A New Trade Policy? Australia Needs A Whole Set Of Them

The Age

Thursday January 12, 2006

After 264 trade deficits in 305 months, it's time to end the complacency and increase our competitiveness.

WHEN the prices of the things Australia sells have soared to record levels, when demand for them is being fuelled by the world economy growing at its fastest rate in decades, when Australian household spending has recoiled back to subdued levels, reducing demand for imports, surely we might expect our trade balance will reflect our luck by recording a large surplus.

Instead, Australia has reported the fourth largest trade deficit in its history: $2.5 billion in November, after seasonal adjustment. Take out the seasonal adjustment, and the actual deficit was the second worst ever: $3.2 billion or more than $100 million a day. It defies logic that Australia's trade balance could be so deeply in the red when so much is in its favour. Coal is our biggest merchandise export, and this financial year its export revenues are up 63 per cent from a year ago. Iron ore, our second-biggest earner, is reaping 83 per cent more than a year ago. We have not had luck like this since the early '70s, when the trade surplus soared so high that even the current account deficit went into surplus.

How could we fail to be running a trade surplus at a time like this? Minor factors aside, the reason is that globalisation carries more costs than our policymakers realise - and they have failed to equip Australia with the policies it needs to compete effectively.

The first problem is the dollar. At no time in the past 20 years has the Australian dollar stayed so high for so long. That has made Australian products more expensive on world markets, and harder to sell. And a high dollar makes imports cheaper on our markets, and easier to sell. Australians are holidaying overseas in record numbers, because the high dollar makes it cheaper. But from most of the world, fewer tourists are coming here, because the high dollar makes it more expensive.

The problems of a high dollar, however, are neither new nor unexpected. They are no excuse for a deficit of this size. The last time our dollar was this high was in 1996-97, yet Australia kept running trade surpluses. We knew when we floated the dollar in 1983 that financial markets at times would overvalue or undervalue it. The undervaluation in 2001 gave us our only trade surpluses in recent years. The dollar is a factor in our export malaise - but not the prime cause.

The second problem is China. Yesterday it revealed that it ran up a trade surplus in 2005 of $US102 billion, three times the 2004 level. Walk into any store in Australia, and you can see why: masses of Chinese-made clothes, electronic appliances, office equipment, whatever. In an open world market, in which firms fight to extract every dollar for shareholders, they are shutting down operations in high-wage Western countries such as Australia to relocate them in China.

Why is China so competitive? Because its Government keeps tight control over its currency, keeping it massively undervalued. Australian Treasury officials estimate that the yuan is undervalued by up to 30 per cent; other estimates suggest it is more like 50 per cent undervalued. That policy, now being imitated by Russia, India and other Asian countries, confers a huge competitive advantage that will cost the West many millions more production jobs over coming years, forcing it to buy what it used to produce. We cannot change this; what we need is a range of policies to offset it.

After 264 trade deficits in the past 305 months, we have seduced ourselves into believing it is normal to live like this, always spending more than we earn, and borrowing to pay the bills. It is time common sense ruled again. Rather than waving goodbye to industries such as steel and chemicals, ministers and officials should meet industry leaders, listen and learn what changes are needed so they can expand in Australia rather than relocate. Industry does not need blank cheques, but a hard-headed determination by Government to keep this country producing and exporting sophisticated, high-value goods. We need to be practical, not ideological. We need to admit that the present hands-off policies have failed. And we need comprehensive hands-on policies that will work.

© 2006 The Age

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