Australia’s “Asia First” Policies and Trade with Asia

 

 

 

Bruce Donald

Economics Research, Canberra, Australia

PO Box A248, ANU

Canberra ACT 2601

Australia

mailto:[email protected]

URL:        http://au.geocities.com/economics_research/index.html

 

 

 

 

 

This paper briefly assesses whether Australia’s “Asia First” policies have been successful, in terms of their effects on trade, and whether it is desirable to continue and further develop these policies in the future.

 

 

 

Contents

Australia’s “Asia First” Policies and Trade with Asia. 0

Contents. 0

Introduction. 1

Change In Trade Patterns. 1

Role of Government In Shifting Trade Patterns. 6

Conclusion. 7

References. 8

 

 

Introduction

This paper briefly assesses whether Australia’s “Asia First” policies have been successful, at least when considered in terms of their effects on trade as opposed to other goals such as diplomatic ones, and whether it is desirable to continue and further develop these policies in the future.  I draw on some important recent theoretical and policy oriented papers on the economics of international trade to highlight important issues and strengthen policy conclusions; these are referenced at the end for the interested reader.  I will use some data on Australia’s trade since WWII to illustrate my case[1].

 

Australia has pursued a number of policies for some years that have come to be called “Asia First”, although it was not until the mid-1980s that they could definitely be seen to form a coherent strategy.  Essentially these policies aimed to increase Australia’s engagement with its neighbours to the north on a number of fronts.  While there are many facets of this, and in many important senses the policies are mutually reinforcing - for example increased immigration from Asia was seen as providing a valuable entrée into the overseas Chinese trading network - here I will only consider those policies more or less directly connected with trade.

 

Although there have been a large number of initiatives I will only provide a brief account of them here.  According to the former head of the Australian Department of Foreign Affairs and Trade (DFAT), Mr Costello, “since 1991 more than fifty DFAT positions have been withdrawn from Europe and lower priority areas in order to finance additional analytical and operational activity in Australian posts in Asia; and 10 posts, also mainly in Europe, have been scaled down or closed to ensure that DFAT and Austrade could undertake new activities to promote Australia’s interests in the Asia-Pacific region”[2].

 

DFAT has also created a special East Asia Analytical Unit which researches the Overseas Chinese networks, and attempts to assist efforts by Australian businesses to link up with them.  There have been initiatives from the Department of Industry, Science and Technology to attract Regional Headquarters for the Asia-Pacific area to locate in Australia as opposed to other nations such as Singapore.  The Australian Tourist Commission has been targeting Asia in particular in recent years.  On the broader diplomatic front Australia has been increasingly involved in regional fora such as APEC[3], ASEAN and AFTA, all of which have largely focused on trade issues.

 

Change In Trade Patterns

But the main question I want to address is not whether the Government has been devoting extra effort to Asia, but rather whether that extra effort has resulted in any benefit.  The first thing to note is that Australia’s exports[4] to Asia have indeed been growing rapidly, but this has been happening at least since WWII (see Table 1 below).  The second thing to note is that since 1983[5] the growth rate of exports to Asia has fallen to 11.7% p.a. from 15% p.a. over the whole postwar period.  This does not, however, establish the case against the Asia First approach.

 

There are clearly two largely separable components of Australia’s trade with Asia: Japan and the Rest of Asia (hereafter ROA).  Despite the devastation of WWII Japan has long been wealthier than the other Asian nations, and Australia’s trade with Japan is in many ways more similar to its trade with other developed nations.  For example economic slowdowns affecting the USA and Europe are much more likely to be similarly experienced by Japan than by other Asian nations, even wealthy ones like Hong Kong and Singapore.  Japan has also long been Australia’s single most important trading partner and given the high level of existing exports it would be unreasonable to expect a continuation of very rapid growth.  Indeed this is borne out by the figures: the growth rates of exports to Japan over the whole period has been 20 % p.a. (obviously from a low base in 1946); but this fell to only 8.1 % p.a. for the period 1983-96[6].

 

Table 1. Postwar Growth of Australia’s Merchandise Exports, by Region.

