light and moved hastily in the direction of

formalising RTA memberships, its attempts appear limited by the regional caucuses that

act as a countermeasure to APEC. These caucuses, predominantly under the banner of the

ASEAN Free Trade Area (AFTA), are keen to adopt a separate identity to that of APEC,

while maintaining cool links with this body.89

These newer forums bear a significant contrast to the East Asian Economic Caucus

(EAEC) originated by Dr Mahathir in 1990. While their reason de tri may be different,

membership to these forums is nonetheless the same. ASEAN + 3 originated as a

countermeasure to the Asian economic crisis, while the EAEC was more of a

countermeasure to APEC itself. The latter rested very much on the laurels of Mahatir who

87 Menon, J., The Evolving ASEAN Free Trade Area: Widening and Deepening, in Asian Development Review, 2000, Vol. 18, No. 1, p. 49. 88 Menon, pp.49-50.89 Menon, p. 52.

59

wanted the region to be less dependent upon western economies for its ongoing economic

development.

Mahatir’s concern was that Malaysia and indeed the rest of Asia, while having

significant economic clout as a region, still had no formal dialogue to bind regional

economies together. This represented an attempt to make them powerful lobbyists and

express regional views in international trade negotiations.90 Owing to the extent of foreign

investment and foreign aid to the region, many of the ASEAN economies that Mahatir

wanted incorporated into the EAEC (such as Indonesia and Thailand) were concerned

about the impacts of perhaps being seen to be a member of a possible regional trading bloc.

This was no more so than in the eyes of the economic powerhouses of Japan, the

EU and the US. Notwithstanding, that much of the investment of the region came, from

these nations and they consume most of the exports of the region. However, for Mahathir

the EAEC was more of an emotional or heartfelt issue and involved a very different

approach to the way in which economic liberalisation and regional trade was conducted.

Therefore, it reflected a divergent approach to that of APEC and in particular its dominant

member states. The significance of this for Australia’s economic development could be

substantial, and may well see this nation isolated in the region. The so far rhetorical trade

barriers to non-member participation could be substantial especially if they are predicated

by RTA membership of which Australia currently has very limited access.

Moreover, a proposal such as that of ASEAN + 3 or EAEC is made all the more

problematic for Australia because of a late push into developing greater RTA access for

itself. This is no more so than in the development of a proposed Singapore – Australia

Closer Economic Relationship (CER). One of the major obstacles here is the extent to

90 Higgott, R. & Stubbs, R. Competing conceptions of economic regionalism: APEC versus EAEC in the Asia Pacific, in Review of International Political Economy, 2:3 Summer, 1995, pp. 522-523.

60

which tariffs may well require compromising if any such deal is to go ahead. The Howard

government has set into reverse some of the trends of the previous Labor government by

freezing of tariffs in the automobile industry, along with holds on sensitive areas such as

those in the textiles, clothing and footwear industries.91 Since the government has worked

hard to appease an electorate concerned by economic liberalisation, a free trade deal with

Singapore would seem highly contentious not to mention unpopular, for it would mean

some backing off from its tariff freezes.

Moreover, these holds on tariffs are very much an appeal to the accommodation of

US interests, as Australia pushes for formal bilateral relations. They are also in keeping

with ongoing support, in particular for the national automotive industries, of which the US

also has a strong presence in Australia. While the US is looking through large transnational

corporations such as Ford and Holden to increase their stake here, this is based largely on

the proviso that the market continues to be receptive.

As Australia’s second largest export market, and in the interests of preserving what

remains of the ANZUS alliance after New Zealand’s withdrawal in 1987, Australia is keen

to see the US remain in the open trading system. The consequences of any US withdrawal

into NAFTA would have devastating consequences for Australia’s economy. Not least

because they could completely undermine APEC as a forum for continued talks on free

trade agendas, owing to the considerable weight the US carries in these discussions.

This is one reason why Australia is so keen on an American-Australian FTA

regardless of its regional consequences. This foreshadows the idea that trade with other

western economies is preferable to trade with Australia’s Asian neighbours, and represents

a concerted push by the Howard government in the opening up of NAFTA to the

Australian market.

