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Downturn fails to relieve bloated ICT trade deficit

ACS staff, Information Age

04/12/2003 12:04:00

The ACS’ release of the 2003 ICT Trade Update shows that Australia generated an ICT trade deficit of $14.4 billion for the 2002-03 financial year.

Noting that the deficit had not shown any substantive improvement since the last survey undertaken by the ACS in 2001-02, the ACS believes this continuing situation remains a cause for concern and is calling for greater cooperation between industry and government to address the problem.

Deficit stays high as trade slows “The deficit remained constant only because of the ICT industry downturn, which saw decreased demand for ICT products and services,” said ACS President Richard Hogg.

“As conditions gradually improve across the sector, we expect the deficit to resume its previously high growth levels unless steps are taken to reverse the trend,” he said.

The quantity of both imports and exports fell during the survey period, with total ICT exports worth $5.3 billion while imports cost $19.7 billion, each marginally down on the previous year. Even taking the past year’s stagnation into account, the ICT trade deficit grew by an average 7.4 per cent per annum since 1993-94.

ICT equipment deficit the biggest cost The report’s author, Professor John Houghton of the Centre for Strategic Economic Studies, pointed to continued falls in exports of locally produced ICT equipment as a cause for concern, with ICT equipment trade in deficit by $13.8 billion

“Of the $2.8 billion in ICT equipment exported from Australia in 2002-03, only 44 per cent was produced locally, with re-exports amounting to $1.6 billion,” he said. Re-exports are items brought into Australia and re-exported with little or no value added.

Over the last five years, ICT equipment exports declined by 2 per cent per annum, but within that figure, re-exports grew by almost 8 per cent per annum while locally produced exports fell by 9.5 per cent per annum.

“Locally produced ICT equipment exports have now fallen to levels of a decade ago, and during 2002-03, they were worth almost $800 million less than they were at their peak in 1997-98,” Professor Houghton said.

“This is particularly disturbing since it suggests that Australian ICT equipment producers failed to participate in the boom of the late 1990s. For them to participate in the emerging recovery, something has to change.”

ICTs contribute to productivity growth While recognising the importance of using ICTs, the report notes the contribution of ICT production to productivity growth, pointing to OECD figures showing that those countries with the highest ICT production, such as Ireland and Korea, also enjoyed the highest labour and multifactor productivity growth during the 1990s.

“The Federal Government has consistently pointed to Australia’s strong track record as a user of ICT products and services, but we believe we also must be a good ICT producer in order to reap the full benefits technology can deliver,” said Hogg.

“For Australia to retain our competitive edge, not just in ICT but in all other spheres of business and commerce, we need a strong and growing ICT production sector to underpin and drive our innovation capabilities,” he said.

Offshore outsourcing threatens services growth Computing and information services proved the best performer, with Australian exporting services worth over $1 billion while importing just over $600 million.

However, Hogg said those who believed Australia should focus only on software and services at the expense of hardware manufacturing were being short-sighted.

“The rapid growth of offshore outsourcing has demonstrated just how portable services have become in the 21st century,” he said.

“We cannot afford to concentrate on services to the exclusion of other potential growth sectors in light of predictions that a substantial proportion of our software and services sector will move offshore over the next few years,” said Mr Hogg.

AEEMA supports a strong focus on high-value ICT manufacturing The Australian Electrical and Electronic Manufacturer’s Association (AEEMA) has leant its weight to ACS calls for new strategies and cooperative measures to encourage more ICT manufacturing in Australia.

AEEMA chief executive Angus Robinson reaffirmed his organisation’s commitment to working with government to address this trade deficit situation.

He said the Electronics Industry Action Agenda, which had been recently launched by the Australian Government, represented a valuable opportunity to stimulate high-value, complex manufacturing in a range of key sectors which included automotive, home networking, medical electronics, defence, and traditional areas of the economy such as mining.

Robinson said an industry-led implementation group was working with both the Australian and state government agencies to map Australia’s ‘hi-tech’ electronics and photonics industry capability, which to date had been badly fragmented and poorly coordinated.

“Australian industry needs to recognise its strength in technology integration, commercialise what technological capabilities we do have in Australia and exploit niche market opportunities that are emerging, particularly in North Asia and NAFTA,” he said. Mr Robinson noted that the electronics industry action agenda is a key plank of the Australian Government’s recently launched ‘Technology Australia’ branding initiative. F3 recommendations key to growth Hogg also pointed to the recommendations of the Framework for the Future (F3) Leaders Forum as providing a way forward.

“An Industry Leaders Forum held in August recommended a range of strategies in its submission to the Backing Australia’s Ability Program, many of which could help improve Australia’s manufacturing and commercialisation capabilities,” he said.

