Sunday, February 3, 2013

Australia’s closeness to Asia

The Australia in the Asian Century White Paper said that for Australia, ‘The tyranny of distance is being replaced by the prospects of proximity’. It is true that Australia is in the right place at the right time. Australia’s neighbourhood is the most dynamic growth centre in the global economy.

Yet looking at flight times or calculating the distance as the crow flies (or great circle distance), some might reckon that Australia is not particularly close to Asia at all. The Australian historian Geoffrey Blainey observes that: ‘Every city in Europe is closer to continental Asia than are Melbourne, Sydney and Perth’ and that Los Angeles is almost as well placed as Sydney in its distance from China. Japan is of course, right next door to China.

This simple view of the geo-economics ignores one of the concepts that is most important in determining the intensity of our trade and other interactions with others: the idea of relative distance. London may be closer to Beijing than Sydney is and Russia only needs one footstep to cross from Europe to Asia but London is between the United States and continental Europe and Russia is also next to the other major economic powers in Europe.

Australia is relatively close to Asia.

It takes but a rudimentary look of the facts of trade to understand that there is something wrong with a simple view of the impact of geography on the world economy. In the more careful analysis of international economics, two things are both well-known and empirically well established. The first is that the bigger an economy, the more likely it is that your country will have a large trade and commercial relationship with it. The second is that where your country is placed in the world (your proximity relative to other countries as a potential trading partner) will affect the share of your country’s commerce with that other economy. Sound plausible? It is not only plausible, but these are relationships that are rock-solid empirically and pregnant with implications that are not perhaps intuitively so obvious.

True Australia is a long way from anywhere, especially if you grew up a generation or two ago and hankered after the economic and political security which the Old World in Europe and then the New World in North America seemed to provide. Not much that you can do about that, one might have thought.

But though far from everywhere, Australia was always relatively close to Asia, a fact that the logic of economic geography dictated would cause Asia to have a relatively large share in Australia’s trade even when Asia was relatively unimportant. These things can be measured statistically of course, and when you do that what you find is that the intensity of Australia’s trade with Asia (the share of Australian trade with Asia compared with its world trade share) is usually 2 to 4 times higher than its trade with the rest of the world. That’s not only for bulk, costly-to-transport commodities like iron ore or coal, but right across the range of goods, both exports and imports. And more than that, the intensity of Europe’s and America’s trade with Asia is much lower than Australia’s (or our other neighbours in the region).

And how the unimportance of Asia has changed!

Now Asia is not only relatively close to Australia, it’s super important. It already accounts for more than a third of the world economy. Asia’s successful industrialisation has indeed changed the geo-economic map and brought the centre of world industrialisation relatively close to Australia (as well as bringing it into the same time zone!).

Even as transportation costs fall and communications technology improves, the evidence suggests that distance and time zone is important in determining trade and investment patterns. Production of the simplest of goods has value added in different locations across Asian production networks and the location for each part, component or stage of production is determined by a number of factors, of which relative distance is one of the most important.

Relative distance works both ways, of course. Viewed from Beijing, for example, Sydney is relatively closer than is London. Any advantage in absolute distance that London has over Sydney is negated by the fact that London sits in the middle of the other industrial powers in Europe. On average it is no surprise then that Australians know and care much more about their neighbours in Asia than Europeans do — relatively speaking, of course.

Given where Australia sits in the world, with its closest trading partners in Asia, Australia is an important economic and political participant in Asian affairs. Helping establish APEC and promoting the East Asia Summit, as well as being the principal underwriter of economic security of most of Northeast Asia through it raw materials and energy supply, is only possible because Australia is a part of what is going on in Asia.

Shiro Armstrong is a Research Fellow and Co-Editor of East Asia Forum in the Crawford School at the Australian National University.

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