91 Leaver, Is Australia being economically excluded from Asia? pp. 143-144.

61

Nowhere is this concerted push emphasised more openly than in the Liberal Party’s

own web-based archives, which in the introductory paragraphs highlight the failure of the

multilateral trade process.92 The failure of this process is widely accepted as regional

economies have retreated from multilateral trade toward the establishment of RTAs. While

widely accepted the Liberal Party archives highlight Australia’s apparent distain at its own

(and APEC’s) exclusion from greater regional integration and have afforded themselves a

policy initiative of looking further afield for economic prosperity.93 One of the assertions

here has been that Labor had no coherent directionality for Australia’s export trade as it

”… was more concerned with grandstanding on the world stage.”94 This vague assumption

is perhaps more in keeping with the notion of Howard’s recent attempts at middle power

posturing in the region, and in contrast to the Labor party’s endeavors. While having

rubbed shoulders with regional elites,95 the Labor party made more of a concerted effort at

harmonious relations in the interests of developing greater regional integration than

Howard’s government has in recent times.

Moreover, today’s incumbents have ditched much of the ideology of open

regionalism by swinging in the opposite direction, with a decidedly aggressive forward

defence posture. This stance and the perception of Howard in his defacto role as regional

policeman for the US, and the vigorous pursuit of bilateral trade with the US offers little

latitude for warmth among Howard and Australia’s regional trading partners.

Acknowledgement of the above factors is at the very heart of concerns over the

likely impact of an American – Australian free trade agreement on Australia’s regional

trade interests. This could be misconstrued by the region, which may see Australia’s

92 Liberal Party of Australia, 1998, Advancing Australia’s Trade Interest, <http://www.liberal.org.au/archives/1998 election policies/trade/trade.doc>, accessed July 2001.93 Advancing Australia’s Trade Interest, p. 3.94 Advancing Australia’s Trade Interest.95 Jayasuriya, p. 96.

62

bilateral relationship with the US as part of a greater, perhaps, hidden agenda. This is

because any linkage of this agreement to the existing Japan - American alliance in terms of

a tacit tripartite arrangement to preserve and strengthen US interests in the region, may

well be seen to isolate China in the process. 96 Therefore, this may well prove to be a

double-edged sword for Australia, with any perceived linkages to the alliance and the

possibility of ASEAN + 3 developing into a regional trading block, leaving Australia out in

the cold. While Japan is Australia’s largest trading partner and the US its second in terms

of individual country merchandise export destinations, the region, in particular ASEAN, is

a far more important export destination overall (Table 12).

96 Atkins, A., `Put your lives on the line, US tells Australia’, The Advertiser, Adelaide, Saturday, 18 August2001.

63

Table 12 Australia’s most Important Export DestinationsPrinciple Trading Partners by region & country

($A billions) 2000 – 2001

REGION EXPORTS TOTAL SHARE (PERCENT)

JapanASEAN

EUUS

ROKChina

23,50315,91713,96411,6759,2086,843

19.713.311.79.87.75.8

TOTALS 81,110 68.0Source: DFAT country/economy fact sheets 2001, www.dfat.gov.au/geo/fs/

Japan and the US have strong bargaining chips in terms of preferential trade

arrangements with the region as a source of ongoing bilateral relationships. Japan is still a

major source of FDI for the region and the US is still a major destination for regional

exports. Australia on the other hand is not in such an advantageous position; not only is

Australia a recipient of FDI, it only has one bilateral relationship of any merit, the CER

with New Zealand. Australia is currently in negotiations with Singapore for a bilateral

FTA, though these discussions seem unnecessarily protracted and face many obstacles

before the agreement is ratified.

Without carrying any weight in terms of ongoing bilateral agreements and in the

wake of…”the failed policy of open regionalism” Australia may be forced into a situation

where it may have to choose its allegiances very wisely. 97 There may well be no middle

road to travel; either Australia bind itself lock stock and barrel to the US as its regional

watchdog, or lay down its arms and reinvigorate its relationship with the region. At any

97 Edwards, J., An American – Australian Free Trade Agreement? In Policy, Organisation and Society, Vol. 20, No. 1, 2001, p. 29.

64

rate, for this to occur it must be without seeming bias or prejudice towards Australia’s

large and powerful friends.

Strategically this may pose a looming problem, however, economically for some

commentators there are mostly sizeable gains for Australia, and minimal impacts on the

region arising from an American – Australian Free Trade Agreement.98 In fact, this

approach advocates that such an agreement would strengthen Australia’s bargaining power

in the region. In light of the exclusions to Australia’s regional memberships discussed in

this thesis, the agreement would integrate Australia with the world’s biggest market, and

the largest economy in APEC.99 With most of the region’s exports going to the US, this

relationship would undoubtedly give Australia reason enough for more considered

inclusion in regional trade negotiations and more bargaining power in the process.

