Its official: we are ‘hugging the panda’ again. China is again our number one trading partner in the new rankings released by the Australian Bureau of Statistics (ABS). In the financial year 2008-09, China accounted for $83 billion or 14.7 per cent of our total trade in goods and services, with Japan in second place at $75.3 billion (or 13.4 per cent of total trade). China was also our top source of imports, whilst Japan remains Australia’s top export destination. In fact, four out of our five top export destinations are in Asia. They are Japan, China, Korea and India, followed by the United States. The ‘Big 4’ account for just under $140 billion or nearly half of our total exports.

It really is the Asia-Pacific century, certainly for Australia, if not for the whole world. The recent Global Financial Crisis (GFC), left Asia relatively unscathed compared to the US and Europe and even some of the other emerging economies such as Brazil and some of the Middle East markets faired relatively well. The emerging market story – and the performance of the economies outside the G8 – could well shape the new global economic order. We’ve already seen the rise in prominence with the G20. It could well be the shape of things to come in terms of global governance as the Bretton Woods institutions come in for some re-engineering to better suit the new global balance of economic power.

But in the case of Australia, have we got too many eggs in the China basket? According to recent public statements from the Reserve Bank of Australia (RBA) Governor Glenn Stevens, we’ll have to watch the relationship carefully, not just in terms of China but also India and the whole Asia-Pacific region. It will be a matter of managing the next resources boom carefully, and ensuring that we use the boost in national income from the favourable terms of trade wisely, and watch carefully for the emergence of ‘bottlenecks’ or other ‘capacity constraints’ on the supply side.

The Airport Economist hit the streets of Ho Chi Minh City (Saigon) recently and tried the Saigon Taxi driver test. You can mention a plethora of international household names and have to really work through them in broken Vietnamese and broken English to get where you want to go on Saigon’s busy streets. But there’s one name every taxi drivers knows in Saigon: “ARRR – MITT”, that is R.M.I.T. – The Royal Melbourne Institute of Technology University – which is making quite a splash since setting up in South Saigon in 2001.

RMIT is an example of Australia’s new export push into Vietnam in terms of education. Vietnam has a young population, has a high propensity to spend income on education and its urban middle class is expanding. That’s also why Australia financial services companies are also doing well in Vietnam – particularly the Commonwealth Bank and ANZ.

Of course, outside the bright lights of Saigon and the capital Hanoi, much of Vietnam is still rural an d poor and requires infrastructure investment. According to Ray Mallon, an Australian economist based in Hanoi: “If Vietnam just concentrates on Hanoi and Ho Chi Minh City for all its development it will face major infrastructure hurdles. But if it can divert some of its resources to building coastal highways and developing the regional growth centres then it will avoid a lot of pitfalls that have affected other South East Asian countries that in part, contributed to their financial troubles in 1997-98.”

Find out more about Australian exporters and the education revolution in Vietnam

Latin America is no longer the place it was in the 1970s and 1980s. Economic reforms and political reforms have put it in a stronger position to absorb the credit crunch. However, many Latin America economies are commodity-driven economies, and like Australia, will feel the affects of lower prices for their exports, lower terms of trade and possible impact on their currencies. Financial institutions are stronger in Latin America than they have been historically, but with Argentina the exception with its financial institutional weakness.

The IMF has downgraded its forecast for Latin America, but it is still expected to regionally achieve an economic growth rate of 4.6 per cent this year and 3.1 next year. Peru leads the pack and is expected to grow by 9.2 per cent this year and 7 per cent next year, Argentina 6.5 and 3.6, Brazil 5.2 and 3.5, Chile 4.5 and 3.8, and Mexico (with its dependence on the USA market) 2.1 and 1.8. Colombia is an emerging economy but still expects to grow by 4 this year and 3.5 next year. Inflation is also a concern in the region with the IMF upgrading its forecasts from the early 5s to high to mid 7s in 2008 and 2009.

How will the crisis affect Australian-Latin American relations?

In some ways, we’re both in the same camp as commodity-based economies forging trade links with Asia, Europe and the USA. There was a time when Australia and Latin America were considered to be substitutes but now we are complements. In some ways, Australia has been a model economy for many Latin American economies – particularly Chile to emulate. In addition, many of the similar strengths in areas like mining, services to mining, agribusiness, and viticulture have provided opportunities for collaboration and joint ventures.

What opportunities will emerge in the Latin American landscape for Australian businesses?

Despite the global downturn, if we take a quick scan around the region, we can see some good opportunities for Australian exporters and investors.

First there’s the big ‘Latin 4’ to consider – Brazil, Mexico, Argentina and Chile. Historically, the big 4 have produced more than 80 per cent of Latin American gross domestic product and 90 per cent of Australia’s trade with Latin America.

