AUSTRALIA-CHINA TRADE: PERFORMANCE AND PROSPECTS

by ERIKA PLATTE*

This article not only presents a case study of the performance of Australia- China commodity trade in 1975-1985, but more importantly, it highlights the basic dilemma that Australia faces in failing to achieve an internationally competitive manufacturing, sector. Questions answered on the basis of empirical evidence include the following: How intensive is the trade flow between China and Australia relative to the impact of the two countries in the international trade arena? Are their patterns of comparative advantage with the rest of the world' consistent with their economies' factor endowments? To what degree do their bilateral export structures differ from their comparative advantage established in world markets? Have these patterns of trade specialisation shifted over the ten-year sample period in terms of product sophistication? What are the effects of China's new foreign trade policy and practices, initiated in 1979, both on her international competitiveness and in the Australian context? And most importantly, what is the potential for further expansion in Australia-China trade?

In assessing these questions this paper focuses on the commodity composition of exports, because import patterns tend to be severely distorted by government trade policies.z

China's and Australia's foreign trade in global perspective Despite the spectacular increase in China's external trade since the

launching of an open foreign trade policy at the Third Plenum in 1978, it remained insignificant in world trade, accounting for only 1.68% seven years later. Even though its growth rate exceeded that of the world average, it only meant substantial growth on a small base.

Generally speaking, China's main interest in foreign trade is to import

* Research scholar, Upper Mount Gravatt.

1. "World" refers to only market economies, because detailed foreign trade statistics for the centrally planned economies (CPE) are unavailable. The trade of countries reporting according to the United Nations' Standard International Bade Classification (SIX) covers about 90% of world trade. Given the relatively small volume of CPE trade, its omission is unlikely to bias the data used in this article.

2. The data used in this paper can be found in various issues of United Nations, Commodity E-ade Statistics and United Nations, Yearbook of International n a d e Statistics.

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the needed producer goods for the implementation of her socialist industrialisation. Hence exports are considered a necessary evil to earn the foreign exchange to pay for imports. In 1975, China’s share in world exports exceeded that in world imports. By 1980, however, imports outstripped exports as a result of the policy shift from import substitution to comparative advantage. Nevertheless, China’s ranking in world total exports improved from 28th to 16th during the sample period (Almanac, 1988, p. 46). In 1985, she contributed 1.37% and 1.98% to the global export and import trades respectively.

Australia cannot claim to be a major trading nation either. What is more, her share in world trade has declined marginally. While imports rose from 1.08% in 1975 to 1.13% in 1985, Australia’s contribution to total world exports fell from 1.33% to 1.15% in the corresponding period. As exporters Australia and China ranked 21st and 19th respectively in 1984 (Almanac, 1986, pp. 951 and 952).

The importance of the bilateral trading relationship China’s major trading partners in 1985 were, by far, Japan, Hong Kong,

the EEC and USA, in descending order of importance. Between 1975 and 1985, Australia’s share of China’s exports dropped from 1.34% to 1.08%. While her share of China’s demand for imports ihitialiy stood at an impressive 5.21%, it declined progressively to 2.18%. Thus China has become more independent of Australia in trade.

In this period Australia conducted a large proportion of its foreign trade with Japan and the United States, the two major economic powers of the Pacific. The most crucial relationship was with Japan, which was the most important customer for Australian commodity and energy exports, and a major supplier of manufactured goods. On the import side, the United Kingdom, West Germany and New Zealand, in descending order of impor- tance, followed as Australia’s leading trading partners. Although China’s share of the Australian demand for imports rose from 0.87% to 1.23% during the period, Australia continues to provide only a small market for China.

By comparison, on the export side Australia has become one of China’s largest suppliers of food and raw materials. The PRC’s share in Australian exports increased from 2.78% to 3.78% in the decade to 1985. By 1985, China had overtaken New Zealand, the United Kingdom, West Germany and the USSR as Australia’s major customers, thus rising from 8th to 3rd position. In other words, Australia has become more dependent on China in trade.