The fact that the US has turned to the region is not simply a random occurrence. Its

apparent strategic interests here are based more on a need to develop its economic

relationships in an effort to stabilise, and indeed reverse, the US burgeoning trade deficit,

which is largely with the region (Table 13).

East Asia represents 54.1 percent of the US trade deficit in 2000, down from 84.8

percent in 1993.100 Though in relative terms the US deficit with East Asia has almost

doubled in the last several years, going from $US 117.4 billion to $US 235.9 billion.

Ostensibly this is owed to the fact that the US deficit with its NAFTA trading partners has

substantially increased against that of East Asia to represent a higher percentage of the

world total.

98 Edwards, p. 29.99 Edwards, p. 37.100 Tracy, The APEC dilemma, p. 149.

65

Table 13 United States trade deficit, 2000 (US$ millions)

Region Exports Imports Trade Balance

World

Japan

China

ROK

Hong Kong

Singapore

Taiwan

ASEAN 4

East Asia

781,917.00

64,924.40

16,185.30

27,830.00

14,452.00

17,806.30

24,405.90

28,756.10

194,360.00

1,218,021.00

146,479.40

100,018.40

40,307.70

11,449.00

19,178.30

40,502.80

6,255.20

364,190.80

-436,104.00

-81,555.00

-83,833.10

-12,477.70

3,133.00

-1,372.00

-16,096.90

-37,499.10

-235,966.80

East Asia as % of total 24.8 29.9 54.1

Source: US Census Bureau, Foreign Trade Division www.census.gov/foreign-trade/balance/index.html

Nonetheless, owing to the decided lack in competitiveness of US industry with East

Asia, these figures do not bode well for an APEC-led recovery, or the development of new

regional free trade regimes within APEC itself.101 Increased Australian trade with the US

could help to alleviate pressure on Australia’s multilateral trade deficit, the largest

component of which stands with the US at $A10.7 billion and the EU at $A11.5 billion in

2000-01. This could go some way in offsetting the apparent decline in APEC as RTAs and

other regional forums increase in importance to East Asia (Table 14).102

101 Tracy, The APEC dilemma, pp. 148-149.102 Department of Foreign Affairs and Trade, 2000: Direction of Merchandise Trade in Composition of Trade 2000. < http://www.dfat.gov.au/publications/stats-pubs/cot.pdf > accessed August 2001.

66

Table 14 Australia’s merchandise trade balancesPrinciple regional trading partners ($A billions)

2000-01Country Deficit Surplus

EU 11,534.000USA 10,680.000

China 3,039.000ASEAN 1,534.000Japan 8,132.000ROK 4,498.000

Totals 26,796.000 12,630.000Source: Australian Bureau of Statistics on the DFAT STARS database.

While Australia has large trade deficits with its western trading partners, this deficit

is translated into a sizeable surplus when compared with Japan And the Republic of Korea

(ROK) of $A12.6 billion in 2000-01. Australia’s trade was in surplus with ASEAN before

the regional economic crisis, and currently stands as a minor deficit of some $A1.5 billion.

It would certainly make good economic sense to maintain the surpluses already

generated and to make all necessary efforts to reduce deficits where they occur. In

international economic theory where a country has a high level of overseas debt,

repayments will result in an increase in supply of that nation’s currency on overseas

markets, thereby weakening the overall value of the currency itself. Australia’s currency

has been trading at around 51 to 54 cents US on overseas markets for some time, and is

seriously undervalued. While this is a boon for exports, it substantially increases the cost of

Australia’s imports.

It may well be beyond Australia’s capacity to turn this situation around being only

1.7 per cent of total US markets.103 Yet as some commentators attest, it is still possible to

103 Australian Department of Foreign Affairs and Trade 2001: Economic impacts of an Australia – United States Free Trade Area. Complete Report Summary. <http://www.dfat.gov.au/publications/aus_us_fta/summary2.html>, accessed July 2001.

67

turn these negatives into positives, with Australia having nothing to lose from such an

arrangement. It could gain substantially from trade benefits and access to greater regional

bargaining power in the process.

The Shadow Minister for Foreign Affairs and Trade Laurie Brereton was very

sceptical of an American free trade agenda in the region.104 He viewed the disparity

between Australia and the US in terms of Australia’s small US market share as a

significant obstacle to increasing trade between the two nations. He further suggested that

the trade barriers under NAFTA clearly make it impossible for any nation to compete

given the restrictions on agriculture and other sensitive sectors of the US economy.

