TRADE LIBERALIZATION AND ITS IMPACT ON THE STRUCTURE OF INVESTMENT IN THE AUSTRALIAN MANUFACTURING SECTOR

1. Introduction

Garnaut (1991), Swan and Zeitch (1992), Menzies (1994) and Athukorala (1995) among other studies, highlight the integral role of trade liberalization in accelerating the manufacturing export growth rate in various sub periods in the 10 years to 1994. Bullock et al. (1993) conduct a study based on pooled cross-section time series data and reach a similar conclusion for the longer period 1976–1991. Marks and Sadeghi (1998) reveal the positive impact of the move towards free trade on the Australian manufacturing sector’s export orientation. In particular, this study uses a single equation export model (with quarterly data) to disclose the fundamental importance of trade liberalization in stimulating higher export orientated production in the period 1980:1–1996:2. It is also revealed that this effect has been more pronounced in the second half of this period due to the mounting pressure deriving from the accumulated reductions in import protection levels.

Chand (1999) and Paul and Marks (2009) complement these studies by explaining the transmission mechanism through which trade liberalization has been promoting the Australian manufacturing sector’s export competitiveness. The first is a panel data study which estimates a Cobb Douglass production function both in levels (with constant returns to scale) and growth rates incorporating industry specific fixed effects to highlight the underlying importance of the move towards free trade (using the nominal rate of assistance (NRA)) in driving higher multifactor productivity (MFP) growth in this sector and its two digit Australian New Zealand Industrial Classification (ANZIC) subdivisions in the period 1968/69–1994/95. “An overlapping result has been reached by Paul and Marks (2009)” who use a cost function approach in the context of panel data to assess the impact of greater openness (using both the NRA and effective rate of assistance (ERA)) on cost savings (dual) and MFP output enhancing (primal) effects in the Australian manufacturing sector and its two-digit ANZIC subdivisions in the more recent period 1968/69–2000/01. The empirical results of this study reveal a statistically significant positive relationship between these two measures of openness and costs of production and a statistically significant negative relationship with MFP.

The previously mentioned studies provide interlocking evidence of the pivotal role played by trade liberalization in sharpening the export focus of the Australian manufacturing sector. This is likely to have stimulated higher levels of investment in export creating capacity to accommodate the higher export-based production thereby prompting the restructuring of investment from domestic to export capacity. The contribution of investment in export creating capacity to total investment in this sector in the period 1968/69–2015/16 is displayed by Figure 1.¹

The first interesting dimension of Figure 1 is the upward trend in the contribution of investment in creating capacity to total investment in the manufacturing sector thereby indicating the restructuring of investment from domestic to export capacity. Of note also is the reversal of this trend in the period 2000/01–2008/09 with an upturn occurring since 2009/10. The epicenter of this paper is to assess whether trade liberalization has impact on the restructuring of investment towards export capacity in the period 1968/69–2015/16.² This task is pursued by formulating a model to explain the determinants of the structure of investment which is gauged by the contribution of investment in export creating capacity to total investment in the manufacturing sector. Thus, a higher contribution from investment in export creating capacity as a result of trade liberalization implies the restructuring of investment towards export capacity whilst a lower contribution indicates that the restructuring of investment has become more domestically focused. The empirical results of this exercise have critical implications for higher export-oriented production at a time of increased import penetration emanating from the prolonged period of reductions in import protection levels which ultimately affects the sustainability of manufacturing production in the long run.³ Furthermore, the empirical results will have important ramifications for output and employment growth in the economy due to the multiple linkages that exist between manufacturing activity and other sectors of the economy. On a more general note, assessing the determinants of the structure of investment is also important for countries with a small domestic market seeking to re-orient investment and hence production of a particular sector or the economy to the larger international market to promote stronger export led growth.

The rest of the paper is organized as follows. Section 2 will attempt to link the theory of trade with investment in export creating capacity whilst the following section will canvass the important studies undertaken on this type of investment in Australia. Section 4 will formulate a model to explain the determinants of the structure of investment with the following section revealing the empirical results of this model. Section 6 will briefly discuss a number of costs associated with any improvement in the restructuring of investment towards export capacity with Section 7 constituting an overview of the main results of the paper in order to assess the implications for policy.

