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How US protectionism would threaten Australia

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COMMENTS

24 November 2016 18:04

The impact of US President-elect Donald Trump's intended withdrawal from the Trans Pacific Partnership (TPP) on Australia could be seen as relatively benign, if one concentrated soley on trade in goods and services.

After all, we have the Australia-United States FTA, concluded in 2004. The strength of US growth could help counter problems with trade agreements and planned infrastructure spending by the new administration could provide opportunities for Australian suppliers and service providers.

The Regional Comprehensive Economic Partnership Agreement also presents a possible alternative to the TPP, (though it is far less ambitious than TPP, to the point where my colleague Dr Jeffrey Wilson chose to describe it as the 'Steven Bradbury of free trade agreements').

Trade Minister Steve Ciobo has also floated the possibility of renegotiating the TPP with China or Indonesia, and without the US.

But as commentators are now pointing out, the US withdrawal from TPP (especially if it is accompanied by the imposition of trade restriction) will also have a substantial impact on both trade liberalisation in this region and, more seriously for Australia, pathways to multilateral two-way investment.

Trade and investment summaries released by DFAT in October and November highlight Australia’s continuing dependence on the US which is arguably our key partner for trade and investment combined. This is notwithstanding rapid growth of Australia’s exports to Asia, dominated by minerals and energy.

In 2015 the US became Australia’s second most important two-way trade partner, supplanting Japan and behind only China. As a market for Australian exports, the US jumped ahead of Korea in 2015 to number three in value.  And for imports by Australia, the US was second after China.

Australia-US relationships are even closer when it comes to investment. The US is far and away Australia's most important two-way investment partner. In 2015, the stock of total US foreign investment in Australia was $860 billion, which equates to 28% of all inward foreign investment. China, by comparison, was ranked seventh with investment stock of $75 billion. The UK (the second-ranked investor) plus other European nations had investment stocks valued at $847 billion.

The stock of total Australian investment in the US in 2015 was $594 billion, or 29% of Australia’s outward investment. China is Australia’s fifth-ranked investment destination with investment stocks of $70 billion. Europe is the second most valuable investment destination for Australia ($466 billion), led by the UK.

Investment liberalisation is where the TPP would have been expected to shine, along with multilateral opening of services trade. As planned, it would have created a framework for other agreements and could have been expanded to include other economies. Indonesia’s President Joko Widodo had already suggested that his country could join TPP in the future.

For Australia, two-way investment is now more important than trade, and within trade, services offer the greatest potential for further export growth economic transformation.

Of course, the potential impact of Trump's economic policies don’t stop at the US position on the TPP. During the campaign, President-elect Trump proposed a 35% tariff on products made by companies that move their production from the US to other countries.

International Investment Australia 2015 cites some enlightening 2013 data about the presence of US firms in Australia. This shows there were 842 majority US-owned foreign affiliates in Australia with total assets of $639 billion in this country. These firms contributed $48 billion in value-added to the Australian economy. The affiliates had sales of goods and services globally of $190 billion. They employed 310,000 people and paid wages and salaries totalling $28 billion.

The loss of the US from the TPP or worse, the collapse of the TPP, or even worse, imposition by the US of trade or investment restrictions could be serious for Australia, and not only in terms of opportunity cost.

Of course there are also some real opportunities in Australia’s close economic relationship with the US, as well as within our region and with Europe, our number two investment partner. Just how the various scenarios play out for Australia will depend on how nimble government and the private sector can be both domestically and in the hugely competitive market for international trade and investment.

Photo: Getty Images/James D Morgan

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