While Australia was bereft of trade and strategic affiliations with Europe, and in

particular the UK, its alliance with the US, while largely trade related, was very much a

part of a greater agenda. For the US, the so-called alliance was at best a convenient,

tentative strategic arrangement fostering little more than goodwill. Though the courtship

was significantly elevated by senior Australian politicians who saw it in more definitive

terms, seemingly raising the status of Australia by virtue of its affinity with its great and

powerful friends.

This certainly stands out today with Howard having visited the US shortly before a

federal election campaign in 2001, hoping to engage President George W Bush in talks

concerning the need for an American – Australian Free Trade Agreement. This agreement,

while coming with certain caveats attached in the form of Australia’s strategic compliance

in return for economic gains, is nothing new, as these arrangements already existed as a

precondition under the ANZUS agreement. However, Howard’s eagerness in making the

104Channel 10, Meet the Press, 2001: Interview with the Shadow Minister for Foreign Affairs and Trade, Laury Breraton on issues involving U.S. free trade agenda.< http://www.ten.com.au/html>, accessed June 2001.

68

allied tracking bases on Australian soil (such as Pine Gap) available for the US National

Missile Defence (NMD) program, is of concern. In fact, the Bush administration’s

considerations of this in opening up dialogue on the Free Trade Agreement are also cause

for concern.105 This indicates that trade with the US is paramount to the Howard

government, not just in terms of its obvious economic advantages but strategically as well.

Such a symbiosis is problematic first and perhaps foremost because it is very

difficult for a middle power to manufacture an alliance with a major power. Under the

norms of international diplomacy, like powers form alliances with like powers, such as the

strategic relationship between the US and Japan. This relationship is very much based on

the need to preserve and harmonise the significant trade between these two major trading

partners.

Australia is only a minor trading partner with the US taking in only 1.7 per cent of

US GDP. This in itself belies Australia’s seemingly fickle acceptance of US foreign policy

in the region. As evidenced by Howard’s blind faith in US pronouncements to become

increasingly engaged with the region, this does not offer any assurance of complete

strategic assistance in times of crisis. Secondly, such an arrangement often antagonises

one’s neighbours and can unnecessarily impinge on economic relations, as has already

been exemplified by John Howard in his avid acceptance of the role for Australia as US

regional policeman.106

While Howard later rejected this notion, it still managed to antagonise many

reasonable people. Greg Sheridan, (international correspondent for the Australian

newspaper) and perhaps more vocal proponents of regional dissatisfaction; mouthpieces

such as Malaysia’s Mahatir who is staunchly opposed to US and Australian engagement in

105 Australian Broadcasting Commission, 2001, Howards visit to Washington, Compare Tony Jones, ABC’s Lateline, <http://www.abc.net.au/lateline/s323755.htm>, accessed September 2001.106 Brenchley, F. `The Howard Defence Doctrine`, The Bulletin, September 28, 1999, pp. 22-24.

69

the region was stirred by these notions. Steps such as these have also helped Mahatir’s

reinvigoration of the EAEC and have seen this group take further steps towards its

implementation, with regional sentiment often being derided by Australia’s apparent lack

of diplomacy in the above context.

Moreover, Australia’s unequivocal support for the US may be interpreted as the

backing of hostile foreign policy in our region, as well as further afield, in places where

passionate hostility towards the US flows over into inimitable hatred. Such a strong tirade

of opinion may well see Australia’s support for US foreign policy end up as a recipient of

much of this hostility itself, especially where outward similarities lend themselves to the

appearance of complicity. Whether this complicity is real or fictitious are irrelevant if the

manifestations themselves become physical.

70

CHAPTER 6

The Forces Driving Australia into the New Millennium

Finally, it must be said that Australia’s relationship with the region had primarily

been based on the development of new commodity markets after the demise of its trade

relationship with the UK and Europe. Although Australia had developed a thriving

manufacturing sector, this had all but dwindled away, though it was not entirely a result of

the region’s impact on the economy. It was perhaps more a result of Australia’s own

perceptions of this relationship amidst the demands of an insular, inward looking economy

that was increasingly engaged in economic, political and social activities outside its own

borders.

Such an approach is problematic for Australia in that it does not indicate to what

extent the region had helped or hindered Australia’s economic development. Nonetheless,

it suggests that Australia itself had embarked on strategies for growth, which in the end

have not transpired into resounding success. Instead, the extraction of mineral resources

was given primacy over the development of other industries, particularly those in

technology related fields, which are now in the leading growth sectors of developed

economies.

