Who's winning? The shape of global competition: we are delighted to bring this exclusive and special paper by the Australian Industry Group on Australia's export competitiveness with the rest of the world.

Position::SPECIAL REPORT: AIG
 
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Australia's record current account deficit has raised attention about the nation's flagging export performance.

Export volumes in the 1990s grew strongly (by 7.5 percent per annum), under the influence of a super-competitive low Australian dollar and a thirst by companies for export dollars. This along with supportive microeconomic reforms enabled the nation to lift its international competitiveness, and reassert its place as a top ten nation in terms of productivity growth.

Our manufactured exports prospered throughout this period as export volumes lifted by 12.5 percent per annum. Manufactured export propensity rose from around 21 percent of all sales at the start of the nineties to 26 percent by the end of the decade. Total manufactured exports stood at around $70 billion.

But something has happened to our performance since 2000 that should be a source of concern to all. Total export volumes have grown by only 0.9 percent per annum, and growth in manufactured exports volumes has slowed to around 3.8 percent per annum.

Over the last two years, the value of our manufactured exports has fallen by over $6 billion, and our manufactured export propensity is back to where it was at the start of the nineties (21 percent).

"Who's Winning? The shape of global competition" points to "two C's" at work in explaining this deterioration--China and the currency. Chinese competition is the obvious explanation with the appreciating currency seriously aggravating the difficulties more recently.

Since April 2001, the Australian dollar has appreciated by over 60 percent, making it harder for Australian businesses to remain competitive in export markets. Given that the Australian dollar surge has been on the back of a depreciating US dollar, and the Chinese currency is pegged to the US dollar, Chinese exports have become even more competitive.

The outcome of this is seen in that while China's manufactured exports grew by 16.7 percent per annum in the nineties, they have been growing by over 26.1 percent since 2000. Not only have Australian exports suffered but most other developed nations have lost export share to China.

This report documents these changes and highlights the need for Australia to lift its efforts in improving competitiveness and exports. While a strong domestic economy has acted to dampen the impact of the export decline on business earnings, weaker domestic conditions now threaten to expose manufacturing and industry generally to the new realities of emerging China.

The competitive position of any business is regularly buffeted by global and national swings in exchange rates, raw material prices and wage rounds largely outside their control. But for every action there is a reaction. If these swings hurt enough firms, deteriorating national economic positions breed eventual rectification. Thus rampant national inflation generates uncompetitive firms, lost export and home markets, trade deficits and an eventual restorative plunge in the currency.

Each firm is different, facing individual circumstances on its costs and position in domestic and export markets against an array of competitors. Taking stock of of the national average competitive position is thus a formidable exercise in data collection and averaging. Fortunately, researchers at the Organisation for Economic Cooperation and Development (OECD) perform the calculations on the changing positions twice yearly for most of its industrialised member countries. This Economic Brief summarises and interprets the latest findings for Australia, the US, Japan and Korea and four main European economies (Germany, the UK, France and Italy). (1)

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The chief findings are a mix of expected and surprising results. Thus export market performance in most OECD economies (and the average for the organisation) has been adversely affected this decade by China's emergence, the exceptions being the major capital goods producers (Japan, Korea and Germany). International competitiveness is strongly influenced by exchange rate movements, but there is less variability in competitive price outcomes than in underlying labour cost changes. The clear implication is that profit margins act as global competition's...

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