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Who matters more to Australia, the US or China?

The US is Australia’s top investor, not China. What impact will that have on the Australian economy in January when Donald Trump becomes President? BlueNotes looks at US investment in Australia and how this fits into the Asian Century.

In a pre-US election in September interview with BlueNotes, former Labor Party leader, defence minister and recently returned US ambassador Kim Beazley said “if you flick the word economy at most Australian commentators they say, ‘ahh China important economically, US important strategically.’

"The United States is the biggest investor in Australia, well above China at number five."
Helen Clark, Freelance journalist & former foreign correspondent

“No. It is US important economically and strategically.... the American investment portfolio is comprehensive, the Chinese is narrowly targeted.”

China’s economy is viewed as tremendously important to Australia by government and industry but also by a majority of the populace, whilst the US still takes centre stage in terms of its importance to Australia’s security.

That’s the standard line, anyhow. Yet the economic interlinkages between the US and Australia are enormous. Two-way trade, foreign direct investment (FDI) and portfolio investment total $A 1.5 trillion. But what does that mean when you break it down?

The United States is the biggest investor in Australia, well above China at number five (below Belgium). Even last year - the year of the Darwin port lease, the Kidman cattle station furore and the fear of Chinese ‘buying up’ all Australia’s residential real estate - the US eclipsed China, with $A55.9 billion worth of assets bought.

The Australian Financial Review wrote in May that “the accumulated stock of US direct investment in Australia is five times larger than that of China, while it also holds 16 times the value of equity securities and 123 times the value of debt securities.”

There is also the 11-year-old AUSFTA, its free trade agreement with the States. This has been important to the Australian economy even as we have bubbled over with excitement at the billion-dollar dreams of the ChAFTA (the FTA with China).

Beazley told BlueNotes the “free-trade agreement opened up not so much a trade cornucopia, though it’s substantially increased, but... an investment highway and that’s now starting to come into observable operation.”

The enormous amount of Australian money under portfolio management in the US comes largely from super investments, but Australian companies have been investing increasingly in the United States also, from SMEs to big operators Visy and Westfield.  Shipbuilder Austal is the biggest employer in Mobile, Alabama.

We export beef (Australia’s largest US export), but there are also commodities, engine parts and other consumables like beer and wine (Yellowtail designed their wine for the US market then apparently inspired a downturn in consumption of the better stuff Stateside).

On the ten-year anniversary of the FTA US trade envoy (and former World Bank president) Robert Zoellick told the US Studies Centre in Sydney in the years since the Australian-US FTA came into force “our annual two-way trade has about doubled, to over $US60 billion.”

He said the FTA is not just terrifically important for Australia but the United States also.

“As I survey developments in the US economy today, this FTA connection may turn out to be the most important,” Zoellick said, speaking last year before Trump’s successful protectionist push and when the TPP was more certain.

Whilst important, trade is comparatively much lower than investment. ANZ’s Dan Wilson in New York told BlueNotes the US is Australia’s “fourth-largest trading partner, but accounts for only 5 per cent of total exports. This is dwarfed by exports to Asia.”  

The US role in Australia’s economy, however, matters greatly.

THE NOT-CHINA STORY

If that is indeed the case, why don’t more think of this than the China story of the past decade?

It’s partly because the resources boom presented just that, a tremendous boom and boon to the economy. But it’s also, as Niels Marquardt at American Chamber of Commerce in Sydney told BlueNotes, “part of it is no one's telling the story.”

“For that I give us (AmCham) bad marks. Amcham have to get better at telling the story.”

Quite why PR is needed for $A1.5 trillion in trade is not clear, but the media has stuck to China.

The big projects are things like natural gassaid projects, including Chevron’s Gorgon and Wheatstone projects in the West, Marquardt said.

“Gorgon was the single largest investment... investment there was approaching $A100 billion,” he said. “That peak of enormous capital flows has been temporarily suspended. It’s a boom and bust industry.”

Boeing, Google, Hewlett Packard, and IBM all have between 5,000 and 10,000 staff in Australia, Marquardt said, along with tech companies like Adobe, Intel and Salesforce.

“Boeing's largest overseas footprint is in Australia... Why are they there?” he asked. “Because they have very capable workforces with products [that are] dedicated and very smart.”

This high-quality workforce makes up for some of the downsides, he said. The “rhetoric” around tax is increasingly one of these.

So why does Australia invest so much in the US when the Asian Century suggests it should be looking closer to home?

As Beazley said, “Only in the US do you get the legal protection... we can talk about the need to do more in Asia and we can urge Australian business to do more in Asia, they will try to do more in Asia. But the truth of the matter is it ain’t our money it’s theirs. And they are not going to chase essentially pyrrhic outcomes.”

And Marquardt, who has been in Australia long enough to watch the evolution of excitement over the Asian Century?

“I’d say it's both a good direction and it’s overhyped. Most Chinese investment is in things that already exist - land and apartments.”

DIFFERENT OPPORTUNITIES

For Australians looking to invest, the US and emerging Asian economies present very different opportunities. The US is large, developed, with good rule of law and infrastructure and a mature workforce.

“For any company attempting to create a global footprint it is difficult to ignore the largest market in the world,” Wilson said.

“Asia represents a true growth opportunity. The Asian Century is underpinned by favourable demographics, a rising middle class, and a need for massive infrastructure development.”

At the same time characterising all of Asia as the same is futile; the mature investment climate of Singapore differs greatly from say, Laos and Cambodia, which are institutionally weak with large infrastructure gaps.

Preferring trade with Asia over the US is not new. As Zoellick said in his speech, “that idea (of a US FTA) created a stir among some Australian political leaders, who, at the start of the 1990s, preferred to link Australia to a Japan that they believed would be the next dynamic leader of the world economy.

“They rejected our logic that closer economic links with the United States would strengthen Australia’s ability to compete globally, including with Asian partners.”

Beazley said Australia doesn’t sell much advanced manufacturing products or services, “but we sell them a lot of commodities, humungous amounts of commodities.”  

“We’re not getting value as we used to but we’re sure as hell getting volume.”

The linkages between the US, Australia and Asia are beneficial and Marquardt believes the interlinked supply chain is efficient.

However the downside here is actually what a protectionist Trump administration will do to Australia. The effects are likely to be knock-on, rather than direct.

Beazley has said that 45 per cent tariff on Chinese goods headed to the US would start a trade war with China that would be “disastrous” for Australia. It’s a thought shared by many.

Whilst Trump predictions remain tricky, “most impacts will be indirect rather than direct... The expected withdraw from the TPP and re-negotiation of regional trade ties could see trade growth in Asia slow, indirectly adversely affecting Australia,”  Wilson said.

The possible tariff would be harmful to Australia also and, “Australia is a small open economy largely dependent on global trade for its prosperity, Trump’s more protectionist stance on global trade may reduce Australia’s potential growth on a more persistent basis.” said Wilson

The TPP being off the table will have an effect, though what the Regional Comprehensive Economic Partnership which involves Australia, New Zealand, China, India and all of ASEAN will mean isn’t clear yet. Meanwhile US investors seem buoyant about Australia’s promise, especially its $A195 defence spend.

Helen Clark is a freelance journalist and former foreign correspondent

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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