Trading Places: The Airport Economist's Guide to International Business

By Tim Harcourt

Is Japan running out of husbands? Is China running out of wives? Did Genghis Khan really invent free trade? And why can't you see the price of a Big Mac at McDonalds in Argentina? In Trading Places, Tim Harcourt—also known as the Airport Economist—takes you around the globe, talking to businesses, governments, union officials, NGOs, and others in the community to understand what makes each economy tick. He reveals where the opportunities are, identifies the risks, and provides insider tips on doing business in each destination. Like The Airport Economist, a bestseller in several languages, Trading Places is essential reading for business travelers, students of economics or business, and anyone who wants to understand the complexities of our modern globalized world.

• Language: English
• Publisher: NewSouth
• Release date: Mar 17, 2015
• ISBN: 9781742241722

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I

ASIA

Does Asia dominate Australia’s economic future? How will Australia navigate a global economy where China, India and the ASEAN states play a key role, along with the United States, Japan and Europe? Is Australia an ‘honest broker’ in working with Latin America, Europe and the US, and their Asian economic links? What does this mean for Australia’s trade and investment landscape in the future? The Airport Economist investigates some key Asian economies to see what our economic future may look like.

The importance of the Hawke–Keating–Kelty reforms couldn’t have been more apparent than in the dark days of the global financial crisis (GFC), where internal reforms (float of the dollar, reduction of tariffs, financial reforms, introduction of the social wage through Medicare, super-annuation, education and skills reform) enabled Australia to avoid the high unemployment and banking collapses of our counterparts in the northern hemisphere. In addition, our trade and investment links have been consolidated in Asia and the emerging markets, making us less reliant on our traditional links with the United Kingdom, Europe and the US. This would not have been possible had we not forged strong ties with Japan, Korea and the ‘newly industrialising economies’ (NIEs), and now China, India, ASEAN and the emerging economies of the region. And Andrew Robb, the Trade and Investment Minister in the Abbott government, hasn’t wasted any time in pursuing his free trade hat trick with South Korea, Japan and China.

Furthermore, as well as selling rocks and crops from Australia’s shores, our exporters and investors are increasingly engaged, at both at the coalface and the chalkface, in a myriad of industries on the ground in various Asian economies. In the Airport Economist’s journey around the Asian region, whole multitudes of export opportunities were witnessed as well as some investments in new industries, particularly relating to the challenges of climate change. In short, when it comes to Australia’s economic engagement with Asia, you ain’t seen nothin’ yet!

NORTH - EAST ASIA

CHINA: SINO THE TIMES

How important is China to Australia economically? And to the global economy? Is China just for big business or can a small enterprise make a quid there too? And what about the workers – how do they fare in the labour market of the new China? The Airport Economist investigates the world’s emerging economic superpower.

CHINA FAST FACTS

CAPITAL

Beijing

POPULATION

1360 million

GDP

US$10 027.6 billion

PPP

US$14 625.2 billion

GDP PER CAPITA

US$7333

REAL GDP GROWTH

7.5%

EXPORTS TO CHINA

$94 709 million (1st)

IMPORTS FROM CHINA

$47 238 million (1st)

NUMBER OF EXPORTERS

5638 (2012–13)

THE Airport Economist first visited China as a trade union official some years ago. The Australian trade union delegation, of which I was a member, was taken to a factory making watch compo-nents. While on the tour, I asked our hosts ‘Do you have workers’ compensation in China?’ After much deliberation, the translator replied, ‘No. If the workers break anything, they don’t have to compensate us … straight away.’

I’m not sure what was lost in translation, but our host’s reaction was not surprising given that at the time China had almost an endless reserve army of labour as unskilled migrants from rural areas flocked to the big cities and the new industrial zones. The factory job was, and is, a much better alternative to rural poverty. And there was no concept of workers’ compensation or social welfare, as we are used to in the Australian labour market.

