China is Poised at the Materials-Intensive Phase

17 November 2005

Edited summary of comments made by Hugh Morgan, President of the Business Council of Australia, to the Monash University conference, Riding China’s Boom, in August 2005.

China presents an excellent trading opportunity for the Australian economy, but we cannot afford to be complacent. Australia needs to consider its own domestic reforms to put itself in the best position to take advantage of potential increases in trade with China.

In terms of competition, China unquestionably has its fundamentals right. Its people are challenged, determined, and focused. They are doing exactly the same sort of thing that we see on our sporting fields – being focused to win.

China’s economic growth presents real challenges for Australia and illustrates the increasing competition we face globally. On the other hand, China’s growth is good for us – and there is no doubt that we should take advantage of it.

It is important that Australia respond to this wake-up call to a continuing need for change. We face a situation reminiscent of the one created by the tariff reductions of the 1980s, which was the best thing for Australia, and as a consequence of which we have prospered.

A free trade agreement with China is an important undertaking, both for trade and politically. But there is no doubt it will be a tough negotiation.

It is extremely important that Australia achieve generous access to the Chinese market in respect of agriculture. It is not our obligation to answer any domestic issues in China about agriculture; nor should they hold fears about it, given that we are such a comparatively small agricultural producer. However, we will have problems domestically if there is not a generous opportunity for our agricultural sector in any agreement.

The scope of the agreement also raises questions. What is often overlooked is that China, for the purposes of the FTA negotiation process, is effectively a federation of states, rather than a centralised country providing access to all its jurisdictions. An agreement with Beijing does not necessarily provide access to the entire Chinese market.

Then there is the complexion of our economy. Services have become a vital part of the Australian economy; we now have a workforce that has about 1.2 per cent in mining, 4 per cent in farming, 13 per cent in manufacturing and 80 per cent in services.

Despite the fact that services provide substantial employment opportunities in this country, as yet they do not have a collegiate way in which to represent themselves externally. We see a bit of representation of the services sector for architecture, engineering, education and others, but few linkages between them. External competition is a relatively new phenomenon for these groups, whereas for miners and farmers international competition is old ground as they have long been in the international trade arena.

How Australia represents itself is very important. This goes to the question of “Brand Australia”. We have successfully advanced the important tourism sector and reinforced the image of Australia as the place to come and put another prawn on the barbie. Unfortunately, this runs counter to our own endeavours to be the “smart” country. It is hard to sell a high-tech product from a country that is presented to the world mainly as a tourist destination. We need to be better co-ordinated in how we market ourselves in the international arena so as to enhance and protect our long-term trade prospects.

China is moving into a phase of intensive development, during which it will have a high demand for the materials and resources needed to service growth and to improve standards of living.

As the per-capita income in China moves through the range of about $700 to about $5000 a year, there is a very heavy demand on materials as a share of gross domestic product. This is to provide things like infrastructure, housing, cars and consumer goods.

Once average incomes reach $5000 a head, the influence of the services sector, rather than materials, becomes increasingly important.

First, people look to fulfil their basic needs for survival, such as getting food. Then they start wanting products like electrical appliances and cars, then infrastructure, bridges and buildings. This is a substantial metal-intensive stage that an economy moves through.

Australia’s economic growth and development during the 1960s, 1970s and into the 1980s was driven by Japan going through exactly that same phase. In Japan there were 120 million people rebuilding a country, going through exactly that income curve and demanding huge amounts of materials from Australia.

In today’s China there are 1.3 billion people. Its demand for resources, in the context of its travelling up the income-growth curve, will be long-lasting, intense and competitive; and this is before any additional demand from India.

But, to take advantage of China’s growth, Australia must ensure it understands the global environment and present trends. In particular, Australia must be aware that it needs to respond to worldwide price signals or demand fluctuations.

Australia’s regulatory environment is increasingly reducing business flexibility to adjust its production supply in response to price and demand fluctuations. In the resources sector, for example, the regulatory burden includes the Environment Protection Authority, the environment report, the heritage authorities, and so on – more people wanting to tell us how to do things than we have ever had before.

There has been a big increase in government and regulatory intervention in business affairs throughout the community. Although many activities have been privatised, there remains a plethora of regulators that are sapping the capacity of businesses to enter into effective competition.

Australia’s economy has further restrictions on supply, in terms of access to skilled labour. Announcing projects is easy, but getting them done is an entirely different matter given the difficulty of obtaining access to the right skills and overcoming the increased competition for skilled labour, which has been exacerbated by shortages around the world.

The consequence is that, although Australia may attempt to respond to price and demand fluctuations, constraints mean it will take a lot longer.
Australia needs to be in a position to take advantage of China’s growth, remembering that there will be a limit to the amount the Chinese economy can expand because it will be constrained by the physical availability of essential materials as it moves through the metal-intense part of the GDP curve.

It is a corollary that does not often get observed, but it is an important one in terms of managing how China progresses and how effectively it uses its own resources into the future.



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