“We look forward to working with our industry partners and with the new Minister, Daryl Williams, to create substantial improvement in Australia’s ICT trade performance over the coming months and years.”

This is an executive summary of the Houghton report:

This report is part of a series of statistical updates on the information and communication technology (ICT) industries and their markets. The series aims to provide consistent compilations of statistics on a core set of topics, namely: the information industries, the Australian market for ICT products and services, and Australia's international trade in ICTs. For the last three years these updates have been sponsored by the ACS through its Computer Systems and Software Engineering Board. They are compiled by Prof John Houghton of the Centre for Strategic Economic Studies, Victoria University, Melbourne. The ACS exercises no editorial control over the reports. The ‘ICT Update Reports’ are updated annually. They can be obtained from the Centre for Strategic Economic Studies (cfses.com/infoind.htm) or the ACS (acs.org.au).

Summary & conclusions This Australian ICT Trade Update 2003 presents a detailed statistical update on Australia's information and communication technology (ICT) trade over the decade up to and including 2002-03. It explores the composition and direction of ICT equipment, content and services trade, and discusses the ICT trade deficit. It also examines trade state-by-state and looks at the impact of the recent downturn on Australia’s ICT trade performance.

ICT trade Total ICT exports were worth $5.3 billion during 2002-03, around 2 per cent down on the previous year and well down on the peak of $7.1 billion achieved in 2000-01. Total ICT imports cost $19.7 billion in 2002-03, down marginally on the previous year and by almost 9 per cent from the peak of $21.6 billion in 2000-01.

ICT equipment trade Of the $2.8 billion in ICT equipment exported from Australia during 2002-03, just 44 per cent was produced locally, with re-exports (things brought into Australia and re-exported with little or no value added) amounting to $1.6 billion. Over the last five years ICT equipment exports from Australia declined by 2 per cent per annum, but within that figure re-exports increased by almost 8 per cent per annum while locally produced exports declined by no less than 9.5 per cent per annum. Locally produced ICT equipment exports have now fallen to levels of a decade ago, and during 2002-03 were worth almost $800 million less than they were at their peak in 1997-98.

Dividing the last decade into two periods reveals some disturbing trends. ICT equipment exports from Australia grew at a healthy 13 per cent per annum over the five-years to 1997-98, but declined by more than 2 per cent per annum over the five-years to 2002-03. More disturbingly, locally produced ICT equipment exports grew 12 per cent per annum over the five-years to 1997-98, but declined 9.5 per cent per annum over the five-years to 2002-03. This is indicative of a decline in Australian ICT equipment manufacturing since the mid 1990s. Australian ICT equipment production for export has been hit by the recent downturn. But what is more disturbing, it failed to take advantage of export opportunities during the boom years of the late 1990s. The obvious question is what must we do differently to enable Australian manufacturers to participate in the emerging recovery and the next ICT boom?

ICT services trade Australia’s ICT related services exports amounted to almost $2.6 billion during 2002-03. Computer and information services are an area of relative strength, with exports growing more than 18 per cent per annum since 1993-94, to $1.1 billion. ICT related services imports cost $3.1 billion, and have increased by almost 6 per cent per annum since 1993-94. Hence, despite a strong positive contribution from computer services, there was an overall deficit on trade in ICT services in 2002-03 of $569 million.

ICT export markets and import sources The major markets for Australia’s ICT equipment exports in 2002-03 were New Zealand ($774 million) and the United States ($602 million). Other national markets were significantly smaller. China and Hong Kong $167 million, Singapore $159 million and the United Kingdom $123 million make up the top five markets. China (including Hong Kong) is now the largest supplier of imported ICT equipment to Australia, accounting for almost 18 per cent of total imports or close to $3 billion during 2002-03. The United States, Malaysia, Japan, Korea and Singapore are among our other major ICT equipment suppliers.

ICT trade state-by-state Looking at ICT trade state-by-state, we find that NSW accounted for a declining 45 per cent of Australia’s locally produced ICT equipment exports during 2002-03 and a remarkable 72 per cent of all ICT equipment imports. ICT equipment exports from NSW have declined by more than 5 per cent per annum over the last decade, and are now less than half their level of the mid 1990s. Victoria accounted for around 35 per cent of Australia’s locally produced ICT equipment exports during 2002-03. The exit of such manufacturing activities as those in Wangaratta have seen a significant fall in computer equipment exports from Victoria. Of the other states, Queensland accounted for just over 8 per cent of Australia’s locally produced ICT equipment exports during 2002-03, South Australia for almost 7 per cent and Western Australia for just less than 5 per cent. The contribution of the other states and territories to ICT trade was relatively small.

