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Australian trade faces up to familiar anxieties

Asia / 05-07-17 / by

Finbarr Bermingham reports from Sydney, where a mood of reflection pervaded the Australia Trade Forum 2017.

 

One surprise beneficiary of the election of US President Donald Trump last year was the estate of Sinclair Lewis, the deceased author whose 1935 book It Can’t Happen Here shot to the top of bestseller lists around the turn of the year.

The satirical, dystopian novel outlines Buzz Windrop’s ascent to the presidency, defeating FD Roosevelt in an election and going onto impose a fascist, Nazi-esque regime on the US. Its renewed popularity speaks to its prescience. All the way through the US election campaign, people said: “He couldn’t possibly win”, but he did.

At the GTR Australia Trade Forum 2017 in Sydney in May, a group of trade economists were keen not to show the same negligence. While stopping short of saying: “It could happen here,” this was clearly the allusion, as the country prepares for a post-industrial economy and the social questions that would bring.

This October, the General Motors-owned Holden automotive factory in Elizabeth will close its doors for the last time. With Toyota’s Camry factory in Altona shutting in the same month, this spells the end of Australia’s century-old automotive industry, one that has long been in decline.

Australia’s bountiful natural resources allowed it to weather the global and Asian financial crises relatively unscathed. So too, did the resources sector allow it to retrain and redeploy some of the workers that lost their jobs after the automotive industry’s decline. But once the coal mines of Queensland and Western Australia are abandoned for once and all, where are you going to put those workers?

“The energy of incomes growth has left us. There’s nothing more difficult than to reflate an economy when your interest rates are zero. You’ve got massive fiscal underbalance in terms of debt. This is the issue when we see populism rising,” said Andrew Wilson, chief economist at Domain Group, a research firm, speaking at the conference.

He added: “Australia has come late to this party of course, because we’ve had the stimulus of the resources sector to help us through the global financial crisis. But we’re now stretched in terms of interest rates and the dollar. You still have that tension with the low incomes and underemployment, that’s been international. That’s an inherited or imported scenario. I think we’ll start to see a shift down into negative growth.”

You can see signs of populism in Australia in the return of Pauline Hanson’s One Nation party, an anti-globalisation, protectionist outfit that won four seats in the senate in 2016.

Wilson can also see worrying signs of the same sort of “anti-trade rhetoric” that is growing in the US, Brexit Britain and among the populist parties of Western Europe. He slammed the “ad hoc political machinations” which have seen the government place a limit on the amount of Chinese money that can be invested in real estate and also lashed out at the anti-migrant sentiment that is prevalent in Australia. All of these trends, he said, are diametrically opposed to a pro-trade agenda.

“The growth lever of migration is something else that’s coming under pressure as well. We seem to be all over the shop in freeing our trade, we’re putting trade barriers in and I think it’s part of us becoming hostage to this second-gear economy. We’re going to have to face lower living standards. It’s interesting that the lack of incomes growth and prosperity in advanced economy has lent itself to the political environment but also to an anti-trade attitude,” he said.

Many people point to the service sector when they are asked for Australia’s next booming export industry – most likely as experts did when manufacturing was offshored from the UK and US in the 1980s. While services account for a huge portion of domestic GDP, this doesn’t yet translate into exports, which are dominated by commodities.

For Bryan Clark, director for trade and international affairs at the Australian Chamber of Commerce and Industry, the service sector deserves the attention it’s being given, but should not rest on its laurels. Australia has successfully exported its professional services sector, for example, but stiff challenges await.

While Australian businesses have benefitted greatly from free trade agreements with China, Japan (the FTA with Japan has 93 to 97% utilisation among Aussie exporters to Japan) and South Korea, service providers need to be more proactive and aggressive in the wake of incoming competition, Clark said. Given the high and rising level of quality tertiary education in parts of Asia, there will be accountants and accountancy firms that will rival the Australians’ offering within a generation.

“So the question is how can Australia get into those markets before they do?” he asked. “We can’t sit at the end of the earth with a high cost environment and think the world will just buy from us because we’re Australian and we’ve got good status and our land is nice and we have kangaroos.

“We’ve got to do more than that. If we don’t have a competitive labour market and tax system, don’t have costs lower in an economy which is built on an attitude that’s disconnected with the world, then we’re going to struggle to get anywhere. We’re in a political environment that’s not receptive to that.”

