AUSTRALIAN-SOUTH AFRICAN TRADE: RECENT STRUCTURE AND FUTURE PROSPECTS

by DR MALCOLM ABBOT*

South Africa and Australia have had a long, but volatile history when it comes to their bilateral trade relations. Despite strong commodity flows between the two countries in some years (especially during the 1920s and 1960s) trade between the two countries has been limited by the similar nature of the two countries’ natural resource factor endowment, and consequently mix of exports and imports. During the 1980s trade relations between the two countries were disrupted by the Australian Government’s imposition of economic sanctions on trade with South Africa. In the early 1990s South Africa has emerged from its international isolation and since its first democratic elections in April 1994, and the installation of the Government of Unity under the leadership of Nelson Mandela, there has been a renewed interest on the part of Australian companies and the Australian Government in pursuing increased trade links with South Africa. In this paper the recent trading relationship between the two countries is analysed and the prospects of future trade between them is examined. In the first section the recent structure of Australia-South African trade is briefly described. In the following section the degree to which their bilateral export structures differ from each countries’ comparative advantage in world markets is analysed. Finally the potential for future expansion in Australian-South African trade is considered, bearing in mind the economic restructuring both countries are at present undertaking.

I. Australian/South African ‘lkade in World Perspective Traditionally the prospect of substantial trade between Australia and South

Africa has been limited by the similar structure of the two countries’ mix of exports and imports. The Australian and South African economies are similar in that both are well endowed with rich mineral resources which for many years have been the mainstays of each countries’ balance of payments. Agricultural products have also been important exports from each country. On the import side the bulk of goods purchased by Australian and South Africa have been manufactured goods with the most important being machinery, transport equipment, chemicals and textiles. This has left little scope for bilateral trade between the two countries. In 1994/95 South Africa’s major trading partners were Germany, the United States, Japan and the United Kingdom in

*School of Economics, Deakin University, Burwood Highway, Burwood, 3125, Victoria, Australia. Ph: (03) 9244 6540. Fax: (03) 9244 6520.

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descending order of importance. Australia’s share of South Africa’s exports on the other hand was only 0.75% while Australia’s share of South African imports stood at only 0.65%.’ Japan is the most important destination of Australia’s exports followed by the Republic of Korea, New Zealand and the United States. On the import side the United States, Japan, Germany and United Kingdom were Australia’s leading trading partners (Composition of Trade, 1994/95, pp. 49-SO). Despite the small proportion of total Australian exports to South Africa in 1994 this has risen from a very low level (0.25%) in 199393 (Table 1); and in the South African case of exports from 0.33%. In world terms both countries are insignificant in world trade, Australia only accounting for 1.14% of world exports and South Africa 0.41% in 1994. The Australian economy itself is approximately two and a half times that of South Africa; in 1994 Australia’s Gross Domestic Product was $324 billion in US dollars compared to South Africa’s $122 billion, despite South Africa having a far larger population that Australia; 40 million compared to 18 million (International Financial Statistics Yearbook, 1994).

TABLE 1 RECENT TRENDS IN TRADE BE”EEN SOUTH AFRICA A N D AUSTRALIA

1980181 1987188 1992193 1993194 1994195

South African exports to Australia (Aust. mil. 1990 $) 435.4 151.5 150.2 188.4 193.7

Annual growth rate (%) -16.3 0 25.8 2.5 Australian exports to South Africa

(Aust. mil. 1990 $) 522.1 235.1 262.2 246.9 361.2 Annual growth rate (YO) -12.1 2.9 -5.8 46.3

Aust.’s share of SA export % 0.50 0.74 0.25 0.62 0.75 SA’s share of Aust. exports % 0.77 0.43 0.33 0.78 0.65

~~

Source: ABS, International Merchandise Trade Australia, Catalogue No. 5422.0. IMF, International Financial Statistics Yearbook, 1994.

After strong growth in trade between the two countries during the 1960s this trade between them fell off during the 1970s and 1 9 8 0 ~ . ~ The lack of competitiveness of Australian manufacturing in international markets, plus the slow growth of the South African economy during the 1980s meant that Australian exports to South Africa fell to very low levels by 1985. In tandem with other nations in 1985, a range of restrictions was placed by the Australian Government on trade between the two countries. South African exports to Australia continued to grow during the 1980s, despite these restrictions, assisted by the substantial depreciation of the south African currency compared to the Australian dollar (Figure 2). After 1987 South African exports to Australia also declined and Australian-South African trade reached its lowest

~~ ~~

1. Table 1. In this section all figures are from the IMF, Direction of Trade Statistics Yearbook, 1994. 2. For accounts of AustralianiSouth African trade see R. Johnstone and F! Richardson (1986); J .