Impact of the recent downturn The recent downturn had a major impact on both ICT exports and imports. Significant variation of trends between specific equipment and services categories are a major feature of the recent downturn and emerging recovery. During 2000-01, ICT equipment exports from Australia increased by 25 per cent – although locally produced equipment exports increased by a somewhat slower 20 per cent. Boosted by the one-off impact of the Olympics, ICT related services exports increased by 39 per cent. During 2001-02 the full force of the downturn was felt, with ICT equipment exports falling 8 per cent and ICT services exports 39 per cent. A recovery in services during 2002-03 saw the declines halted, despite a further 12 per cent fall in ICT equipment exports.

Because of the relative strength of Australian investment spending during the downturn imports were affected somewhat less than exports, with equipment imports down 9 per cent during 2001-02 and stabilising during 2002-03. ICT related services imports declined during 2000-01 and 2001-02 – by 3 and 5 per cent respectively. During 2002-03, they rebounded – growing 4.2 per cent. The net result has been small declines in the ICT trade deficit during 2000-01 and 2001-02, and a small increase in the deficit during 2002-03.

Does an ICT deficit matter? While it is true that a deficit in one area of trade is not a concern if there are surpluses to pay for it in others, the ICT deficit is a concern for a number of reasons. For one thing, the sheer size of the ICT deficit is now such that the question of whether we can afford it must be raised – especially in an environment in which Australia’s overall trade position is declining. ICTs could be making a positive contribution to Australia’s trade position, rather than a negative one. Nevertheless, some argue that the ICT deficit underpins productivity gains in other sectors. While true, realising the benefits of being a user of ICTs should not blind us to the potential benefits of being a producer. Nor should we be blinded by the false dichotomy between ICT-producing and ICT-using industries.

Looking at productivity growth for the decade of the 1990s (adjusted for the business cycle) the OECD revealed that those countries with the largest growth in GDP per hour worked (ie, labour productivity) were Korea, Ireland and Luxembourg. Australia ranked ninth and the US 12th, both well behind the leading three.

Ireland and Finland experienced the highest multifactor productivity growth during the 1990s, well ahead of all other OECD countries.

Looking at ICT production the OECD revealed that the three countries with the highest share of ICT value added in business sector value added in 1999 (ie, of ICT production in total production) were Ireland, Finland and Korea; the top two countries in terms of ICT equipment share of manufacturing trade were Ireland and Korea; and the three countries with the highest trade surplus in ICTs were Ireland, Korea and Finland. Obviously, Finland, Korea and, to a lesser extent, Ireland are advanced users of ICTs. But is it a coincidence that the leading producers of ICTs during the 1990s experienced the highest labour and multifactor productivity growth during the decade?

There is emerging evidence of the productivity benefits of being an ICT user, but the benefits of being an ICT producer should not be overlooked. The US Department of Commerce noted that the ICT producing industries in the US “contribute disproportionately to overall economic growth”. Over the period 1996-99, the ICT producing sector accounted for an average of just 7 per cent of US GDP, but was responsible for an average 29 per cent of the country’s overall real economic growth. During 2000, the ICT producing sector accounted for 8 per cent of US GDP and 26 per cent of real economic growth. By contrast, NOIE recently reported that ICT use “is currently responsible for 1.66 per cent growth in Australian GDP”.

Recent analysis has shown that new product technologies tend to create jobs, while new process technologies tend to be job destroying – with their benefits accruing through increases in productivity rather than through new employment opportunities. By failing to gain any serious position as a creator and producer of ICT and related product technologies, and becoming only a defensive adopter of process technologies to enhance efficiency, Australia has missed the creation of new streams of high value employment that have been associated with the ICT industries in some other countries, and has seen employment growth over the last five years or more concentrated in low paid, casual jobs. Nor is there a clear distinction between ICT producing and ICT using. Because of the synergies between production and use, it is often the ICT producing industries that are best able to use ICTs productively. What has made Dell more successful than other PC producers in recent years is not its PCs, but its use of the Internet for ordering and the consequent enabling of building to order rather than to inventory, as a business model, and its coordination of global sourcing and delivery. It should not be surprising, then, that NOIE’s recent report, Productivity and Organisational Transformation, noted that the largest productivity impacts from using ICTs in Australia are expected in electronics manufacturing and communications (ie ICT producing industries).

More importantly, the growth of the ICT deficit is an indicator of decline in the local ICT industry and a clear sign of declining international competitiveness in some areas of ICT production. The recently released Future Framework report recognised that Australia cannot simply be a user of ICTs, and must also be a producer. The F3 Committee 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.

