Executive Summary

In the 1990s, the North-East Asian Region (Japan, China, Taiwan, Hong Kong,
the Republic of Korea and the Democratic People's Republic of Korea) will
continue to be a major engine of world economic growth. The Region's already
major share of world trade and financial flows will continue to grow.
Australia's future economic growth will depend to a significant extent on its
success in increasing its economic interaction with the North-East Asian
Region. Successful economic performance, in turn, will be a prerequisite for
Australia to maintain and extend its political and strategic relevance in the
North-East Asian Region and the wider Asia Pacific area.

North-East Asia is crucial to Australia's future economic performance. Over
40 per cent of Australia's merchandise exports go to the Region and almost 30
per cent of our imports come from it. Japan alone accounts for almost 30 per
cent of Australia's merchandise exports and supplies 20 per cent of imports.
North-East Asia is also a major source of tourists (27 per cent), investment
(20 per cent of the cumulative total), and business immigrants, and is the
single most important market for education exports. By comparison, the United
States and the EC account for 11 and 12 per cent of exports and 24 and 22 per
cent of imports respectively. Just over 10 per cent of tourists come from the
United States and 20 per cent from the EC. The United States is the source of
18 per cent of total cumulative investment in Australia and the EC of around
25 per cent.

North-East Asia is also playing a leading role in promoting economic growth
in South-East Asia through increasing levels of trade and as its major source
of foreign investment. North-East Asia's growing interest in Indo-China
suggests that it will eventually embrace a similar pattern of economic
interaction.

For these reasons, North-East Asia will need to continue to be given a high
priority in Australia's foreign and economic relations throughout the 1990s.
North-East Asia clearly promises much in terms of Australia's integration with
the international economy.

Changes in the Region present Australia in the 1990s with immense
opportunities and challenges. A decade of microeconomic reform in Australia
has seen good progress in internationalising the economy and equipping
Australia to respond to rapid changes in the Region. While the gains have
begun to show, continuing structural change within the North-East Asian
economies, and elsewhere, will maintain the pressure for continuing structural
adjustment in Australia.

Accelerating Change In North-East Asia

Fundamental changes in international political and strategic settings in
the past two years have had profound implications for the security of
North-East Asia, which in turn affect the management of Australia's relations
with the Region. While the end of the Cold War is obviously to be welcomed, it
brings with it new uncertainties and risks in the 1990s and, in particular,
enhanced risks of regional conflict.

Changes in the role of the United States in the Region, economically and
strategically, do not necessarily signify a move towards a tripolar
(US/Europe/Japan) world. Nor are uncertainties in the political and strategic
outlook likely to distract the Region from a continuing process of structural
change and economic growth. Indeed, residual political barriers to deeper
integration within the Region, such as those between the ROK and China and
between Taiwan and China, are being substantially transcended by trade and
investment, leading to new patterns of production around the Region.

Speculation about the emergence of an Asia bloc (perhaps excluding
Australia) overlooks the heterogeneity of societies in the Region. There is
nevertheless a growing preoccupation with regional affairs in Japan's and
China's foreign policies. Japan, in response to international pressures to
assume a greater leadership role in world affairs, will want to make its
greatest effort in its own region. China's desire to play a leadership role
vis-a-vis developing countries in the East and South-East Asian area will
continue. Yet these trends in foreign relations are not generally reflected in
inward-looking economic policies, despite increased US-Japan and US-China
trade frictions. Instead, movement is towards a more open economies and
globalisation of production.

Nevertheless, there is a significant risk for Australia that opportunities
for economic interaction with North-East Asia and elsewhere will be frustrated
by a growing number of restrictive bilateral deals between the major players.
A liberal and open global economic environment is essential for Australia to
be able to take full advantage of economic opportunities in North-East Asia
and elsewhere.

Structural economic change in the Region continues to produce big shifts in
where goods are produced and in what type of goods - and increasingly services
- are traded, and by whom. Japan has set the course for structural change,
moving from lower to higher value-added industries. It has now consolidated
its position with products which require high levels of skill, knowledge and
sophisticated technology. High-value service industries are growing rapidly as
incomes rise. The export market is still the main destination for products and
services from Japan's most efficient industries.

Much of Japan's capital-intensive industry is being moved to other
locations in Asia, North America and Europe. The impetus for this has come
variously from increased wage costs and labour shortages; appreciation of the
yen eroding competitiveness; concentration within Japan on high value-added,
high technology industries, and relocation offshore of lower technology
industries; restrictions imposed by the United States and the European
Community on imports of some manufactures; and an attempt to circumvent
barriers which may come with EC92. Production on a global scale based on an
international division of labour and specialisation is emerging from this.
Such patterns of production have become well established in North-East Asia.
The same restructuring imperatives as Japan faced in the 1980s are now
underway in the ROK, Taiwan, and Hong Kong.