The relative importance of the bilateral trading relationship between two countries can be gauged using the intensity of trade index.3 This provides a measure of the extent to which China’s (Australia’s) exports to Australia (China) are larger or smaller relative to her exports to the whole world than Australia’s (China’s) imports are relative to world trade.

Table 1 puts the two countries’ trade intensities in global perspective. The evidence suggests that China’s export trade was extremely intensive with Hong Kong, albeit with a sharp downward trend, followed, at a considerable

10

distance, by Singapore, Japan and Malaysia. If special characteristics of Hong Kong’s and Singapore’s re-export trade are taken into account, China can be said to have exported most intensely to Japan, and decreasingly to Malaysia. Initially, China also exported intensely to Australia, but by 1985 the actual trade flow fell short of the expected value. Chinese imports from Hong Kong became increasingly important during the period under analysis. Again, given Hong Kong’s entrepat activities, China can be said to have imported most intensively from Japan, Australia and New Zealand, in declining order of trade intensity. However, Australia’s intensity in China’s import trade has declined over time.

As shown in Table 1, Australia has an extremely intense bilateral relationship, both in her export and import trades, with New Zealand. In addition, her export trade with Japan, China and South Korea was more intensive than that with the rest of the world, including the UK and the USA. By contrast, Australia is shown to have imported more intensely from the UK and the USA than from China.

Overview of Sino-Australian trade In value terms, two-way trade between China and Australia nearly trebled

during the 1975-1985 period, with most of the growth occurring in the first half of the period.

Imports play a strategic role in China’s development process and largely depend on the country’s economic policy objectives. During the PRC’s Sixth Fiveyear Plan (1981-1985), foreign trade was earmarked for rapid expansion and imports were expected to grow at a faster rate than exports. However, these expectations did not materialise in the Australian context. As analysed below, Australia could not supply China with the advanced technology needed for her indu~trialisation.~

3. The “intensity of trade” concept was first used in Brown (1948). It was popularised by Kojima (1964); Drysdale (1969); Drysdale and Garnaut 11982); and Anderson (1983).

The intensity of trade index is defined a s the share of one country’s trade with another country, divided by the other country’s share of world trade. A value of unity indicates that the bilateral relationship between two countries is a s important as their trade with the rest of the world. A value greater [smaller) than one suggests a more (less) intense bilateral trading relationship. The index takes the form

Xij Mj Xi Mw - Mi

Iij = - I

where Xij is country i’s exports to country j . Xi is country i’s total exports, Mj is country j’s total imports, Mw is total world imports, and Mi is country i’s total imports.

4. By comparison. Japan and the EEC, who could provide China with the technology-intensive goods needed for her industrialisation, increased their exports to China by 145.7% and 107.5% respectively during the 1980-1985 period.

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TABLE 1 TRADE INTENSITfES

noding Partner

China's Exports China's Imports 1975 1980 1985 1975 1980 1985

Hong Kong Singapore

Malaysia Australia USA New Zealand W. Germany Canada

Japan

28.63 22.10 19.23 5.00 2.84 6.52 3.73 3.43 3.78 5.92 2.62 1.54 1.23 1.34 0.93 0.00 0.51 0.88 0.60 0.89 0.67 0.43 0.48 0.42 0.23 0.25 0.29

0.80 1.12 5.55 2.00 4.03 0.36 1.07 0.77 1.62

6.63 1.66 3.83 1.74 3.77 1.56 3.07 0.57 1.16

13.02 0.73 3.36 0.53 1.89 0.75 1.22 0.57 0.48

noding Partner

New Zealand

China South Korea UK USA

Japan

Australia's Exports 1975 1980 1985

14.89 18.78 11.60 4.62 3.69 4.04 4.03 3.77 1.89 2.44 2.01 2.45 0.78 0.75 0.54 0.96 0.84 0.44

Australia's Imports 1975 1980 1985

10.88 13.42 13.84 2.69 2.52 2.53 1.23 1.34 0.93 1.14 1.35 1.06 2.70 1.61 1.47 1.40 1.71 1.75

Source: Calculations a re based on United Nations trade statistics (various issues of Commodity ' h d e Statistics and Yearbook of International n o d e Statistics).

