AUSTRALIA IN THE GLOBAL ECONOMY

AUSTRALIAS TRADE AND FINANCIAL FLOWS

Value, Compostition and Direction of Australias trade and
financial flows
Trends in Australias trade pattern
International trade significant role in development of
economy
Geographic isolation from rest of world - trade represents
high proportion of Australias economic activity
Always been overseas markets for Australias primary
commodities like minerals and agricultural products
Trade in order to obtain new technology and items not
produced in Australia
Australia referred to as small, open economy
Produced 2% of Global World Product.
Export 1/5 of production and import 1/5 of GDP
Changing Direction of Trade:
1950s Australia traded with United Kingdom and other
European countries.
Australias trade pattern shifted and Japan, China, South Korea
and ASEAN countries have become the larger portion of the
export markets
One of the key factors UK joining European Trading bloc
called European Economic Community (now EU) in 1973
Once UK joined the trading bloc required to impose same
barriers as other European countries for preference of the bloc.
Australian exporters found it hard to access the European
markets and thus a shift in focus for trading opportunities
occurred
1960s Japan undergoing massive economic growth and
needed production inputs Australia exported these and
Japan became largest export market
Early 2000s China exports increased dramatically largest
trading partner since 2007
2013-14 China accounted for approximately 1/3 of Australias
export earnings from merchandise trade.
Imports from US and European countries for capital equipment
and consumer items.
Changing Composition of Australias Trade:
Primary industries main focus for Australian exports as it has
a comparative advantage in commodities
Agricultural and Mineral exports account for 2/3 of Australias
export earnings but however is less competitive in
manufacturing.
Australia relies on primary exports and importing capital and
manufactured consumer goods.
Significant changes in export base composition as in 2013-14
total exports were 332 billion metal ores 97 billion, coal 40
billion, tourism 36 billion etc.
Decrease in agriculture and minerals increase in metals and

minerals leading to global commodities boom

Decline of agricultural exports
o Fluctuations in prices
o Trade policies of other countries
o Commodity items which add extra value to processing
and elaborate manufactures
Manufacturing is produced in low volume in Australia due to
the difficulties faced with high exchange rate, competition with
countries like China and other low-cost economies in the AsiaPacific region.
Global resources boom debate on Australia continuing to rely
on commodity items for exports as it relies on economic growth
to occur in countries.
Best long term alternative is to diversify from just minerals and
energy goods to goods and services which has the greatest
potential for growth in the long term
Service industries have a high skilled workforce as thy employ
nearly 2/3 of the entire industry
Growth rates in education services, tourism alongside minute
growth in transport, health and insurance.
Potential in agriculture and manufacturing output like
processed food.
As long as China is still growing, it will keep the Australian
dollar high and resources sector to continue its exports.
For imports, 1/5 is Capital goods for the increasing mining
sector. Overall proportion of imports have increased which can
be from the shift away from mass production manufacturing in
Australia especially with lowered tariffs and local content rules.
Trends financial flows debt and equity
Rate of Financial flows has been much greater as international
businesses have bought Australian assets and invested in
Australian businesses due to increased overseas investments in
Australian companies
International financial flows were not very important in decades
after WW2
Exchange rates remained fixed and capital markets on a global
scale were closed off.
1970s lead to the international system of exchange rates to an
end.
Floating exchange rates came into play and restrictions on
capital movement were removed and more liberalized
Financial flows began to grow rapidly when the markets opened
up and due to technological changes, the shift between
countries regards to finances were made easier.
Direct investment includes the establishment of a new
company or the purchase of a substantial proportion of shares
in an existing company (10% or more).
Business taking direct investment longer term investment
and investor contributes to management of business.
This differs from portfolio investment as they include loans and
other types of securities and fewer shares in the company and
do not intend to participate in running the company.
Before the deregulation of the financial sector, the financial

flows were usually direct investment which governments

preferred as increased job creation and technology.
Removal of restrictions led to Australia attracting more finance
to inject the economy with money flowing into companies in
forms of loans and share purchases.
Financial flows have grown rapidly since 1980s when
Australias dollar was floated and financial markets were
opened
Since then level of foreign investment has grown and continued
to grow fast
Growth of portfolio investment is faster than long term foreign
direct investment
Portfolio investment is now higher than level of direct
investment
Growth in financial flows remains higher than growth in trade
Another feature of financial flows is imbalance of investment in
Australia and Australian investment overseas
Australia is a net capital importer level of foreign investment
in Australia is sustained to be twice the level of Australian
investment abroad
Reflects low levels of domestic savings in Australia historically
occurred
Australia relied on financial flows cover gap between savings
and investment