2. Theory of Trade and Investment

Theory does not directly predict the impact of free trade on investment. Nevertheless, it indicates that trade liberalizing measures will lead to the restructuring of production in the economy from the areas of least to those with the greatest comparative advantage on the international market that will be underpinned by resources flowing in the same direction. A similar pattern of production and resource flows is expected when the authorities adopt trade liberalization for a specific sector i.e., production and resources flowing from the industries with the least to those with the greatest comparative advantage on the international market thereby raising export-oriented production. Consequently, among the shifting resources, investment expenditure is also expected to shift from the declining to expanding industries which exhibit the greatest comparative advantage in order to buttress their sharper export focus. The higher investment expenditure in the expanding industries is likely to take the form of investment in export creating capacity that will expand export capacity and hence underpin the re-orientation of production towards the international market thereby prompting the restructuring of investment from domestic to export capacity. Trade liberalization therefore is expected to change the structure of investment towards export capacity.

From a practical perspective, Australia has been endowed with an abundance of land based relative to other resources that has bestowed a comparative advantage in the production and export of primary products. Nevertheless, efforts have been made by successive governments to upgrade the skill level of the labor force which has helped to create a comparative advantage in the production and export of medium technology manufacturing goods which stimulates investment in export capacity in the manufacturing sector.

3. Previous Studies

There has been one previous study on investment in export creating, that by Lewis and Wood (1991) who formulate a measure for his variable which is expressed as follows :

W $=$ investment in export creating capacity.

And

E_i $=$ exports of industry i,

Y_i $=$ output of industry i

and

I_i $=$ total investment of industry i.

The assumption underpinning this measure is that each industry uses the same capital to output ratio in production for both the domestic and international markets. Expression (1) constitutes the basis in calculating trends in the Australian manufacturing sector’s level of investment in export creating capacity, the structure of investment as gauged by the level of investment in export creating capacity as a proportion of total investment, the change in investment in export creating capacity as a percentage of total investment, export orientated production as a proportion of total investment and export intensity as measured by the change in export oriented production as a percentage of total investment. Another exercise of this study involves using the eight two-digit Australian Standard International Classification (ASIC) manufacturing subdivisions to compute the cumulated change in investment in export creating capacity, this variable as a proportion of the total cumulated change in investment in export creating capacity, exports as a percentage of exports in the manufacturing sector and the gains/losses in international competitiveness. Of particular interest is the structural change in investment where the contribution of investment in export creating capacity to total investment in this sector has exhibited a mild downward trend in the period 1980/81–1987/88. One noteworthy aspect of this trend is the sensitivity of the structure of investment to movements in the exchange rate. Specifically, the sharp depreciation of the $A in 1985 and 1986 led to a marked increase in the ratio of investment in export creating capacity to investment in the manufacturing sector in 1986/87. There have been numerous other studies on investment in Australia which however have centered on aggregate investment expenditure and include Heijdra and Scarth (1990), McKibben and Siegloff (1988), Stegman (1982) and Hawkins (1979) among others.

4. Specification of the Model

Theory does not predict the determinants of the structure of investment. Nevertheless, an attempt is made to formulate a model based on those factors that are most likely to impact on this variable. Specifically, the dependent variable constitutes the structure of investment which is measured as investment in export creating capacity as a proportion of total investment in the Australian manufacturing sector. “This is consistent with the use of this variable by Lewis and Wood (1991)” to explain structural shifts in investment in this sector in the period 1980/81–1987/88. The dependent variable is measured in real terms with details of its calculation provided in Appendix C.

Investment in export creating capacity as a proportion of total investment in the manufacturing sector is likely to be influenced by the interplay of numerous factors that include the extent of export-oriented production which is measured by the proportion of exports to turnover. Thus, as the proportion of turnover exported rises so does the need to expand export creating capacity which in turn increases its contribution to investment in this sector. A fall in the proportion of turnover exported will depress investment in export creating capacity thereby leading to a fall in its contribution to manufacturing investment. The proportion of turnover exported is lagged one and two periods (years) in order to make an allowance for the possibility of endogeniety. A positive relationship is expected between the proportion of turnover exported and the dependent variable. Exports as a proportion of turnover is measured in real terms with details of its calculation provided in Appendix D. The real exchange rate is also likely to impact on the proportion of investment in export creating capacity to investment. Specifically, the depreciation of the real exchange rate will reduce export prices and hence improve international competitiveness which promotes exports and hence stimulates investment in export creating capacity thereby restructuring investment towards export capacity. The appreciation of the real exchange rate will have the opposite effects on export prices, international competitiveness, export demand, investment in export creating capacity and ultimately the structure of investment. The inclusion of this variable is based on the study by Lewis and Wood (1991) who also utilize the exchange rate to evaluate its impact on the proportion of investment attributable to investment in export creating capacity. A negative relationship is expected between the real exchange rate and the dependent variable. Details of the calculation of this explanatory variable are provided in Appendix E.