These Newly Industrialising Economies (NIEs) of North-East Asia have become
Newly Maturing Economies (NMEs), shifting very rapidly from production
involving cheap labour to production which requires larger amounts of
investment. In effect, they have taken up the industries which Japan has let
go. The old labour-intensive industries of these economies are now moving
rapidly to southern China and parts of ASEAN and will soon go to Indo-China.
As in Japan in the second half of the 1980s, domestic demand is now becoming
increasingly a source of growth in the NMEs. Yet trade will remain important
for rapid economic development in the NMEs and especially for the
labour-surplus economies.

Technological change has accelerated under the pressure of rapid structural
change and greater international competition. The gap between leaders and
followers is now quite short in some industries. Japan is being pushed hard by
the ROK and Taiwan in some areas. The ROK and Taiwan in turn are being pushed
by new Asian entrants into world manufactures markets. Consequently, the
demand for basic scientific and research inputs into the research and
development process is growing strongly. In response, in Japan, the ROK,
Taiwan, and Hong Kong, government research and development expenditure has
been increasing by around 15 per cent a year, and private sector research and
development expenditure at an even higher rate.

Structural change is involving a gradual liberalisation of the economies of
North-East Asia, especially for manufactures. It will also sustain pressure
for continuing microeconomic reform and trade liberalisation within the
individual North-East Asian economies and their trading partners, whatever
path the international trading regime takes following the Uruguay Round. APEC
is ideally suited to provide a framework for the interests of globally
oriented economies in North-East Asia.

Australia Adjusting To Change In The Region

There has been significant microeconomic reform and macroeconomic
adjustment in the past decade in order to internationalise the Australian
economy. As part of this process, much of what has been done is consistent
with the recommendations of the Garnaut Report. Most recently, the Government
Industry Statement of 12 March 1991 announced further reductions of
protection, continued domestic structural reforms and encouraged adoption of
best international practices.

Australia has taken seriously the challenge to undertake structural change.
The Government's macro and microeconomic policies have given impetus to
improved international competitiveness and openness, giving Australia an
excellent opportunity to increase its aggregate level of exports with a
greater contribution from the industrial and services sectors, to supplement
our traditional strength in commodity exports. Trends in the composition of
Australia's merchandise and services exports demonstrate that the Australian
economy can undergo structural change and export a range of manufactures and
high-value services in response to change in North-East Asia and other
economies. Significantly, since 1987, at a time of rapid change in the
composition of North-East Asia's imports, Australia has been holding market
share in North-East Asia. We now face the hard task of winning back market
share lost in the early to mid 1980s and then increasing it.

Primary products comprised 65 per cent of Australia's exports to North-East
Asia in 1990. While this sector will remain important, Australia's export
trade with North-East Asia has begun to broaden its base. These developments,
together with comparative advantages in its agricultural, minerals and energy
resources, equip Australia to capture changing market opportunities.
Structural reform and improved competitiveness have led to growing
manufacturing, service and technological exports. Australia has the
opportunity to develop further industries that will add value in such areas as
food, fibre and mineral processing.

Some of the biggest gains have been in exports of elaborately transformed
manufactures (ETMs) such as motor vehicle parts, office machines and
telecommunications equipment. In 1990, the value of Australia's exports of
ETMs to the Region almost equalled the value of meat exports. Changing
composition has helped sustain aggregate export growth at a time when markets
for traditional commodities are particularly weak. Exports of high value-added
services are growing rapidly - the tourist industry, for instance, saw a 336
per cent incease in arrivals from North-East Asia between 1985 and 1991.
Medical, education, design and software services are also growing rapidly, but
from a small base.

The pattern around the world, and especially in North-East Asia, is
increasingly for investment to drive trade. Yet Australian investment in
North-East Asia is still small relative to both the big share of Australia's
trade which is with the Region and the strategic importance of establishing
close links with its economies. In 1990, Australian investment in all of
North-East Asia was less than A$8 billion, out of its world-wide total
overseas investment of A$91 billion. North-East Asia's share of investment in
Australian manufacturing industry is also small, but its proportion of total
foreign investment in Australia is more substantial, reaching A$53 billion out
of a total of A$257 billion at 30 June 1990. The greatest share of this
North-East Asian investment is from Japan (A$45 billion or 17.5 per cent of
the total).

Avenues for Australia's further economic engagement with the Region are
being opened by structural change in both Australia and North-East Asia, but
Australia will have to work hard to keep up with the accelerating change
occurring in North-East Asia. Australia's substantial stock of skilled labour
provides a basis for increasing interdependence. Increased education and skill
levels will be required as Japan and the NMEs put more resources into these
areas. Accelerated technological change in the Region and the narrowing gap
between leaders and followers will substantially increase the demand for
scientific inputs into the research and development process, especially by the
followers. Expanded cultural and information programs to enhance awareness of
Australia in the Region will also be vital to efforts to realise opportunities
in knowledge and skill-intensive activities. Increased Australian interaction
and engagement with the Region will follow from the progressive removal of
regulatory impediments within Australia and overseas.

