The Department of Foreign Affairs and Trade, Australia


AUSTRALIA AND THE UNITED KINGDOM

SPEECH BY MINISTER FOR FOREIGN AFFAIRS TO A JOINT MEETING OF AUSTRALIAN BUSINESS IN EUROPE AND THE AUSTRALIAN BRITISH CHAMBER OF COMMERCE, 20 SEPTEMBER 1996

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This is my first official visit to Great Britain and to Europe as Australia's Minister for Foreign Affairs.

I am especially pleased to address a group of business people that has a committed interest in the future of Australian-British and Australian-European commercial relations.

Australia, Britain and the EU: Important Economic Partners

The new Australian Government recognises that it is crucially important for Australia to maintain and build closer relations with key European partners.

In June of this year, my Department released the first ever comprehensive analysis of Australia's trade and investment relationship with the EU.

I don't have the time here to elaborate on the detailed analysis in the report, which is available from the Australian High Commission, but let me make a few comments on some of its conclusions.

The EU is by far the major source and destination for Australia's foreign direct investment (FDI)

- and new investment figures that have just come out for mid-1996 confirm that the two-way investment relationship continues to grow strongly, with the stock of EU foreign direct investment in Australia growing by 14% over the previous year to [[sterling]]27 billion and Australian foreign direct investment in the EU now totalling [[sterling]]10.5 billion.

The UK of course dominates these statistics and its FDI in Australia is [[sterling]]15.5 billion whilst our FDI in the UK stands at [[sterling]]9 billion.

European and British exports to Australia continue to grow strongly, aided by substantial unilateral cuts in Australia's protection - which now rates as among the lowest in the world.

Australia's exports of manufactured products also continue to grow.

But our traditional exports of agricultural products are being impeded by EU import restrictions, while our exports of raw materials are being affected by factors such as the low economic growth rates and structural problems in much of Europe and the switching of supply by some of our exporters to strongly growing and closer Asian markets.

The resultant blow-out in Australia's trade deficit with the EU, which has more than doubled over the last decade, offers challenges to both sides

- from the EU, we are looking for improved access for our agricultural exports

- for the Australian Government, we clearly need to strengthen our international competitiveness.

I am very conscious that the international competitiveness of the Australian economy is a critical issue for European companies as they determine their global investment strategies

- the new Australian Government is keen to promote strategic investment in Australia, and particularly investment that establishes regional export operations , research and development, regional head-quarters and joint ventures.

The Australia-EU Trade and Investment study demonstrates that hundreds of European companies are taking advantage of the many comparative advantages Australia offers to foreign investors who are seeking to establish regional operations in Asia:

- a few notable examples of such strategic investment are:

: the French company Accor SA- which I understand now controls the largest number of hotel beds in Asia - locating its Asian regional headquarters in Australia;

: the German company Siemans Nixdorf, which is serving the Australian market and also turning to the regional market place with projects in China, Thailand and Vietnam;

: and the recent merger of RTZ and CRA to establish the largest mining company in the world, with substantial export and R&D operations in Australia.

I am aware that many of you in this audience are involved in Australian foreign investments in the UK and other parts of the EU. You may be interested to note the conclusion in the Trade and Investment study that the stock of such investment is 1 and 1/2 times the global assets of Australia's major company, BHP

- and that it is generating annual sales that far exceed the value of Australia's total annual exports of goods and services to the EU.

This globalisation of Australian companies is an important reflection of the internationalisation and growth of the Australian economy and I would hope that we will continue to see strong growth in this area

- it is particularly interesting to note that the UK is at the vanguard of this relatively recent phenomenon in the Australian economy

- this has added a significant new dimension to our bilateral relationship

Australian Economic Policy

The central focus of the new Australian Government, elected just six months ago, has been economic policy.

And that policy has now come together in a clear and decisive form with the Budget brought down on August 20.

At the heart of our economic strategy is a commitment to increase domestic savings by raising public savings to achieve a higher speed limit for economic growth over the long term without the constraints of rising current account deficits and inflation.

As we pursue this goal, together with sustained low inflation, it will produce a climate for low real interest rates and stimulate a strong investment response.

Together with our fundamental labour market reform this will form the basis of a change in the composition of the Australian economy.

What we will see, in turn, is a shift in our resources to the production and sale of more exports.

In short, a leaner, more competitive domestic economy will make us a better more competitive exporter.

Let me set out for you some of the key figures and targets from the Budget.

Our most urgent task has been to cut the underlying Budget deficit.

Despite being many years into recovery, Australia's underlying budget deficit remained at a deficit of more than $10 billion in 1995-96.

In this Budget we have announced measures that will reduce the underlying budget deficit by $3.9 billion in financial year 1996-97, and by $7.2 billion the following year compared with the no policy change case. This has been achieved mostly by reducing expenditure, without recourse to higher taxes.

