Going on exchange to “the other side of the world” and spending a whole semester in a country 251 times bigger than Belgium is about way more than just studying abroad. You not only get to meet new people, may they be Aussies or other international students, build friendships, discover amazing landscapes but also get to learn about your host country’s economy and its positioning in the global marketplace. The following article offers an insight into three recent challenges – the Greek crisis, the Chinese slowdown and the Indonesian import quota – from an Australian business perspective. As the world is more interconnected and integrated than ever disruptions resulting from political choices, economic decisions or cultural differences have knock-on effects on a global scale. In that sense, Australian businesses doing cross-border activities are exposed to various risks whichever challenge they are facing.
Europe – Greece’s lack of FDI attractiveness and competitiveness
Despite being regionally integrated within the EU, Greece – accounting for a mere 1.5% of the EU’s GDP – is unable to take advantage from the economic and monetary union and seems to lack key elements to succeed in a globalised world. More than five years after it first defaulted on its payments, Greece is still struggling to get on the track of economic recovery. The public debt crisis is in that sense not its only problem. Instead of more productive use of resources and increased international attractiveness a regional integration comes with, Greece struggles to attract foreign investments reflecting severe competitiveness deficits. Not only Greece had the smallest amount of FDI inward stock as a percentage of GDP (8.5% in 2014) among all EU member states but also the majority of these investments were coming from within the EU itself, indicating a lack of confidence from outside investors. Key economic, political and infrastructural factors as well as favourable market conditions seem not to be in place in a way to motivate firms to select the country as their terminal FDI location. Without defining a new growth model based on innovation, competitive firms with internationalised value chains and creating an attractive climate for investments, the country will not be able to thrive in an integrated hence interdependent world.
Limited exposure with some potential contagion effect for Australian businesses
Though Australia’s exposure to Greek crisis is minuscule, Australian businesses might be impacted through a contagion effect. In case Greece does not put the required reforms in place, a Grexit might have an impact on the stability and the existence of the single currency as well as on the economic union as a whole. Any disruption in the EU’s economy could harm Australian businesses, the economic bloc being Australia’s third largest trading partner. While a low confidence in the Eurozone could make Australia more appealing to investors overseas – driving the dollar up and negatively impacting Australian exports, a general and global lack of investor confidence could lower the Australian dollar, exports then gaining in competitiveness. Despite avoiding such a Grexit in the short to medium term thanks to various agreements reached a few months ago, the Greek public sector’s inability to use resources efficiently and its government mismanagement are a few examples of an alarming situation that must not only be closely followed by all EU member states but Australian businesses and investors as well.
Indonesia – Defensive trade protectionism to safeguard domestic industry
With a population of ten times as big as of Australia’s but a per capita income that is only one tenth of that of Australia, the close neighbours are clearly at differing levels of development. Despite establishing strong bilateral ties, Indonesia’s decision to cut its quarterly live-cattle import quota by 80% in July translates the government’s willingness to become self-sufficient in beef production and independent of risky imports. This highly protectionist move following a defensive rationale through the implementation of non-tariff barriers is a response to the drawbacks of globalisation: Indonesia sees its dependence on Australian imports as a threatening factor undermining its national sovereignty, the quota aiming at protecting its national economy and safeguarding its domestic industry. These components of country risk do not only harm trade partners but also have potential damaging effects for the country itself especially when such a policy is implemented in bad times of declining purchasing power of Indonesian consumers. Recalling some international trade knowledge, this quota drives up prices for Indonesian consumers and while local farmers might be better off in the short run, their competitiveness and productivity are more likely to be undermined as a result of falling consumer demand.
No real harm but political and cultural risks at stake for Australia
Ranking 10th in Australia’s merchandise trade accounting for a mere 2.1% in total exports, the extent to which this non-tariff barrier affects Australian businesses is relatively limited; cattle exports being regionally important especially to the Northern Territory and Western Australia (where exporters still have diversified opportunities in China, Vietnam or Malaysia). The lesson that must be drawn however from this defensive government intervention is the fact that cultural differences, coupled with diverse legal systems and a relatively fragile political setup in Indonesia expose Australian businesses to cultural as well as country risks.
When ranked by level of economic freedom, Indonesia appears to be in the “mostly unfree” band meaning that “the government puts constraints on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself” (Cavusgil et al. 2015). This is a clear example of how Australian businesses face political risks. In addition to that, cultural differences in diplomatic negotiations as well as diverse decision-making styles are at stake to some extent and if these cultural aspects are not taken into account, the relationship between the two neighbours can deteriorate which would have knock-on effects on trade as well as further political and economic negotiations.
China – Aggressive government intervention linking political risk with financial exposure
Weakening steel production, decreasing electricity output or tumbling exports are all signs of a feared Chinese slowdown. As a global sourcing platform with a rising middle class and an economic strategy oriented towards export-driven industrial growth, China’s importance on the international scene is unquestionable. Not surprising then that when the Chinese economy begins to slow down the whole world holds its breath. In fact, China experienced its slowest growth rate for the last six years with exports down by 8.3% year-on-year in July. At the same time the economy was losing steam, excessive margin lending (especially to retail investors) fuelled a speculative market bubble, which once investors realised was no longer sustainable burst. All these, coupled with the government’s intervention in the markets through the easing of monetary policy expose trade partners to country as well as currency risks. Following intense internal pressure and recognising that China’s competitive advantage in extremely cheap exports has started to diminish, Beijing has decided to devalue its currency to make Chinese exports more competitive and to boost its economy; an aggressive strategic move that links political risk with financial exposure and has global knock-on effects.
“When China sneezes, Australia catches the cold” – The case of a symbiotic dependence
China being Australia’s largest trade partner accounting for 33.9% of its total exports is without a doubt of great importance to Australian businesses. Looking closely at the ties between the two countries, a symbiotic relationship seems to exist between them. In fact, “China needs Australia to supply it with raw materials to help fuel its huge infrastructure requirements while Australia, as a major commodity exporter, needs the Chinese economy to remain strong in order to maintain its own economic prosperity” (Scutt 2015). Problems arise when Chinese demand for such raw materials falls as a result of a slowing economy. The real concern for Australian businesses here is that not only the associated commodity prices drop but so do the revenues for commodity exporters. Mining companies are, in that sense, the ones who suffer the most because demand for Australian iron ore, Australia’s top export will fall if the Chinese economy suffers. The reliance on the Chinese economy and the challenges associated with it for Australian businesses are straightforward: not only China is Australia’s largest trade partner but 56% of total exports to China are iron ore & concentrates. In addition to that, with investor confidence at low, Chinese FDIs flowing into Australia might slow down. Even though China only ranks 6th as Foreign Direct Investor in Australia, it has been the fastest growing FDI inflow provider among all countries. Not surprisingly, around 90% of these investments target the Energy & Mining sectors especially for resource and asset-seeking motives. The recent disruptions might therefore impact incoming flows in these sectors in the future.
The three challenges presented here are just a few among the many that shape trade relations in international business. Even though the “Chinese slowdown, with all the political, social and economic risks it entails, turns out to be the biggest threat to the global and hence the Australian economy” (Allen 2015) the potential implications of the other challenges cannot be overlooked. Looking to the future, an upcoming challenge confronting Australia with the dynamics of market globalisation will be a likely decline in raw material exports as China climbs up the value chain and shifts from a manufacture-based production towards a more services-oriented economy.