This had seen a declining emphasis on education, which is now at the forefront of

requirements in technology related industries, an issue that the incumbent government in

Australia is just starting to pick up on. It may well be decades too late, as many of the

industries where Australia once had a comparative advantage, have already fled to become

major industries in other economies, which have developed somewhat more successful

manufacturing bases.

71

While liberalisation of Australia’s economy was essential to its survival, it may be

a case of too little too late. The full force of international competition is perhaps more in

the interests of international capital than in meeting the specific needs of the domestic

economy. This is said very much in light of Japan’s continued dominance of Australia’s

coal and iron ore industries after liberalisation, and the ongoing encouragement of FDI that

this period of expansion incurred.

Undoubtedly, regional trade is very important to Australia’s economic

development; with Japan being Australia’s largest export market and ASEAN the largest

export region, it would be hard to doubt the significance of this trade. Yet, this may not

take into account the preference for countries with which Australia may like to trade in the

future. For example, relationships with the EU and particularly the US certainly indicate a

growing need among the Howard government for bilateral relationships with significant

western nations. This is no more so than in difficult regional circumstances, which saw

trade diversion to these major trading partners between 1997 and 1999. Moreover, this

amplified the difficulties in APECs transition, as new regional trade regimes emerge in

opposition too, rather than, in complementarity with this group of trading nations.

Whereas, the thesis established a link with early trade relationships and

contemporary outcomes in regional trade arrangements, it is precisely those early

influences that may be partly responsible for the strains in current regional relationships.

This is particularly relevant when we consider the external influences on Australia’s small

economy. Among others the impacts of FDI in mining and the automotive industry and the

subsequent lag in the economy’s level of technological innovation and change, which is

perhaps greatest in the manufacturing sector more than any other.

72

Nonetheless, there were similarities between Australia and the region in terms of

the lack in an indigenous crop of local capitalists who were also manufacturers. As distinct

from the early industrial development of the UK and the US, which had such a class of

entrepreneurs. The consequences of these early trade relationships had seen the economy

fall into a state of considerable disrepair. Though in hindsight it was not so much what

Keating had done in the economic liberalisation of the economy, as much as what previous

government’s had not done. In other words before 1983, the economy had continued to

muddle along, riding the wave of economic success that came from the commodity boom

of the previous two decades. When the boom ended the economy faltered exposing cracks

in a weak manufacturing sector, and a highly protected domestic economy.

Furthermore, FDI had a significant impact on Australia’s economy, and by virtue of

its own requirements to utilise Australia as an extractive economy, had actually

undermined domestic technical innovation and change and had continued to stifle the

manufacturing sector. However, by virtue of the existence of competing capitalisms in the

region, and the differences in the patterns of economic development to many western

nations, there was a considerable propensity for, not only economic but also social

upheaval as well.

This could certainly impact negatively on Australia’s economic development and

suggests that increased RTA membership may encourage more harmonious relations

between competing nations within the region. With Australia’s current RTA membership

standing at one, the urgency with which Australia needs to consider its regional

involvement is apparent. Regional trade is not only important to Australia in reference to

the ongoing relationship with Japan as the nations number one trading partner. This

73

relationship must also be considered in terms of the significance of ASEAN in the overall

trade picture with the top trading nation and region both being located in Asia.

Owing to the increasing demand for Australia’s service exports the importance not

only of regional trade but also manufacturing is made much clearer. To some extent this

indicates that manufacturing is not in quite the level of fatal decline that it may appear,

owing to the input of R & D from the manufacturing sector in service industries. However,

this comes with a caveat attached, in that foreign ownership continues to hamper domestic

R & D and may consequently degrade regional relationships.

Ongoing concerns about regional volatility suggest that Australia’s trade diversion

to the EU and the US during the regional crisis was perhaps more than a knee-jerk reaction.

It hints at a desire, particularly by the Howard government for trade relationships with

significant western others outside the region. This has not, necessarily seen bad tidings for

Australia as automotive giants such as Ford and Holden in the US have, and continue to

increase production in Australia. Especially after the currency devaluation here had made

Australia a more suitably attractive destination for investment, considering the regions

volatility.

Concerns over the future direction of APEC indicate the shakiness of Australia’s

relationship with the region. The relationship is made all the more problematic by regional

demands for new bodies to represent their interests, much to the exclusion of Australia and

the US. The urgency with which the Howard government is pushing for an American –

Australian free trade agreement is testimony to concerns over the increasing insignificance

of APEC. Particularly as the rise of RTAs throughout the Asia Pacific indicates to some

extent the failure of the multilateral process.