Hence, the main concern over the ICT deficit is that if Australia is losing ground in the production of ICTs for the market, then it is likely to be losing ground in the production of ICTs for in-house use (ie, in the application of ICTs). This because many of the same factors underpin ICT production for market and ICT in-house, non-specialist 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.

There are some positive signs regarding applications in the growing surplus on trade in ICT services – the most important area of capability for the local application of ICTs. However, it is clear that most areas of ICT manufacturing (electronics) are losing ground. Electronics has become a generic technology, used in and supporting many areas of manufacturing. Innovative and competitive local electronics equipment and systems producers are essential to enabling innovative design and manufacturing across a wide range of industries. The growing deficit on trade in ICT and related electronic products and systems points to a potential decline in Australia’s capacity to support high technology manufacturing.

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 industries are a highly diverse range of industries. Comparative and competitive advantage 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 developed countries to have strengths in some aspect of ICT production, and comparative advantage in some part of the ICT industries.

Arguments that treat ICTs like wheat and suggest that Australia need not worry about being an ICT producer are misguided. They fail to take account of this diversity in the ICT industries. Not all countries can or should produce wheat. Amongst other things, to do so requires particular environmental conditions. However, all developed countries can and do produce ICTs (for market and/or internal use), and they should specialise in specific areas of ICT production for the market in which they have a comparative advantage.

In Australia’s case, long-term and rapidly growing surpluses on trade in ICT consulting and implementation services stand out as a bright spot among what is otherwise a rather depressing trade performance. In 2002-03, Australia exported more than $1 billion worth of computer and information services, while importing just over $600 million. It is the only area of ICTs in which Australia has consistently run a surplus on trade, and that surplus has been growing strongly – albeit from a low base. This suggests that IT services are an area of local advantage.

The challenge for Australian policy makers is to build on such advantages. But it is not simply a case of focusing on services or hardware. International trade patterns suggest that a more subtle approach is required, and the recent globalisation of services and such phenomena as offshoring to India should serve as a wake-up call to the need for a more sophisticated approach.

What could be done? A long-term weakness in Australia’s ICT industries has been the tendency to invest on a relatively small scale, to supply the local market. A key aim of the Partnerships for Development Program throughout the 1990s was to encourage multinational firms investing in Australia to increase exports to 50 per cent of their imports. Modest as it was, that aim has not been achieved. The ICT multinational firms operating in Australia are net importers. What the “Asian Tiger” economies and Ireland have done, and what Australia has failed to do, is to attract export-oriented investment. 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. Increasingly, global markets involve competition between entire production systems, orchestrated by multinational firms, rather than between individual factories or firms. Looking at worldwide ICT trade patterns, the activities of various countries in global production chains is evident. For example, there are some countries with large surpluses on trade in computer equipment and deficits on trade in electronic components, indicating extensive assembly activities (eg Mexico); and others with surpluses in electronic components combined with deficits in computer equipment, indicating the maintenance of a central role in key technologies (eg the US). So, it is not simply a case of hardware manufacturing moving to lower wage locations, but rather one of relatively labour intensive assembly moving to lower wage locations, while relatively capital intensive and intellectual property intensive electronic components manufacturing remains in higher wage locations. A similar split applies to services, and as trade in services is liberalised is leading to the emerging phenomenon of offshoring. Australia should not simply give up ICT and related electronics manufacturing and look to a future in services. Many ICT related services activities will disappear offshore just as fast as ICT manufacturing has, if not faster. 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, and focus coherent and consistent policy support, inter alia, on attracting export-oriented investment.

1.OECD (2001) Science, Technology and Industry Scoreboard 2001: Towards a Knowledge-based Economy, Paris. 2.See, for example, McKinsey (2001) U.S. Productivity Growth 1995-2000: Understanding the contribution of Information Technology relative to other factors, McKinsey Global Institute, Washington, DC which demonstrates that US productivity growth in the second half of the 1990s was attributable to six sectors, of which three are ICT producing (ie semiconductors, computer equipment and telecommunications). 3.Department of Commerce (2002) Digital Economy 2002, US Department of Commerce, Washington DC, pp23-26. 4.OVUM (2003) Productivity and Organisational Transformation: Optimising investment in ICT, NOIE, February 2003, p6. 5.See, for example, Edquist, C, Hommen, L and McKelvey M. (2001) Innovations and Employment: Process versus Product Innovation, Edward Elgar, London 6.OVUM (2003) Productivity and Organisational Transformation: Optimising investment in ICT, NOIE, February 2003, p151. 7.Framework for the Future Steering Committee (2003) Enabling Our Future: A framework for the information and communication technology industry, DCITA, April 2003, p19. 8.UNCTAD (2002) World Investment Report 2002: Transnational Corporations and Export Competitiveness, United Nations, New York and Geneva, pxxi.