Patterns of Trade Down Under

Patterns of Trade Down Under

Australia is in the enviable position of having posted 21 straight years of positive growth.

Although distant geographically, Australia is in many ways a close cousin of Canada – presenting many reasons why Canadian exporters should look Down Under to expand their business opportunities.

For starters, our countries share a common language and institutions, both hailing from our joint British heritage. Geographically, we both have to deal with vast spaces, low population densities and extreme temperatures.

Our countries also have elevated living standards and highly educated populations, offering a wide spectrum of skills and innovative mentalities.

From the Boer Wars to the recent campaign in Afghanistan, we have always been military and diplomatic allies; today cooperation ranges from cultural and academic exchanges to consular arrangements. In trade patterns, both Australia and Canada have developed large and diversified commodity export sectors.

When it comes to business, dealing with foreign customers that speak the same language and use similar business practices is a critical advantage for Canadian companies interested in expanding Down Under. Moreover, our bilateral trade with Australia is largely free of legal challenges (except for agricultural products, which account for only 1.4 per cent of this trade).

A second reason for looking to Australia is its robust economy, which has proven to be very resilient to the ups and downs of the global business cycle. It is the only country in the Organisation for Economic Co-operation and Development (OECD) in the enviable position of having posted 21 straight years of positive growth. This impressive feat is due to sound economic policies, high commodity prices and Australia’s proximity to booming Asia.

Export Performance (index 2000=100)

In 2003, Australia’s pace of exports started surpassing that of Canada, owing to its strong trade ties with Asia.

Door to Asia opens wider

This leads to a third key reason for interest in Australia – it is a wide-open gateway to Asia. The Australian economy is intimately tied to that of Asia, the world’s fastest growing regional economy. This proximity is one of the main reasons for its economic success.

It wasn’t always this way. Since its founding in the late 1700s, Australia saw its foreign trade dominated by bilateral exchanges with the UK. As the UK became more integrated in the European Economic Community (EEC) in the mid-70s, Australia began to redirect its focus towards Japan and Asia.

Today, China is Australia’s main trading partner and Asia its main trading region. Australian firms have solid experience and an established reputation in the Asia-Pacific region that Canadian companies can leverage, by partnering with Australian firms or becoming part of their supply chains.

Both Canada and Australia are founding members of the Asia-Pacific Economic Cooperation (APEC) forum, and are in negotiations for the Trans-Pacific Partnership (TPP) free trade agreement, which also involves 10 other countries.

The aim of these regional initiatives is to enhance trade and investment and dismantle trade barriers among the participants. The TPP is of particular interest as it will allow Canada to access the Asia-Pacific market more easily – and having a trusted Australian partner could prove to be a winning strategy.

Perhaps the most obvious reason to look Down Under is the structure of Australia’s economy. Thanks to its natural resources endowment, the commodity sector dominates the country’s industrial make-up.

The latest numbers from the Australian Department of Foreign Affairs show that the three largest exporting categories in 2012 were metals and ores (about a third of total merchandise exports), energy (chiefly coal, but also natural gas and crude petroleum, accounting for more than 25 per cent), and gold (six per cent).

These are all sectors that present tremendous opportunities for exporters in the extractive services and related equipment industries, in which Canada has unique expertise.

“To help create new export opportunities for Canadian companies in the oil and gas sector, EDC has established financing relationships with a number of project sponsors in the Australian liquefied natural gas (LNG) sector, including Santos, Origin Energy (APLNG project) and British Gas (QGC project),” says Rob Simmons, EDC’s Chief Representative for Asia.

“EDC has also been actively supporting Canadian investment in and development of Australian infrastructure, including ports, rail and social infrastructure.”

Looking forward, prospects are similarly bright for Canadian agricultural machinery as Australia responds to the growing demand from developing Asia for safe and secure food supplies.

Other Canadian companies, operating in non-traditional sectors, could also face good growth prospects in Australia. For instance, Canadian cleantech companies working in the extractive, water treatment and alternative energy sectors could export their expertise to Australia.

Similarly, consulting firms with experience in corporate social responsibility, related to global resource development, could find opportunities with Australia’s extractive companies.

Claudia Verno is a senior economist at EDC, with a focus on country, sector and macro-economic analysis and forecasting.

How Geography Impacts Trade

Like Australia, Canada’s trade patterns are heavily affected by geography. Compare British Columbia and Ontario’s export performance over the past 10 years, and you see that market orientation played a key role — despite differences in industrial specialization. For example, Ontario’s exports are more intensive in capital equipment and motor vehicles, while B.C. specializes in forestry, energy and metals.

Between 2003 and 2012, Ontario exports declined by nearly three per cent, while B.C.’s rose some 12 per cent.

Arguably a combination of booming commodity prices played in favour of resource-intensive BC, while declining U.S. economic growth adversely affected capital-goods intensive Ontario. However, the U.S. housing market, a big generator of demand for B.C. forestry products, also collapsed with the bursting of the U.S. housing bubble.

Assuming both those effects put the two provinces’ trade in roughly similar difficulties, it is BC’s increasing orientation towards Asia that helps explain the stark difference in the provincial trade performances.

Indeed, Asia was the destination of about 40 per cent of BC’s export in 2012, up from 21 per cent in 2003. By comparison, Ontario’s share of Asia-bound exports marginally increased over the period. Similarly, the provincial share of exports to the U.S. and Europe went from 70 per cent to just below 50 per cent in B.C. but remained relatively stable at 88 per cent in Ontario.

The bottom line: exposure to Asia made the big difference.

Real Effective* Foreign Exchange Rate: Australia vs. Canada

Real Effective Exchange Rate (Index Jan 1994 = 100.0)

The Aussie dollar has been effectively higher than our loonie largely because its exports are even more commodity-intensive than Canada’s and its Asian trading partners have fixed or quasi-fixed exchange rates.

*Real effective exchange rates are calculated against the currencies of a country’s main trading partners.

Categories Asia & Pacific, Mining & Energy

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