74

The above themes reflect how to a considerable extent Australia’s economic

development has been interwoven with the regions. However, the level to which the region

has helped or hindered this development is still largely based upon subjective

interpretation, which suggests that regional trade in itself is not necessarily the sole

precursor to Australia’s economic development. Rather, that any such path while primarily

one of symbiosis and reciprocity still regards the protection of the core of the economy

from exhaustive external influence and control as sacrosanct.

Nonetheless, any pervasive threat in the form of hollowing out of Australia’s

economy or the spreading of such contagion as the ‘Dutch Disease’ while honing out the

core of an economy may have more immediate or noticeable effects in these languishing

parts of the tradable sector. Comparatively, those parts of the tradable sector which appear

to be in a state of growth often do so at the expense of these smaller protected industries in

the same sector. In many instances, growth is siphoned off as profits that race overseas

with scant regard for R & D or the development of the new economy in Australia.

It is for these reasons that the extent to which regional trade has helped or hindered

Australia’s economic development while appearing to have external causes in regard to

economic data, is a question of more internal dimensions than many care to think.

Therefore, another way of perhaps interpreting the question may be through researching

the extractive origins of various industries concerned. This might be done with a view to

understanding any internal conflicts within the public and private sectors, which allowed

this sort of development to take place. These sectors continue to propagate a culture of

dependence be it with great and powerful friends or great and powerful corporations. As

they offer considerable help in the development of Australia’s industries, they could also

prove to be a considerable hindrance if such a culture is allowed to remain in place.

75

Appendix: Statistics

Exchange Rates: US–Australian Dollar 1970–2001

Source: The Australian Labor Party

Australia’s average terms of trade by decade

Source: ABS 5302.0

76

Australian productivity growth rates (annual average)

Labour Productivity

Multifactor Productivity

Second half of 1990s 3.7 2.0

1990s 2.9 1.41980s 1.4 0.41970s 2.8 1.3

Average since 1964/65 2.4 1.1

Source: ABS 5204.0

Investment in R&D, Australia and selected OECD countries, 1992–98(Share of GDP)

84 91 92 93 94 95 96 97 98 84–95 95–98Change (%)

OECD 2.20 2.28 2.24 2.19 2.14 2.16 2.18 2.21 2.25 –1.8 4.2Australia 1.11 1.46 1.59 1.59 1.62 1.76 1.70 1.60 1.49 59.0 –15.4

USA 2.73 2.81 2.74 2.62 2.52 2.61 2.66 2.71 2.74 –4.4 5.0

Source: OECD Main Science and Technology Indicators (2000) and estimates by Considine et al.

Productivity levels in OECD countries, 1950– 98(GDP per man-hour relative to the United States)

1950 1960 1973 1987 1992 1998

77

United States 100 100 100 100 100 100Japan 15 20 45 60 67 68

West Germany 34 52 73 91 100 106Germany — 87 90France 42 51 74 99 101 102Italy 38 46 78 96 97 100

United Kingdom 58 57 68 81 79 82Canada 68 72 75 83 82 80

Australia 66 68 69 77 75 78Belgium 50 53 76 102 108 109Denmark 54 58 79 85 85 89Finland 32 37 59 69 74 82Greece 19 n.a. 43 55 54 54Ireland 32 n.a. 46 66 77 86Korea 11 n.a. 15 25 32 36Mexico 35 n.a. 47 n.a. 41 34

Netherlands 49 57 82 98 107 98Norway 51 n.a. 71 96 104 109Portugal 20 n.a. 42 44 48 50

Spain 24 n.a. 53 79 80 79Sweden 50 55 78 84 82 84

Switzerland 70 74 84 85 87 85Coeff. of variation1 50 n.a. 30 26 25 24

1 Excluding Mexico and Germany.

Source: OECD estimates.

Bibliography

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78

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Howlett, M., Simplifying Senior Economics, Bernard Publishing, Pt Norlunga, 1990.

Leaver, R., & Cox, D., Middling, Meddling, Muddling. Issues in Australian foreign policy. Allen & Unwin, NSW, 1997.

Broomhill, R., The Banana Republic? Australia’s current economic problems, Left Book Club Co-op, NSW, 1991.

Chapters in multi-authored works:

Edwards, J., An American – Australian Free Trade Agreement? In Policy, Organisation and Society, Vol. 20, No. 1, Flinders University, 2001.

Jayasuriya., K. The Crisis of Open Regionalism and the New Political Economy of the Asia-Pacific? In Policy, Organisation and Society, Vol. 20, No. 1, Flinders University, 2001.

