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Tuesday 22 Aug 2017 | 15:18 | SYDNEY
Tuesday 22 Aug 2017 | 15:18 | SYDNEY

Economic diplomacy brief: Asian investment, GDP passing lane and Japan trade

Ho Chi Minh City, 2013 (Photo: Flickr/Ares Nguyen)

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COMMENTS

9 February 2017 15:26

Banking on the neighbours

With US President Donald Trump shaking up the way America does business with the world, the relative strength of Australia's commercial links with the Asian countries it may well need to more heavily rely on for security is set to come back onto the agenda.

At the very least, this must be a key issue for the foreign policy white paper now under way, given the priority the current federal government puts on economic diplomacy. The year has gotten off to a troubling start on the Asian business front, with the Crown and Bellamy's set-backs in China and the continuing banking cutbacks.

But this chart provides some new perspective on just how Australia stacks up internationally on direct investment in Asia. This is the sticky, on-the-ground investment in hard assets and permanent employees that is difficult to quickly exit (as the ANZ Bank has found with its Asian bank stakes), in contrast to more liquid portfolio investment or pure trade deals.

Corporate Australia's timidity about foreign direct investment (FDI) in Asia (in contrast to its high trade exposure) was highlighted in the PwC Passing us by study two years ago, which pointed out that Australia had more invested in New Zealand (population 4.5 million) than all of Southeast Asia (population 625 million).

The challenge has always been finding the right benchmark for comparison, and as this chart shows, the answer is very much in the eye of the beholder. These figures are potentially complicated by different national collection systems and by the remarkable and rising proportion of Australia's FDI classified as confidential, which might be a small but useful transparency task for the white paper.

But at face value Australia now seems to have about the same proportion of its FDI in Asia as the US and the UK at around 12%. Is this too low? Well, it is way below our export exposure to our close, fast-growing neighbours, which is around 65%. And the UK and US have been investing in Asia for a long time; remember the East India Company and the 'black ships' off Japan.

In fact, Australia has a more even spread of investment across the globe without concentrations such as the 50% of British FDI in Europe, or the 44% of Canadian money in the US.

On the other hand, this might be the benchmark for investing in the neighbours. By this standard Australia clearly falls short; even if we total Asia, New Zealand and other neighbours (substantially Papua New Guinea), we only get to around 25% close to home.

But the escalating tension between Donald Trump and Mexico (a G20 economy locked into the US by the comprehensive North American Free Trade Agreement) throws up a curiosity. The US only has about 2% of its FDI in Mexico despite the 23-year-old NAFTA deal, which is a lot less than Australia has invested in the parallel, fast growing - but potentially politically risky - countries of Southeast Asia (7%).

Japan provides the other very different benchmark for Australia as a country prepared to back its geographic location with investment. It has 29% of its FDI in Asia; 35% if Australia is regarded as Asian, which would just top the 33% Japan has invested in the US. And despite the bilateral diplomatic tensions, Japan stands out for having much more actually invested in China (though this has slowed in recent times).

If the China investment is a risky growth punt for Japan, the newly industrialised countries of Asia (Korea, Singapore and Taiwan) might well be seen as Japan's New Zealand. Indeed, it has a somewhat similar (but slightly smaller) proportion of its FDI in those reliable countries (and former colonies) as Australia has across the Tasman.

Australia's stature as an independent nation arguably loses a bit of shine from the fact that it is the only investor country in this sample group that has more of its money in the UK than the rest of Europe – virtually the mirror opposite of its Commonwealth cousin Canada. This may well turn out to be an unintended punt on the success of Brexit, but it also underlines how this sticky FDI takes a while to change direction.

Beyond reinforcing the known point that the proportion of Australia's trade and investment flows into Asia are extremely different, these figures probably don't provide any greater clarity for the businesspeople making the real decisions at the ground level.

But here are two numbers that suggest Australia may not be so out of kilter with the global reality (notwithstanding our trade dependence on Asia). If we create an Anglosphere investment destination out of the US, UK, Canada, New Zealand and Australia, it turns out that Japan and Australia have the same proportion of their FDI in this comforting world (46%). It must be something about being Asia's islander outsiders, or perhaps just reliable returns in transparent markets.

And, despite the striking fact Australian business has more FDI in tiny New Zealand ($60.5bn) than fast-growing Southeast Asia ($37.7bn), an unnoticed watershed development occurred in 2015. Australians now have more total investment (sticky FDI plus liquid portfolio and other money) in Southeast Asia ($100.7bn) than New Zealand ($98.7bn) for the first time. This a development that certainly should be recorded in the white paper.

Avoiding the rough

Donald Trump says he will go easy on Japanese Prime Minister Shinzo Abe when they hit the golf course in Florida this weekend. This suggests Abe should count his clubs carefully later in his quest to cut the first trade deal with the new administration.

Abe always had very nuanced appreciation of the now-moribund Trans-Pacific Partnership (TPP) as a US-led security pact and as a stick to pursue Abenomics reforms at home. Abe now wants to lock Trump into the bilateral security alliance by getting Japanese companies to sign up for more investment in the US.

But it is hard to see how Abe can get a better deal for Japan in a bilateral negotiation with the US than he got in the TPP when Trump has a golfer's simple scorecard for economic diplomacy: cutting the US trade deficit. With the national deficit at a four-year high and the deficit with Japan running at US$60 billion a year, it is hard to see Trump simply turning the TPP into some form of bilateral deal, as Abe seems to hope. 

Bangladesh bound

Amid the global debate about how the US is adjusting to the economic rise of China, the latest long-term GDP projections from PwC underline how Australia arguably has bigger psychological adjustment ahead. By 2050 the US will still be the second- or third-largest (after China and India respectively) largest economy, depending on whether you use market or purchasing power parity (PPP) measures. The top three will also be proportionately larger in the world than they are now.

But spare a thought for Australia, which 20 years ago was still the third biggest economy in Asia until India caught up, and has mostly been around number four or five since (depending on the metric). The pecking order changes dramatically by 2050, according to the PPP projections, when Australia will struggle for a spot in the top ten Asian economies, tagging along with Bangladesh. But the real psychological adjustment will be in dealing with the Southeast Asian neighbours, where Indonesia, Vietnam, the Philippines, Thailand and Malaysia will have all hit the lead. Indonesian officials love to point out they are already larger in PPP terms. This is going to be a trend.

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