Department of Foreign Affairs and Trade

6. Australia's 2002 trade performance

It was a challenging year for Australian trade in 2002. Strong domestic demand and business confidence increased our propensity to import, particularly in those items that would invest in the future growth of the Australian economy. At the same time, the weaker economic conditions in our major trading partners apparent since early 2001 had a greater impact on our export earnings, mainly through lower commodity prices. Other factors, such as the severe drought, the appreciation of the Australian dollar and concerns over global terrorism, also had an impact on our trade performance towards the end of 2002.

The medium-term prospects for stronger world growth and a return to normal seasonal conditions in Australia following the drought should lead to an improvement in our trade performance.

Following a trade surplus of $2.9 billion in 2001, the balance on trade was a deficit of $11.0 billion in 2002. Goods and services imports grew by 7 per cent in 2002, underpinned by the strength of Australian domestic demand. Imports of capital goods (used mainly as investment in future growth) rose 19 per cent, including $3.7 billion worth of civil aircraft (seven times the level of aircraft imports in 2001).

After exceptional growth in 2000 and 2001, exports of goods and services fell 2.3 per cent in 2002, with all major export categories recording falls. This result largely reflected a 2.2 per cent fall in export prices in 2002, due to the impact of subdued global economic growth on commodity prices and the appreciation of the Australian dollar (the Australian dollar appreciated in both US dollar and trade weighted index terms by 4.4 per cent on average in 2002 compared to 2001).

Volumes of goods exports rose 1 per cent in 2002 (following strong growth of 9.9 per cent and 3 per cent in 2000 and 2001 respectively), with a 3.4 per cent increase in non-rural export volumes being partially offset by a 5.3 per cent fall in rural export volumes, due in part to the impact of the current drought.

The value of goods and services exports in 2002 - at $151 billion - remains around record levels (see chart below). Goods and services exports grew strongly in 2000 and 2001 due to the impact of the Sydney Olympics, the lower value of the Australian dollar, strong rural production, high commodity prices and a strong rebound in East Asian growth following the 1997-98 financial crisis.

The weaker economic performance of our major trading partners since early 2001 is now being more strongly reflected in our export growth, particularly through lower commodity prices. As noted in Chapter 1, initial hopes of a rebound in the global economy through 2002 from the downturn in 2001 did not eventuate. The traditional drivers of global growth - the United States, the European Union and Japan - all recorded lower than historical average economic growth rates in 2002.

Merchandise exports to East Asia - which has taken more than half of Australia's merchandise exports in recent years - were affected by slower regional growth and lower commodity prices, and fell 3.7 per cent in 2002. Country-by-country, Australia's exports within East Asia reflected differences in the performance of individual regional economies. For example, our export growth to China and the Republic of Korea was very positive, reflecting those countries' very strong economic growth. Whereas our exports to other East Asian economies, including Japan (Australia's largest merchandise export market), were weaker, in line with subdued economic growth. The 6.6 per cent fall in Australian merchandise exports to Japan in 2002 accounted for two-thirds of the fall in total merchandise exports to East Asia.

The broad relationship between the share of Australian exports to East Asia and the region's economic growth is illustrated in the chart below.

Merchandise exports to the rest of the world fell by 1.0 per cent in 2002. Within this, exports to the United States decreased by 3.3 per cent, while exports to Europe rose by 1.0 per cent.

Rural exports fell in value by 7.1 per cent or $2.1 billion in 2002, accounting for 61 per cent of the fall in total exports of goods and services. The impact of the severe drought was increasingly evident towards the end of 2002, particularly in crop exports, including barley, rice and wheat (see chart below). The negative effect of the drought on rural exports is expected to continue in 2003.

Other factors have also reined in rural export growth. Beef exports fell despite increased slaughter rates, due to lower prices and Japanese consumer concerns over mad cow' disease (following a domestic outbreak in September 2001). But higher demand in Indonesia and Saudi Arabia resulted in a strong increase in live animal exports. Cotton exports fell significantly in 2002 due to the impact of water restrictions on production and increased stockpiling due to low world cotton prices.

Exports of non-rural and other goods declined in value by 1.3 per cent in 2002. The impact of slower global economic growth was most evident in the $1.1 billion decline in alumina and aluminium exports in 2002 as a result of lower demand in the United States, the European Union and Japan. Exports of natural gas and crude and refined petroleum also fell $1.1 billion, reflecting currency movements and lower prices for liquefied natural gas (LNG) exports (prices for Australian mineral fuel exports fell 7.6 per cent in 2002). Despite weaker global growth, coal exports rose $353 million in 2002 as lower exports to Japan were offset by increased demand from China and Taiwan.

Exports of manufactured goods declined in value by 2.2 per cent in 2002. A strong pick-up in demand for motor vehicles from New Zealand and Kuwait was offset by falls in exports to Saudi Arabia and the United States. There was also a strong increase in uncoated flat-rolled steel exports (predominantly to the United States), while wine exports reached a record $2.3 billion in 2003 (see box). The completion of an undersea optical fibre communications cable to Japan resulted in a $605 million fall in telecommunications and optical equipment exports in 2002.

Service exports fell by 0.6 per cent in 2002. Tourism exports fell marginally, reflecting concerns over international travel following the terrorist attacks in the United States and Bali - visitor arrivals from the United States were down 3 per cent in 2002. Exports of personal and business services reported modest growth in 2002, particularly in information technology, marketing, research and legal services. Services income from shipping and transportation was lower, reflecting slower global export activity and lower prices in the shipping industry.

Australia's terms of trade have improved over the last several years, as the price of many imports (particularly manufactured imports) continues to fall. Australia's terms of trade rose by 2.5 per cent in 2002 compared to 2001 as import prices fell more than export prices.