Fitzgerald (1984) and D. Gadiel, (1974).

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FIGURE 1 VALUE OF AUSTRALIAN-SOUTH AFRICAN W E , $US, CONSTANT I990 $

SoumAfrlcanEqorfstoAustrtllla Source: IYF, Dlnctlon of Trade.

1.2

1

0.8

0.6

0.4

0.2

0

FIGURE 2

AUSTRALLAN $ SOUTH AFRICA-AUSTRALIAN EXCHANGE RATE, VALUE OF THE RAND IN

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point in 1989/90 after which it has recovered. Gradually with the lifting of trade sanctions and the revival of the South Africa have recovered.

Tables 2 and 3 provide details about the value and composition of recent bilateral trade flows between the two countries for a selection of SITC 2 digit industries for 1994/95. The most important Australian export commodity to South Africa is meat and meat preparations (SITC Code 01) representing 19.5% of Australia merchandise exports to South Africa in 1994/95. The bulk of this trade is meat and offal (SITC Code 012) worth $87,321,000 and bovine meat (01 1) $6,489,000. The second largest export commodity is non-ferrous metals (68) at 12.2% of exports; which includes aluminium (684) $49,424,000 and lead (+96) $7,869,000. Other important exports include leather products, power generating machinery and equipment and general industrial machinery and equipment. Table 3 provides data on SITC-2 digit Australian merchandise imports from South Africa in 1994/5. From Table 3 we can see that South Africa is an important source of several commodity categories such as fertilisers (56) and paper and paper board (64), both making up 12.9% of imports from that country and 7% of total imports to Australia of these products. Other important imports include iron and steel (mostly pig iron $17,333,000 and primary finished steel $9,459,000) road vehicles, textile yarns and fabrics.

Much of the trade between the two countries is in agriculture and resource intensive goods such as meat, hides, oils and fats, leather materials, paper products, fertilisers, non-ferrous metals and iron and steel. This reflects both countries comparative advantage in resource based industries and trade

TABLE 2 M l O R AUS7RALZAN MERCHANDISE EXPORTS TO SOUTH AFRICA, 1994/95

SITC 2-Digit Code -

01 21 41 54 57 61

68 71

72

74

76

78

($A mil.] % of total % of total Australian Australian exports to exports of this

South Africa commodity

Meat and meat preparations Hides, skins and furskins, raw Animal oils and fats Medicinal and pharmaceutical products Plastics in primary forms Leather, leather manufactures and dressed fashions Non-ferrous metals Power generating machinery and equipment Machinery specialised for particular industries General industrial machinery and equipment Telecommunications and sound recording and reproducing apparatus and equipment Road vehicles (including air cushion vehicles]

94.1 12.2 44.4 10.9 14.1

42.2 58.8

19.6

16.7

18.1

14.5

18.4

19.5 2.5 9.2 2.3 2.9

8.8 12.2

4.1

3.5

3.8

3.0

3.8

2.6 2.5

20.2 1.4 9.8

8.2 1.3

2.7

1.8

1.9

2.7

1.7

Source: ABS, International Mechanise 7kade Australia, Catalogue No. 5422.0.

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TABLE 3 MAIOR AUSTRALIAN MERCHANDISE EXPORTS FROM SOUTH AFRICA, 1994195

($A mil.) % of total % of total Australian Australian exports to exports of this

SITC 2-Digit Code South Africa commodity

03 Fish, crustaceans, molluscs, etc. 51 Organic chemicals 52 Inorganic chemicals 53 Dyeing, tanning and colouring materials 56 Fertilisers (excluding crude) 64 Paper, paperboard and articles and paper

pulp of paper or paperboard 65 Textile yarn fabrics, made up articles,

nes and related products 67 Iron and steel 68 Non-ferrous metals 69 Manufactures of metals, nes 78 Road vehicles (including air cushion

89 Miscellaneous manufactured articles nes vehicles)

12.4 7.4 6.9 9.6

37.4

31.3

20.5 34.9 17.0 12.0

18.9 7.8

4.3 2.5 2.4 3.3

12.9

12.9

7.0 12.0

5.8 4.1

6.5 2.7

2.0 0.4 1.2 2.6 7.0

7.0

0.8 2.7 2.5 0.6

0.2 0.2

Source: ABS, International Mechanise nade Australia, Catalogue No. 5422.0.

between the two countries for these products can be said to be based on the Hechsher-Ohlin model in international trade which emphasises the gains from trading products which embody different factor proportions. Intra-industry trade - that is the two way trade of similar, but differentiated goods in the same product group - is not an important feature of Australia/South African trade. Indeed estimates of intra-industry trade for both countries are lower than for most other countries (Grubel and Lloyd, 1975).

