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Executive Summary

Introduction

- Global connections have long given individual living standards and the Australian economy as a whole a boost. But they also expose the domestic economy to risks, and it is these risks rather than the opportunities that are receiving increased focus in Australian commentary. Specific risks being raised include the trade and investment fallout from geopolitical tensions and a relative shift in global demand away from fossil fuels as the world responds to climate change.

- In the face of these risks, there are concerns about Australia’s export resilience. Resilience refers to an ability to bounce back when hit by a shock, as well as a capacity to adapt to, and shape, structural trends that may unfold more gradually. If a domestic political consensus supportive of openness is to be maintained, a convincing response to these concerns will be required.

- Resilience in the face of adverse shocks and shifts is made more challenging if Australia’s export basket is unusually concentrated by market destination, product classification or both. Or put more colloquially, if Australia has ‘too many eggs in one basket’. And if it does, what have been the consequences of this concentration beyond the export basket for the domestic industrial base and broader economic performance and resilience?

- To assess whether Australia’s export basket is unusually concentrated, this report benchmarks it against the baskets of other high-income, medium-size peer economies, including Canada, France, the UK, Switzerland, the Netherlands, the Republic of Korea and Taiwan.

Export market concentration

- Having a top market that accounts for between 25-30 percent of total goods exports is found to be par for the course amongst the peer group over the period of analysis. Australia mostly conforms to this benchmark.

- It was only in 2020 that Australia differed markedly when 41 percent of its goods exports went to China. This was up from 32 percent in 2015. The scale of this recent exposure and the associated risks are, however, moderated by several considerations. Some of the goods that Australia exports to China feed into global value chains with the final consumer being located elsewhere. When this is accounted for, China’s share of Australia’s total falls by around five percentage points. Further, many of the goods Australia sells to China are traded in global markets. If the China market is closed, global markets adjust and new opportunities for Australia’s exports are created in other economies.

- Australia is far from alone in the Asia-Pacific region in having a significant exposure to China. Despite serious geopolitical tension, the share of Taiwan’s goods exports going to China rose from 25 percent in 2015 to 30 percent in 2020. Globally, nearly three-quarters of countries now trade more goods with China than with the US.

- The jump in China’s share of Australia’s goods exports between 2015 and 2020 was overwhelmingly an iron ore price story. Iron ore prices in the vicinity of US$200/tonne are a temporary phenomenon: when they fall, China’s share of Australia’s goods exports will return closer to the peer average. Take away iron ore from Australia’s export basket and in 2020 China’s share of the remaining total almost halves to 22 percent. Last year, China accounted for 68 percent of global seaborne iron ore imports. The next biggest importer was Japan with just eight percent. The implication is that Australia’s exposure to China is mostly a symptom of the prominent place that iron ore occupies in the export basket.

- Looking beyond the top market exposure to the combined share of the next four largest markets, Australia’s exposure is shown to have been consistently in the middle of the pack.

- In terms of services exports, Australia’s top market share – China at 20 percent of the total – also does not stand out as unusual when compared with peer economies.

Export product concentration

- In contrast to metrics around market concentration where Australia’s exposures mostly do not stand out, the degree of product concentration found in Australia’s goods export basket mark it as an outlier.

- Between 1990 and 2020, the top product share of Australia’s goods exports rose from 13 percent (coal) to 33 percent (iron ore). This was markedly higher than the peer average of six percent and 15 percent, respectively. If the combined share of the next four largest products is examined, in Australia’s case this rose from 24 percent in 1990 to 36 percent in 2020. Once again, this was markedly higher than the peer average of 14 percent and 20 percent, respectively.

- In 2020, primary goods accounted for more than 80 percent of total Australian goods exports. This was eight times the peer average. The flip-side was the share of manufactures fell to just 15 percent. This contrasted with a peer average of 82 percent.

- Aside from being heavily weighted towards primary goods, Australia’s goods export basket was also distinguished by a lack of complexity. In 2020, 98 percent of Australia’s primary goods exports were in unprocessed form, compared with a peer average of 42 percent. The share of simply transformed manufactures (STMs) in total manufactured goods exports stood at 30 percent, compared with a peer average of 12 percent.

- The surge in the value and share of primary goods in Australia’s goods export basket, particularly unprocessed ones, reflected a rational response to leverage Australia’s natural factor endowments to benefit from strong global demand. That said, peers with export baskets more orientated towards manufactures and complex goods were mostly able to match Australia’s performance. And as product concentration increased, the resilience of Australia’s export basket was negatively impacted.

- Australia’s services exports are also highly concentrated relative to peers, focused on the product classification of travel.

Interdependence of export mix with industrial structure

- Changes in Australia’s export mix are interdependent with the domestic industrial base. Spurred by strong overseas demand, mining has grown from seven percent of value-added output in 1985 to 12 percent today, making it the largest single sector. Owing to the capital-intensive nature of mining production, its direct employment share only rose marginally from 1.5 percent to 1.8 percent. In the case of Canada, another geographically large economy with extensive natural resources, the mining sector accounts for five percent of output.

- The counterpart of the increased prominence of mining in the industrial base has been a relative shrinking of manufacturing. In 1985, manufacturing was the largest sector the Australian economy in terms of both output and employment, accounting for 15 percent and 16 percent, respectively. By 2019, however, this had fallen to seven percent of output and employment. Australia now has the lowest share of manufacturing amongst peers by a considerable margin.

- This transformation of the industrial base was accelerated by the commodities boom of the early 2000s, which elevated the exchange rate and made it harder for domestically-produced manufactures to compete. In 2020, Australia ran a trade deficit in elaborately-transformed manufactures (ETMs) equal to 9.5 percent of gross domestic product (GDP). Canada was next closest with an ETMs deficit of 7.8 percent, while the peer average was a surplus of 2.5 percent. In contrast to Australia, several peers are more heavily engaged in intra-industry trade: ETMs are both exported and imported in large volumes, leading to small sector balances as these flows mostly net out.

- While Australia’s changed industrial structure has brought benefits in terms of output and income growth, the implications for broader economic resilience are more concerning as, for example, sovereign manufacturing production capacity has been eroded. There have also arguably been adverse implications for overall productivity growth and income inequality.

Policy next steps

- In documenting that Australia is an outlier in terms of its export product structure and industrial base, this report prompts and serves as a basis for an informed discussion and debate around appropriate public policy responses. While recognising that government intervention can potentially ameliorate risks, it comes with costs too, and there is significant scope for a divergence between best intentions and actual policy effectiveness.

Authors:

Professor James Laurenceson is Director of the Australia-China Relations Institute at the University of Technology Sydney; Thomas Pantle is a Project and Research Officer at the Australia-China Relations Institute, University of Technology Sydney; Dr Phillip Toner is a Senior Research Fellow in the Department of Political Economy at the University of Sydney and Adjunct Professor at UTS Business School; Emeritus Professor Roy Green is Special Innovation Advisor at the University of Technology Sydney.

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