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ICT imports outstrip exports 5:1, deficit grows to $20bn

Prof John Houghton; Centre for Strategic Economic Studies, Victoria University, Information Age

13/06/2006 12:11:02

Australia's ICT trade deficit grew to nearly $20bn in 2005 as imports cost more than $25bn and exports of goods and services yielded $5.3bn, down from $7.7bn in 2000.

And among exports, locally-produced ICT equipment accounted for only 1.9bn, more than $72m less than 10 years before at current prices.

At the same time, equipment imports cost $22bn, accounting for 14 per cent of Australia's total merchandise imports, and nearly twice what we spent on imported motor vehicles.

China is now our largest single source of imported ICT equipment, worth $6.6bn or 30 per cent of total ICT equipment imports.

When re-exported equipment (passing through Australia with little or no value added) is added, equipment exports get to $3.2bn, and at 3 per cent of national merchandise exports, just ahead of wool at 2 per cent.

While services exports earned $2.2bn in 2003-04, down from $2.3bn in the year before, we imported services worth more than $3bn, leaving a deficit although down on the previous year.

The findings are contained in the ICT Trade Update 2005, researched and written by Prof John Houghton of the Centre for Strategic Economic Studies at Victoria University for the Australian Computer Society.

His report tracks Australia's ICT over the decade to 2005, providing a continuing analysis of the composition of imports and exports and their source and direction.

The complete report is available from www.acs.org.au or from www.cfes.com/infoind.htm.

Summary Australian ICT Trade Update 2006 presents a detailed statistical update on Australia's information and communication technology (ICT) trade over the decade 1995 to 2005. It explores the composition and direction of ICT equipment, software, content and services trade, and discusses the ICT trade deficit. It also examines ICT trade state-by-state.

ICT trade In 2005, ICT goods and services exports from Australia were worth more than $5.3 billion, well down from the $7.7 billion exported in 2000. Total ICT imports cost $25 billion, up from around $15 billion a decade ago. Consequently, Australia's ICT trade deficit reached $19.7 billion during 2005

ICT equipment trade In 2005, total ICT equipment exports from Australia were worth $3.2 billion - around 3 per cent of Australia's total goods exports. To put that into perspective, Australia's wool exports accounted for around 2 per cent and coal for more than 15 per cent.

Re-exports (i.e. things brought into Australia and re-exported with little or no value added) amounted to $1.2 billion (40 per cent) of Australia's total ICT equipment exports. Locally produced ICT equipment exports were worth $1.9 billion in 2005 - $72 million less that they had been worth a decade earlier (in current prices). Locally produced exports of audiovisual equipment, components and other ICT-related equipment have increased over the last decade, while computer and communications equipment exports have declined. Indeed, in the mid 1990s, locally produced exports of computer equipment were worth more than $920 million. By 2005, they had fallen to just $300 million.

Total ICT equipment imports into Australia cost more than $22 billion in 2005 - up from $13.5 billion a decade earlier (in current prices), and higher than the previous peak reached during the dotcom boom. ICTs accounted for around 14 per cent of total goods imports during 2005, compared to less than 9 per cent for motor vehicles.

During 2005, ICT equipment accounted for around 14 per cent of Australia's total merchandise imports. Imports of ICT equipment for domestic consumption cost a little under $21 billion in 2005, up from less than $13 billion a decade earlier (Figure 3). Computer equipment accounted for 34 per cent, audiovisual equipment for 21 per cent and communications equipment for 21 per cent.

ICT services trade Australia's ICT-related services exports were worth $2.2 billion in 2005. They accounted for around 6 per cent of total services exports. Computer and information services were the largest and fastest growing category, although 2005 exports were 5 per cent down on 2004.

Australia's ICT related services imports cost $3 billion in 2005. They accounted for around 8 per cent of all services imports. Computer and information services accounted for 34 per cent, audiovisual services for 23 per cent, communications services for 22 per cent, and software royalties and licence fees for an estimated 21 per cent.

