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Economic diplomacy should focus on investment, not just trade

Policy-makers need to modifying government narratives and policy settings to embrace and celebrate the success of Australian investment internationally, as well as foreign investment in Australia.

Photo: Flickr/Kai C. Schwarzer
Photo: Flickr/Kai C. Schwarzer
Published 14 Mar 2017 

This post is part of a debate on Australia’s foreign policy White Paper 2017. Click here for other debate posts.

Sam Roggeveen is right when he says that managing the tension between the interests of the United States and China ‘has to be at the very heart of Australian foreign policy’. But his commentary differentiating the US as our major strategic partner and China as our primary economic partner looks somewhat awry when we examine economic data beyond simply exports and imports.

Most Australians understand that China is Australia’s largest partner for trade in goods and services. But as Kim Beazley noted in this post, fewer realise the United States is by far Australia’s largest investment partner, while China ranks seventh in two-way investment with Australia. Sales by Australian firms in the United States and by US firms in Australia dwarf the value of exports - from Australia to the US and from the US to Australia respectively - by a factor of four. 

As well, the profile of goods and services trade between Australia and the US is more knowledge and technology-intensive than Australia’s trade with most others. Two-way goods trade with the US is dominated by elaborately transformed manufactures and the US is Australia’s largest partner in services trade, which is dominated by technical, business and financial services.

Australia needs a more holistic understanding of its shifting global trade and investment interests if we are to fully understand our economic position in the world, promote all facets of trade and investment, and successfully negotiate investment and services chapters of free trade agreements.  

Despite gaps in current data, there is strong evidence in recent DFAT and Austrade publications that Australian firms operating internationally are transitioning from principally export-focussed business models to more investment in-country to improve their access to local markets and participate in global and regional value chains. This trend will only accelerate as Australia’s economy shifts to larger exports of services, many of which must be delivered through in-country presence of firms providing them.

Despite two-way investment becoming as important to Australia’s economy as trade in goods and services, most of the discussions about Australia’s economic relationships focus on exports and inward investment (commentary on the latter is as much negative as positive). There is little commentary - and even less data - about how Australian companies are changing business models, adding investment to export in their pursuit of markets abroad.  Some Austrade reports and presentations have highlighted the trend, however.

There were promising signs of a more contemporary  understanding of Australia’s economic interests (and implementation of a more economically focussed foreign policy) when, in August 2014, the then Trade Minister Andrew Robb and Foreign Minister Julie Bishop launched the Economic Diplomacy strategy.  But since then, there has been little discussion of the full range of economic interactions, though Trade Minister Steve Ciobo has canvassed two way investment interests in his Investment Statement to Parliament and in recent speeches in the United States and China.

The investment gap in commentary about Australia’s economic interests has persisted in this White Paper debate so far. There has been some discussion about the role of foreign investment into Australia but nothing about the increasingly important role Australian investment abroad plays is in supporting the Australian economy. Currently, the stock of inward foreign direct investment ($735.5 billion) makes up about 18% of all direct investment in thi country. Surprisingly to some, the stock of Australian direct investment abroad is a high $594.4 billion, or 74% of inward investment.

The lack of discussion about inward and outward investment in part is due to of deficiencies in Australian data, particularly about Australian investment abroad, which admittedly is difficult to track. Several other developed nations successfully track two-way investment, however, plus the performance of foreign affiliates. These nations’ policies reflect superior understanding of investment dynamics.

Australian government officials are well aware of the data gaps in the face of changing dynamics of trade and investment and authors of DFAT and Austrade reports have highlighted the need for more comprehensive data. It is understood that during 2017, DFAT will commission a survey of Australian services firms operating abroad.

What we do know from current ABS and DFAT investment data is that the largest sectors for Australian direct investment abroad are financial and insurance services (31.4%), manufacturing (17.5%) and mining (15.2%).

The Department of Foreign Affairs and Trade recently analysed data from agencies in the US, European Union and New Zealand to better understand the performance of Australian firms there.

The results are surprising and point to a shift of strategies by many Australian firms to better access international markets.  In 2012 and 2013 there were more than 4800 Australian majority-owned enterprises in the US, EU and NZ, with combined investment of around $265 billion, generating sales of $127 billion. This sales total is more than two and a half times the value of exports from Australia to these economies of $49 billion.

A 2016 Austrade-sponsored survey of 913 companies in Australia found 71% have been involved in inward and outward investment.

Canadian Government data and Australian university research find that Australian-listed companies make up the second-largest group of explorers for minerals and coal globally by both number of companies and expenditure. Australian exploration and mining companies are active in all regions of the globe.

Australia’s very positive two-way  investment story could turn negative if Australia fails to maintain its competiveness for investment here and net investment flows from both Australia and its main investor nations increasingly turn towards destinations abroad. Policy-makers need to understand and respond to changes in the international strategies of firms by modifying government narratives and policy settings to those that embrace and celebrate the success of Australian investment internationally, as well as foreign investment in Australia.

This requires adequate data and analysis to enable policymakers to gain a better understanding of investment at home and abroad, to negotiate enhanced investment provisions in FTAs, and to create an improved investment climate at home.

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