A Good Match: Optimising Australia's permanent skilled migration
Nearly a quarter of permanent skilled migrants in Australia are working in a job beneath their skill level, a new report by CEDA has found.
International trade has played a significant role in Australia’s economic development, but current disruptions to the flow of goods and people across borders as a result of COVID-19 has some questioning how much our dependence on global trade could create havoc for our economy.
With the situation changing rapidly from week to week, initial concerns around delays to manufacturing in China and South Korea have broadened to other sectors of trade as the virus continues to significantly impact all of Australia’s major trade partners. Understandably, the immediate worry is accessing sufficient stocks of medical equipment to abate the devastating health impacts of COVID-19.
Fears of the impact of worldwide shutdowns on diffused supply chains has fuelled sentiments that were already growing amidst weak global trading conditions in the years leading up to the outbreak, featuring the on-going tariff wars between China and the US.
Some commentators are already making a bold call for structural adjustment policies to domesticise Australia’s essential goods manufacturing in the hopes of building long-term national resilience to similar crises in the future.
We know there will be impacts to our national supply chains, but what is still unclear is how deep these impacts will be and how long they are likely to last. Whether this pandemic marks the start of a new global trade paradigm remains uncertain.
For now, it is worth bringing some perspective to just how disrupted global trade will be and the impacts for Australia based on our trade profile. In this three-part blog series, CEDA researchers examine what the data suggests about how exposed Australia’s exports and imports are (Parts 1 & 2), and provide an initial assessment of some of the suggestions that are being made to bolster Australian trade supply chains (Part 3)
CEDA will be releasing a short research paper on COVID-19’s impact on trade and supply chains before the end of May.
With the longevity and extent of the COVID-19 pandemic still highly unpredictable, the only certainty we have at this stage is that global trade and economic growth will slow down significantly during 2020.
At the end of March, the OECD released a set of stark estimates of the initial impact of COVID-19 containment measures, predicting a loss of two percentage points in annual GDP growth for each month of containment, highlighting tourism and retail trade as some of the hardest hit sectors. This loss of output flows into trade, with the World Trade Organisation estimating world trade will plummet between 13 and 32 per cent, with complex value chain goods like electronics and motor vehicles the worst impacted.
In the most recent fiscal year, Australia’s exports amounted to $419 billion and its imports amounted to $395 billion, the equivalent of 22 and 21 per cent of total GDP respectively. The anticipated slowdown from global trade alone is enough to have major impacts on the Australian economy.
Australia’s people-related exports were hit hard early, with the first COVID-19 related border restriction applied to foreign nationals from mainland China. In 2018, China overtook New Zealand as the largest inbound market of overseas arrivals in terms of both visitor numbers and visitor spending, while over a fifth of international student visas granted in the second half of 2019 were for Chinese citizens.
Of course, the comprehensive extension of international travel bans means that much of the 12 per cent of our exports from international tourism and education are in hibernation for the time being. In the case of international education, some expect that at least one-fifth of foreign students will depart before the end of the year, as they struggle to gain sufficient work in the hardest hit sectors of the economy and are excluded from most government supports. The Mitchell Institute sees cumulative losses for universities of up to $19 billion over the next three years.
The future prospects are not much better for the tourism sector. International tourism makes up about 30 per cent of total tourism spending, but of course the limits on people movement within Australia mean the remaining 70 per cent in the domestic market can currently do little to offset the international pain. Even when there is freer domestic movement of people, we shouldn’t expect that tourism will immediately bounce back or that more Aussies holidaying at home will simply offset the losses from international tourism.
Beyond these hard hit sectors, Australia could actually be less exposed than many other trading nations by virtue of the composition of its key trading partners and heavy reliance on commodity exports.
While it will be some time before any country can declare victory in containing the pandemic, Australia’s key export markets include many countries that appear to be well progressed in either flattening the curve or restricting the virus, including China, South Korea, Taiwan and New Zealand.
Australia’s exports are dominated by resources, with these commodities accounting for around 70 per cent of all exports. Iron ore and coal alone account for around a third of our exports, with our biggest customers including China, Japan, India and South Korea. The latest international trade release from the ABS shows that exports for the month of March increased by an impressive 29 per cent, largely driven by iron ore exports to China.
The dominance of resource exports explains why Australia is less integrated in global value chains than other advanced economies. The share of imported intermediate goods in Australia’s exports stands at around a fifth, compared to an OECD average of around 45 per cent. This has been a source of consternation over recent decades. Amongst other indicators, it is often cited as evidence that the Australian economy has an over-reliance on resources and lacks a diversified and sophisticated industrial base, including advanced manufacturing. This debate will only intensify in the wake of COVID-19.
Despite these concerns, in the immediate term the lack of reliance on disrupted supply chains for foreign inputs is likely to cushion the adverse impacts of the crisis on our exports.
To date, we have seen continuing demand for Australia’s commodity exports, led by the largely uninterrupted demand for Australian iron ore in China. In China’s case, government stimulus for domestic infrastructure will also cushion demand for iron ore.
However, in a global crisis of this dimension, reductions in global demand could also put some pressure on resources markets in future. The recent gyrations on oil markets underline how quickly evaporating economic activity can sink demand for commodities and with it prices.
At the end of the day, Australia’s customers for iron ore are some of the world’s largest exporters of steel, largely dependent on demand for its manufactured goods from around the world. And although natural gas export volumes are expected to increase throughout the year, the drastic fall in gas prices is expected to lead to an overall decline in export value, with even greater falls expected for 2020-21.
Other big commodity exports in agriculture and fishing are facing air freight bottlenecks, although the government recently introduced a $110 million international air freight mechanism to assist in maintaining those trade flows. In an encouraging sign, 500 tonnes of rock lobster is expected to be exported to China in the next two months.
Though the initial resilience in iron ore exports is a positive sign for Australia, continuing uncertainty suggests this will not be enough to prevent a significant hit to our trade income, especially given the impacts to our services exports.
Australia’s ability to sell goods and services outside our borders is only one side of the trade picture. What about imports? In the immediate wake of the COVID-19 outbreak, shortfalls in medical equipment has understandably prompted concerns that our ability to source essential goods and services from overseas is at risk.
The second part of CEDA’s analysis of Australia’s trade profile will focus on our major imports and trading partners and how the immediate and longer term impacts of the COVID-19 pandemic are likely to unfold.
Read Part 2 of the Trade and Supply Chains: pressure points in perspective series here.
Read Part 3 of the Trade and Supply Chains: pressure points in perspective series here.
The author would like to thank former CEDA Senior Economist Meg Cuddihy for her work on this blog and CEDA's trade and supply chain work.
CEDA is hosting a livestream event on global supply chains on May 28 featuring Jarrod Ball, Deputy Chief Executive Officer of Austrade, Tim Beresford; NSW Ports Chief Executive, Marika Calfas; and Managing Partner, Global Business Services, IBM Australia & New Zealand. Register here.