Kevin Rudd (Griffith, Australian Labor Party, Shadow Minister for Foreign Affairs and Trade and International Security) Share this | Hansard source

I am confident that the debate on this legislation will be as diverting and as engaging as the most recent exchanges we have had on the matters just now. I rise to speak on the Australian Trade Commission Legislation Amendment Bill 2006. This is an important bill because it brings focus to bear on Australia’s trade performance—a trade performance which, over the last decade, and half-decade in particular, has in fact been exceptionally poor. Despite the record terms of trade that Australia now enjoys, the government has not yet found a way to reverse the longstanding trend of imports outstripping exports and the fact that more money is being pulled out of Australia than the Australian government, consumers and business are able to bring into Australia.

This trend is having a major impact. It is having a major impact on our current account deficit; it is having a major impact, therefore, on our half-trillion-dollar foreign debt. Most disturbingly, that in turn has the capacity to drive up interest rates. That is why in considering this bill the parliament should also address exactly how Australia’s export performance has deteriorated over the last decade; Australia’s current account deficit and its spiralling trend; Australia’s record foreign debt; the risk to interest rates of our continued external imbalances; the government’s narrowcast approach to our export regime through its focus exclusively on resources; the government’s neglect of other key export sectors, specifically with regard to manufacturing; and the need for a new export strategy for Australia. This country and its economy desperately need such a strategy because unless we correct our most recent performance on exports we cannot see a way forward in bringing this country’s current account deficit under control.

Current account deficits do count. Current account deficits have not simply fallen off the radar screen when it comes to the attitude of international financial markets. Current account deficits become critical evaluation tools by which markets ultimately judge the adequacy of macro-economic balances within any economy, including this one. It is important that this country and this government have an effective strategy for dealing with the current account deficit. You cannot simply pretend that a current account deficit does not exist. You cannot simply pretend that a current account deficit no longer matters to markets. You cannot simply wish a current account deficit away. The laws of economic gravity have not simply been suspended, and the rule of thumb which has prevailed over many economic cycles in recent decades is that when a country’s current account deficit starts to head north of five per cent of gross domestic product—let alone six per cent of gross domestic product and beyond—international financial markets begin to pay close attention.

The cumulative result of the Howard government’s export performance over the past 10 years has been disastrous. When it comes to export performance, the cumulative result of Minister Vaile’s performance over the last six years that he has held the job of Minister for Trade has been doubly disastrous. In fact, there are not many ways in which you could interpret the trade minister’s performance in a positive light. You do not have to look much further than the Australian Bureau of Statistics to demonstrate this fact. According to the ABS, Australia’s monthly trade deficit for March 2006 was $1.5 billion. This was the 48th consecutive monthly trade deficit, meaning that for more than four years the value of Australia’s exports has been exceeded by the value of our imports. In November 2004 Australia’s trade deficit of $2.6 billion was the highest on record—a record we have come close to equalling on a number of occasions since, most recently in February this year, when the monthly trade deficit reached $2.4 billion. Australia’s annual trade deficit for the calendar year 2005 was close to $20 billion, and these record trade deficits of recent years have contributed directly to our record current account deficits.

In the federal budget released a fortnight ago the government forecast export growth of seven per cent in 2006-07. I hope—we as an opposition hope—that this is achieved. But, given the government’s forecasting record, we do not hold out a great deal of hope. It is important to place clearly on the record the gap which has existed in recent years between the government’s forecast at budget time of what export growth is likely to be and the government’s actual performance, come year’s end, as to what that growth was. In 2001 the government forecast five per cent export growth when in fact exports fell in that year by 0.8 per cent. In 2002 the forecast was for growth of six per cent when in fact exports fell, again, by 0.8 per cent. In 2003 again the forecast was for export growth of six per cent, while exports grew by barely more than one per cent. In 2004 we had a heroic forecast of eight per cent export growth, whereas exports in fact grew by only 2.5 per cent. In 2005 there was a further heroic forecast of seven per cent growth when in fact exports grew by barely two per cent.

Over the past five years, therefore, the government has forecast growth in exports of an average of 5.5 percentage points each year. The government’s forecast of export growth has grossly exceeded that which has been delivered by an average factor of 5.5 percentage points every year. Combined with that, Australia has recorded an annual trade deficit every year since the year 2000, with the single exception of 2001. The export growth over this five-year period is recorded at 2.6 per cent, whereas import growth over this five-year period is recorded at 5.3 per cent. Obviously this performance is bad for Australia’s export regime, but it is having a broader effect on the Australian economy as well.