Australias Balance of Payments:

Most important economic indicator of the relationship between
Australia and the global economy
Summarises all transactions that Australia has with the rest of
the world over a given period of time
Shows trade and financial flows in and out of the Australian
economy
Money flows in credit
Money flows out debit
BOP represented in two accounts
STRUCTURE:
CURRENT ACCOUNT, DEBITS AND CREDITS
o Shows the money flow from all exports and imports of
goods and services, income flows and non-marker
transfers for a period of one year.
o Current account cover external transactions and cannot
be undoe (irreversible)
o Net Goods:
Difference between the money gotten through
exports compared to money paid for imports
Three possible outcomes: balance, surplus or
deficit
Net goods recorded a surplus of $8.1 billion in
2013-14
o Net Services:
Services that are bought and sold without people
receiving a good

 Examples are transport, travel, insurance charges,

telephone calls
Services that sells inflow, Services that are
bought outflow
Deficit 14.3 billion value of service exports lower
than value of service imports
o Balance on Goods and Services:
Amount from adding net goods and services
together
$6.2 billon is shown for 2013-14
o Net Primary Income:
Refers to earnings on investment
Covers interest payment borrowings and returns
like foreign owned companies in Australia or
foreign land ownership eg rent, profits, interests
and dividend flows
Australians invest overseas flows back to Aus
Income deficit of 38.8 billion
Major contributor to CAD of $47.1 billion
Previously known as primary account
o Net Secondary Income:
Non-market transfers
Occur when products or financial resources ->
specific good is being provided in return
Small and technical account little scope to
overall BOP
Income includes payouts such as insurance claims,
workers remittances and funds taken out of
Australia in the form of unconditional aid to
developing countries
Pensions received by residents from foreign
governments are also included
Previously till 2009 net current transfers

CAPITAL AND FINANCIAL ACCOUNT

o Concerned with financial assets and liabilities
o Results from international borrowing, lending and
purchases of assets shares and real estate
o Lasts for a period of one year
o Transactions occur can be undone in the future
o Borrowings can be paid back and assets that are bought
can be sold again
o Capital Account:
Made up of two main components capital
transfers and debt forgiveness
Capital transfers form of conditional foreign aid
grants
Debt Forgiveness form of assistance that is to
help them build up their infrastructure or capital
stock
Second item is entries for the purchase sale of
non-produced, non-financial assets and intellectual

property such as patents, copyrights, trademarks

and franchises
September 2009 migrant transfers
Capital account deficits -$0.4 billion
o Financial Account:
Australias transactions in foreign financial assets
Categorized by the type of investment direct,
portfolio, financial, reserve and other
Credit entries are net inflows increase in foreign
investment or reduction in overseas Australian
investment
Debit entries are net outflows
Australia consistently records a positive financial
account balance
Australia draws on savings of the rest of the world
to finance a deficit on its current account
Direct Investment:
Covers aspects of foreign financial transactions
new investment in Australia/overseas
Buy more than 10%of shares in an existing
company
Surplus of $53.2 billion in 2013-14
Portfolio Investment:
Buying of land shares and other marketable
securities
Most foreign debt recorded here
Largest item on CFA
$38.6 billion surplus in 2013-14
Financial Derivatives:
Complex financial assets significant over
years
Value interest rates, exchange rates and
indices
$15.9 billion dollar deficit in 2013-14
Reserve Assets:
Foreign financial assets regulated and
controlled by central authorities
Includes monetary gold, special drawing rights,
reserve position in IMF and Foreign Exchange in
RBA
Deficit of $10.7 billion
Other investment:
Residual category for transactions not
classified
Includes trade credits, loans, financial leases,
currency and deposits and other accounts
payable
$17.7 billion deficit in this category
o Balance on Capital and Financial Account
Determined by adding both categories together