Leaver, R., Is Australia being economically excluded from Asia? In Policy, Organisation & Society Vol. 20, No. 1, 2001, Special Edition: An American-Australian Free Trade Treaty? pp. 143-144.

Toner, P., Manufacturing Industry in the Australian Economy, in Journal of Australian Political Economy, No 45. June 2000.

Tracy, N., The APEC Dilemma: problems along the road to a new trade regime in the Pacific, in Leaver, R. & Cox, D. in Middling, Meddling, Muddling. Allen & Unwin, 1997.

Official Reports and Publications:

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Australian Bureau of Statistics. 2001: Special Article-Developments in Australian Exports - a longer-term perspective, <http//www.abs.gov.ausstats/abs@.nsf>, accessed July 2001.

Calvert., A. 2000, `Australia’s Foreign and Trade Policy Agenda’. Speech by Dr Ashton Calvert, Secretary of the Department of Foreign Affairs and Trade, National Press Club. <http://www.defat.gov.au/media/speeches/department/000803>, accessed June 2001.

De Brouwer., G. & Warren, T. 2001, Strengthening Australia – Japan Economic Relations, Department of Foreign Affairs and Trade, April, <http://www.dfat.gov.au/geo/japan/aus_relations/ser_report.pdf>, accessed May 2001.

Department of Foreign Affairs and Trade, 1999: Composition of Trade Australia 1998. <http://www.dfat.gov.au/publications/stats-pubs/cot.pdf> accessed July 2001.

Department of Foreign Affairs and Trade: Composition of Merchandise Trade in Composition of Trade Australia 2000-01. < http://www.dfat.gov.au/publications/stats-pubs/cot.pdf > accessed September 2001.

Department of Foreign Affairs and Trade, 2000: Australia’s trade in services in Composition of Trade 2000. < http://www.dfat.gov.au/publications/stats-pubs/cot.pdf > accessed August 2001.

Department of Foreign Affairs and Trade, 2000: Direction of Merchandise Trade in Composition of Trade 2000. < http://www.dfat.gov.au/publications/stats-pubs/cot.pdf > accessed August 2001.

Department of Foreign Affairs and Trade (DFAT), 2000: Major Export Markets in 2000, (Main Features) in Composition of Trade 2000. <http://www.dfat.gov.au/publications/stats-pubs/cot.pdf>, accessed August 2001.

Department of Foreign Affairs and Trade, Feature article: Major commodities traded by Australia, 1991 to 2000, http//www.dfat.gov.au accessed July 2001.

Department of Foreign Affairs and Trade, 2001: Composition of Trade Australia 2000-01. <http://www.dfat.gov.au/publications/stats-pubs/cot.pdf> accessed September 2001.

Department of Foreign Affairs and Trade 2001: Economic impacts of an Australia – United States Free Trade Area. Complete Report Summary. <http://www.dfat.gov.au/publications/aus_us_fta/summary2.html>, accessed July 2001.

Department of Foreign Affairs and Trade 2001: Country, Economy and Regional Information, Country/Economy fact sheets. <http://www.dfat.gov.au//geo/fs/ >, accessed July 2001.

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Liberal Party of Australia, 1998, Advancing Australia’s Trade Interest, <http://www.liberal.org.au/archives/1998 election policies/trade/trade.doc>, accessed July 2001.

National Australian Labor Party, Home Page, Barry Jones – Launch of the report of the ‘Knowledge Nation’ taskforce, < http: www.alp.org.au/kn/kn_report_ 020701.html> accessed July 2001.

The APEC Region Trade and Investment 2001, Market Information and Analysis Unit, DFAT, Australia, October 2001.

Vaile, M. 2001, `Export Subsidies Still Distorting Agricultural Trade. ` Department of Foreign Affairs and Trade, Media Release, Australian Minister for Trade, 24 July 2001. <http://www.dfat.gov.au/media/releases/trade/2001/mvt102_01.html> accessed August 2001.

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Periodical articles:

Asian Development Review, Studies of Asian and Pacific Economic Issues, The Asian Development Bank, Vol. 18, No. 1, 2000.

Australian Economic Review, Vol. 34, No. 2, June 2001.

Blainey, G., ‘The Cargo Cult in Mineral Policy’, Economic Record, Vol. 44, No. 108, 1968.

Cordon, W.M., ‘Booming Sector and Dutch Disease Economics: A Survey’, Working Papers in Economics and Econometrics, No. 079, Research School of Social Sciences, ANU, November 1982.