As a result, by 1997-98 the Australian Treasury estimates that we will have only a small underlying deficit of $1.5 billion. In headline terms, the budget is forecast to move into surplus this financial year.

I am sure you will appreciate this has involved a lot of tough, and in some cases unpopular, measures.

But it is the course we have had to take to restore to Australia the sort of prosperity it should enjoy.

In the last financial year, the Australian economy grew by 4.1 per cent, around double the OECD average rate.

Growth will not be so high in this financial year, because last year's result was influenced by the extra activity following the breaking of a severe drought. But at a forecast 3.5 per cent, it will remain at the stronger end of OECD growth.

We expect strong business investment growth of 14 per cent in 1996/97 - reflecting high levels of capacity utilisation, confidence about the future business conditions and profits.

Continued strong investment growth is expected in mining and service related sectors, infrastructure projects and large building projects. The outlook for manufacturing is more modest owing to lower levels of capacity utilisation and subdued trading outcomes. Dwelling and stock cycles also suggest a positive outlook for investment, especially towards the end of the year and beyond.

For 1996-97 net exports are expected to be a brake on growth because, though exports will continue to increase strongly at 8 percent in 1996/97, imports are expected to rise at a faster rate of 11 per cent reflecting strong increases in import intensive components of demand and in particular the buoyant investment outlook.

The current account deficit should fall slightly as a share of GDP to 4 per cent or around $20 billion in 1996-97. A rise in the net income deficit and a decline in net exports volumes will be offset by a continued improvement in the terms of trade.

Employment should continue to pick-up through this financial year, but the unemployment rate will fall only slowly and is expected to remain above 8 per cent.

The underlying inflation rate is forecast to be 23/4 per cent in the year to the June quarter 1997, slightly below the outcome for the previous year.

The headline inflation rate for Australia is expected to ease further to 2 per cent this financial year.

The Government also has a very strong microeconomic reform agenda, that will push aside inflexible and inefficient work and business practice.

This revitalised program of microeconomic reform has three major elements

- first, establishing a more flexible labour market

- second, improving efficiency in the provision of infrastructure services in areas such as the waterfront, aviation and energy

- and third, reducing the burden of regulation and paperwork for business, particularly small business.

Overall, the outlook for the Australian economy is very positive. The important economic policy reforms the Government is introducing will enhance our competitiveness and make Australia a more attractive investment destination.

- following the release of the Budget, Standard and Poors upgraded their outlook for the Australian dollar from stable to positive, paving the way for an upgrading of Australia's credit rating.

And while you will all know of the strengths of our resources and farm sectors I am certain we will become a much better prospect for those looking to invest and joint venture in manufacturing and services.

The upshot of Australia's economic reform is that the economy will boost its export performance both to the world and in particular to Asia.

Australia sits at the top end of the OECD league for its recent growth performances. Our goal is to sustain this but without the usual deterioration in the current account deficit

- this will put Australia in an enviable position compared to our colleagues in the industrialised world.

Australia-Britain Commercial Relations

Let me now say a few words about other ways the Government is going about making good on its policy of re-invigorating our traditional relationships with the UK and the EU.

We are currently negotiating a framework trade and cooperation agreement with the European Community and an accompanying joint political declaration with the Presidency of the European Union

- these agreements will encourage further development of bilateral trade and economic cooperation across a wide range of areas, and the declaration will set out a framework for dialogue and cooperation on issues of common interest.

In December last year, at the Australian National Trade and Investment Outlook Conference - the Asia Pacific's most important forum for business networking and information exchange - the UK was featured as a focus market and partner country.

This year, NTIOC will devote a special session to examine the experiences of European companies using Australia as a regional base for research and development.

- Given the particular success that British companies have achieved by investing in Australia as a base for regional operations, I hope that other British firms will be encouraged to attend NTIOC '96 to find out more about investing in Australia.

. The Government is also preparing a market development strategy for the United Kingdom, as part of a broad-based market development plan, which will set out a range of initiatives to strengthen bilateral trade and investment ties

- The strategy will build on the analysis and conclusions in our recent study on Australia-EU trade and investment, which are particularly relevant to the Australia-UK relationship.

In 1997, the Australian and UK Governments will be pursuing a number of important initiatives under the British Council's banner of ``New Images''

- This British initiative is primarily designed to project a more modern image of the UK, and of Australia-UK relations, to the Australian public.

- and we will be putting on a range of cultural and trade and investment activities in the UK to highlight Australian innovation and technology.

I expect to be personally involved in these activities in both Australia and the UK next year, and that other ministers will visit the UK throughout the course of the year.

Conclusion

In concluding, I wish to stress that the Australian Government is committed to strengthening our relations with Europe and Britain in particular.

At the commercial level Australia offers to British and European companies more than just a mature medium-sized market

- as the record shows it is also an ideal country with which these firms can become involved in the Asia Pacific region

: and the new Australian Government will establish a business environment that will enhance the global competitiveness of Australian companies.