It's a developing world
As the recent, and in some places still current, Global Financial Crisis has demonstrated the growth businesses in India and China are closely tied to Australia’s success; the more competitive they are the better off we are.
Following the assumptions set out at the top of this paper Australia is now committed to free trade and its benefits. These principles deliberately disregard longer term strategic thinking (for example about future industrial capability for defence or other strategic specialisation like longer term skills development) in favour of maximising immediate national wealth by buying international goods and services at the best price available and selling our internationally traded goods and services at the best price we can get.
Disregarding capital flows the size of the total trade ‘cake’ is set by how much international markets want to take of our products and services and how much we can deliver at a price they are prepared to pay. It is an economic tautology that under a floating currency, Australia’s exports (visible and invisible) balance our imports (after adjusting for the balance of inward and outward borrowings - investment flows). It inevitably follows that consuming more international goods lowers the value of the $A, and makes our exports more competitive. Correspondingly the success of our exporters (or some exporters) raises the traded value of the $A, and makes other exports less competitive.
Our exporters are competing with each other for a place in the export mix. They are not competing (on price) with overseas producers of similar goods but with other Australian exporters for a piece of the available export action. Thus (investment flows remaining constant) if services, minerals, grains or other manufactures get a bigger share of the ‘cake’, some marginal manufactured goods become less competitive. If imports increase without a corresponding increase in exports, the dollar will fall making some imported goods more expensive and some exported goods more profitable to manufacture locally.
Overseas manufactured goods are only ‘cheap’ because some of our exports are excellent value for money in international markets (at current currency equilibrium values). Manufactures who wish to stay in business need to make products that are at least as good ‘value for money’ as the products of our other exporters (alumina, LNG, iron ore, coal, wheat, wool, wine, as well as mining and medical machinery, therapeutic drugs and so on).
Of course capital flows also affect the value of the dollar. Higher capital inflows raise the value of the dollar and make local manufacturing less competitive. Higher returns encourage more foreign investment. In part returns are determined by interest rates; in turn influenced by the level of economic activity; and any resource misallocation (for example of labour or capital) or shortfall (eg over-full employment) that leads to inflation.
Current projections by the minerals sector suggest a substantial escalation to meet the increasing raw materials demand particularly of India and China but of developing countries generally. Unless imports increase substantially, it can be expected that this increase in mineral exports together with any resource shortfalls (eg in labour) will make some local manufacturing less competitive. To offset the need for more labour Australian businesses are likely to increase automation and seek more economies of scale.
Manufacturers that continue to trade will need to introduce new equipment and methods as they compete for skills with large minerals developments. While a proportion of the increase in plant and equipment needed by all players will be locally sourced it is probable that much will be sought on world markets and a proportion will come from India, China and other developing countries as well as from North America, Japan and Europe. These imports will place some offsetting downward pressure on the dollar.
If the present minerals sector expansion projections are correct, the degree to which the finance for such projects comes from overseas, together with any additional share in the export ‘cake’, will determine the net upward pressure on the dollar that will result. In turn, this will determine how much more competitive imported goods from the developing world are about to become and ultimately the degree to which Australian industry becomes more capital intensive and labour productivity is thus increased.
The outcome is likely to be the increased importation of mass produced goods that benefit from economies of scale (as do our mineral and some agricultural exports). Export exposed local firms are unlikely to be able to compete in these market sectors and will need to find new innovative high value or up-market products or a means of adding value to imported components (eg assembling imported components; using their established distribution chain; marketing; product design; or branding).
The products India, China, Taiwan, Malaysia, Singapore and Korea successfully export to Australia include: cars and trucks; electronic devices; wind turbines; railway carriages; industrial machinery; white goods; small domestic appliances; and a wide range of textiles and clothing. These are often designed in developed countries and branded as European or US products. Those successfully exported by Australia are often custom installations or small run manufactured equipment like specialist medical and scientific equipment, mining and other machinery (often with a high design component); products protected by patent, registered design or copyright; or products adding value to food, minerals or other primary products.
Additional capital intensiveness requires investment. This can be provided internally from revenue, borrowed (via the financial network) or by attracting additional equity investment. While encouraging more international equity investment into Australia makes our exports less competitive, this can be justified if it brings with it new technology that provides new products appropriate to Australian manufacture or improves productivity and total wealth (making the cake bigger rather than sharing it differently).
To support their development several developing and developed countries keep their currency well below its underlying market value. While this denies their citizens lower cost imports and luxuries (and makes international tourism a luxury; and visiting Australia less attractive), it makes their exports more competitive internationally and local manufacturing more profitable. It also results in an accumulation of foreign currency reserves that are effectively accessible by others, through the banking system, as loans for investment.
Developing countries often apply this mechanism as the higher work for less real income imposed on a domestic labour force can be hidden in (and is justified by) an environment of rapidly improving living standards. China is the prime example in the World today. As a result there is an ongoing exchange between the US and China as to how long this can go on; with China now challenging Japan as the principle source of US foreign investment; and the Chinese remarking unfavourably on the current US deficit and fiscal policies that undermine their $US investments.
India, and several other developing countries, also manipulate their currency to stimulate development; with varying degrees of success.
Under this world view, the goods and services demand and competition coming from rapidly developing economies like China, Taiwan, Korea and India, as well as from Japan, the US and Europe, are expected to benefit Australians by providing advanced products and competitive prices; at the same time encouraging Australian manufactures to be innovative, to use the latest equipment, processes and techniques and to compete in those areas where they can best contribute.