	Exports, 1946	Exports, 1983	Exports, 1996	Growth Rate of Exports, 1946 - 96	Growth Rate of Exports, 1983 - 96
Exports to:	A$ million	A$ million	A$ million	% per year	% per year
Asia	40.71	10660.5	44876	15.0	11.7
·  Japan	1.78	5975.5	16419	20.0	8.1
·  Other Asia	38.93	4685.1	28457	14.1	14.9
Europe	73.96	3287.7	8441	9.9	7.5
USA	37.34	2241.1	4601	10.1	5.7
Other	44.87	5932.2	18081	12.7	9.0
Total	196.88	22121.6	75999	12.7	10.0

 

Exports to ROA grew at 14.9 % p.a. for 1983-96, up from 14.1 % p.a. over the whole postwar period.  This clearly does not reflect a general improvement in the competitiveness of Australian exports since the growth of exports to every other region fell.  Indeed exports to the US actually fell in nominal terms from 1988 to 1996.  Correspondingly the Other category includes New Zealand, and during this period one might have expected ANZCERTA to have boosted Australia’s export position, which it did, but not as much as for our Asian partners.  So it would appear that there is indeed something causing an important shift of Australia’s exports toward Asia.

 

This is confirmed by the following charts, which present the percentage share of exports held by each region at the three dates we have been focusing on.  In 1946 Europe and the US dominated: they have steadily declined in importance ever since.  Japan’s relative importance to Australia ballooned from 1946 to 1983, but has slowly declined since.  Other nations have held a fairly constant quarter of Australian exports over the whole period.  Most interestingly of all, however, is the behaviour of Australian exports to ROA: these retained a relatively constant share of exports until 1983, and since then have grown in relative importance very rapidly.  The very fact that Australia’s exports to the region grew at the same rate as our other exports for the rest of the postwar period, despite Asia’s rapid growth even then, highlights the critical importance of the Government focusing on the region, as a catalyst for increased export success.

 

Chart 1: Destinations of Australian Merchandise Exports, 1946.

 

 

Chart 2.  Destinations of Australian Merchandise Exports, 1983.

 

Chart 3: Destinations of Australian Merchandise Exports, 1996.

 

 

It is important to keep hold of the fact that the above charts represent relative shifts: trade with all regions has been growing[7], and there have been no long-term absolute declines.  This is dramatically represented in the following chart.  Of course in real terms the growth rate has been less dramatic.

 

Chart 4: Postwar Growth of Australian Merchandise Exports.

 

 

As mentioned earlier we are missing an important part of the picture with these data: there is no account taken of services exports such as tourism, education or motion pictures.  Although it is certainly the case that the top ten sources for fee-paying students attending Australian higher education institutions are all in Asia, I do not have data on the growth rate in numbers over time, so I cannot make a strong case for an effect from the Asia First policy, although intuitively it seems obvious.  However I do have some data on the sources of tourists over time, and these are presented below.

 

Table 2. Number of Tourist Visits to Australia, by Source Region.

Year	Asia	Europe	USA	Other	Total
1967	32263	39879	32783	116896	221821
1973	62253	113530	83498	212843	472124
1978	93754	163349	80972	292519	630594
1983	204500	268100	139700	331600	943900
1988	660300	529600	322300	737100	2249300
1993	1353800	637600	280800	724100	2996300
Growth Rate 1967-93 (% p.a.)	15.5	11.3	8.6	7.3	10.5
Growth Rate 1983-93 (% p.a.)	20.8	9.1	7.2	8.1	12.2

 

Overall the results are startlingly similar to that of merchandise trade: there is strong long-term growth from all sources, but this is strongest for Asia.  In the period 1983-93 the growth rate of tourists from all other sources fell, but rose dramatically for Asia, so that in 1993 almost half of Australia’s tourists were from Asia, whereas only about one-seventh had been in 1967.

 

Role of Government In Shifting Trade Patterns

So having established a prima facie case that there is indeed something to explain, in terms of an increase in the growth rate of exports to Asia, can we safely attribute this to a shift in Government policy?  There are some alternative explanations:

1. Incomes in Asia have been growing rapidly and so it is only natural that they start buying more imports;
2. Asian nations have been industrialising rapidly so naturally they have an increased demand for raw materials such as Australia supplies; and
3. More theoretically but quite similar to (2), there has been a shift in endowments of factors of production such that it is more profitable for trade to occur between Asia and Australia.