TABLE 2 SINO-AUSTRALIAN BILATERAL TRADE PERFORMANCE

1975 1980 Change 1985 Change [USSIOOOJ {US$ZOOOJ I%! iUS$lOOO) WJ

PRC Exports 85,963 239,311 178.4 285,735 19.4 PRC Imports 323,394 775,943 139.9 839,080 8.1 Total Trade 409,357 1,015,254 148.0 1,124.815 10.8 Balance of Trade - 237,431 - 536,632 - 553,345 ExpJImp. Ratio 1:3.8 1:3.2 1:2.9

Source: Figures were compiled from various issues of United Nations, commodity Trade Statistics.

Table 2 summarises the Sino-Australian bilateral trade position over the period under analysis. China suffered a continual trade deficit that was increasing in absolute terms. But since exports expanded faster than imports, the ratio of trade deficits to exports declined accordingly. Over the 10-year period, the deficit dropped from 276% to 194% of the value of Sino-Australian exports. Commodity composition of China's exports to Australia

Considering China's comparative advantage in goods intensive in unskilled labour (see below), it is not surprising that basic manufactures and

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miscellaneous manufactured articles comprised the major areas of interest. Food and live animals, although not of the same value, also accounted for a substantial export trade with Australia. During the period under analysis, China's export structure remained basically unchanged, with the manu- facturing sector accounting for approximately four-fifths of total exports. The share of primary products-SITC sections 0 to 4 including non-ferrous metals (SITC division 68)-increased slightly due to exports of crude petroleum and refined petroleum products, while that of manufactures- SITC sections 5 to 8 excluding non-ferrous metals-dropped marginally.

The salient feature revealed in Table 3 is the fact that, with the bulk of her sales being light industrial goods, the commodity composition of China's export trade with Australia typifies that of a newly industrialising country. The manufacturing sector, in particular clothing, woven cotton fabrics, textiles, and to a lesser degree footwear, provided the bulk of China's leading export earners. By comparison, the contribution of the primary industry was relatively insignificant except that crude petroleum and refined petroleum products joined the ranks of the top ten key export commodities. TABLE 3

COMMODITY COMPOSITION OF CHINAS EXPORTS TO AUSTRALIA BY S I X ONE-DIGIT SECTIONS

1975 1980 1985 SITC [US%lOOO~ 1%) [usslooo) p / o l [US$lOOO) I%)

0 7,823 9.1 21.801 9.1 26,614 9.3 1 365 0.4 - - 133 0.0 2 4,017 4.7 7.318 3.1 8.327 2.9 3 182 0.2 15,611 6.5 21,403 7.5 4 319 0.4 888 0.4 509 0.2 5 4,821 5.6 23,375 9.8 19,858 6.9 6 36,157 42.1 92,900 38.8 91,146 31.9 7 1,028 1.2 2,909 1.2 7,486 2.6 8 29,843 34.7 74,429 31.1 109,448 38.3

810 0.3 9 1,400 1.6 - -

The one-digit code (sections] of the SITC is as follows: 0 Food and Live Animals 1 Beverages and Tobacco 2 Crude Minerals except Fuels 3, Mineral Fuels 4 5 Chemicals 6 Basic Manufactures 7 Machinery and Transport Equipment 8 Miscellaneous Manufactured Articles 9 Commodities not Classified by Kind Note: SITC sections 0 to 9 do not add up to the total PRC-Australian export values shown

in Table 2, because the United Nations' commodity trade statistics occasionally lump China's trade in with that of other "Asian Planned Economies". However. the discrepancies a re negligible.

Source: Figures were compiled from various issues of United Nations. Commodity Trade

Animal and Vegetable Oils and Fats

Statistics.

