How the ‘tyranny of distance’ affects the Australian economy

Technology may have reduced transport and communication costs, giving us instant communication around the world, and turning manufacturing into a network of global supply chains stretching across nations. But my recent research with Marie-Claire Robitaillefound that Australia’s distance from Europe and the United States still imposes enormous costs on our exports.

We found the impact of distance differs for different exports. Iron ore and gas are twice as sensitive to distance as manufacturing products are. Likewise coal, oil and agricultural products are also very sensitive to distance.

Our modelling shows that Australian resource exports would be 20-30% higher if we were not so far away from markets in Europe and the United States.

There is a silver lining however. Economic growth combined with huge populations in Asia mean the centre of world demand is shifting, which is making Australia less remote. This will boost our exports overall, but it will also change what we export as our agriculture industry becomes more competitive.

The tyranny of distance

Unsurprisingly, trade partners who are further apart trade less with each other. The reasons are easy to guess. Iron ore, for example, has a high weight to value ratio (it weighs a lot for its price) so transport costs per tonne are high. Likewise gas has high shipping and storage costs.

There may be additional costs associated with communications, loading and engineering constraints around the size of ships. But for whatever reason, technological change and globalisation have not yet levelled the playing field for resource exports as much as they have for manufacturing. Read more

Peter Robertson – The Conversation – 7 Sep 2017