Arthur Kroeber, who produces the well-respected newsletter on the Chinese economy Dragonomics, explains China’s labour market this way.

As it has modernised its economy, China has experienced a virtual ‘tsunami’ of labour supply. Much of it has consisted of young Chinese women between eighteen and twenty-two, with not much bargaining power. As a result, China, for a long time, could run its economy at 12 per cent growth, with little pressure on wage and price inflation or the exchange rate.

In Kroeber’s analysis, the millions of Chinese workers going to toil in factories from the countryside were hardly in a position to demand improvements in working conditions such as workers’ compensation, and there was no resulting pressure on wages as China grew. This enabled more workers to be absorbed without pressure on wages and therefore prices (or what economists call ‘cost-push’ inflation, which ravaged industrialised countries like Australia during the stagflation period of the 1970s).

But according to Kroeber, the labour market tide is turning. In fact, he thinks that the demographic trends that have helped China’s economic progress to date will change in, or just after, 2020, when the ageing of the population and the gender balance will produce significant headwinds. He explains:

In the future, we’ll see a tighter labour market in China, so the authorities will either have to accept a higher exchange rate or a higher rate of inflation. This will occur as China shifts from its reliance on exportled development and investment to consumption by increasing its efficiency of investment. Inflation tolerance ought to be higher than it is now. Beijing must let inflation take some of the burden.

This is mainly because of a structural imbalance in the global economy where the US had ‘too many shoppers and not enough shippers’ and China ‘too many shippers and not enough shoppers’. That is, America had too much debt and was not competitive trade-wise, while China was export-dependent (bolstered by an artificially low exchange rate) and not doing enough domestically in terms of consumption and investment. ‘Efficiency of investment’ refers to the tendency of the Chinese government (centrally and regionally) to pour large amounts of capital into projects that may be unproductive. Over time, as China’s investment environment matures, capital should go to its most productive use. The key is for China to move out of export dependency, let the exchange rate rise above its artificial level (putting upward pressure on prices), and let Chinese workers achieve higher wage rises, in line with price rises. It’s a matter of making the shift (from ‘shippers’ to ‘shoppers’) without letting the inflation genie out of the bottle and while maintaining relatively strong rates of economic growth.

While Kroeber believes this will be a delicate balance, he does not believe that Beijing will ever completely take the foot off the pedal as far as economic growth is concerned. At the time of the GFC, which was brought on by the collapse of Lehman Brothers in 2008, Kroeber said, ‘China wants to grow at 8 per cent this year, and around 8.5 per cent next year, and Beijing will stimulate the economy until those rates are achieved. The stimulus package is not a one-off.’ And he was right. China did throw the switch to stimulus at the height of the GFC, but still has a tendency to prime the pump – particularly in the emerging urban areas of Western China. It’s partly to avoid a short-term slump, but partly to develop the economy in the medium term outside the richer areas on the eastern seaboard, which are dominated by the mega-economies based around Beijing, Shanghai and Guangzhou.

So what does this mean for Australia?

The relationship between Australia and China certainly benefitted from the ‘bamboo shoots’ of the Chinese stimulus package during the GFC (I was hoping Fed Governor Ben Bernanke would start talking bamboo shoots instead of green shoots, to get markets focused on Asia rather than Athens). The ‘bamboo shoots’ did have a big impact on Australia’s amazing export performance, with demand for coal, iron ore and liquefied natural gas (LNG) being added to the already strong Chinese demand for infrastructure, architectural and construction services to build the growing second-and third-tier cities of the interior.

But the Sino–Australian relationship goes well beyond bamboo shoots from Beijing. There are many historical reasons for this.

Firstly, Gough Whitlam visited Beijing (then Peking) in 1971 as Labor leader before granting recognition in 1973 as Australian Prime Minister. He was criticised at the time by his domestic opponents, who hadn’t realised that Dr Henry Kissinger and President Nixon had been having similar thoughts in Washington DC and had made approaches to China at around the same time.