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China’s factor endowments Countries will export commodities making relatively intensive use of the

factor of production that is relatively cheap before trade. This section reviews some crude indicators of the Chinese economy’s factor endowments: land, labour and capital. They provide us with certain expectations with respect to the PRC’s export specialisation. The following discussion adopts the approach taken by Garnaut and Anderson (1980). Firstly, taking income as a proxy for physical capital, in terms of capital to labour ratio (GNP per capita) China belongs to the low-income countries. Secondly, the proportion of the PRC’s population participating in tertiary education, taken as a proxy for human capital, is very low. These two economic indicators suggest a low endowment of both physical and human capital relative to labour. This implies that China will tend to specialise in unskilled labour-intensive goods rather than in technology-intensive or human capital-intensive products.

Thirdly, China’s ratio of population to “total land area”,5 a crude proxy for the ratio of labour to natural resources, takes an intermediate value between resource-rich countries, such as Australia and Canada, and resource-poor countries, such as Hong Kong, Singapore, Taiwan, South Korea and Japan. Hence one can only speculate as to whether China has a slight comparative advantage or comparative disadvantage in agricultural and mineral resources. The hypotheses advanced above will be tested in the next two sections. All we can say with confidence at this stage is that China is abundant in labour relative to both capital and natural resources, compared with a global average. China’s global comparative advantage

The concept of global comparative advantage derives from the commodity composition of a country’s total exports, showing its pattern of comparative advantage with the rest of the world. The “revealed” comparative advan- tage index,6 introduced by Balassa (1965), permits us to measure a country’s

5.

6.

The concept of “total land area” has been adopted from FA0 Production Yearbook (1986, p. 3). I t refers to the total area of the country, including area under inland water bodies. “Population density” is used a s a proxy for the availability of natural resources per head, as in Keesing and Sherk (1971, p. 956). The “revealed” comparative advantage index is defined as the share of a commodity group in an economy’s total exports divided by that commodity group’s share of world exports. Provided the country’s export specialisation has not been distorted by government policies, an index value above (below) unity indicates a comparative advantage [disadvantage) relative to the rest of the world. The index takes the form

Xic Xwc Iic = - / -

Xi Xw where Xic is country i’s exports of commodity group c,

Xi is country i’s total exports, Xwc is world exports of commodity group c. and Xw is total world exports.

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export specialisation on a global scale. The analysis which follows adopts the method developed by Krause (1982),

who considers commodities to result from five factor inputs: natural resources, unskilled labour, physical capital, human capital (skilled labour) and technology. Although most products require inputs of all five factors, they can be classified according to their dominant factor, that which determines the location of production and that used most intensively. Physical capital is not used as a factor for classification purposes, because it is relatively mobile internationally.

Based on the work of Findlay, Phillips and Tyers (1985), this article further disaggregates natural resources into agricultural and mineral resources. This permits a more detailed analysis of the structure of Australian exports, which are primarily natural-resource-based. Thus the commodities of the SITC three-digit level’ have been divided into five categories of factor characteristics: agricultural resources, mineral resources, unskilled labour, technology, and human capital.

The upper section of Table 4 reveals a strong global comparative advantage for China in goods intensive in unskilled labour which was to be expected given the abundance of labour relative to land and capital. Among the Pacific Basin countries, only South Korea, Taiwan and Hong Kong had higher levels of export specialisation in this factor category of commodities (Tyers and Phillips, 1985). The importance of unskilled labour- intensive manufactures in China’s world exports increased over time, highlighted by the switch in emphasis from heavy industry to light industry as an integral part of the economic reforms.

The extent of the comparative advantage in agricultural commodities relative to the rest of the world, in particular in the 1970% is surprising, since a value marginally above or below unity would have more closely accorded with China’s factor endowments observed above. This distortion in the commodity composition of the PRC’s world exports appears to be a reflection of an economic development strategy which promoted agricultural exports to finance imports of producer goods for the heavy industry sector. The shift in investment priorities towards light industry, initiated in 1979, is borne out by a substantially reduced international export specialisation in agricultural goods in the 1980s.