 

Expanding horizons

In an interview with GTR in Sydney after the event, Alan Huse, ANZ’s head of transaction banking for Australia, New Zealand and Papua New Guinea, said that when the economy is growing at just 2% in Australia, it’s part of his remit to find opportunities for clients elsewhere in Asia Pacific.

If it wasn’t blindingly obvious before the event, then a keynote address from Rajiv Biswas, the Asia Pacific chief economist for IHS Markit, helpfully pointed to where exactly they should be looking.

“Emerging Asia will be the fastest growing region for the next 30 years,” he said, highlighting the ageing populations in Australia’s key markets, Korea and Japan. Those demographic issues will drive down consumption there. China will experience a similar shift, and probably on a huge scale. Propelled by young, innovative and cheap labour, Asean and India will be the major sources of growth in Asia Pacific for generations to come.

Biswas described Asean as “Asia’s third growth engine”. Shortly after 2020, the bloc will be closing in on Japan in terms of GDP and by 2030 it will be well ahead. India will follow a similar trajectory, except by 2030, it will be miles ahead of both.

Furthermore, by 2030 two-thirds of the world’s middle class will reside in East and Southeast Asia, a figure bolstered by the rising income levels expected in Asean. Australia already has a trade deal with Asean (along with New Zealand, in the multilateral Asean-Australia-New Zealand free trade area). This will be expanded and superseded by the Regional Comprehensive Economic Partnership (RCEP), which should complete over the next year. But more needs to be done domestically to tap into the impending consumption boom.

In Australia’s neglected north, plans are afoot to create infrastructure that caters for these markets in particular. As well as roads and ports, the North Australia Infrastructure Facility (NAIF – a government lending body armed with A$5bn) will lend money to companies attempting to rejig their supply chains to match Asian standards.

Laurie Walker, NAIF CEO, explained to GTR: “We’re trying to encourage meat exports to satisfy the middle class demand in Asia. My understanding is that at the moment the way Australian abattoirs cut meat now is not the way it’s required in China. If we want to encourage people to take that opportunity and develop the north, we need to encourage people to move onto new supply chains, and there’s risk involved in that.”

She added: “We can offer up to 30-year tenors. We can be very patient in terms of the principal interest payment, whereas the private sector would traditionally only capitalise on interest during the construction period, we can push that out. We can be interest-only for longer periods than the private sector. We can structure our fees differently and our interest rates. We need to recover minimum cost of funding plus our charges, but that could be substantially lower than the private sector. We might take some upside if a project over-performs.”

NAIF will be seeking investment from the commercial banks Down Under, and from banks and investors throughout Asia. But for Australia’s big four banks, projects and infrastructure financings have become thin on the ground.

Over a coffee in Brisbane, a senior resources banker with one of the big four (who wished to speak off the record) explained how the regular billion-dollar deals they used to see for a mine or a piece of mining infrastructure are a thing of the past. In Queensland’s resources sector, the investment period has well and truly ended. These deals have been replaced by sporadic working capital loans, no more than a couple of hundred million Aussie dollars at a time.

The banker explained that they had not seen the take up in supply chain finance that they had hoped for and that the competition between the banks is fierce: they are scrapping for every client and every piece of business, driving prices towards the floor in a race to the bottom. Banks don’t invite their clients to industry events any more out of fear that one of their competitors will poach them.

Away from resources, one of the problems is that the fast-growing service sector industries (tourism, healthcare, education) do not fall within the traditional trade finance arena. Yes they are exported, but nobody issues a letter of credit for a college diploma, or for a week in Cairns.

“Trade is changing,” says Huse at ANZ. “And so we have to find a way to broaden the trade banner to include working capital facility. The pie is smaller and the competitive nature means pricing is down. Banks are thinking: am I getting fair returns? The cost of delivery is high in trade with all the documentary checks.”

He adds: “One of the big changes we’ll see is around data and digitisation, which will drive costs down and help us do things more efficiently and make bigger margins. For SMEs in particular, presenting a complex trade proposition is always a difficult sell. If you find a way to make it more nimble and efficient, then you have a winner.”

As with many issues pertaining to trade, this is one shared the world over. Australia may “sit at the end of the earth”, but its problems sound very familiar.

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