Summary Conclusions: Policy Challenges

North-East Asia continues to present great opportunities for Australia's
economic advancement. The rapid pace of growth and structural and
technological change in the Region both encourage and require continued
internationalisation of the Australian economy.

New avenues for interaction with the Region have been opened by structural
change in Australia and North-East Asia. The economic relationship is becoming
more complex. The role of people-to-people relationships, information flows
and education is becoming much more important than previously. This opens
opportunities for Australia to become more deeply engaged with the Region in
knowledge and skill-intensive activities. To realise these, it will be
necessary to ensure the public and private sectors are aware of both the
opportunities and the benefits of internationalising further the Australian
economy. It is necessary to change perceptions of Australia as merely a farm
or a quarry.

In the 1990s, it will be important for Australia to contribute to the
maintenance of regional stability and security by building on existing links
within the Region, strengthening dialogue and encouraging confidence-building
measures. The Korean Peninsula as well as Japan and China will command
increased attention. Australian policy makers will need to be well informed
about regional developments and well placed to influence them through active
bilateral and wider efforts.

To build on existing links with North-East Asia and to take best advantage
of trends in the Region in the 1990s, it will be important for Australia to:

• Continue to pursue sound macroeconomic policies, micro-economic reform
  and improvements in international competitiveness - to sustain the process
  of internationalising the Australian economy and in particular to ensure
  Australia is able to maximise the opportunities available in North-East
  Asia (pp. 9-11, 43).
• Identify and overcome structural and other remaining impediments
  including access barriers - to allow Australia to participate more fully
  in the Region. This will be important both in further liberalising access
  for Australia's primary commodity exports and in expanding areas such as
  ETMs, high-quality services and value-added processing in food, fibre and
  minerals (pp. 42-43, 57-58, 83-87, 91).
• Develop better coordination between Australia's public and private
  sectors - to make Australia more effective when dealing with economies in
  the Region which traditionally have had strong linkages between government
  and business (pp. 71-72).
• Strengthen information gathering - to enable Australia to assess the
  potential impact of a range of political and economic developments in
  North-East Asia and to analyse the implications for us of political
  shifts, economic growth and structural change in the Region (pp. 36-45,
  70-71).
• Help maintain and strengthen the multilateral trading system - to assist
  both Australia and North-East Asia to realise fully their economic growth
  potential (pp. 42-43).
• Ensure a regional focus in the development of political and economic
  strategies - to enable Australia to capture opportunities arising from
  regional developments and from a high level of complementarity with the
  Region (pp.42-43, 73-74).
• Support and promote APEC as the major regional economic forum - to
  ensure APEC becomes an important framework around which to structure
  policies and strategies to promote trade liberalisation and economic
  cooperation in the Asia Pacific region in the post-Uruguay Round world
  (pp. 42-43, 91).
• Support and promote regional security dialogue - to ensure that economic
  development in the Region is as unimpeded by security tensions as possible
  and to ensure that Australia has a secure place in any regional security
  framework which might emerge (pp. 36-39).
• Develop appropriate responses to the growing economic linkages between
  North-East and South-East Asia - to ensure that Australia capitalises on
  this trend (pp. 41, 45).
• Develop bilateral trade strategies - to enable Australia to capture
  opportunities arising in the economies of the Region (pp. 67-74).
• Continue efforts to engage Japan in dialogue on regional issues across a
  broad spectrum - to reflect the overriding importance of the Japanese
  economy and the potential for changes in Japan's role (pp. 68-72).
• Foster even closer links with the ROK and demonstrate worthwhile areas
  for expanded cooperation - to take account of the dynamism of the ROK
  economy, the ROK's growing self confidence and engagement regionally and
  internationally, and the sensitive and evolving security situation on the
  Korean Peninsula (pp. 37, 68-74).
• Reflect in Australia's trade and investment priorities the importance of
  the increasing interaction between southern China, Hong Kong and Taiwan -
  to enable Australia to take advantage of opportunities arising from these
  developments (pp. 68-72).
• Intensify exchanges of information and experience between government,
  business and the community - to contribute to more effective pursuit of
  Australia's strategic, commercial, economic and technological interests in
  North-East Asia and ensure increased awareness of these interests (pp.
  71-74).
• Increase the level of research and development and exploit opportunities
  for cooperation by emphasising industrial technology - to enable Australia
  to keep up with and benefit from the pace of technological change which is
  accelerating across the Region. While Australia has considerable strength
  in basic scientific research, its level of research and development
  investment is not increasing at the same rate as that of Japan and the
  NMEs (pp. 89-91).

Take advantage of human resource skills - to enable Australia to achieve
much greater participation in the Region. Australia's strengths include being
the major English speaking country in the Western Pacific with high levels of
education, technical training, and links into the international academic
community (pp. 87-89).

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