The prospects for the Australian economy are beyond doubt beat expectations. Despite the ongoing COVID-19 pandemic, a net annual decline in Australian GDP standing at 1.1 percent, the best in the OECD. However, much of the apparent economic gain was due to a surge in prices for Australia’s biggest export, iron ore.
Over the last decade, the volume of Australian iron ore exports has decreased an increase of 200 percent, largely supported by increased demand from China. However, even though the Chinese economy has continued for Australian iron ore, other sectors have not performed well. Indeed, China has imposed tariffs on a number of Australian commodities, including barley, beef, lamb, cotton grapes, lobster, and coal.
Tariff imposition has new call to diversify the Australian economy. This is a mantra that is often chanted stated by politicians, both state and federal and from across political aisles. However, as the saying goes, actions speak louder than words. In Western Australia (WA), the state most dependent on iron ore for economic prosperity, it is clear that local governments are implementing a counterproductive strategy.
Emphasis on Trade
After Labor’s landslide victory in the WA 2021 state election, the next cabinet reshuffle saw the dismissal Asian Engagement Portfolios along with the removal of trade commissioners in Indonesia, South Korea, and India, leaving only staff involved locally to promote economic diversification that WA urgently require.
The office reshuffle now sees India represented by the Dubai office in the Middle East, creating the India-Gulf commission. South Korea will be represented by the Tokyo office in Japan, and Indonesia will now be represented by an ASEAN-level commission based in Singapore. However, the WA government has stated its intention that the commission will move to Indonesia to affirm WA’s commitment to its northern neighbor.
Nonetheless, WA Prime Minister Mark McGowan has illustrated that the state government remains committed to diversifying the WA economy. That claims from critics that the country’s economy cannot be diversified without the Asian Engagement portfolio indicates a lack of understanding about the economic complexities of WA and the Indo-Pacific region.
The premise of the prime minister raises an interesting point. Much has been said about the need to diversify WA’s resource-intensive economy. What is often overlooked, however, is the expansive nature of WA’s resource sector. Much of the discussion has centered on two main premises: China and trade. While both remain important, they do not cover the bigger picture of the complexity of the WA economy.
Excessive Emphasis in China
When it comes to WA’s trade and investment portfolio, as well as Australia’s trade relations more generally, China often dominates discussions – promoting this misconception. The allure of Chinese influence is clear. Indeed, Australia Top 30 export industries rely on one dominant customer – China. Especially, the Chinese market accounts for 56 percent WA’s export market share.
Despite China’s dominance in the WA export market, it would be a mistake to ignore the importance of WA diversification efforts based on China’s example. Taking an overall economic perspective, the dominant players in WA are still the United States and the United Kingdom.
US and UK undoubtedly are largest foreign investor in Australia, they account for 25.6 percent and 17.8 percent of Australia’s total, respectively. China on the other hand, only accounts for 2 percent of investment in Australia. This stark difference in the importance of trade vs the importance of investment reflects two different ideological frameworks that govern the US-UK and Chinese strategy.
Juxtaposition of Approaches
China’s strategy is dominated by an extraction framework. This means that China’s economic activity with Australia is directed at commodities that Australia offers to the Chinese market. Indeed, the large Chinese population coupled with the rapid development of the Chinese economy have engineered the conditions for large-scale public and private consumption of Australian resources.
At the same time, the importance of the WA resource sector to the Chinese economy cannot be underestimated. The Australian economy continues to be the fourth most leveraged economy for China in the world. What this means is that most of Australia’s exports to China tend to stay in China, more often than not ending up in fixed investment which will continue to drive China’s economy.
In contrast, the Anglo-American strategy is governed by a long-term framework. This is in large part because WA’s resource sector continues to be resilient and has been the driving force of the Australian economy for more than a century. British and American companies have recognized the opportunities WA has provided Chevron Investments in WA’s domestic gas portfolio at its Wheatstone, Gorgon and North Shelf facilities BP feasibility study into a hydrogen energy production facility in WA.
Reframing the Conversation
The resilience of the WA resource sector remains visible. Throughout the COVID-19 pandemic, the resource industry has provided WA with Australia’s only operational budget surplus. Hence, even in the uncertainty of a global pandemic, the WA resource sector continues to be the engine of driving a large part of the Australian economy. However, when discussing the importance of the resource sector, there appears to be an overemphasis on demand, mostly from China, and little consideration for the supply side, particularly from US and UK companies.
In contrast to China, America and the UK continue to see the opportunities that the WA resource sector has to offer. Thus, instead of engaging in discussion of the end game, i.e. export destinations, perhaps, there should be a shift to the nature of the capital-intensive industry and a renewed focus on investment, which America and Britain seem best to do.