Secondly, when China was hoping to join the World Trade Organisation (WTO), there was opposition to their accession from successive US administrations but the Keating government (particularly the Ambassador to the United States, Don Russell) strongly backed China, as did Keating’s successor as Prime Minister, John Howard. China was eventually granted membership in 2001.

Thirdly, twelve years later, in 2013, Prime Minister Julia Gillard, flanked by ANZ CEO Mike Smith and Westpac CEO Gail Kelly, announced the convertibility of Australian dollars into the Chinese yuan (or renminbi). This was good news for Australian exporters – especially small and medium enterprises (SMEs), who don’t have the large capacity to hedge on currency that Rio Tinto or Woodside do.

Fourthly, under the Abbott government, China was included in Trade Minister Andrew Robb’s ‘free trade trifecta’, in which a China–Australia free trade agreement (FTA) was achieved, along with agreements with South Korea and Japan, in the government’s first eighteen months in office.

All these geopolitical developments have provided a good background for the development of the business relationship.

In terms of trade, China is Australia’s number one trading partner, number one export destination and number one import source. It took over from Japan as number one export destination at the end of the last decade, after Japan had been number one since 1966 (taking over from the UK right when economics historian Geoffrey Blainey’s book The Tyranny of Distance was published, and just two years after the publication of Donald Horne’s The Lucky Country).

Then there is the fact that China has become a happy hunting ground for SMEs. According to Sensis, more exporting SMEs export to China (and ASEAN) than to Europe. ABS data estimates too that over 5600 Australian companies export goods to China, with another 4977 selling to Hong Kong (mainly as a base for the Chinese market). This dwarfs exports to most European destinations and even to north-east Asian giants Japan (on 3053) and Korea (on 2272). When you add the 3000-plus Australian companies with an office in the Middle Kingdom, it’s clear that China has become a big deal for small business.

It’s not just a trade story – it’s increasingly about investment as well. Australian business proposals in China are flourishing through joint ventures and wholly foreign-owned enterprises (WFOEs). Australian businesses have long seen the need to access global supply chains and have a permanent presence in the domestic Chinese market. Doing business in China is now as much about accessing the massive internal consumer market in China (1.3 billion people) as it is about straight export and import transactions. This is why Australian steelmaker BlueScope runs its plant just outside Shanghai, to service the domestic market, and hot water heating company Rheem bases its plant just outside Chengdu in western China. (They figured that every household in Australia who wants a water heater has got one, so it’s China’s turn to ‘install a Rheem’.)

In addition, China itself is also turning to foreign direct investment (FDI), and the Airport Economist has met with Chinese investors in South America – from Cartagena on the tropical Caribbean coast of Colombia, right down to the Patagonian tip of Tierra del Fuego – not to mention in Africa and other emerging markets.

Finally, China’s environmental challenges have given Australian companies a chance to ‘put the green back in the green and gold’, particularly in terms of architecture and design. The Beijing Olympics was a great example of this, with ‘rock star’ architect John Bilmon from PTW designing the famous Water Cube swimming complex and Australian companies involved in the design of the ‘birds nest’ main stadium as well as the hockey pitches, sailing facilities and transport and logistics infrastructure.

Even in second- and third-tier cities of southern and western China like Chengdu, the popularity of ‘green design’ with the emerging Chinese urban middle class is providing great opportunities for Australian companies like PLACE Design. The company’s partner Clint Wood moved his business from Brisbane to Chengdu, as that was where his future market was. ‘We design a range of environmentally friendly structure and there is a real demand for landscape architecture in western China, so business is booming here.’ In fact, the green architects of Australia are some of the most popular lecturers I invite to speak in my Australian Graduate School of Management MBA course International Business Strategy in Asia, which takes MBA students to Chengdu and neighbouring Chongqing in western China. (AGSM is part of the UNSW Business School at the University of New South Wales, Australia.)

But the billion renminbi question is: will Sino– Australian economic relations be enhanced by an FTA?

