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Australia in the AIIB: refocusing the ‘pivot to China’ back to Asia

Contemporary Australia is reminded every few years of the importance of Asia-focused trade for the prosperity of the Australian economy. Whether these reminders come from the release of government White Papers or the significant news focus on free trade deals, we are told that Australia is ‘open for business’. However, the realities of Australian export trade are quite contradictory to this ‘open’ view.

An examination of Australian exports highlights the obvious: China dwarfs all other export partners taking up 28.8% of all Australian exports, whilst 27.2% of all exports are made up of iron ore and coal. To put this into perspective, Australian exports to countries like India and Indonesia sit at around 6.4% of total export trade combined. This creates two significant problems. Firstly, as highlighted by Deloitte, Australia’s economy is significantly dependent on the trajectory of the Chinese economy. This dependency allows China’s political and economic decision making to disproportionately affect the Australian government’s ability to make its own economic and political decisions, especially when compared to other trade relationships. Secondly, the dependency on iron ore exports leaves the Australian budget vulnerable to significant volatility in prices, which can negatively affect government revenues. Ultimately, these problems emphasise that Australia should begin to refocus its ‘pivot to China’ back to a broader ‘pivot to Asia’.

Crucial to this pivot back to Asia is a reenergised trade focus by Australia into countries like India and Indonesia. Both countries combined have a population of 1.547 billion and hold compelling opportunities for Australia. In 2016 India will become the world’s fastest growing economy growing at 7.3%. However, the amount of Australian exports to India rival’s our exports to New Zealand, roughly equating to 4% of export trade, with coal exports accounting for the vast majority of this trade.

A prime candidate for export expansion into India is agriculture exports. The Australia-India Comprehensive Economic Cooperation Agreement opened the door for increased agriculture trade, yet a five-year export trend of -9.3% has shown that there is significant room for improvement. Currently non-mining exports to India sit a distant third, yet significant opportunities are being missed in agricultural exports where long-term low yields, from cereal, fruit and vegetable and dairy, caused by structural issues within Indian industries have created new trade pathways into the country. Significantly boosting a diversified range of export trade to India will help Australia to become less susceptible to the two core problems highlighted at the beginning of this article.

The second potential country for diversifying trade is Indonesia. A country that is predicted to be the fourth largest economy by 2050, Australian export trade to Indonesia lags behind at 2.2% of total exports, and exports have actually declined 1.7% year-on-year in 2016. While the impending Australian-Indonesian free trade agreement signals positive diversification steps, the agreement is facing some protectionist fightback. In contrast to India, there are numerous opportunities for increased export trade into Indonesia, mainly in the form of services. Whilst Indonesia can produce a lot of its own food, areas such as plantation technologies and seed/pest management technologies provide diversified trade opportunities for the agricultural sector in Australia.

Furthermore, a significant export opportunity exists within the Indonesian infrastructure sector. These opportunities are services-based, as skills shortages within Indonesia’s infrastructure sector continues to hamper infrastructure production and progress. This affords Australian infrastructure firms a new opportunity to export their services and provide design and implementation skills on Indonesian projects. However, while these two examples provide a positive picture for Australia to diversify export trade, there is a major issue that must be addressed: the issue of infrastructure development to facilitate trade growth.

Infrastructure is inextricably linked not only to economic growth but also trade viability. The good news is that Australia is now in a prime position to address these issues. The quality of infrastructure such as roads, seaports, railroads and airports acts like a faucet: the better the infrastructure, the better the flow of trade and vice-versa. Examining data from the World Economic Forum, we find that India is currently struggling with air transport infrastructure and road quality, ranked 71 and 61 respectively. With regards to Indonesia, road and seaport infrastructure are of major concern, ranked 80 and 82 respectively.

Australia’s role in addressing these issues comes from its significant position within the Asian Infrastructure Investment Bank (AIIB). Australia is the 6th largest shareholder in the new bank and will hold a board of directors seat. A ‘soft coalition’ between Australia, India (who will likely hold a vice-president position) and Indonesia would allow this coalition to have the second largest voting power in the organisation. This new coalition could then begin to seek loans to fund new infrastructure projects in their respective countries, which would ‘turn the faucet on’ and provide Australia with the opportunity to diversify export trade—thus completing the beginning of the pivot from China and back to Asia.

Charles Bryant is the International Trade and Economy Fellow for Young Australians in International Affairs.

Image credit: Australian Embassy Jakarta (Flickr: Creative Commons)

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