The “revealed” comparative advantage indexes for mineral resource- based goods are close to unity and thus consistent with China’s factor endowments. In a similar vein, the poor penetration of world markets by Chinese technology-intensive and human capital-intensive goods was to be expected. What is more, the values for these two factor categories show

7. For the purpose of measuring comparative advantage, commodities are disaggregated to the SITC threedigit level. also referred to as commodity groups, because they most closely correspond to the concept of an “industry” used conventionally in economic analysis. For a list of commodity categories at the SITC threedigit level, see Findlay, Phillips and Tyers (1985. p. 45).

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TABLE 4 CHINAS “REVEALED” COMPARATIVE ADVANTAGE AND EXPORTS TO AUSTRALIA

BY FACTOR INTENSITY

1975 1980 1985

“Revealed” comparative advantage index-goods intensive in: Agricultural resources Mineral resources Unskilled labour Technology Human capital

Factor category shares of exports to Australia “J/oj :

Agricultural resources Mineral resources Unskilled labour Technology Human capital

2.26 0.73 2.78 0.27 0.32

13.2 3.0

73.8 6.4 3.6

1.66 0.88 3.56 0.34 0.37

13.3 7.8

65.6 10.4

2.9

1.54 1.20 3.58 0.24 0.29

11.7 8.9

66.2 8.2 5.0

Sources: The “revealed” comparative advantage index was calculated from data provided in CIA (1989). The factor category shares of exports to Australia were calculated from various issues of United Nations, Commodity n o d e Statistics.

that there was no progress whatsoever within the ten years under analysis. China’s research and development expenditure as a share of value added in production and its proportion of scientists, engineers and skilled workers in total employment has obviously remained extremely low.

China’s bilateral comparative advantage Although dependent upon it, a country’s pattern of bilateral comparative

advantage generally differs substantially from that of its global comparative advantage. The purpose of this section is twofold. Firstly, it examines the ex- tent to which the pattern of China’s comparative advantage established in world markets has been duplicated in Australia. Secondly, given that export specialisation is a qualitative concept indicating higher levels of value added per worker or technological input, it looks at the shifting pattern over time in the Sino-Australian context.

The lower section of Table 4 provides a summary of the PRC’s exports to Australia by factor intensity. The predominance of the unskilled labour- intensive component accorded with China’s competitive position in the international market place except for a downward trend following increases in protection for textiles, clothing and footwear through quantitative restrictions by Australia. This was the area in which the PRC enjoyed a significant comparative advantage due to low labour costs. Apart from clothing and textiles, light manufactures such as footwear, toys and sporting goods, miscellaneous manufactured goods and furniture comprised the major foreign exchange earners in China’s export trade with Australia. A

16

closer examination reveals that the share of yarns, fabrics and other textile products in total sales dropped progressively from 35.2% in 1975 to 25.9% in 1985, while clothing retained its proportion of about 21.0%. This shift implies specialisation within a factor category towards products of higher- value forms.

China’s agricultural resource-intensive exports to Australia remained constant, albeit below her level established in world markets. Since both countries enjoy a natural advantage in agricultural resources, some lack of commodity mix complementarity would have to be expected in this area. The same appears to apply to trade in minerals, although supplies of crude petroleum and refined petroleum products boosted the mineral-resources component of Sino-Australian exports.

Interestingly enough, the PRC’s exports to Australia of goods intensive in technology were in excess of its global comparative advantage. Nevertheless, the slight shift towards technology-intensive and human capital-intensive products proved statistically insignificant. On the whole, the commodity structure of China’s exports to Australia reflected her pattern of comparative advantage with the rest of the world, with export specialisation being limited to higher levels of value added per worker.

Commodity composition of Australia’s exports to China Australia’s export trade with China was preponderantly focused on food

and live animals, crude materials except fuels and basic manufactures, with varying emphasis over time. The importance of basic manufactures was largely due to semi-processed minerals, such as aluminium and pig iron, thus forming part of the primary rather than the manufacturing sector. Exports of mineral fuels did not emerge until 1985, when Australia began supplying coal to China.

