Is Europe off the map? No!

From Europhobia to Eurovision? Australian trade opportunities in the new Europe. TIM HARCOURT

 

Is Europe off the map for Australian exporters? Do they have a heavy dose of ‘Europhobia’? Is it the complexity of the market, perceptions about trade barriers or is the pull of other markets just too great?

 

After all, the European Union (with the latest expansion to 27 members with the inclusion of Romania and Bulgaria just over a year ago) has recently grown from a market of over 378 million people (before the 2004 enlargement) to almost 495 million.

 

As EU officials have pointed out, this has created a combined GDP of $19.3 trillion and an enormous consumer market that is larger than Japan, Canada and the USA combined. Yet Europe is hardly on the radar screen for Australian exporters. If you look at the top 20 destinations for exporters, there are only two European nations – the UK and Germany – featured. Large modern economies like France and Italy don’t even get a guernsey.

 

Why is this so? Let’s round up the usual suspects.

 

Location, location, location

 

The first explanation is, of course “location, location, location”. It is the old “tyranny of distance” at play. There’s some truth to this, as New Zealand, Papua New Guinea and Fiji are prominent in the top 20 as are four out the 10 “neighbouring” ASEAN states, (who are neighbours although still a hefty eight hours away by plane). But it’s not just the Asia-Pacific nations nearby who feature; the far away destinations like the UK and the USA are up there as well.

 

Parlez-vous anglais?

 

This brings us to the second explanation – the English language. English-speaking nations also dominate the exporter list. For many years, commentators used the phrase “channel fever” to describe Australian exporters’ propensity to go to Britain first before trying out “the continent”.

 

Like the Easybeats and the Bee Gees in the 1960s, and later Kylie Minogue and Natalie Imbruglia, London was the first port of call for Australians wanting to launch an international career in music and Australian business people were no different.

 

Even today, the UK dominates the table when it comes to the number of Australian exporters to Europe. The UK attracts 5668 exporters, and is in first place by a mile, with light years between it and second placed Germany on 2637.

 

For small business too, Britain performs strongly. According to Sensis, around 20% of small and medium enterprises (SMEs) export to the UK, which is just behind New Zealand and the United States.

 

But it is not just language alone. Many Australian companies focus on Britain and other English-speaking economies because they are also more comfortable with the business culture, rule of law and other institutional characteristics. This also explains why Australian exporters also seem to export to Commonwealth countries (and even former Commonwealth countries) that have British-style institutions relative to Latin America and Francophone Africa as well.

 

However, it’s not just culture either. To use a well-worn phrase, it’s the economy, stupid – there’s clearly an economic explanation for this phenomenon as well. Countries that are English speaking and have British institutions, have, in recent years, been stronger economies.

 

As pointed out by well-respected international economics commentator Martin Wolf, there has been, since the 1990s, a growing trend for English speaking economies (UK, USA, Australia and Canada [pardon Quebec!]) to outperform the rest of the industrialised world (including Japan and the larger European economies Germany, France and Italy), in terms of economic growth and GDP per capita.

 

Therefore, it is quite rational for Australian exporters to go where the economic action is. This may change due to the sub-prime issue in the US recently, but Wolf’s point is well made over a long stretch of time series data.

 

The rise of Asia

 

Speaking of economic action, it should be pointed out that 10 out of 20 Australian exporter destinations are in Asia. As every pet shop galah knows, this is certainly the main story of the past two decades.

 

The rise of east Asia and Australia’s increasing economic integration in the region is also reflected in the exporter destination data. In 1989-90 three European countries – France, Italy and the Netherlands – were in the top 20, while in 2006-07, these markets have been replaced by India, the United Arab Emirates and (you guessed it) China.

 

In fact, Asia makes up five of the top 10. All this focus on Asia has made it difficult for Europe to get profile in the Australian press. As one European observer complained to me after the simultaneous visits of President Bush and President Hu to Australia (most recently at APEC) that Europe can’t get noticed. “Australia is having a ménage a trios with Asia and America, and Europe cannot even get in the bedroom!” he sniffed.

 

‘Fortress Europe’?

 

The remaining issue is that of Europe itself. Is there a perception among Australian business that Europe is an impenetrable fortress? We all know about the issue of the common agricultural policy (CAP), but are overall trade barriers too high and the EU to inwardly focused?

 

Not so says European Central Bank (ECB) in Frankfurt. In fact, ECB research has shown that since the implementation of the common currency and the single market, trade between “Euroland” and the rest of the world is actually increasing not decreasing and turning inward.

