Trade and Investment

EU-Australia Economic Relations 2006

1. Introduction

The bilateral economic and trade relationship between the European Union and Australia is healthy with strong and consistent underlying growth. However, because the focus in Australia is often placed on individual European countries, the importance of the EU, as a single market, is not always acknowledged. This EU Insight reviews the bilateral relationship between Australia and its largest single economic partner, the European Union.

The European Union is the world's largest economy and the world's largest trader

The EU represents a huge market opportunity for Australia , both in terms of current trade levels and growth. With a combined GDP of $A19.3 trillion in 2006, the EU was the world's largest single market. In 2006, the EU was the world's largest two-way trader of merchandise goods (excluding intra-Union trade), being the world's largest exporter and the world's second largest importer, accounting for roughly 18% of world merchandise trade on each of these accounts. Australia , in comparison, was ranked 18th as an exporter (1.4% of world exports), 14 th as an importer (1.5% of imports) and 14th in terms of two-way trade (1.5% of world two-way trade). (See Table 1) .

Table 1: Leading exporters and importers in world merchandise trade, 2006

The EU economy is competitive and dynamic

The EU is also a competitive economy, which is attributable in large part to its capacity to implement structural reform. The 'Global Competitiveness Rankings ' produced by the World Economic Forum found that six of the world's ten most competitive countries in 2006-07 were EU Member States, with 25 out of 27 Member States featuring in the top 50. The same report ranked Australia as the 19 th most competitive economy. A separate report, prepared by The Economist Intelligence Unit, forecast that eight EU Members States would be in the top 15 countries worldwide with the best business environment over the next five years (2007-2011), with Australia ranking 9th out of the countries surveyed. Meanwhile, the World Bank also found that two of the world's top six reformers in 2006 were EU Member States.

In 2006, growth in the EU economy rebounded to a healthy 3.0%, following a period of disappointing growth from 2003 onwards. Future projections are for sound growth to continue into 2007 and 2008 at a rate of 2.4% per annum. Significantly, these estimations put the EU growing at a faster rate than both the United States and Japan for this year and the next. This means that the EU economy is forecast to be the fastest growing major developed economy in the near future.

2. Overall Economic Relationship

The EU has been Australia's largest economic partner for over 20 years

The most complete measure of the overall EU-Australia economic relationship is the Balance of Payments. This takes into account trade in goods and services, foreign investment income and transfer payments. On this basis, the EU has been Australia 's largest economic partner since at least 1980, when the Australian Bureau of Statistics (ABS) first began keeping records of this.

The value of the Australia-EU balance of payments relationship grew by 12% in 2006, behind the average of 17% for all trading partners. Nevertheless, economic activity amounted to $A100 billion, or 19% of all Australian overseas transactions. In comparison, the overall value of the economic relationships between Australia and China , and Australia and ASEAN, increased by approximately 23%, albeit from much smaller starting points (with ASEAN accounting for just under two-thirds and China for 40% of the EU's share). In comparative terms, the EU's 19% share of Australia's overall two-way balance of trade remains well ahead of the US (14%), ASEAN (13%), Japan (12%) and China (10%) in 2006 ( See Figure 1) .

In terms of Australia's overall balance of payments with the EU, the deficit with the EU narrowed by 11% to $A30 billion, primarily due to strong growth in Australian exports to the EU (+25%), which more than offset a 5% growth rate in EU imports. In a year when Australia 's overall deficit narrowed by 2% to $A54.3 billion, Australia 's other large, long-standing balance of payments deficit - that with the US - declined by 6% to $A20 billion. The deficit with China also narrowed by 24% to $A3 billion, while Australia 's traditional trade surplus with Japan increased by 39% in 2006 to $A11 billion. Most of these decreases in trade deficit levels were due to stronger growth in exports than in imports. Among Australia 's major trading partners, ASEAN was a notable exception to this pattern, with Australia 's deficit increasing by 34% to $A19 billion.

Australia's relationship with the EU is more diversified than with other partners

Reflecting its maturity, Australia 's trade relationship with the EU is more diversified than its relationship with most other major partners. Merchandise trade represented 57% of Australia 's economic relationship with the EU in 2006, compared to 90% with China , 81% with Japan , 76% with ASEAN, and 45% with the USA . This greater degree of sectoral balance is a result of the greater comparative importance of trade in services, which accounted for 18% of total transactions in 2006 (as compared to 9% for both China and Japan, for example), and of investment (24% of transactions, compared with less than 0.5% for China, 3% for ASEAN and 10% for Japan). ( See Figure 2) .