Hence, there was a deficit on trade in ICT-related services in 2005 of $872 million - down significantly from $1.2 billion peak of 2001-2002 (Figure 5). Computer and information services have been in surplus since 2002, and there has been a small surplus on trade in communication services during the last two years.

ICT export markets and import sources Throughout the last decade, New Zealand and the United States have been the largest markets for Australia's ICT equipment exports. In 2005, other major markets included Germany, China, Singapore, the United Kingdom, India, Korea and Taiwan (Figure 6). New Zealand, Germany and the United States were the largest markets for locally produced equipment exports.

A decade ago the US and Japan were the two main sources of ICT equipment imports into Australia. Asian countries, including China and Hong Kong, Malaysia, Korea, Singapore and Taiwan, are now major suppliers (Figure 6). The biggest change is in imports from China, which is now the largest supplier - with exports to Australia in excess of $6 billion during 2005 (approaching 30 per cent of Australia's total ICT equipment imports).

Services data are limited, but major markets for Australia's ICT services exports during 2004 included the United States ($418 million), United Kingdom ($117 million), Hong Kong ($114 million), Japan, China, Netherlands, France, Singapore and Germany (Figure 7).

The growth markets for communications services exports between 2000 and 2004 were China, Hong Kong and Germany, while for computer and information services the major growth markets were Germany, Ireland, South Africa, China, Switzerland and Japan. Of the few reporting countries, the United States was by far our largest single source for ICT services imports during 2004 at $475 million. The United Kingdom was the source of $113 million, and France $6 million.

Offshoring and trade in off-shored services involves computer and information services (i.e. IT services) and a range of IT-enabled business services. The major growth suppliers of IT-enabled services imports between 2000 and 2004 were: South Africa, PNG, India, Germany, Canada, China and the United Kingdom. These countries are a mix of those building exports from a very low base (e.g. PNG) and those that are major offshored services providers (e.g. India and Canada).

ICT trade state by state NSW and Victoria dominate ICT equipment exports and imports - with Victoria the largest exporter of ICT and related equipment in 2005. ICT equipment exports from Queensland, South Australia and Western Australia were also significant (Figure 8). NSW attracted no less than 67 per cent of all ICT equipment imports during 2005 - although more than $1 billion worth were re-exported. NSW also accounted for more than 65 per cent of Australia's trade in ICT related services.

In 2004, NSW exported $674 million worth of domestically produced ICT equipment, less than half the $1.2 billion exported from NSW a decade earlier; whereas Victoria's domestically produced ICT equipment exports were worth $704 million, up from $582 million a decade earlier. Of the other States, Queensland accounted for 7 per cent of Australia's locally produced ICT equipment exports, and South Australia for 6 per cent and Western Australia for 5 per cent. The contribution of the other States and Territories to ICT trade is relatively small.

What does the ICT deficit show? ICT imports underpin productivity gains, but realising the benefits of being a user of ICTs should not blind us to the potential benefits of being a producer. Strong productivity increases have been realised by countries that are ICT producers and by the ICT producing industries. The OECD's Pilat and Wolfl (2004) concluded that: "In Finland, Ireland and Korea, close to 1 percentage point of aggregate labour productivity growth over the 1995-2001 period was due to the strong productivity performance of the ICT manufacturing sector. In the United States, Japan and Sweden, the ICT-producing sector also contributed significantly to productivity growth."

Productivity in ICT production has been a significant driver of overall productivity growth in many developed countries, it does not depend upon ICT consumption alone.

Indeed, a growing ICT deficit can be seen as an indicator of decline in the local ICT industry and a sign of declining international competitiveness in ICT production. This has implications for ICT using as well as the ICT producing industries. The Future Framework report stated that: "World-class ICT capabilities (eg, in terms of skills and innovation) are fundamental to the ability to apply ICT in other industries and achieve broader national economic and social goals.

A significant ICT production capability in the economy creates a symbiotic relationship between users and producers such that the level of sophistication of users is enhanced by the presence of producers of ICT goods and services. Without an industry producing such products and services, it would be more difficult for Australia to keep up internationally in terms of their adoption and use."