Continued failure to achieve substantial export growth is having a direct impact on Australia’s current account. Australia’s current account deficit in 2005 was $55 billion or six per cent of GDP, and we recorded a quarterly current account deficit in December 2004 of 7.3 per cent of GDP. For the past 13 quarters, Australia has had a current account deficit above five per cent of GDP. This has occurred at a time when Australia is experiencing some of the strongest prices and demand for our major commodity exports that this country has seen in 30 years—that is, at a time when our external balance should be in surplus or at least heading in the direction of surplus. It does not appear that Australia’s trade position will improve significantly in the near future either, as this year’s budget papers point out. The government has forecast a current account deficit of $62½ billion for the year 2006-07. If this comes about, it will be another new record low when it comes to Australia’s overall trade performance.

It is important to understand the composition of the current account if we are to understand what it means for the economy, how it may develop and what impact it might have on the economy over time. There are two parts to the current account. The first is, of course, the balance on trade—close to a $20 billion deficit in the year 2005. This simply means that the value of Australia’s imports exceeded the value of our exports by $20 billion last year. The second is the balance on income. The balance on income is the total value of interest and dividends Australia has received from the rest of the world less the payments of interest and dividends from Australia to other countries. In 2005 Australia had a net income deficit of $35 billion. In total, Australia paid out $35 billion more in interest and dividends overseas than we received from overseas. As our current account deficit grows from year to year, so does our debt to the world. When we combine this net income deficit of $35 billion and add it to the trade deficit of $20 billion, we are in fact adding a very large amount of money each year to this country’s overall foreign debt—a foreign debt which now stands at half a trillion dollars or more than half of GDP. As a result, so does the amount of interest that Australia must pay abroad.

Like any business with an overdraft or a homeowner with a mortgage, Australia as a whole must pay interest on this half-trillion-dollar debt. Over the past two years, the interest on Australia’s foreign debt has risen by almost 40 per cent from $15.9 billion in the year 2003 to $22.4 billion in the year 2005. While our current account deficit continues to increase, so will our level of foreign debt. This is because the current account deficit reflects a surfeit of savings within the domestic economy. Put simply, when we import more than we export, this implies that the economy as a whole is spending more than we are saving. The money to pay for our current account deficit must come from abroad; hence, each current account deficit increases foreign debt by roughly the same amount. Taking calendar year 2005 as an example, the current account deficit, as I said before, was $55 billion, comprised of both the trade deficit and the net income deficit. This meant that the Australian economy required $55 billion more than it saved. Therefore, the surfeit had to be sourced from somewhere: overseas. Australia borrowed a sum roughly equivalent to the current account deficit, our foreign debt, and our foreign debt will increase by roughly that same amount as each year progresses. There are some exchange rate effects and the revaluation effects in 2005, in particular, meant that our foreign debt last year rose by $53 billion, not the full $55 billion of the current account deficit itself.

An important factor in Australia’s current account is the level of foreign ownership of Australian companies. This is something I referred to in an address earlier today to the Committee for the Economic Development of Australia. Both in this respect and in other elements of my address here to the parliament today, I draw significantly on the remarks made this morning. Many of our large resource companies have significant foreign ownership and, as a result, much of the income from the resource boom goes directly out of the country and adds to the net income deficit. It is estimated that less than 50 per cent of earnings from resources actually remain in Australia.

I highlight this not to make a point about foreign ownership but rather to highlight that the resources boom will take a considerable amount of time, if it continues, to actually reduce the current account deficit or reduce it significantly. Because the simple fact is that the resources boom is not a universal panacea for our current account problems, the solution to the cycle of debt is to export more than we import—a trade surplus, one which, as I have already noted, this country has not enjoyed for more than four years. Exports remain the sick man of the Australian economy and, unless we address this challenge to our exports and export performance, the problems we face at the level of the current account and foreign debt will simply continue. There is no other solution for this economy.

Before I discuss the factors affecting Australia’s recent trade performance, I would like to compare our trade imbalances with the rest of the world. Earlier this month, the IMD International released its world competitiveness index, which outlined just how poor the government’s record on trade is. This is what the Committee for the Economic Development of Australia says about Australia’s trade performance as reported in the world competitiveness index:

... the numbers also show that Australia remains relatively uninvolved in global trade. Even in the middle of a commodities boom, we rank 57th out of 61 as an international trader. These numbers suggest we are simply not buying and selling enough with the rest of the world.

The IMD report concludes that, on exports as a percentage of GDP, Australia was ranked 54th out of 61 countries; on overall productivity, real growth, Australia was ranked 54th out of 61 countries; on skills shortages, it found that on qualified engineers Australia was ranked 39th out of 61 countries; and on the current account—in our case, the current account deficit—Australia was ranked 41st out of 61 countries. This is not a positive report card when we are seeking in this country to rebuild exports, to restore balance to the trade account, to restore ultimately a greater sense of balance to the current account and, ultimately, to bring down our foreign indebtedness. This report by IMD suggests that, when measured against other developed economies and some developing economies, our record on exports is, frankly, poor indeed.