The trouble with all these explanations, although they undoubtedly go some way to explaining the shift in patterns of trade, is that they have been occurring steadily for some time.  Yet there does seem to a clear take-off for exports to Asia that occurred in the early 1980s.

 

Given that the current consensus on trade policy is for free-trade (see Krueger, 1997 for a discussion of how this consensus arose) is there any justification for the Government to have intervened to shift trade toward Asia?  First of all the policies that have been adopted are not the sort of distortionary policy previously criticised by economists; rather they are mainly aimed at providing more information about the possibility of market opportunities in an environment where people did not currently have much information.  Given Australians’ familiarity with business in Europe and North America, there is less justification to provide resources to assist businesses find markets there than in Asia.

 

Eichengreen & Irwin’s recent paper establishes an important role for history in a nation’s trade pattern: nations tend to trade with those nations they traded with in the past, even when fundamental economic conditions change.  For example when the Commonwealth (British Empire) trading system fell into disuse, and the transport routes that it used actually were abandoned, members of the Commonwealth still largely traded with each other, just to a smaller degree.  This pattern goes some way to explaining Australia’s disappointing export performance after WWII.  To establish new, and profitable, trading relations, some powerful force needs to apply for the inertia to be overcome.  This can - with considerable caution - be used to justify Governments drawing attention to new possibilities.  Given the interrelatedness of the cultures and businesses of Asia this can justify something like an Asia First policy.

 

Another potential justification for increasing Australia’s engagement with Asia is because of the prospect, even after all the recent upheavals, that these economies will be growing faster than the rest of the global economy (see the paper by Frankel, Romer & Cyrus).  Therefore establishing a market share now is important in order to be able to participate fully in this more important market in the future.  It is also vital that Australia participate as an active member in the trade fora in the region, since it has been established that openness to trade has been a very important explanatory component of the region’s economic development (Frankel et al).  If Australia wishes to match the successes of the richer nations of Asia, such as Hong Kong or Singapore, it needs not only to encourage openness to trade on the part of other Asian nations such as Indonesia, it also needs to pursue such policies itself, and a forum such as APEC is valuable in forcing Australia to commit itself to such a set of policies.

 

Conclusion

Overall there is quite good evidence that the shift in the Australian Government's attitudes to an Asia First approach in the early 1980s, was both successful in shifting Australia’s trade more toward Asia, and was a necessary component in achieving that switch.

 

This is not just so because of the problem of inertia in trade patterns discussed above, but also because many of the sectors experiencing growth in exports have a large role played by Government.  This is especially true in the services sector - for example tourism is affected by the provision of consular staff to provide visas, and education is affected by Government restrictions on student numbers and visas, and also funding structures of universities.

 

Finally we can conclude that resources allocated to an Asia First policy were justified, since there are important barriers to readjusting trade relationships, even when an adjustment is called for, as it clearly was in Australia’s case to take account of the emergence of major new markets close-by.  This did not violate the pursuit of growth-enhancing free-trade policies (see the arguments for these policies in either Krueger or Frankel et al), and indeed encourages Australia to further pursue those policies in league with the other countries who are most in favour of these policies, and who are now important as trading partners to Australia, i.e. the nations of East Asia.

 

References

 

 

Eichengreen, Barry and Irwin, Douglas A., “The Role of History in Bilateral Trade Flows”, NBER Working Paper #5565, May 1996.

 

Frankel, Jeffrey A., Romer, David and Cyrus, Teresa, “Trade and Growth in East Asian Countries: Cause and Effect”, NBER Working Paper #5732, August 1996.

 

Krueger, Anne O., “Trade Policy and Economic Development: How We Learn”, NBER Working Paper #5896, January 1997.

 

Luttrell, Tas, “APEC after Subic Bay - the Road to Free Trade”, Department of the Parliamentary Library, Current Issues Brief 25, 1997.