Many of the same factors underpin ICT production for market and in-house production and application. The concern is not so much, or not primarily, about the deficit per se, but rather about what a large and growing deficit indicates about Australia's underlying ICT capabilities.

What are Australia's strengths? Trade and specialisation are economically beneficial. Not all countries will have a comparative advantage in all areas of ICT production. Nevertheless, the ICT producing industries are a highly diverse range of industries. Comparative and competitive advantages in areas like electronic equipment assembly are very different from those in such areas as consulting services. Given the enormous range of the ICT industries, and the diversity of their underlying inputs and cost structures, one could reasonably expect almost all countries to have strengths in some aspect of ICT production, and comparative advantage in some part of the ICT industries.

In Australia's case, modest surpluses on trade in computer services stand out among what is otherwise a disappointing trade performance. It is the only area in which Australia has a surplus on trade, albeit small. This suggests that computer services may be one area of local advantage. Despite the overall picture, there are also areas of electronics production in which Australia is competitive and actively participating in global production systems (e.g. automotive electronics, some areas of ICTs, medical devices, instrumentation, etc.). The challenge is to build on these capabilities.

The challenge of offshorin Offshoring may deliver cost savings, but it may also involve job losses. On the one hand, cost savings and efficiency gains provide the foundation for productivity growth and the creation of new employment opportunities. They enable firms to compete, win new business, gain market share and grow. On the other hand, some of the jobs lost may be difficult to replace, and there is some concern that labour conditions will be eroded through competition with locations without equivalent labour and social welfare provisions - leading to a "race to the bottom".

A protectionist response that forfeits the potential benefits of offshoring is unlikely to be the most constructive. A more measured response would be to take advantage of the benefits while managing the adjustment process, compensating for adjustment costs where necessary and enabling workers to seize new job opportunities. One of the keys to maximising the benefits will be to ensure that they flow to the consumer as quickly as possible through continued attention to competition policy.

There may also be a need to adjust education and training, not only to account for the types of jobs being lost and created, but also for the possible loss of traditional career paths. In the long run, further trade liberalisation and development in developing countries, and the harmonisation of minimum labour and welfare conditions will reduce the opportunities for wage arbitrage and the motivation for offshoring.

Globalised services activities, depend upon local education and skills. Potential opportunities for Australian participation as a major venue for 'on-shoring' (ie being a major services exporter) will depend above all else upon education and skills, as well as IT and communications infrastructure (e.g. high speed broadband), the regulatory environment and the ability of would-be local suppliers to link into global production systems. Education and training, and communications policy will be central. Australia's participation in global ICT manufacturing declined as manufacturing activity globalised. The challenge is to ensure that the same thing does not happen again with IT services.

What could be done The globalisation of the ICT producing industries and the emergence of international production systems reflects the responses of multinational firms to technological change, policy and trade liberalisation and increased competition. In the post-'Dot Com' recovery, there is a new wave of globalisation transforming the ICT industries - with the rise of some developing economies as both producers and new growth markets (e.g. China and India), and a rapid globalisation of services that is focused on IT and a range of IT-enabled business services.

In many of these areas, as in manufacturing, the focus of globalisation is shifting from "market seeking", driven by the need for market access, towards "efficiency seeking", driven by competition and the need for global rationalisation of production. As a result, production of both goods and services is becoming increasingly fragmented and geographically dispersed.

These trends raise very real challenges for Australia. Isolated for world markets, it is likely to become increasingly difficult to connect with, and participate in, global production systems. The challenge for Australian policy makers is to take a more "fine-grained" view of local capabilities, competitive and comparative advantages than has hitherto been the case, take account of the emergence of global production systems, and focus coherent and consistent policy attention, inter alia, on developing local capabilities that can further engage local producers in global production systems.

Cluster development policies have been popular at the local level, but as global competition intensifies, global production systems rationalise and multinational enterprises increasingly permeate economies around the world, we may need to shift the emphasis from the creation of local linkages and clusters, towards the creation of global linkages and participation in global production systems (i.e. towards cooperating globally in order to compete locally).