In Brazil, Australia companies are involved heavily in mining, and resources related-railway infrastructure, agribusiness, along with education and tourism. Brazil has one of the world’s largest advanced manufacturing sectors and global supply chain opportunities that are attracting Australian component suppliers (such as Embrauer and the GM Flex Fuel Engine). Brazil’s large tract of arable land provides great potential for Australia given our comparative advantage in agribusiness, extractive industries and infrastructure. Climate change will bring its challenges to Brazil and its fledging ethanol industry and Australia – particularly the state of Queensland, led by its America’s Trade Commissioner and former Premier Peter Beattie – is playing an active role. The ethanol industry is well established in Brazil and the country is leading the world in terms of bio fuel technology that has naturally attracted interest from Queensland given the importance of sugar cane in the sunshine state. However the ethanol industry provides many economic and environmental opportunities and challenges over and above opportunities for sugar cane exports.

Secondly, in Mexico, mining technology and consumers goods and services to Mexico’s growing middle class. However, Mexico with its close trade links to the USA will be the most impacted by the sub-prime impact north of the border. As with much of the region, energy security is important in Mexico which is providing opportunities for both coal and other non-traditional clean energy sources.

Thirdly, Chile is continuing to play its role as the unofficial ‘gateway’ to Latin America for Australian businesses – over 60 Aussie companies now are based in Santiago. In many ways Chile is the South American ‘Jaguar’ to Asia’s Tigers!

Fourthly, Argentina, the last of the big 4 is having its financial problems yet again. However, Australian businesses in niche areas are still making headway such as in agribusiness in the Pampas with animal genetics (Ar-gene-tina) and viticulture in the vineyards of Mendoza (sometimes known as the ‘Barossa of Argentina’).

In addition, some of the adjoining economies in the Andean states are also emerging. As we saw at the APEC Summit in Lima, Peru is becoming a ‘mini-Chile’ in terms of mining and investment. In addition, agribusiness (particularly dairy) education and tourism are growing areas too.

Finally, Austrade Americas Regional Director Grame Barty likes to extend the Latin 4 to the Latin 6 to include both Peru and Colombia. Barty sees Colombia becoming a rising start in mining, agricultural science and education as it aims to shed some poor nation perceptions of its past and Peter Beattie has also been bullish about Colombia’s potential.

Conclusion

Australian exporters successfully dealt with the Asian financial crisis of 1997-99 and the dot.com crash of 2001 due to their own endurance, innovation and ability to forge lasting business relationships and the flexibility of the exchange rate to take on the burden of adjustment to insulate the Australian economy. The Latin American economies have withstood endless hardships and instability in the past but due to economic reforms of the 1990s, have fared better. Whilst with the credit crunch, we are heading into unchartered waters but the hard work of economic reform, our stronger trade links with the emerging economies and the benefit of experience with past crises, means Australian and Latin America can have some confidence we can both ride out the storm.

I welcome your feedback and also invite Australian exporters active in the region to share their experiences.

Tim Harcourt, Chief Economist
www.austrade.gov.au/economistscorner

2008 has been the year of living dangerously for the global economy. In fact, the extent of how much has changed on the global economic front can be bookmarked by two road shows I participated in with two eminent American economists over the past 12 months.

The first road show was with Stephen Roach of Morgan Stanley Asia in December 2007. At that stage we had just heard the beginning on the sub-prime story (I first heard about it at the OECD from Dr Adrian Blundell-Wignall a well known Australian economist) and the thesis that Roach was tackling was ‘Asian Decoupling’ – the view that East Asia (and Australia) could somehow escape from the downturn in the US and possibly Europe. Roach believed that if you believe de-coupling then you can’t subscribe to the theory of globalisation. He predicted that the US was headed for a crisis and that Asia – including China – would not escape.

Moving on 10 months later, the world has moved on at a rapid rate. The second roadshow was with another eminent US economist David Hale in October, 2008. A Chicago-based economist, David Hale was in Australia as part of the Australian Export Awards, in his capacity as an economic adviser to the Commonwealth Bank. By October, we all knew about sub-prime, we’d seen the collapse of Lehman brothers and very different bailouts on both sides of the Atlantic. Whilst Hale did not subscribe to Asian de-coupling he did believe that East Asia was going to survive the global economic slowdown in better shape than the US and Europe and some emerging economies such as Russia.

Accordingly, all the major private forecasters and the IMF have dramatically revised their forecasts for the global economy. The IMF described the world economy as now entering “a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s.” After four years plus 5 per cent growth rates – with the global economy in its best shape in 30 years – the IMF now expects the world economy to grow at 3 per cent in 2009, with the advanced economies at 0.5 per cent and the emerging and developing economies growing at 6.1 per cent. Of course, the forecasts are greatly varied across regions and subject to major local factors as well as the global head winds affecting the whole world community.

In the coming weeks and months I will take a random walk around the global economy to see how different regional markets are fairing beginning with the United States.

However, the main purpose of this blog is for us all to gain a better understanding of what Australian exporters are experiencing and how they are responding.

As an economist, I find talking to exporters and investors really helps me to understand the dynamics of global business in the world economy. We know from our survey data and from talking with exporters that credit has been tight and the volatility of the Australian dollar has been affecting their prospects. So, if you’d like to share your insights and experiences with us, please feel free to send us your views by posting a comment.

Tim Harcourt, Chief Economist
www.austrade.gov.au/economistscorner