11. Aspects of International Competitiveness Insight into the international competitiveness of countries like South Africa

and Australia can be obtained by considering the revealed comparative advantage index (RCAI) for both countries.3 The RCAI is determined by calculating the share of a particularly commodity group in an economy’s total exports and then dividing by that commodity group’s share of world export^.^ Provided the country’s exports 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 RCAI has been calculated for South Africa and Australia’s SITC 2-digit

3. The RCAI was introduced by Balassa (1965) and permits us to measure a country’s export specialisation on a world scale.

4. The RCAI can be formalised as follows RCAI = (Xc/X)(Xwcixw) where Xc is the country’s exports of the commodity c, X is the country’s total exports, Xwc is the world experts of commodity c, and Xw is the world’s total experts.

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industries which reveal that Australia has a strong comparative advantage in industries producing in most manufactured products.

Australia has a comparative advantage in producing food and live animals, crude materials, and mineral fuels. Much of Australia’s exports are therefore concentrated in such products as meat, cereals, vegetables, fruits, metal ores and scrap, coal, coke, non-ferrous metals and gold. South Africa has a similar comparative advantage in crude materials and basic manufactured goods such as minerals, iron and steel, non-ferrous metals, paper products and of course gold and diamonds. Given the strong competitiveness of both countries in agricultural commodities, basic metals and crude materials the scope for trade between the two counties has always been limited. However going beyond the single digit categories of commodities there does seem some scope for further trade in basic commodities. South Africa, although possessing a well developed agricultural sector, still imports significant quantities of particular agricultural products such as meat, oils and fats and from time to time wheat and flour. Australia on the other hand imports fish products, and crude manufactured products such as non-ferrous metals (especially silver, platinum and copper) and paper, paperboard and fertilisers. Despite the similar concentration of both economies on agricultural and mining products there is still some scope for trade in primary products between the two countries. If both countries move to further reduce protection then the export trade in products such as meat, fruits, sea food, wheat and dairy products between the two countries should show modest growth. The same is true for basic manufactured products such as pig iron, steel and non-ferrous metals where there is some scope for developing trade in the various metals and steel products that each countries’ mining and steel industries specialises in.

111. Future Prospects The extent of trade between South Africa and Australia has always been

restricted by the similar nature of the two countries’ export mix. Although it seems unlikely that the two countries in future will become major trading

TABLE 4 AUSTRALLA AND SOUTH AFRICA’S REVEALED COMPARATIVE ADVANTAGE

SITC 1 Digit

0 Food and live animals 1 Beverages and tobacco 2 Crude Materials, inedible, except fuels 3 Mineral fuels, lubricants and related materials 4 Animal and vegetable oils, fats and waxes 5 Chemical and related products, nes 6 Manufactured goods classified chiefly by material 7 Machinery and transport equipment 8 Miscellaneous manufactured articles 9 Commodities and transactions not classified elsewhere

South Africa

0.82 0.54 2.12 0.71 0.50 0.60 2.10 0.12 0.12

13.10

Australia

2.15 0.46 2.38 2.14 0.50 0.29 0.91 0.20 0.47 8.25

Source: United Nations, International Trade Statistics, 1993, New York, 1995. The high index for category number 9 is caused by the listing of gold exports under this category.

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TABLE 5 R E V W E D COMPARATNE ALIVANTAGE FOR SELECT COMMODI’IIES,

AUSTRALlA A N D SOUTH AFRICA South Africa Australia

03 51 52 53 56 64 65 67 68 69

89 78

~

Fish, crustaceans, molluscs, etc. Organic chemicals Inorganic chemicals Dying, tanning and colouring Fertilisers (excl. crude) Paper, paperboard etc. Textile yarn, fabrics, nes Iron and steel Non-ferrous metals Manufactures of metals nes Road vehicles Miscellaneous manufactures

0.73 0.29 0.41 0.44 1.13 0.77 0.36 3.07 2.06 0.47 0.29 0.12

01 21 41 54 57 61 68 71 72 74 76 78 -

Meat and meat preparations Hides, skins and furskins raw Animal oils and fats Medical and pharmaceutical Plastics in primary form Leather, leather manufactures Non-ferrous metals Power generating machinery Machinery specialised General industrial machinery Telecommunications equipment Road vehicles