3. Merchandise Trade

The EU is Australia's largest partner in two-way goods trade

The EU is Australia 's most important trading partner in terms of two-way merchandise trade. In 2006, the EU was the largest source of merchandise imports , and regained its ranking as the third largest export market for Australian goods (up from the previous calendar year, when it was the fourth largest market - see Table 2) .

The EU accounted for $A57 billion in two-way merchandise trade with Australia in 2006 on a Balance of Payments basis, or 17% of total two-way merchandise trade, which was an increase of 9% on the previous calendar year. Australia 's other major merchandise trading partners were ASEAN (16%), followed by Japan (15%), China (14%) and the USA (10%) . The EU has been Australia 's most important trade partner in terms of total merchandise trade since 1996 - that is, consistently for the last 11 years (see Figure 3) . This coincides with the enlargement of the EU to include Austria , Finland and Sweden in 1995.

Enlargement of EU will provide further trade opportunities for Australia

In contrast to the 1995 enlargement, which admitted three countries with relatively high GDP into the EU, recent EU enlargements - in May 2004, where 10 additional Member States acceded to the Union (Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia), and again in 2007, with the accession of Bulgaria and Romania - has so far had a limited impact on trade levels between the EU and Australia. As a result of these enlargements, the population of the EU has risen by almost 30% to a total of 495 million, while GDP has grown by only 6%. Notwithstanding this relatively small increase in GDP, the potential for future growth in the new Member States is well-recognised. In 2008, for example, GDP growth in the 12 new Member States is forecast to be an average of 5.4% p.a., which is significantly ahead of the average 2.2% growth rate forecast for the pre-existing EU15. In particular, a number of new Member States have projected growth rates well above the EU27 average of 2.5%, with both Estonia and Latvia having estimated growth rates of roughly 8%. On the whole, this restructuring is expected to lead to increased opportunities for trade between Australia and the EU.

Australia's trade in goods with the EU is more balanced than with other partners

Australian merchandise exports to the EU, by broad category, have changed in composition over the last 15 years - primary products are now relatively much less important, with higher growth being seen in manufactures, particularly Elaborately Transformed Manufactures (ETMs). Since 1989, the growth in exports of ETMs has been almost three times the growth in primary products (See Figure 4) .

The EU is Australia's third largest export market

In 2006, Australian merchandise exports to the EU continued to grow faster than imports. Australian exports to the EU increased by a very strong 36% to $A20.3 billion, following a 12% increase the previous calendar year. Even excluding volatile gold exports, Australian exports to the EU grew by a robust 21% in a year when total exports rose by 18%. As a result, exports to the EU accounted for 12% of total Australian exports, and the EU regained its position as the third most important market for Australian exports after Japan ($A32.4bn, or 20%) and China ($A20.4bn, or 13%) and ahead of ASEAN ($A18.8bn, or 12%) and the USA ($A10bn, or 6%).

The EU is Australia's largest source of imports

Meanwhile, imports from the EU grew by only 1% to reach $A36.5 billion, significantly behind the growth in total imports, which recorded 13% growth in 2006. As a result, Australia 's merchandise trade deficit with the EU narrowed by 13% (or $A5 billion), ending in an overall deficit of $A16.2 billion. Despite this slower rate of growth, the EU remained Australia 's principal source of imports, with EU imports accounting for 21% of total imports. ASEAN was the second most important source ($35.1bn, + 26% or 20% of total imports); followed by China ($A25.5bn, +19% or 15%); and then the USA ($A24.4bn, + 14% or 14%) .

Principal exports and imports

The UK no longer dominates the EU-Australia trade relationship

In terms of Australia's trade relationship with Europe, there seems to be a common assumption that the relationship is heavily reliant on Australia's relationship with the United Kingdom. While this remains the case in terms of trade in services, investment income and transfers, trade in merchandise goods largely does not reflect this precedent. The UK accounts for only 25% of two-way trade in goods between Australia and the EU in 2006 on a recorded trade basis. Indeed, Germany has surpassed the UK as a source of merchandise imports , and has been the largest source of imports from the EU for the last five years. In 2006, Germany accounted for $A9 billion worth of merchandise imports into Australia , or 25% of imports from the EU, well ahead of the UK 's 17% share. Nonetheless, 40% of all Australian exports to the EU still went to the UK in 2006, with the Netherlands in second place. Australian exports to the latter increased by 30% on the previous calendar year, while exports to Italy (+9%) and Germany (+7%) also recorded strong growth rates. Overall these figures deem that, while the UK remains an important market for Australia, it is not as dominant as it once was (see Figure 5 and Table 6) .

