Food for Thought #5: China, US, China, US? What To Do? Ohh! What To Do?

A comment was made in an article by Geoffrey Garret (The Weekend Australian, August 13-14, 2011) that: ‘agonising over challenges to Australia’s geopolitical triangle ignores the very real fact we are part of a vibrant economic triangle with China and the US’.  One wonders who is really benefiting from this ménage a trois?  Especially as Garret also points out; ‘American investment – foreign direct investment, portfolio and debt – is attracted to Australian projects because of the big upside of selling Australian minerals and energy into China’.

Before going into details, there are a couple of other points that need highlighting.  Firstly, most developed economies not only invest in developing economies because of cheap labour costs but also because they see the value of forming relationships with a numerically huge and increasingly wealthier consumer market.  And, secondly,
developed economies (and their businesses) will also invest in other countries where they can maximise their returns by selling to developing economies those products that are in high demand.  Things like, iron ore and concentrates, coal, gold, crude petroleum, natural gas.

Australian exports of these in 2010 were in the order of $126.7 billion.  I wonder how much of that actually returned into the Australian economy and wasn’t transferred elsewhere?

Here are a few more bits of useful information:

  • The US economy has changed from manufacturing based to a knowledge based economy, as have many others, including ours.  In 1981 there were 20 million workers in the manufacturing sector in the US. In 2011, 12 million, a decline of some 40%.  It’s understood that this number is falling by 50,000 a month.  The knowledge based economy in the US has grown and draws on fewer, more highly educated people to service it.  The result is that there are fewer opportunities for people of lesser education levels and average incomes have hardly risen from what they were 20 years ago.  American businesses are also moving their manufacture offshore into the developing countries.
  • Measuring the intangible value of the knowledge economy is inherently difficult.  It’s harder and more ephemeral, and the ascribed value can be easily inflated or deflated.  Not a bit like bricks and mortar, infrastructure, motor cars, houses etc.
    It is even more difficult when there is little or no regulation of the business and financial sectors.  We have seen the fruits of that lack of regulation recently and are still suffering from it.
  • In 2010 the capital spend of the US was 16% of its GDP.  Compare this with  China’s 48% and ours of 28%.
  • The US is carrying a debt of some $4.5 trillion which is growing daily.
  • China owns $1.2 trillion of the $4.5 trillion of US debt.  That’s 26.7% of the total.  Conversely Oz owns $12.3 billion of it.  That represents 0.27% of the total US debt.  Put another way our US debt ownership of $12.3 billion represents 0.85% of our gross domestic product (GDP) for 2010/11 ($1,448.2 billion US$).

What does that say about the US and its companies, the biggest investor in Australia?
What does it say about our relative exposure to US debt?

  • Since 2007 the world economy has grown by about 10%.  The contribution by the US, Canada, Britain and the Euro area to this growth has been almost zero.  All that growth has come from the other countries, including the developing economies.  The Chinese and Indian economies have grown by almost 50% while East Asia (excluding China and Japan) grew by almost 20%.  When gross domestic product (GDP) is adjusted in terms of ‘purchasing power parity’ developing countries share of world GDP reached 50% in 2008 and is expected to be 54% this year.  Developing countries shares of exports has reached 50%, double what it was in 1990.
  • In 2010 China was our largest export destination ($64.4 billion).  A trebling of exports since 2005.  We ran a trade surplus of $23.4 billion with China in that year compared to a trade deficit of $6 billion with the rest of the world.  China is our main export destination (25.3%) followed by Japan (18.9%), the Republic of Korea(8.8%), India (7.1%), followed by the US at 4.0%.
  • The developing countries’ share of world consumer spending is 34% (up from 24% in 2001).  This would be higher if allowance is made for the lower prices of housing and services.  Regardless, their share of world retail sales: 46% of retail; 52% of new car sales; 82% of mobile phone subscriptions.
  • Developing economies account for 60% of the world’s annual energy consumption, 65% of copper consumption, 75% of steel use and 55% of the world’s oil consumption.
  • The Asia-Pacific region, especially in South-East Asia has an ever increasing middle class, all demanding the benefits that a greater income can provide.  Some 70% of the people on this planet reside in the Asia-Pacific region. That was 4.73 billion people in 2009. The GDP of this region is some 53.2% of the world GDP. That’s a healthy and growing GDP.
  • Some 81.3% of Australia’s merchandise exports in 2009 were to the Asia-Pacific region and 70.2% of our imports came from the same place. That’s a pretty healthy chunk of our economic parameters. In comparison only 9.3% of our exports went to Europe and 21.1% of our imports came from there.  Only 4% of our exports went to the US.

If such is the case, where then should Australia’s real priorities and interests lie?

And finally:

  • China’s investment in Australia in 2010 was $16 billion (up from $2.2 billion in 2005).  The US investment in Australia in 2010 was $550 billion (up from $334 billion in 2005).  The US investment in Australia is greater than 25% of all foreign investment in our country.  That’s $80 billion more than investor number
    2, Britain and $530 billion more than China, investor number 12.

So if China is ranked 12th on the list of other countries investing in Australia, what’s the big fuss about China ‘buying up the farm, etc’?  It would appear that it’s already been purchased by others, mainly the US and Britain.

It seems apparent where the major economic growth will occur over the ensuing decades.
That our major overseas investors see great benefit in selling Australian merchandise into Asia, especially China at this point in time.  And that they reap substantial financial benefits from their involvement – they wouldn’t be here otherwise.  Perhaps it time that we asked ourselves where Australia’s priorities and interests truly lie.  Perhaps it’s also time that Australia bypassed the middlemen and dealt directly with a well capitalised customer who appears interested in dealing with us . . . . . . And that’s food for thought . . . .

Further Reading & Reference:

America is Rotting at its Core: Hugh White. Sydney Morning Herald, August 16, 2011.

The Real Action is Taking Place in Developing World: Ross Gittins, SMH August 13-14, 2011.

Winning Global Confidence: Peter Hartcher. SMH, August 13-14, 2011.

Why this Love Triangle Works: Geoffrey Garrett, The Weekend Australian, August 13-14, 2011.

Our Mountain of Debt: Todd Lindeman & Neill Irwin, The Washington Post, July 17, 2011.


About deknarf

Australian born and bred who has spent most of his working life in R&D and IP management with earlier forays in the newspaper industry and martial arts. Fortunate enough to be living in one of the best countries in the World, even though I might get grumpy with it from time to time.
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