Persistent high current account deficits place an economy at risk of higher interest rates. Economic theory and history show us that current account deficits cannot persist forever and market forces will eventually adjust the deficit towards balance. The Senate Economics Committee summarises the standard textbook economics process by which a current account deficit unwinds in its report on household debt and the current account deficit. The report states:

In theory, when the CAD gets too high self-correcting market forces are triggered. Interest rates will tend to rise (slowing economic growth); the exchange rate will tend to fall (making imports more expensive and exports cheaper); the trade balance will improve; and as a result the CAD will improve.

Let me just reiterate the key part of that quote: interest rates will rise, slowing economic growth.

Like any borrower, Australia risks losing the confidence of its lenders as our debt mounts. A loss of confidence in Australia as a destination for international investment would have the following effects: first, a premium would be built into the interest rates expected when Australia borrows money from overseas; second, this would also precipitate a fall in demand for the Australian dollar, driving the exchange rate down; third, imported goods would then become more expensive; fourth, inflation would increase; and, fifth, the Reserve Bank would in all probability have little option other than to increase rates. We have begun regrettably to see certain elements of this process unfold. The question is by how much more interest rates will rise, having already seen two increases in the rate since the last election—an election where the Prime Minister told the country that rates would not rise again and that—to use his own language—the rates that existed at the time of the last election would continue into the future.

There is some argument about the definition of what too high a current account deficit is, but in 2000 the US Federal Reserve broadly defined it as five per cent of GDP. There may have been some structural shift in Australia’s current account deficit, but the fact remains that Australia’s current account deficit has been above five per cent of GDP for 13 consecutive quarters and there is a risk therefore over time to interest rates.

The financial markets have so far adopted a permissive attitude to our external imbalances, but it is worth noting again that the Access Economics March 2006 Business Outlook states:

Superheated commodity prices were meant to send our trade accounts whirring back towards surplus. Instead, the current account deficit is lingeringly large. There is a risk that markets eventually - but suddenly - overreact to that, pushing the A$ down and our long term interest rates up. That won’t happen until commodity prices start to fade in a year or so. But it will happen.

The root cause of Australia’s external balance problem is Australia’s recent performance on exports. If our external imbalance is not addressed, there is every potential that interest rates will suffer as a consequence. Rather than looking at a comprehensive solution to Australia’s export problems, the government is focusing its attentions squarely and almost exclusively on the resources boom. This is a government placing all its eggs in one basket. There is no doubt that Australia should take advantage of its resource stocks to enhance its export performance, but long-term economic planning suggests we should not leave all of our eggs in one basket, because the reality is that, at some stage in the future, this resources boom will come to an end. If in the meantime the government continues to neglect other key export industries, the result at that point in time would be unthinkable. However, this is the path the current government is leading us down. All of its attention is being devoted to the resources sector, with none of its attention being devoted to other export sectors such as services, manufacturing and, I have to say, even agriculture.

Let us look at Australia’s manufacturing sector as an example. The 2006-07 budget papers effectively hauled up the white flag on manufacturing exports. Budget Paper No. 1 Statement 3: Economic Outlook states:

Other categories of exports—

that is other than resources—

are forecast to pick up [in] 2006-07, although they are unlikely to grow at the strong rates experienced in the 1990s. Exports of elaborately transformed manufactures are forecast to grow moderately over the next two years ...

Although the manufacturing sector recorded reasonable growth in 2004-05, the total value of manufactured exports is now $2 billion less than it was at its peak in 2001. This performance is unacceptable.

Welcome back, Prime Minister.

Australian manufacturing exports were one of the great success stories of the 1980s and 1990s. Between 1986 and 1996, the volume of exports of ETMs increased by 13.9 per cent per annum. Between 1995 and 2000 they grew at an annual average rate of 7.2 per cent per annum. Manufacturing remains the largest sector in the economy, accounting for 30 per cent of value added activity; however, as a share of the economy, this is less than the 15 per cent level of 10 years ago and the 18 per cent level of 20 years ago. This does not compare well with other developed economies. The manufacturing sector accounts for 20 per cent of GDP in Italy, 19 per cent of GDP in New Zealand and 17 per cent of GDP in the United Kingdom.

The need for greater government involvement in this sector has become critical. In 2004-05 Australia’s manufacturing trade deficit was $87.5 billion. Put simply, this of itself is unsustainable in the long term. Of course, there are some external factors which have impacted on our manufacturing sector. We cannot talk about the manufacturing sector without also talking about the rise of China as the engine of global manufacturing. Suffice to say that China’s burgeoning output of manufacturing goods is having a significant effect on Australia’s own manufacturing sector—not only through declining prices of goods in import competing sectors but also in competition for our export markets of manufactured goods. Australia’s share of global manufactured exports has been in decline since 2000—

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