4. Services Trade

The EU is the world's largest trader in services

The EU25 was responsible for 22% of global services credits (exports) and 24% of services debits (imports) in 2005 (latest data available), making it the world's largest market in services and accounting for 26% of global services trade. In comparison, the USA accounted for 18% of world services trade, and Japan , the next biggest market, with 7%. Australia accounted for less than 2% of world services trade.

In a recent study, the World Trade Organisation found that three EU Member States were among the top seven most dynamic services exporters in the world, w ith a value increase of 15% or more in their service exports for 2005. These figures demonstrate that the EU is a very important partner for trade in services, not just for Australia , but for the world at large.

The EU is Australia's largest partner in two-way services trade

The EU25 is Australia 's most important trading partner for two-way trade in services, accounting for $A18 billion, or 21% of Australia 's total trade in services in 2006 ( see Figure 6) . Australia 's next largest partners were ASEAN, accounting for 16% (or $A13.6bn) and the USA for 15% (or $A13bn) . Australia's services trade relations with key North Asian economies remain underdeveloped relative to the total volume of two-way trade in goods, with Japan accounting for only 6% ($A5.3bn) and China for only 5% ($A4.5bn) of Australia's total two-way services trade in 2006. The EU is both the largest market for Australia 's services exports (worth $A8.6 billion in 2006 or 19% of total services exports) and the largest source of services imports , valued at $A10 billion for 2006, or 23% of the total (See Table 2).

Growth in services imports from the EU has been marginally stronger than exports to the EU over the last five years, meaning that Australia's traditional deficit in services trade with the EU increased by $290 million to $A1.7 billion in 2006. This compares with Australia 's overall services surplus of $A11 billion for 2006.

Travel and transportation services are still important

Trade in travel services traditionally dominates Australia 's services trade relationship with the EU. In 2006, travel accounted for 61% of Australian services exports to the EU, and 44% of imports. Similarly, Australia 's total trade in travel services is dominated by the EU - in 2006 it accounted for $A9.4 billion, 40% of Australia 's two-way trade in travel services.

Trade in transportation services is another significant part of the relationship, accounting for 25% of two-way trade in services with the EU in 2006. Other important sectors include: other business services (8% of two-way trade in services), royalties and licence fees (4%) and financial services (3%), while two-way trade in personal and cultural services increased by 37%, fuelled by a strong 68% growth in Australian exports, to account for 2.4% of overall two-way services trade.

Significantly, recent estimates suggest that the services sector accounts for approximately 70% of the GDP of both the EU and Australia . As global trade in this sector continues to expand, Australia and the EU will no doubt become even more important partners in two-way services trade.

5. Investment

The EU is Australia's largest two-way investment partner

The EU remained Australia 's largest two-way investment partner in 2006, accounting for 38% of total foreign investment stocks, or $A735bn. This is ahead of the United States, which was Australia's second largest two-way investment partner, accounting for 35% of total stocks or $A683bn, and significantly ahead of New Zealand (5% or $A97bn), Japan (5% or $A91bn) and China (0.3% or $A6bn).

The EU is Australia's largest source of investment

The EU was Australia 's major source of foreign investment in 2006 in terms of investment stocks, and its most important source of investment flows for the year. Proving that investment flows tend to fluctuate widely from year to year, flows from the EU increased by $29bn on the previous year to total $A35bn, following a low of $A1.6bn in 2004. Stocks of investment are much steadier, and thus give a clearer indication of the relative importance of major partners to Australia in the medium to longer term. On this basis, the EU has long been Australia 's major source of foreign investment.

In 2006, the EU's stock of investment in Australia rose 16% to $A480 billion, 33% of all investment in Australia, ahead of the United States with 25% of the total ($A363bn) and significantly ahead of Australia's other partners (c.f. Japan 4% or $A51bn, ASEAN 3% or $A47bn, New Zealand 2% or $A32bn and China 0.2% or $A3bn). ( See Figure 7 and Table 3 ).