Expected profits from exports in the manufacturing sector is another factor that is likely to impact on investment in export creating capacity and hence the structure of investment. However, no data is available on this variable. Consequently, expected profits in the domestic economy is used as a proxy for expected profits in this sector due to its heavy reliance on the domestic market for sales and hence profit. Specifically, an upgrade to expected profits in the domestic economy will discourage investment in export creating capacity as firms divert investment towards expanding domestic capacity to benefit from the relatively higher domestic profits thereby leading to a lower contribution of this type of investment to total investment. A downgrade of expected profits in the domestic economy will have the opposite effect and encourage investment in export creating capacity as firms seek the relatively higher profits from exporting to the international market thereby leading to an increase in the contribution of this type of investment to total manufacturing investment. “The link between expected profits in the domestic market and the proportion of investment in export creating capacity to investment in the manufacturing sector is in harmony with various studies such as Heijdra and Scarth (1990), McKibben and Siegloff (1988), Stegman (1982), Kohl and Ryan (1986) and Hawkins (1979) which” pinpoint the critical importance of this variable in driving changes in aggregate investment expenditure in the Australian economy for various periods since the late 1960s. Expected profits in the domestic market are gauged by the S&P/ASX 200 industrial index of the Australian stock exchange which is dominated by domestically focused firms, that includes firms in the manufacturing sector, due to the inward looking nature of the Australian economy. A negative relationship is expected between expected profits in the domestic economy and the dependent variable. Details on the calculation of this variable are provided in Appendix F.

The introduction has emphasized the likely importance of trade liberalization in prompting the restructuring of investment towards export capacity in the Australian manufacturing sector. Consequently, this variable is also included as an explanatory variable. Specifically, two measures of openness are used in the form of the effective rate of assistance (ERA) and nominal rate of assistance (NRA) in order to rigorously test for any association that may exist between the move towards free trade and the structure of investment. Thus, the sustained fall in these measures of trade liberalization since 1971/72 has increased import competition and hence likely to have led to the contraction of the less competitive industries/firms. This in turn is likely to have prompted the reallocation of resources, such as investment, to the internationally more competitive industries/firms thereby boosting investment in export creating capacity and hence changing the structure of investment towards export capacity. An inverse relationship therefore is expected between the ERA and NRA and the dependent variable. Details of the ERA and NRA as measures of trade liberalization are provided in Appendix G. The model therefore used to empirically test the relationship between trade liberalization and the structure of investment is expressed as follows :

$($IXCC$/$I$)$_t is the ratio of investment in export creating capacity to total investment in the manufacturing sector in the current period.

$($X$/$T$)$_t−2 is the Exports as a proportion of turnover lagged up to two periods (years).

Log ${\left({\pi }_e\right)}_t$ is the Log value of expected profits in the domestic economy in the current period.

Log(REX)_t is the log value of the real exchange rate in the current period.

LogTL_t is the log value of trade liberalization in the current period as measured by the ERA and NRA.

5. The Empirical Results

The relationship between the ratio of investment in export creating capacity to total investment in the manufacturing sector and the explanatory variables is tested with the specific objective of determining the impact of trade liberalization on the structure of investment using annual data in the period 1968/69–20015/16. The empirical exercises will involve the use of two measures of openness in the form of the ERA and NRA to derive robust results of this relationship as mentioned in the previous section. The proportion of turnover exported is lagged 1 and 2 years in each case in order to make an allowance for the possibility of the endogeneity of this variable. All variables in the model are made stationary by calculating their log value or measuring them as a ratio as indicated by Equation (2) to avoid a spurious relationship.

5.1. The effective rate of assistance

The first measure of trade liberalization used to assess the impact on the structure of investment in the manufacturing sector is the ERA with this task initially pursued within the context of the proportion of turnover exported lagged 1 year. The results of this exercise are presented by Table 1.