While FTAs with China incite passions in places like the US, Canada and South Korea, in Australia the response has been relatively benign. In fact, when the DHL Export Barometer first surveyed Australian exporters about FTAs, most wanted an agreement with China more than they did with the US or Thailand, despite the historical and defence ties we have with Washington DC, which we’ve never had with Beijing (or Bangkok, for that matter).

According to that first DHL survey, 45 per cent thought an FTA with China would be positive, 45 per cent thought it would be neutral and only 10 per cent thought it would be negative. This compared to a 25 per cent positive rating for the US, and 21 per cent for Thailand. There was some opposition from manufacturers (although of AiG members the exporters were quite positive compared to companies who only competed with imports) and some mixed views on market access from the agricultural sector, but an overwhelmingly positive response from resources, education, tourism and professional services. In the latest DHL survey about an FTA with China, in 2014, 61 per cent of exporters thought an agreement would benefit their business, 31 per cent thought it would be neutral and only 8 per cent thought it would be negative.

The view from China about the FTA was primarily positive, except for concerns about the impact of open access to agricultural products on poor regions, although leading agricultural representatives have noted that Australian and Chinese agricultural interests are largely complementary.

Do we need an FTA at all? Key investments in both countries will take place with or without an FTA, but it does provide a framework for streamlining the multiplicity of issues that impact Australia’s ties with a complex economy like China’s. That’s why Trade Minister Andrew Robb has pushed for it aggressively on the back of his success in forging pacts with South Korea and Japan. And for China, keen to lock in resource and food security to guarantee growth and prosperity for a majority of its 1.3 billion population, an FTA with Australia would be a desirable economic objective.

But getting back to that Chinese watch components factory ... On a recent trip, the factory manager complained that he had to offer workers extra incentives to stay, ‘because they would prefer to work in a comfortable office if we paid the same wages’. As a result, he was providing piecework incentives (workers were paid a bonus according to the volume of goods they produced) and highly desirable overtime rates. So it’s clear that the Chinese labour market is a very different one to that of the Airport Economist’s first trip to the factory, some years ago. I hope that next time I go, labour conditions will have further improved and visitors’ questions won’t be lost in translation. Yes, the times are a-changing in the Chinese labour market and the Chinese economy, and this will have a significant influence on China’s economic relations with Australia, the Asia–Pacific region and the rest of the world in years to come, especially as the demographics tighten. And if the labour market tightens further, China could have a real ‘workers’ revolution’ on its hands – but not the one it was expecting!

TIM’S TIPS

Previously, many Australians had never set foot in Chinatown in their own cities, let alone China. Now thousands of Australian businesses are ‘hugging the panda’ and going in their droves to the Middle Kingdom, and China has become our number one trading partner. There are endless business guides – particularly from the US – warning about the insurmountable problems involved in doing business in China, but Australian businesses have overall been successful there. It’s just a matter of being sensible, doing due diligence, getting government assistance from Austrade and using the Australian business chambers and associations. Many businesses lose more money in America than in China. As the old saying goes, a businessman who doesn’t go to China for fear of losing his shirt may lose his pants in the US.

The following quick tips may be of help.

•  Big may not be best. Don’t assume 1.3 billion consumers are all you need to succeed. Remember, red may be lucky in China, but niche is the new black!

•  Try the second-tier cities – Chengdu, Wuhan, Chongqing, etc. Really, it’s not a matter of if you’re not in Shanghai, you’re camping out.

•  Get good legal advice about joint ventures/WFOEs. There are several good Australian legal firms in China that AustCham can put you in touch with.

•  Protect your IP by getting legal advice. But remember, sometimes imitation is the highest form of flattery and if you are innovative you’ll be putting out new designs and services quicker than the competition.

•  Don’t be shy about using the government badge. The Australian government agencies – DFAT, Austrade – have a great reputation in China.

