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Performance of Australian Merchandise Exports in East Asia: A Constant
Market Share Analysis
Weiguo Lu
Foreign Affairs, Defence and Trade Group
Issues
Since the mid 1980s, Australia has achieved impressive growth in exports
to East Asian countries.(1) Total exports doubled during 1985-1993 with
manufacturing exports having increased threefold, agricultural exports
by nearly 100 per cent and fuels, minerals and metals by 60 per cent.
However, despite the strong growth, Australia's overall market share
in East Asian merchandise imports declined from 4.05 per cent in 1985
to 2.89 per cent in 1993. In view of the size of the East Asian import
market, the loss of this 1.16 per cent market share was significant and
was equivalent to about $A12 billion worth of potential exports.
The declining share of Australia in the East Asian market has been an
issue subject to hot debate in Australia. The Industry Commission, in
its review of Australia's recent comparative economic performance, has
discussed several possible reasons for Australia's decline in market share.(2)
These include:
- a decline in the relative prices of primary commodities;
- faster growth of manufacturing imports from the East Asian countries;
- export supply constraints from Australia;
- a decline in Australia's competitiveness; and possibly
- the distance factor.
This note uses a statistical tool, called the constant market shares
(CMS) analysis, to examine Australia's export growth attributable to 'world
trade effect', 'commodity composition effect', 'market distribution effect'
and 'competitiveness effect'. The method has several limitations, but,
treated cautiously, it helps to identify the areas in which possible explanations
should be looked for and supplements earlier findings. The identification
of these different effects is important as this has policy implications.
CMS model (3)
'World trade effect' indicates that part of Australia's export growth
is attributable to the general increases in East Asian imports. The magnitude
of this effect shows the potential increase of Australian exports if it
were able to maintain its share of East Asian imports.
'Commodity composition effect' shows whether Australia has concentrated
on the export of commodities for which markets have been expanding rapidly,
or on commodities for which markets have been expanding less rapidly.
This effect reflects the factor endowment of the export country (for instance,
Australia is well endowed with land and mineral resources) and the income
and price elasticities of demand for the products in which that country
specialises.
'Market distribution effect' indicates Australia's ability to concentrate
on relatively rapidly growing countries. The change in exports due to
market distribution depends on trade policies and income growth in foreign
countries.
'Competitiveness effect' is defined by the residual term of the CMS
model. As a residual it picks up everything not explained by the first
three effects. However, this term is taken to indicate the improvement
or the deterioration in the competitiveness of exports depending on whether
the term has a positive or negative sign. It is usually assumed that this
effect is independent of the three other effects discussed above and it
largely reflects the role of domestic factors of the exporting country.
Analysis of sources of the loss in market shares
Standard International Trade Classification (SITC) product groups 0-8
(agricultural products, fuels, minerals & metals and manufactures)
and East Asian markets (ASEAN, Northeast Asia, Japan and other East Asian
countries) are considered for the CMS analysis. The period chosen for
examination is 1985-93 as this period saw substantial growth of trade
in these markets and a noticeable decline in Australia's market share.
Table 1 shows CMS breakdowns of Australia's exports. Several key points
can be drawn from the table.
Table 1 CMS decomposition of Australian exports (SITC 0-8) 1985-93
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Sources of Change in exports (SITC 0-8) Million US dollars Percentage change
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Increase in exports 12 299 100.00
World trade effect 22 284 181.18
Commodity composition effect -7 982 -64.90
Market distribution effect 1 0.01
Competitiveness effect -2 004 -16.29
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First, growth in Australia's exports to East Asia was largely caused
by world trade effect. This can be also seen in the simultaneous growth
in East Asian total imports and imports from Australia since the mid 1980s.
Second, the market distribution effect is positive, but very small.
This indicates that Australia was able to concentrate to a limited degree
on the countries whose imports grew relatively fast.
Third, the commodity composition effect was unfavourable during the
period examined. This suggests that Australia produced commodities with
below average increases in demand. Manufactures were a group of commodities
subject to the highest growth in East Asian imports during 1985-93. Although
Australia's exports were able to match roughly that growth, the small
base for manufacturing exports (less than one per cent in total East Asian
imports) meant that the growth was far from enough to cover the loss of
total market share due to Australia's concentration on slower-growth product
groups.
Finally, the negative number for the competitiveness effect indicates
the deterioration in the competitiveness of Australia's exports to East
Asian countries. While it is possible that this effect may capture some
external factors such as US and EU subsidies to farm exports which have
depressed Australia's exports, the magnitude of the effect found in this
study certainly warrants further consideration.
Policy implications
The above results show that Australia should concentrate on improving
its export commodity structure and competitiveness if it wants to maintain
its share in the East Asian market. Although the unfavourable commodity
composition effect would become smaller if we take account of services
exports in which Australia appears to have a comparative advantage, Australia
should further adjust its economic structure to take advantage of the
higher growth of manufacturing imports in the East Asian countries.
Export competitiveness is also shown as important. Competitiveness is
influenced by many factors, with domestic ones usually being major determinants.
Further study is called for which could help to identify the influences
on competitiveness in the main industry groups. This would help in the
development of sensible policy responses for the sake of improving Australia's
competitiveness in the fast-growing East Asian market.
Endnotes
- East Asian countries include ASEAN and Northeast Asian countries
plus Vietnam, Laos and Cambodia.
- The Industry Commission, Annual Report 1992-93.
- For a formal algebraic expression of the CMS model, please refer
to Richardson, D. 1971, "Constant-Market-Shares Analysis of Export
Growth", Journal of International Economics, 1, pp. 227-239.
Note that the printed version of this paper including four graphs
not shown above is available.
Details on obtaining
a copy.
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