The empirical results reveal a statistically significant inverse relationship between the ERA and the ratio of investment in export creating capacity to total investment expenditure in the manufacturing sector as attested by the value of the $t$-statistic of $-$2.71. Another interesting result is the statistically significant positive relationship between the proportion of turnover exported lagged 1 year and the dependent variable. Furthermore, the empirical results also reveal a statistically significant negative relationship between the real exchange rate and the dependent variable. Finally, the $t$-statistic for expected profits in the domestic market has a value of $-$1.22 which has the expected sign though is statistically insignificant. The high value of the $R^2$ statistic of 0.954 provides re-affirming evidence of the importance of the ERA, export-oriented production (lagged 1 year) and the real exchange rate in driving the restructuring of investment towards export capacity.

The empirical exercise using the ERA as a measure of trade liberalization is repeated with the proportion of turnover exported lagged 2 years on this occasion in order to rigorously test for the possibility of the endogeneity of this variable. The results of this exercise are presented by Table 2.

The empirical results of Table 2 disclose a statistically significant negative relationship between the ERA and the structure of investment as indicated by the value of the $t$-statistic of $-$2.39. Furthermore, there is a statistically significant positive relationship between the proportion of turnover exported lagged 2 years and the dependent variable. Another interesting result is the statistically significant negative relationship between the real exchange rate and the structure of investment. Finally, expected profits in the domestic market and the dependent variable are negatively related although statistically insignificant. The high value of the $R^2$ statistic of 0.943 provides reinforcing evidence of the importance of the ERA, proportion of turnover exported (lagged 2 years) and real exchange rate in restructuring investment towards export capacity. These results are similar to those when the proportion of turnover exported is lagged 1 year i.e., see Table 1. The means the statistically significant negative impact of the ERA on the structure of investment has prevailed whether the proportion of turnover exported is lagged 1 or 2 years thereby indicating the major role trade liberalization is likely to have played in restructuring investment towards export capacity.

5.2. The Nominal Rate of Assistance

The NRA is also used as a measure of trade liberalization in order to rigorously test the relationship with the structure of investment. This task is initially pursued within the context of the proportion of turnover exported lagged 1 year. The results of this exercise are displayed by Table 3.

The empirical results reveal a statistically significant inverse relationship between the NRA and the structure of investment as indicated by the value of the $t$-statistic of $-$2.60. Furthermore, the proportion of turnover exported lagged 1 year exhibits a statistically significant positive relationship with the dependent variable. There is also a statistically significant negative relationship between the real exchange rate and the structure of investment. Expected profits in the domestic market and the dependent variable are negatively related although statistically insignificant. The high value of the $R^2$ statistic of 0.953 provides re-affirming evidence of these results. The empirical exercise using the NRA as a measure of trade liberalization is repeated with the proportion of turnover exported lagged 2 years on this occasion in order to rigorously test the possibility of the endogeneity of this variable. The results of this exercise are depicted by Table 4.

The empirical results of Table 4 depict the NRA exhibiting a statistically significant negative relationship with the structure of investment as the value of the $t$-statistic is $-$2.37. Furthermore, the proportion of turnover exported lagged 2 years exerts a statistically significantly positive impact on the dependent variable. The real exchange rate is negatively related to the structure of investment and is (statistically significant. Finally, expected profits in the domestic market has the expected sign although is statistically insignificant. The high value of the $R^2$ statistic of 0.943 provides reinforcing evidence of the importance of the NRA, proportion of turnover exported (lagged 2 years) and the real exchange rate in restructuring investment towards export capacity. However, of particular interest is the statistically significant negative relationship between the NRA and the structure of investment whether the proportion of turnover exported is lagged 1 or 2 years thereby highlighting the pivotal role of trade liberalization in restructuring investment towards export capacity.