6.50 4.00 0.60 0.50 1.17 1.25 3.50 0.32 0.26 0.26 0.17 0.14

~ - Source: United Nations, International %de Statistics, 1993, New York 1995. United Nations,

Foreign Trade Statistics of Asia and the Pacific 1988/1992. New York 1994, United Nations, Foreign nude Statistics of Africa, New York.

partners there certainly exists scope for this trade to expand. Whether it does so depend upon a number of factors. The first is the absolute level of real economic growth in the two countries. Growth of the Australian economy is steady and Australia’s trade policy has moved to more open stance during the 1980s and therefore constitutes a growing market for South African exports. On the other hand the stagnant nature of the South African market during the 1980s has constituted a major deterrent to Australian exporters. The growth rate of the South African economy declined from an average of 5% per annum in the early 1970s to 0% between 1988 and 1993. The Trade Policy Review of the general Agreement on Tariffs and Trade attributed this slow down to both internal and external factors ( G A n , Review, 1993). Domestic reasons include the anti-competitive stance of the apartheid regime in terms of import replacement policies and the restrictions place on the movement of black labour. A shortage of skilled, managerial of professional expertise arose because of the restrictions placed on black education and jobs. The South African Government also sought to establish certain strategic industries to insulate the economy against economic sanctions, most of which had little economic justification. Externally the prices of gold (South Africa’s major export) and other minerals have declined plus the effects of both financial and goods sanctions have helped to reduce economic activity. Slow productivity growth and declining international competitiveness has been attributed both to the factor market distortions induced by the country’s trade policies and to South Africa’s isolation which has contributed to a limiting of both domestic and international competition and a raising of price of imported technology (GAW, Review, 1993, pp. 11). South Africa today, therefore is going through a period of considerable economic restructuring. If the South African economy can be liberalised and begin to grow at a steady rate then Australian exports to South Africa will naturally increase. It should be borne in mind however, that

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estimates of future growth prospects tend to be around a modest three per cent in real GDP per annum and that the South African economy is a relatively small one.

The other major factor is the degree of openness that is allowed to exist in the structure of the two respective economies. Both countries in the past have pursued import replacement policies which have helped to inhibit trade between the two countries. Tariffs and other barriers have helped to deter imports in general, but more importantly import replacement policies have worked to prevent the establishment in both countries of export oriented manufacturing sectors. As both countries are mostly importers of manufactured goods and industrial equipment neither country has been able to export in significant amounts the goods that each would like to import. In more recent years both countries have generally recognised the need to promote the establishment of an export orientated manufacturing sector. Since the mid 1980s the Australian Government has promoted a more open economy by floating the currency, deregulating financial markets, and removing tariffs, remaining import quotas and producer subsidies (GATT, 1990). This only means that the Australian market is more receptive to the import of goods from countries like South Africa but also that increasingly Australian manufacturing is being forced to turn to export markets. The early 1990s saw a considerable increase in Australian manufactured exports, rising from 26.5% of merchandise exports in 1990/1 (16.8% elaborately transformed goods) to 33.4% in 1994/95 (22.5% elaborately transformed) (Composition of Trade, 1994-95, pp. 19) There have been some suggestions that Australian intra-industry trade in manufactures is growing (Aderson, 1995, pp. 34). The increasing capacity of Australian industry to export would certainly mean that exports to South Africa will rise. On the South African side a more erratic approach to trade policy has been made. The dismantling of import controls which commenced during the 1970s was halted in the early 1980s and only in recent times has recommenced. In March 1995 the two tier currency system, which had operated since 1979, was abolished and the Trade and Industry Minister announced that the government intended reducing tariffs and subsidies to industry by a larger amount and at a faster rate than it was obliged to under an agreement with GATT.

The degree to which Australian and South African bilateral trade in the future grows will be determined largely by the extent to which this process continues. A readjustment of South African manufacturing toward exporting will certainly mean greater trade with Australia, but the opening up of the South African economy to foreign investment, trade and increase in internal competition will also increase the prospect of Australian exports to South Africa. In the South African case manufacturing exports make up 36% of exports compared to 21% in 1989. although like Australia, much of the manufacturing exports is in the form of simply transformed manufactures such as iron and steel and non-ferrous metals.