Table 5 details the shifts in the export mix during the ten years under discussion, illustrating the volatile nature of agricultural trade. In fact, food exports in 1985 were down to pre-1975 levels. By 1985 China’s foreign trade was seriously affected by an overheated domestic economy. As a result of a huge balance of payments deficit, China had to drastically cut her imports, especially of consumer goods.

In 1975, obviously, Australia supplied China with a large portion of her total wheat import requirements.* However, wheat exports declined over time even in absolute volume terms, reducing its contribution to total export earnings from 60.7% to 20.0%. Similarly, in 1985 sugar exports had dis- appeared altogether. So had cotton which is reported to have been due to an increase in China’s own production of cotton (Australia-China Pade, 1984). By contrast, Australia’s most traditional product, wool, enjoyed remarkable success in China. In fact, since 1980 the PRC is said to have

8. For a time series of Australian wheat exports to China, see Australia-China Tkade (1984. P. 4).

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TABLE 5 COMMODITY COMPOSITION OF AUSTRALIA’S EXPORTS TO CHINA

BY S I X ONE-DIGIT SECTIONS

1975 1980 1985 SlTC (us$1000) [VO) [US$lOOOJ [O/o) [US$lOOOJ [Vo]

0 1 2 3 4 5 6 7 8 9

209.664

26,912

10,442 855

70,694 249

-

-

- -

65.8

8.4

3.3 0.3

22.2 0.1

-

-

- -

438,140

162,861

21,779 3,501

140.846 561 744

-

-

-

57.0

21.2

2.8 0.5

18.3 0.1 0.1

-

-

-

174.437

3 3 3,2 7 1 19,012 23,293

3,197 237,089

9.136 4,109

35,459

- 20.8

39.7 2.3 2.8 0.4

28.3 1.1 0.5 4.2

-

The onedigit code (sections) of the SITC is a s follows: 0 1 2 3 4 5 6 7 8 9

Food and Live Animals Beverages and Tobacco Crude Minerals except Fuels Mineral Fuels Animal and Vegetable Oils and Fats Chemicals Basic Manufactures Machinery and Transport Equipment Miscellaneous Manufactured Articles Commodities not Classified by Kind

Note: S I X sections 0 to 9 do not add up to the total Australian-PRC export values shown in Table 2. because the United Nations’ commodity trade statistics occasionally lump China’s trade in with that of other “Asian Planned Economies”. However. the discrepancies a re negligible.

Source: Figures were compiled from various issues of United Nations, Commodity ’Rude Statistics.

been one of Australia’s fastest growing customers for wool. During the period under analysis,’sales climbed from 2.4% to 23.5% of total exports to China.Q Similarly, the emergence of textile yarn as Australia’s sixth most important export commodity in 1985 reflected the rise of China’s textile inhustry:O coinciding with her soaring imports of textile machinery and synthetic fibres” from the EEC and Japan.

The commodity structure of Australia’s exports to China typifies that of an economically underdeveloped country. What is more, the shares of the

9. For comparable wool export growth figures in 1979-83. see Cross and Spinks (1986, p. 53). 10. China became the world’s largest exporter of polyester-cotton mixed fabrics in 1981 (Chia,

11. In the early 1980s. China became a major purchaser of polyamide. polyester and acrylic 1987, p. 107).

fibres (Beijing Review, 27/5/85, p. 31).

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primary and the manufacturing sectors remained virtually unchanged:’ with the former accounting for an average of four-fifths of total export revenue.

Australia‘s factor endowments This section discusses some indicators, albeit imperfect, of the Australian

economy’s factor endowments: land, labour and capital. They provide a sound basis for anticipating Australia’s export specialisation. Firstly, due to its small population size Australia’s per capita income ranks among the highest in the world. Secondly, Australia has a relatively high proportion of the population in tertiary education. Thirdly, taking population density as a crude proxy for the availability of natural resources per head, Australia’s endowment of agricultural and mineral resources per unit of labour is the highest in the Pacific region.