The empirical results of Tables 1–4 provide re-affirming evidence of a statistically significant negative relationship between the ERA and NRA and the structure of investment thereby indicating the major role trade liberalization is likely to have played in driving the restructuring of investment towards export capacity. However, the empirical results related to the ERA are more robust because this is a more accurate measure of trade liberalization than the NRA. Specifically, the ERA incorporates the net effects of protectionism by taking into account both the assistance provided to output and the penalties imposed such as the higher cost of imported inputs. This compares with the NRA which considers only the benefits of protectionism in the form of the assistance provided to output. Consequently, emphasis is placed on the empirical results related to the ERA in attempting to explain various interesting phenomena related to the impact of trade liberalization on the structure of investment. On this basis, trade liberalization has made a major contribution to the restructuring of investment towards export capacity which has the critical implication of sustaining the sharper export focus of the manufacturing sector “as disclosed by Marks and Sadeghi (1998)”. An interesting aspect of this response has been the proactive approach of firms in restructuring investment. Specifically, Australian studies model aggregate investment expenditure with a 3 month lag from the time the decision is made by firms to invest until it materializes i.e., see Heijdra and Scarth (1990) and McKibben and Siegloff (1988). The lag associated with investment in export capacity is compounded due to the heavy dependence on imported specialized capital (and intermediate) goods that are needed to accommodate the production of niche goods on a large scale for the international market from distant markets such as the U.S. and Western Europe. Re-orienting investment towards export capacity in the current period when a lag is involved therefore leads to the striking revelation that firms in the manufacturing sector have been proactive by implementing their investment plans in advance in order to increase exports in a timely manner and hence offset the losses anticipated in the domestic market emanating from the prolonged period of reductions in import protection levels thereby safeguarding production. Secondly, the statistically significant positive relationship between the proportion of turnover exported lagged 1 and 2 years and the dependent variable highlights the importance of rising export-oriented production in prompting the restructuring of investment towards export capacity. Furthermore, the statistically significant inverse relationship between the real exchange rate and the proportion of investment attributable to export creating capacity reflects the trend of the real exchange to depreciate in the period 1968/69–2015/16 to have enhanced international competitiveness thus reinforcing the drive towards restructuring investment in favor of export capacity. “The sensitivity of the structure of investment to the real exchange rate is consistent with the study by Lewis and Wood (1991) which” reveals the sharp depreciation of the $A in 1985 and 1986 led to a marked increase in the contribution of investment in export creating capacity to total investment in the manufacturing sector in 1986/87. Finally, expected profits in the domestic market is negatively related to the dependent variable though not statistically significant. This perplexing result appears to reflect the switch of emphasis by firms from the short-term objective of allocating funds on the basis of the relative profitability of investment in the domestic and international markets to the long-term objective of seeking to safeguard production and hence their survival by reorienting investment towards export capacity to bolster exports and hence offset the sustained losses in the domestic market emanating from trade liberalization. Finally, it is noteworthy to mention the restructuring of investment towards export capacity is likely to be accommodating the production of higher levels of medium technology manufacturing exports which is consistent with government policy of upgrading the skill level of the labor force.

6. The Costs

The economy wide output and employment benefits from the higher export profile of the Australian manufacturing sector are tempered by a number of costs. More specifically, the heavier dependence on export-based production subjects this sector to a number of unfavorable effects such as greater vulnerability to the fluctuations of the international business cycle. For example, a deep international recession will have a larger depressing effect on export demand and hence output and employment growth. Nevertheless, this can be ameliorated by diversifying export markets as not all economies will experience the same magnitude of an international economic downturn. In addition, the stronger dependence of manufacturing production on exports leads to demand for exports being more susceptible to the volatile Australian dollar. In particular, the exchange rate appreciates markedly when the world price of commodities rises which results in the deterioration of international competitiveness thereby weakening world demand for manufacturing exports. Lower commodity prices have the opposite effects on the exchange rate, international competitiveness and hence export demand for manufacturing exports. The gyrations in export demand deriving from these two factors will lead to corresponding movements in output and employment growth in the manufacturing sector which in turn will compound fluctuations in output and employment growth in the economy due to the extensive linkage effects of manufacturing activity with other segments of the economy. A specific challenge confronting export focused firms relates to their link with global supply chains where they produce or source goods/components from other countries in order to minimize costs. For example, “Short et al. (2016) reveal” that firms reliant on global supply chains to manufacture goods in other countries risk reputational damage when working conditions in these countries are dangerous or more generally problematic. Furthermore, “Kind and Soule (2007) highlight” the reputational damage to firms in producing in other countries where there is a poor environmental, social and governance performance. These studies highlight reputational damage ultimately has a negative impact on sales and profits. However, this situation also has the potential to disrupt global supply chains of exporting firms in Australia which may seek to cease or switch the supply of goods/components from a particular country to another.