 

Furthermore, Peter Mandelson, the EU’s trade head honcho, former UK cabinet minister and close ally of former reformist UK prime minister Tony Blair, is leading a raft of reforms in Brussels and is keen to expand trade and wean European producers off trade distorting subsidies.

 

Reasons to be cheerful – finding Eurovision

 

However, despite these hurdles, there are still some good signs for Australian-European trade as well.

 

First, it is important to remember that the EU is, in its own right, important in terms of trade and investment. If the EU is taken together as a trading partner it is Australia’s largest two-way goods partner accounting for $76.3 billion or 17.4% of our total trade in 2006-07. Given the longevity of the Australia-EU economic relationship, the EU is a “mature” trading partner for Australia with an important focus on services and a relatively diversified trading relationship.

 

Second, the EU is an important player for Australia in terms of investment.

The EU is Australia’s leading source of investment providing an accumulated over $A480 billion (2006 data) or 33% of total investment in Australia.

 

Australian investors themselves pour over $A254 billion into the Europe Union (accumulated by the end of 2006), which accounts for 33% of total Australian outward investment, which makes it the second largest destination for Australian investment outside the US.

 

Third, the EU enlargement process will really help Australian businesses by expanding the consumer market and potentially improving living standards in Europe. The EU has a good track record and the enlargement process has helped many nations to become affluent.

 

Think of Portugal in the 1970s, or even Spain or Greece. They were all poor and struggling with the establishment of democracy before joining the EU and have since gone from strength to strength. As Elisa Ferreira, one Portuguese member of the European Parliament (MEP) said to me in Brussels: “Joining the EU really saved us – it gave us an economic boost after the collapse of our colonies and many tough years of dictatorship,” she explained.

 

Ireland is another case in point, after years of poverty and agrarian under-development; EU membership has done a lot for Ireland. Along with smart investment in human capital and FDI attraction, European membership is an important part of the story of the “Celtic Tiger”. In fact, Austrade’s office in Dublin is one of the busiest in Europe and was established to meet the increased demand for services from Australian businesses in Ireland, Scotland and the English regions (in Manchester and in the Midlands).

 

Now that 12 new members have joined the EU, there could be similar advances in living standards. We could see that the same thing happening with the Czech and Poles, that occurred with the Portuguese, Greeks, Spanish and Irish and even for members Romania and Bulgaria and the “potential” members, Turkey, Ukraine and Croatia (who are all pressing their case as EU members of the future).

 

Fourth, Australia has a good name in Europe. I was told in Berlin, that in the industrial heartland of Germany, Australia is seen as a reliable, stable supplier in German manufacturing and is able to provide components and high value services that many other nations can’t.

 

Australia is also doing well in Western European consumer markets – you notice the large number of Billabong products among young consumers on the surf coast of France (in fact, Billabong now makes more revenue off-shore than Westpac).

 

Education and Environmental services have picked up in Denmark on the back of Princess Mary’s profile. In addition, the success of Australian event management companies and sports exporters at the Athens Olympics has provided spin-offs in contracts at the 2006 Turin Winter Olympics, and at the World Cups of Soccer (Germany 2006) and Rugby (France 2007). So watch out London 2012!

 

Finally, there are grounds for optimism in the latest Austrade/DHL Export Barometer, as the exporting companies surveyed regraded Europe as their number one destination for the next 12 months ahead of China, ASEAN, the UK and the Middle East. The better macroeconomic news from some of the EU states had contributed to this finding.

 

Interestingly, outside agriculture, trade barriers were not seen as the only major barrier. According to the exporters surveyed, market access was just part of the story with a big emphasis on in-market regulation and standards. The removal of tariff barriers and subsidies, in the economist’s language, were seen as ‘necessary but not sufficient’. Removing unwanted business regulation and simplifying standards is therefore also needed to smooth the path to Europe for Australian business. The EU efforts to streamline business standards in the internal market are therefore welcome.

 

In conclusion, if Brussels can do more of this type of reform, and the member states can provide an attractive climate of trade and investment then any talk of “Europhobia” will be a thing of the past for Australian exporters and investors and we can look forward to some “Eurovision”.

 

 

 

*Tim Harcourt is Chief Economist of the Australian Trade Commission and the author of Beyond Our Shores and The Airport Economist see: www.austrade.gov.au/economistscorner

Thanks are due to Martin Wolf, Jonathan Coppel, Kathleen Burke and Don Kenyon for their comments and assistance.

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