The debate over Australia’s most valuable economic partners hit fever pitch this month with new arguments over old measuring sticks for an increasingly contested aspect of international relations.
There is no absolute way of resolving this debate which involves value judgements about whether the long-term stock of foreign investment is more important in driving the economy and building relationships than shorter term trade flows.
Investment – especially the more enduring and controlled foreign direct investment (FDI) - requires long term commitment and has enduring spin-offs. But trade flows have a more direct impact on the economy - especially on the value of the currency - and also increasingly involve deep relationships for sophisticated services trade.
The chart below attempts to cut through this debate by comparing the average annual two-way trade and investment flows for key partners (or partner groups) alongside the most recent foreign direct investment stocks for those partners.
But first to the latest debate. The US Studies Centre has reinforced foreign minister Julie Bishop’s argument of three years ago that the US is Australia’s most important partner with this report that emphasises investment stocks.
The latest study builds on this earlier work from the Perth USAsia Centre which introduced the idea that sales by Australian-owned businesses in the US are now substantially larger and more important than traditional exports to the US. (The subsidiary sales data is US-sourced and not available for all trading partners.)
The big figure in these studies is $1.47billion: this is the combined total of cumulative US foreign investment in Australia and Australian foreign investment in the US. Or perhaps alternatively, the big figure is $1.56 billion: the two-way investment stock and two-way 2016 trade flow.
But James Laurenceson from the Australia China Relations Institute has responded that combining stocks of investment and annual trade flows is a bit like mixing apples and oranges.
And if the two-way trade and investment flows for the US and China in 2016 are compared, the result is as equally striking as the USSC figure above. Laurenceson points out the Chinese bilateral relationship flow was $178 billion compared with a comparable US bilateral flow of minus $27 billion due to large portfolio investment withdrawal by both American and Australian investors that year.
Austrade has joined the debate as well with this report that emphasises the value of Japanese FDI stock in Australia. This stock is now second only to the US. (See also this earlier Australia Japan Foundation-funded study that argued the overall Japanese economic relationship is still more valuable than the Chinese relationship.)
As the 2016 US figures show, investment flows can be very volatile, especially for portfolio and debt finance. But the trade figures can also vary with exchange rate changes and other factors.
This chart smooths the numbers by using more stable FDI investment numbers and then averaging the trade and investment flows over the past five years, thereby removing some of the disparities seen in the competing US and China numbers.
* Two-way trade and foreign direct investment annual flow (five year average) # Inward foreign direct investment stock (2016) ^ Two-way FDI stock (2016) Germany outbound not disclosed
Beyond value judgements, this debate requires some way of weighting the long term sunk investment against shorter term trade flows and some acknowledgment of different growth rates. For example, two-way Australian trade between with the US and China has been growing at about the same rate in recent years but Chinese investment in Australia has been growing at a much higher rate than the US investment.
This chart also reveals how the economic importance of Australia’s relationship with countries other than the US and China varies quite a lot depending on the measuring stick used. When two-way investment stock is the measure (as the USSC suggests) rather than flows (as Laurenceson suggests) or just inward investment, Japan’s status is diminished because of low Australian investment there. But New Zealand and the UK become much more important because Australian investment in those two countries is relatively much larger than trade.
Another issue is whether Hong Kong really should be bundled with China for this sort of analysis because it lifts the greater China figure significantly and has had quite high trade and investment growth rates.
The multi-country view underlines how the European Union post Brexit is a larger economic partner than the UK - until the Australian investment in the UK is factored in.
And the other striking outcome from the broader country rankings is the significant role of the South East Asian countries when bundled as a single ASEAN entity. On the flow analysis they are second only to China, which is a point that could well be made at next year’s ASEAN leaders summit in Sydney.
Private v public
The investment stocks debate has once again highlighted the high proportion of Australian foreign investment going to the Anglosphere countries of the US, the UK and New Zealand.
And the latest survey from Asialink of Asian business capability in the boardrooms and C-suites of large Australian companies has produced some interesting insights into why those proportions are so large when economic growth rates are much higher in Asia.
Private companies appear to be more comfortable operating in Asia compared with listed companies, with the survey finding only 55 of the top 200 listed companies reporting Asian revenue while the 'vast majority' of the 30 largest private companies were engaged with Asia.
Senior executives from the private companies also did better on the measured Asian capabilities than their listed company counterparts.
The Match Fit survey found 67% of the top 200 listed company board members showed no evidence of operational experience in Asia, but nevertheless these directors still had 72% more Asian capability than the senior executives they oversaw.
Larger companies generally had more board and executive Asian capabilities than smaller companies, although small to medium-sized company executives had more of some of the six measured capabilities than the largest company executives.
The anecdotal evidence from Asia is that private companies such as Linfox are able to push ahead with regional growth strategies because they are less hostage to producing quarterly financial returns. Meanwhile, some smaller companies such as Huon Aquaculture are able to nimbly pursue Asian opportunities without upsetting the large fund managers who are worried about Asian risks.
Australian governments have been devoting more resources to publicising business opportunities from new trade agreements, but this survey of business leader capabilities suggests that, to some extent, the governments are pushing on a closed door.
McKinsey & Company has been up there with the International Monetary Fund as the public face of globalisation for half a century so it is interesting to see what it says can be rescued from the rubble of the 2007 financial crisis.
Ten years on, McKinsey Global Institute is forecasting that a 'risk-sensitive, rational, and ultimately more resilient version' of globalisation is emerging - so expect to see that phrase in a lot more chief executive speeches.
The Institute argues that the new form of globalisation will be more stable because: foreign direct investment is playing a larger role in international capitalism than hotter, more exotic forms of capital; trade and capital account imbalances between countries have shrunk; and banks have larger capital and liquidity cushions than before.
So while cross border capital flows have fallen by two thirds - or four times relative to global GDP - due to a slump in lending, the stock of global foreign investment relative to GDP is virtually unchanged at 183% of GDP.
And while European banks play a lesser role in globalisation, they have been replaced by banks from places such as Japan, China and Canada. At the same time, developing countries – China in particular – are playing a greater role in diversifying global foreign investment.
The biggest movements in the Institute’s Global Financial Connectedness Ranking in the past decade have been the sharp rises for China, Brazil, Indonesia and Thailand and the sharp falls for Argentina, Portugal, Greece and Israel. Australia is up one place.