It follows that Australia is abundant in capital, both physical and human, and in natural resources relative to labour. Hence the labour content of Australian exports is likely to be extremely low. The following section examines the extent to which actual trade specialisation matches above a priori expectations both in the international trade arena and in the Chinese context.

Australia’s global comparative advantage The following analysis identifies Australia’s export pattern with the rest

of the world. The upper section of.Table 6 shows a strong global comparative advantage for Australia in goods intensive in agricultural resources. Moreover, her internationally competitive position in mineral resource-based products strengthened during the sample period. At the other end of the scale, Australia had the greatest comparative disadvantage in unskilled labour manufactures. These facts were to be expected given the abundance of natural resources relative to labour.

However, Australia’s severe comparative disadvantage in technology- intensive and human capital-intensive exports is obviously not appropriate to its natural endowments. The economic explanation is believed to lie in the growing demand for natural resource-based commodities, especially minerals, generated through the industrial expansion in North-East Asia (Garnaut and Anderson, 1980). These developments appear to have contributed to an upward trend in Australia’s comparative advantage in resources production, thus impeding the emergence of comparative advantage in sophisticated manufactures. To sum up, Australia’s pattern of export specialisation continues to be the reverse of that of advanced industrial countries.

12. By comparison, Canada managed to increase the share of the manufacturing sector in its exports to China from 2.7% in 1975 to 31.9% in 1985.

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TABLE 6 AUSTRALIA’S “REVEALED” COMPARATIVE ADVANTAGE AND EXPORTS TO CHINA

BY FACTOR INTENSITY

1975 1980

“Revealed” comparative advantage index-goods intensive in: Agricultural resources 2.66 2.94 Mineral resources 1.34 1.15 Unskilled labour 0.10 0.32 Technology 0.33 0.31 Human capital 0.35 0.33

Factor category shares of exports to China (%): Agricultural resources Mineral resources Unskilled labour Technology Human capital

72.0 72.2 21.6 15.4 0.0 0.8 0.3 0.6 6.0 11.1

1985

2.58 2.22 0.12 0.17 0.18

51.7 31.5

3.2 1.7

12 .0

Sources: The “revealed” comparative advantage index was calculated from data provided in various issues of United Nations, Yearbook of International 7kade Statistics. The factor group shares of exports to China were calculated from various issues of United Nations, Commodity 7kade Statistics.

Australia’s bilateral comparative advantage Since a country’s pattern of bilateral comparative advantage generally

differs greatly from that of its global comparative advantage, it will be interesting to examine the degree of discrepancy between the factor composition of Australia’s world exports and that of its exports to China as well as the extent to which Australia’s sales to the PRC become more sophisticated during the 1975-1985 period.

The lower section of Table 6 provides a percentage breakdown of Australian exports to China by relative factor intensities. Goods intensive in agricultural resources clearly dominated the regional trade, followed by mineral resources. Both the predominance of these two factor categories and their diametrically opposed trends over time reflect Australia’s competitive position in the international market place.

Interestingly enough, while Australia’s comparative disadvantage in technology-intensive and human capital-intensive products deteriorated on the world market, especially after 1980, this pattern was not duplicated in the Chinese context. Sales of high-technology goods remained statistically insignificant, but those of goods with a high human capital content grew to a level above that established on a global scale. Export specialisation in this particular area was largely due to iron and steel products, one of the few examples in Australia’s foreign trade of raw materials processing to higher-value commodities. On the whole, however, her pattern of export trade with China does not differ substantially from that established worldwide.

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Australia continues to hold her position as a large-scale supplier of primary produce and raw materials.

Bilateral trade prospects Considering the striking similarity of the measures of “revealed”

comparative advantage between Australia and China it is not surprising that their bilateral trade shares are small, both absolutely and relative to the two partners’ world trade shares. As suggested by the data on trade turnover (Table 2), Australia’s benefit from China’s open foreign trade policy since 1979 has been marginal. Furthermore, the importance of the bilateral trade relationship between the two countries relative to the rest of the world declined over time [Table 1). The question arises as to the potential for further expansion in the countries’ two-way trade.