7. Conclusion and Policy Implications

The empirical evidence reveals trade liberalization is likely to have made a major contribution to the restructuring of investment from domestic towards export capacity in the Australian manufacturing sector in the period 1968/69–2015/16. The fundamental objective of boosting export capacity has been to provide a platform for sustained export growth in light of the persistent losses anticipated in the domestic market emanating from the prolonged period of reductions in import protection levels and thereby safeguard production. A particularly interesting dimension of this phenomenon has been the proactive approach of firms which have made an allowance for the lag involved with restructuring investment towards export capacity in order to boost exports in the current period and hence offset the losses anticipated in the domestic market emanating from trade liberalization. The re-orientation of investment towards export capacity implies a sharper export focus of the manufacturing sector that not only promotes its output and employment growth, but also that of the economy, due to the extensive linkage effects of manufacturing activity with other segments of the economy. The rising proportion of turnover exported and the trend for the real exchange rate to depreciate have also constituted important catalysts of the restructuring of investment towards export capacity.

Higher export-based output and employment growth in the manufacturing sector and the stimulatory impact on the economy’s output and employment performance therefore necessitates ongoing measures to promote the international competitiveness of this sector in order to preserve and expand these very important benefits. Towards this end, the continuation with economy wide microeconomic reforms will be crucial. These include education and training reforms to continue to raise the skill level of the labour force, improve labor market flexibility and increase investment in infrastructure to boost productivity growth that in turn combats costs of production throughout the economy which includes the manufacturing sector. “For example, (Paul, 2003) uses” a cost function approach to highlight the stimulatory impact of public infrastructure expenditure on productivity growth in the private sector in Australia in the period 1968/69–1995/96. An interesting aspect of this result is the higher productivity is equally underpinned by public infrastructure serving as a substitute for private capital and labour and higher output. These effects ultimately reduce costs of production and hence improve international competitiveness in the economy that includes this sector. “Furthermore, Forsyth (2000) notes” the deregulation of infrastructure services such as transportation, storage, telecommunications and energy has led to higher productivity in various sub periods from the mid-1980s to the late 1990s, a trend which is likely to have been sustained in light of the competitive pressure in these service industries. This combats the costs of the manufacturing sector and indeed those of the economy when these services are used as inputs in production thereby also promoting international competitiveness. Further progress in improving the flexibility of the labor market where the re-numeration of labor is more closely aligned to growth in labor productivity in this sector will also depress costs and hence improve international competitiveness, particular in view of the high proportion of costs attributable to the use of labour. There are other measures that can be implemented to improve the international competitiveness of the manufacturing sector such as stronger incentives for investment and research and development (R&D) expenditure. “Specifically, Aldrich (1987) survey of twenty-five manufacturing enterprises reveals” the positive impact of incentives for investment expenditure in helping firms overcome the uncertainty related to investment for export purposes. However, higher incentives for investment in export capacity relative to investment for domestic purposes will provide a stronger boost to export competitiveness and hence investment in export capacity. Complementary policies to increase subsidies for R &D will reinforce the incentive to innovate new and improved products with improved quality, particularly medium technology manufacturing goods which exhibit a comparative advantage on the international market. Moreover, government legislation to establish minimum product standards, such as improving safety, will augment quality thereby reinforcing export competitiveness. It is important to highlight that microeconomic reforms to improve international competitiveness will be vital in driving manufacturing export growth and hence maintaining the momentum in investment in export capacity in the post trade liberalization period.

Furthermore, ongoing microeconomic reforms will dampen the inflation rate which with fiscal restraint will restrain interest rate rises thereby containing borrowing costs thus facilitating the restructuring of investment towards export capacity. Finally, measures to encourage foreign direct investment can also enhance the re-orientation of investment towards export capacity and hence export growth in the manufacturing sector, particularly when Australia is used as a regional export base to promote medium technology exports from this sector to the rapidly growing South East Asian economies. However, numerous caveats need to be noted in the process of changing the structure of investment towards export capacity in this sector. Firstly, the stronger reliance on exports increases the vulnerability of export demand and hence output and employment growth in the manufacturing sector to the fluctuations of the international business cycle. This in turn accentuates the fluctuations in output and employment growth in the economy due to the extensive linkage effects of manufacturing activity with other segments of the economy. These gyrations in output and employment are compounded due to the sensitivity of the Australian dollar to the fluctuations in commodity prices on the international market. Finally, a specific challenge confronting export focused firms is the potential disruption to global supply chains due to reputational damage or any other reason that causes the cessation or shift in production of goods/components from one country to another thereby hindering manufacturing exports from Australia. The Australian experience carries important policy implications for the manufacturing and indeed other sectors of countries which are principally domestically focused of the integral role that trade policy can play in restructuring investment towards export capacity and hence promote stronger export generated output and employment growth in the economy.

Notes