KEY CONTACTS

Austrade

www.austrade.gov.au

DFAT Smartraveller

www.smartraveller.gov.au/zw-cgi/view/Advice/China

AustCham

www.austchamshanghai.com

Has great networks in all Chinese cities – check out Shanghai

Australia China Business Council

www.acbc.com.au

Promoting business relations between Australia and China since 1973

Arthur Kroeber’s Dragonomics

http://gavekal.com/dragonomics

A website that is worth subscribing to

NORTH - EAST ASIA

SOUTH KOREA: SEOUL MATES

Why does South Korea twin up with Australia on so many international diplomatic initiatives? Why do South Koreans like gadgets so much? And why are they eating so much Aussie beef? Could they eat more? The Airport Economist investigates.

SOUTH KOREA FAST FACTS

CAPITAL

Seoul

POPULATION

50.2 million

GDP

US$1307.9 billion

PPP

US$1755.0 billion

GDP PER CAPITA

US$25 931

REAL GDP GROWTH

3.7%

EXPORTS TO SOUTH KOREA

$19 599 million (3rd)

IMPORTS FROM SOUTH KOREA

$10 165 million (7th)

NUMBER OF EXPORTERS

2272 (2012–13)

SOUTH Korea has played an important role in Australia’s economic and diplomatic history. In fact, it was in Seoul twenty years ago, in 1989, that the Australian Prime Minister Bob Hawke launched the APEC concept, following key spadework by Australia and the Republic of Korea to build the foundations of an Asia–Pacific community. Hawke launched the APEC concept in a speech in Seoul in January 1989, and the first ever APEC meeting was held in Canberra in November of that year. With the difficulties involved in having North Korea on its border, Seoul wanted to show leadership in the Asia–Pacific region and fully integrate itself into the global economy, with Australian an ideal partner to do it with.

In fact, when the Airport Economist interviewed Bob Hawke, he paid tribute to the efforts of the Republic of Korea in helping to set up an Asian–Pacific community, ‘in response to the global economic tensions resulting from the end of the Cold War’. Hawke believed that there was some fear that the United States, unable to resolve its trade problems with Europe or Japan, would potentially retreat into economic isolationism, and that this would result in the formation of three major trading blocs based the world’s three leading currencies. Hawke said both the Australians and the Koreans decided to develop APEC as a consensus-based organisation, to help ‘strengthen the world economy and promote economic co-operation and freer trade’.

Since then, the Republic of Korea and Australia have not only been important partners in international diplomacy, but have also become important trading partners. And with both nations having had to endure the global financial crisis (GFC), they are close trading partners committed to openness and regional co-operation as never before. Bilateral merchandise trade between the two nations remains strong, despite the GFC. South Korea, from being a closed ‘hermit kingdom’ twenty years ago, is now consistently one of our top four trading partners.

On one visit to Seoul, the Airport Economist got a better feel for Australia’s trading relationship with Korea than can be gleaned from the raw data alone. Speaking with Matt Gurr and Jaewon Rim, Rio Tinto’s representatives in Seoul, I got the feeling that there is some life being breathed back into the steel sector after a tough year for durables. After all, the GFC has been tough on all countries that focus on consumer durables and industrial production, with Singapore, Japan, the US and Korea all suffering, and stocks have been run down. But Gurr expected better times ahead from POSCO, Hyundai and the other Korean chaebols (business conglomerates), after some steel price slashing. A high proportion of Australia’s resources action is in ferrous metals (supplied by Rio Tinto) and LNG (led ably by Sean Rodrigues in Seoul), so recoveries in industrial production will help Australian exports in those key sectors.

Of course, in agribusiness, beef is one of the key commodities in the Australia–Korea trading relationship. On one of the Airport Economist’s many visits to Seoul, the anti-US protests during the BSE (bovine spongiform encephalopathy, or mad cow disease) crisis had boosted Australia’s beef exports to Korea. While things should be returning to normal as US imports return to Korea’s shores, Australia is still maintaining a remarkable 61 per cent of the imported beef