Traditionally Australian/South African trade has been limited to trade in those commodities in which each country has a comparative advantage. As these commodities were resource based the scope for trade between the two

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countries was limited. During the 1960s the nature of this trade changed, with Australia becoming a significant exporter of manufactured goods to South Africa; especially motor vehicles and components. The decline in manufacturing exports to South Africa from the peak levels of the early 1970s (Figure 1) took place because of the relative competitiveness of Australian manufacturing in the 1970s and 1980s. Trade sanctions helped to reduce Australian exports further after 1985. South African exports to Australia remained steady through the late 1970s and early 1980s but also began to decline after 1987. Today Australian trade authorities envisage increasing exports of manufactured goods to South Africa, especially electrical machinery, building and construction materials, hospital and medical equipment, food processing machinery and technology, education and training services, communications equipment, aluminium alloys and mining equipment (Overseas Trading September 1995, Bol47/9: 8-9). From Table 4 and 5 it does not appear that Australia particularly has a comparative advantage in the production of these types of goods. Where Australia is able to achieve an increase in trade with South Africa will depend upon the general ability of Australian manufacturing to become export orientated and compete successfully in international markets. In the South African case the bulk of goods exported to Australia today are manufactured goods but tend to be less value added manufactures such as iron and steel, non-ferrous metals, manufactures of metals and chemical products (especially fertilisers). If South Africa is going to be able to export greater volumes of goods to Australia then presumably its manufacturing sector will have be become more export orientated and produce a more sophisticated range of manufactured commodities for export.

In terms of flows of investment between the two countries one would think that given the similar nature of both countries’ export mixes there would be some scope for direct investment. In fact the levels of direct investment have so far been very limited. In the years 1992-4 Australian investment in South Africa was only $78 million, barely 0.0% of the total Australian investment abroad. South African mining companies have looked beyond their own country for investment possibilities (Balance of Payments and Investment). In particular there has been a growing interest shown by the South African mining houses in Australian coal and gold companies. The large South African firms are already heavily invested in South African mining and are keen to diversify their holdings. Australia as a resource rich nation with a stable political climate is seen as a favourable destination.

IV Conclusion The scope for trade between South Africa and Australia has always been

limited by the similar nature of their respective export mixes. Nonetheless a limited trade has been conducted between the two countries although this has been disrupted at times by external events such as economic sanctions imposed on South Africa during the 1980s. The main restraint of trade between them however has been the inability of both countries to generate a significant export

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growth of manufactured goods. What manufacturing export growth that has occurred has tended to concentrate mainly in resource intensive, basic metals, items which neither country wishes to import. The high costs and inefficiencies generated by both countries import-substitution policies have worked against their manufacturing sectors achieving any degree of competitiveness in international markets. As both countries today are turning to more outward looking export orientated policies for their respective manufacturing sectors it would be expected that the two countries should increasingly sell to some increased scope for intra-industry trade in differentiated products may arise.

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Australia, Australian Bureau of Statistics, Balance of Payments and International Investment

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Australia, Australian Bureau of Statistics, International Trade Australia, Catalogue Number 5461.0. Australia (1995), Department of Foreign Affairs and Trade, Composition of Trade, Australia. Australia (1995), Department of Foreign Affairs and Trade, Economic Review: South Afnca. Australia (199S), Department of Foreign Affairs and Trade, Overseas Trading. Balassa, B. (196S), “Trade Liberalisation and ‘Revealed Comparative Advantage”’, Manchester

School of Economic and Social Studies, vol. 33, no. 2, May, 99-123. Fitzgerald, J. (1984), Trade and Investment Between Australia and South Af.ica, Canberra. Gadiel, D. (1974), “Australia’s Commercial Policy and South Africa’s Economic Isolation”,

General Agreement on Tariffs and Trade (1990), Trade Policy Review: Australia. Geneva. General Agreement of Tariffs and Trade (1993), Trade Policy Review: The Republic of South Afnca,

Grubel, H.G. and Lloyd, P.J. (1975), Intra-Industiy Trade, London, MacMillan. Johnstone, R. and Richardson, P. (1986), Australia’s South Afncan Connection: A Case for Economic

Sanctions Against Apartheid, Australian Council for Overseas Aid, Canberra. International Monetary Fund (19Y5), International Financiaf Statistics Yearbook, 1994. International Monetary Fund (1999, Direction of Trade Sfatistics Yearbook, 1994. South Africa, Quarterly Bulletin of the South Afncan Reserve Bank, various. United Nations (1995), International Trade Statistics 1993, New York. United Nations (1994). Foreign Trade Statistics ofAsia and the Pacific 1988-1992, New York. United Nations (1994), Foreign Trade Statistics ofAfrica, New York. United Nations (1995), Commodity Trade Statistics, 1993, New York.

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