The EU is the second largest destination for Australian investment overseas

In 2006, the EU also remained the second largest destination for Australian investment overseas, with stocks reaching $A254 billion and accounting for 31% of total Australian investment abroad. While the EU remained behind the United States in this category, which accounted for 38% or $A321bn of Australian investment stocks overseas, the share of Australian investment going to the EU increased by 23% on the previous calendar year and by 52% on the level of investment stocks five years ago (cf. 8% for New Zealand; 5% for Japan and 0.4% for China). In terms of flows, the EU was Australia 's most popular destination for foreign investment transactions in 2006, accounting for $A32 billion in outward flows (cf. $A19 billion for the USA , $A5 billion for ASEAN, $A6 billion for New Zealand and $A9 billion for Japan ). The EU also continued to be Australia's largest source of foreign direct investment (FDI), which increased by 9% on the previous calendar year to $A107 billion, or 34% of total FDI stocks in Australia. This was ahead of the United States (which increased 6% to $74bn or 24%) and Japan (which decreased by 1% to $24bn or 8%).

EU investment generates $A180bn and 775, 000 jobs in Australia

A recent survey on EU investment in Australia carried out by the Delegation, in cooperation with EU diplomatic missions, found that there were approximately 2,300 EU companies with a presence in Australia , with a total estimated turnover of $A180 billion (just over 12% of total sales in Australia ). Furthermore, the survey found that EU companies directly created an estimated 400,000 jobs in Australia , and were possibly responsible for an additional 775,000 jobs when account is taken of the flow-on (multiplier) effects. This makes total direct and indirect employment generated by EU investment more than 1.2 million jobs, or around 12% of the Australian workforce.

Underscoring the positive contribution of EU investment, the survey also suggested that approximately 42% of the total turnover by EU companies is in manufacturing, with a further 17% in the finance and insurance sector. Mining and wholesale trade activities both account for just under 10% each, while construction accounts for a further 9% of EU company turnover. Together these five sectors account for some 87% of the total turnover of EU companies ( see Figure 8 ).

Table 2: Australia 's goods and services trade with major partners

Table 3: Australia 's stock of investment with major partners

  Table 4: Australia's principal exports to the EU25

Table 6: Australia 's merchandise trade with EU Member States

For all tables which show percentage changes in value on previous calendar years, a trend change formula has been used (supplied by the Department of Foreign Affairs and Trade).

THE EUROPEAN UNION

1. Eurostat, GDP and main components , extracted from Queen tree tables, 29 August 2006.

2. World Trade Organisation (WTO), International Trade Statistics 2005, Press Release (Press/457), 9 November 2006, available at URL http://www.wto.org/english/news_e/pres06_e/pr457_e.htm

3. World Economic Forum, The Global Competitiveness Report 2006-2007 , 26 September 2006, available at URL http://www.weforum.org/en/initiatives/gcp/Global%20Competitiveness%20Report/index.htm

4. The Economist Intelligence Unit, Business Environment Ranking , August 22 2007, London , available at URL http://www.economist.com/markets/rankings/PrinterFriendly.cfm?story_id=8908422

5. World Bank, Top Reformers 2006/07, Washington, 2007, available at URL http://www.doingbusiness.org/

6. European Commission Commission, Autumn 2007 forecasts, extracted on 9 November 2007 http://ec.europa.eu/economy_finance/publications/european_economy/forecasts_en.htm

7. Australian Bureau of Statistics Balance of Payments, Australia : Supplementary Country Statistics 2006, (5338.0), Canberra , 2007.

8. See note 7, ibid .

9. Department of Foreign Affairs and Trade , Australia 's Trade with the European Union 2006 , Canberra , 2007.

10. For the remainder of this section, the source used is Department of Foreign Affairs and Trade (DFAT), Composition of Trade Australia 2006, Canberra , 2007.

11. World Trade Organisation (WTO), Press Release, retrieved on 9 September 2007, available at URL http://www.wto.org/english/news_e/pres06_e/pr457_e.htm

12. Australian Bureau of Statistics, International Investment Position, Australia : Supplementary Statistics 2006 (5352.0), Canberra , 8 August 2007

13. ABS (5338.0)

14. ABS (5352.0)

15. DFAT, Personal Communication

16. DFAT, Australia's Trade with the European Union, 2006