In the areas of human capital-intensive and technology-intensive products, in which China is least competitive, Australia is even worse off, as a comparison between Tables 4 and 6 shows. According to Keesing and Sherk (1971), developing countries have their most severe comparative disadvantage in the production of machinery and transport equipment. The preceding analysis reveals that this applies not only to China but also to Australia. Australia’s “revealed” comparative advantage index for this particular section dropped from 0.23 in 1975 to 0.12 in 1985!3 By implication, her ability to export non-resource based manufactures was poorer in the mid-1980s than in the mid-1970s.

The fact that by 1985 China had become Australia’s third largest export market, largely for agricultural commodities, should not be overrated. In a centrally planned economy such as China food imports are responsive to short-run fluctuations in domestic production. Abrupt changes did indeed occur in the trade structure of China’s agricultural imports from Australia (Table 5). It should also be remembered that other countries are producing and exporting these commodities in direct competition with Australia. Moreover, agricultural and mining products both face declining markets and declining terms of trade. Commodity prices for wool and wheat fell sharply during the 1975-1985 period and are predicted to drop even further in the 1990s (Abelson, 1989). Only manufacturing, whose markets and terms of trade have been rising, would be the long-term solution to boosting sales to China significantly.

Some scope exists to expand exports in the area of processing raw materials to higher-value forms. A case in point is the emergence in 1985 of aluminium as one of Australia’s key export commodities, capturing 10.2% of total sales to China. Aluminium, even though regarded as a resource-based commodity in terms of factor intensity, represents a higher value-added than bauxite and alumina. Similarly, instead of selling iron ore or pig iron, these

13. By comparison, China’s “revealed” comparative advantage index for the section of machinery and transport equipment dropped from 0.17 in 1975 to 0.14 in 1985.

21

raw materials could be transformed to iron and steel products, such as primary forms, shapes, plates, sheets, hoops, strips, tubes and pipes. During the 1975-1985 period, however, the bulk of Australia’s exports to China in this area consisted of unprocessed resources. Export specialisation along these lines-building upon existing comparative advantages rather than focusing on areas where Australia is unlikely to succeed-would enhance Australia’s position to facilitate China’s modernisation drive by helping to meet her import requirements to upgrade and expand her industrial and physical infrastructure.

As the foregoing analysis shows, actual trade complementarity between China and Australia was lower than it should have been. In response to growing competition in the production of unskilled labour-intensive manufactures from the ASEAN member states, Hong Kong, South Korea and Taiwan, Australia has erected substantial barriers to imports of products in which it has the strongest comparative disadvantage, mainly in the clothing, textiles and footwear industries. As demonstrated above (Table 4), government intervention has distorted the commodity composition of Australia’s imports from China with the result that the latter’s exports of unskilled labour-intensive goods to Australia have been reduced to a level below her international competitiveness.

In addition, China is facing increasing competition in this area from the Asian countries mentioned above who are all vying for a share in the Australian market. She still lacks the necessary capital equipment and expertise to produce a diverse mix of high quality products. Given Australia’s perennial trade surplus with China, the issue of what and how much to buy from the PRC has obviously hampered two-way trade. However, with her low level of development and large population, China is likely to enjoy a strong comparative advantage in labour-intensive goods of the lowest level of value- added per worker, such as textiles, clothing and footwear, for a long time to come.

The analysis here presented does not support the widespread optimism among policy makers and business economists based on the enormous potential of the China market because of her huge population. Having examined a decade of trade performance in 1975-1985 and identified the factors that inhibit trade expansion the picture that emerges does not appear to be a very favourable one. In a nutshell, unless Australia diversifies her export structure by restructuring the economy, the potential for further expansion in the countries’ bilateral trade will be limited. This conclusion is consistent with the fact that China’s trade has shifted significantly toward the industrial countries in general as a consequence of her new foreign trade policies and practices.

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