Economic Papers, Economic Society of Australia, Vol 14, No. 1, March 1995.

Economic Papers, Economic Society of Australia, Vol 20, No. 2, June 2001.

Gregory, R.G., ‘Some implications of the growth of the minerals sector’, Australian Journal of Agricultural Economics, 20(2), 1976.

Higgott, R. & Stubbs, R. Competing conceptions of economic regionalism: APEC versus EAEC in the Asia Pacific, in Review of International Political Economy, 2:3 Summer, 1995, pp. 522-523.

Journal of Australian Political Economy, Number 44, December 1999.

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Journal of Australian Political Economy, Number 45, June 2000.

Journal of Australian Political Economy, Special Issue, Australia Reconstructed: Ten Years On. Number 39, June 1997.

Leaver, R., Australian trade policy under the Howard government implications for APEC, School of Political and International Studies, Flinders University, SA, 2000.

McDougall, D., Australia and Asia – Pacific Security Regionalism. Contemporary South East Asia, Vol. 23, No. 1, April 2001.

Menon, J., The Evolving ASEAN Free Trade Area: Widening and Deepening, in Asian Development Review, Vol. 18, No. 1, 2000.

OECD Economic Surveys Australia 1989/1990, OECD France, February 1990.

OECD Economic Surveys Australia, OECD, No. 14. August 2001.

Peng, D., The Changing Nature of East Asia as an Economic Region, in Pacific Affairs, Vol 73, No. 2, 2000.

Policy Organisation & Society, Vol. 20, No. 1, Special Edition, An American – Australian Free Trade Treaty? Flinders University, South Australia, 2001.

Sheehan, P. & Grewal. B., The Global Knowledge Economy and Regional Concentration of Manufacturing in Australia. Centre for Strategic Economic Studies (CCSES), Victorian University of Technology, Working Paper No. 19. July 2000.

The Australian Economic Review, Blackwell Publishers, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Vol. 34, No. 2, June 2001

The Institute of Public Affairs Review., Vol 53, No. 2, June 2001.

The Journal of East Asian Affairs, Vol XIV, No 2, Winter 2000.

The World Bank Economic Review, World Bank Publications, Washington DC, Volume 12, No 2, May 1998.

Tracy, C.L. & Tracy, N., The Dragon and the Rising Sun: Market Integration and Economic Rivalry in East and Southeast Asia, Flinders University, 1994.

Television Media Releases:

Australian Broadcasting Commission, 2001, ANZUS alliance a sacred trust: Armitage. Interview with US Deputy Secretary of State Richard Armitage, Compare Tony Jones, ABC’s Lateline, <http://www.abc.net.au/lateline/s348556.htm>, accessed August 2001.

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Australian Broadcasting Commission, 2001, Cortis, K. Goldman-Sachs Asia. Interview, Compare Tony Jones, ABC’s Lateline, <http://www.abc.net.au/lateline/s323755.htm>, accessed September 2001.

Australian Broadcasting Commission, 2001, Howards visit to Washington, Compare Tony Jones, ABC’s Lateline, <http://www.abc.net.au/lateline/s323755.htm>, accessed September 2001.

Channel 10, 2001, Meet the Press. Interview with the Shadow Minister for Foreign Affairs and Trade, Laury Breraton on issues involving U.S. free trade agenda. <http://www.ten.com.au/html>, accessed June 2001.

Newspapers:

Atkins, A., `Put your lives on the line, US tells Australia’, The Advertiser, Adelaide, Saturday, 18 August 2000.

Bergsten, F., Tigers throw off shackles, The Australian, Monday, July 17, 2000.

Brenchley, F., `The Howard Defence Doctrine`, The Bulletin, September 1999.

Daff, A., Aviation red tape just plane crazy, The Australian, Friday, 19 October 2001.

Flint, D., Opinion, The Australian, Wednesday January 9, 2002.

Henderson, I., Foreign investors cooling their heals, The Australian, Monday, January 14, 2002.

Howard must just say no to Mitsubishi, Editorial, The Australian, Thurs, December 13, 2001.

Hutton, R. & O’Connell, D., Ford goes into reverse, The Australian, Monday, January 14, 2002.

Marris, S., Handouts to car industry near double in two years. The Australian, Friday, December 21, 2001.

Phaceas, J., Dollar at coalface of recovery, The Australian, Wednesday, Dec 19, 2001.

Wilson, N., Mineral boom on dud dollar, The Australian, Wednesday, December 12, 2001. Wilson, R., Holden’s right turn, The Australian, Thursday, January 10, 2002.