Let’s not distract from the horrors of war and the obvious humanitarian disaster that rising global food prices will create in the developing world, but let’s try to understand how global developments might impact Australia economically.
Exports and imports are commonly split into goods (stuff you can touch) and services (things like tourism or education). We will only look at goods for today’s analysis since they make up the lion’s share of our national exports and imports. We will also only look at pre-pandemic data from 2019 to see how the usual business model of Australia is impacted.
Australia exports US$1.44 trillion worth of stuff while only importing US$1.16 trillion worth.
The difference between these to numbers is our trade surplus. Australia is a business that makes a nice US$280 billion in profit.
What do we sell to the rest of the world? Mostly stuff we dig out of the ground (mining) or grow in the ground (agriculture). Our exports are rather simple to produce.
The mining industry, for example, only employs around a quarter of a million workers (or 1.9 per cent of our 13 million workers) but produces 12 per cent of our GDP. How do we run such a prosperous mining sector?
Small nation, lots of land
Easy – we are a small nation on a big chunk of land. We are 25 million people commanding the resources of a full continent. How much profit we make from mining depends less on the quality of work of each individual worker in the industry but on global prices.
Our exports are shipped through a limited number of ports because it is relatively expensive to send to destination ports: a ship full of coal is worth much less than a ship full of electronics. Transporting our heavy ores and minerals via sea is expensive but it’s the only way. This means we rely on open-sea trade routes to get our exports to a few destination ports.
Our maritime security fully depends on the US Navy, which keeps international waters safe and allows the uninterrupted flow of trade – Peter Zeihan wrote a great book about that. If the US were to become an enemy and so inclined, it could easily interrupt most trade flowing in and out of our most important trading partners. From a security perspective we fully depend on the US for our economic prosperity.
Who is buying our stuff? We don’t have a diverse range of clients. The top three countries buying from us are China (39 per cent), Japan (15 per cent) and South Korea (7 per cent). A whopping 83 per cent of Australian exported goods go to Asia. From a trade perspective we are clearly an Asian nation.
The good news about our exports is that geopolitical and trade experts predict the US to continue to guarantee global maritime security and that demand across Asia for our exports remains strong (see the animated Asia map from my previous column). Prices for the limited range of products we are selling are likely to go up in the near term.
Both Ukraine and Russia export a lot of the things that Australia also exports. Agricultural and industrial production will not return quickly to war-torn Ukraine, and sanctions exclude Russian exports from global trade. Rising prices for our exports might sound great but we better have a quick look at Australian imports before popping the champagne.
Unlike our exports, our imports are dominated by complex goods such as machinery, appliances, vehicles, electrical equipment, and pharmaceuticals among other products. Even a quick glance at the import treemap shows what a diverse range of goods we buy from overseas. This doesn’t just include items we consume as individuals but machines, parts, computers that businesses use to drive up our GDP.
We will need to prepare for everyday life at home and at work to become more expensive. Russia and Ukraine are both important rare-earth metal powerhouses. These are important parts in the semiconductor industry, which means global production of anything with computer chips will become more expensive and total production volume also might decline.
What to do when costs rise
The risk of skyrocketing trade prices is less trade occurs and the benefits of globalisation are scaled back. Without our global free trade system running like a well-oiled machine, global fertiliser prices go up. Australia can easily stomach rising food costs since we produce wheat, meat, and dairy locally. Poorer developing nations however will struggle to feed their populations. Expect terrible news stories about this in the second half of this year.
I don’t think simply tightening the belt is the right approach. Less global trade is not a good thing. It’s not going to drive down global emissions and allow us to live in a self-reliant ecological wonderland. The world over, nations and people depend on global trade networks for the essentials of life.
We should ensure to invest in long-lasting products when buying anything from toys, to building material, to machinery, to clothing. Whenever possible, choose the long-lasting, higher quality product.
In a world where trade keeps flowing, where businesses keep investing despite high prices, Australia stands to win (or at the very least retain it’s high liveability).