 Equal to the deficit on the current account to thus

cancel sort of out each other
Shows Surplus of $47 billion in 2013-14
Net Errors and Omissions reported with CFA
statistical discrepancies
LINKS BETWEEN THE KEY BALANCE OF PAYMENT CATEGORIES
Important relationship exists between CA and CFA
Two accounts add up to zero and represent the Balance of
Payments allowing for the small category of net errors and
omissions
Increase in CAD rise of CFA surplus
Floating Australian dollar ensures balance in BOP and
equilibrium:
Supply of $A = Demand of $A
M + Y debits + K outflow = X + Y credits + K inflow
M X + Y debits Y credits = K inflow K outflow
Deficit on CA = Surplus on the CFA
Strongest link net primary income part of current account
CFA surplus will lead to a larger deficit on the Net Primary
Income
Any foreign financial flow must earn return for earner and
therefore earnings are an outflow recorded on the net primary
income account
There are two ways of financial inflows causing debts on
primary income:
o International Borrowing:
Require regular interest repayments
Service repayments not recorded on CFA but as
debits on net primary income
Only repayments of principal is recorded on FA
High levels of borrowing increase deficit due to
servicing costs of foreign debt
o Foreign Investment:
Requires returns on equity investment
Financial inflows related to the foreign purchase of
assets such as land, shares or companies
The owners rent, share owners dividends
Return on investment recorded as debits on net
primary income part of CA

High levels of CFA surplus widening CAD due to servicing

costs
Increased foreign liabilities debt trap borrows to pay
interest servicing cost on existing debt
Another perspective savings and investment
Low savings level necessary to attract large inflow on FA
suggest CAD is not only result of trade imbalance
Focus on gap between savings and inbestment as the cause of
Australias BOP problems due to low savings needing foreign
capital inflow to fund investment in Australia

2007 net foreign liabilities are roughtly at a constant of 55%

of GDP

TRENDS IN THE SIZE OF COMPOSITION OF AUSTRALIAS

BALANCE OF PAYMENTS
Size of the Current Account Deficit is responsive to changes
from both world and domestic growth
Domestic Growth stronger than world growth CAD tends to
increase
World Growth exceeds Domestic Growth Export income
tends to grow more quickly than import spending reducing size
of CAD
2003-04: effects of drought reduce export income from
$151,616m in 2002-03 to $146,729m in 2003-2004
2004-05: world recovery at end of drought rising exports
alongside imports rose due to strong domestic growth
Higher commodity prices during global resources boom in
2005-06 increased exports/goods and services deficit fell to $15,354m
Major structural change took place in the current account
deficit in 2010-11 with Australia recording a large $28.2 billion
surplus in goods balance due to mining exports
Slower world growth in 2012-13 led to lower export income and
deficit in goods balance of $6.4b
2013-14 current account deficit fell to 47.1B
INTERNATIONAL COMPETITIVENESS:

AUSTRALIA IN THE GLOBAL ECONOMY

EXCHANGE RATE:

Refers to the rate at which a unit of domestic currency is

exchanged for a given amount of foreign currency.
An exchange rate price of one currency quoted for another
Measure of relative value or purchasing power
Basis of conversion for exporters/importers who engage in
international trade, investment and finance
Spot markets are cash markets for foreign exchange
conversion
Forward markets involve trade in derivatives or future
contracts for delivery of foreign exchange at a date in the
future.

Measurement of the Relative Exchange Rates:

Determined by two different ways market forces of demand

and supply or fixed by governments central banking authority
Australia changed to a floating exchange rate in December
1983
Previously used a flexible peg exchange rate
1950s pegged British Pound, 1960-70s US Dollar, 197080s TWI
Relative exchange rates has two ways of measurement:
o Bilateral or Cross Rates
Measure the value of a unit relative to another
currency
Usually that of a major trading partner
Eg US, Japanese Yen, Euro, UK pound etc
A rise in value or purchasing power of the
Australian Dollar is known as appreciation 2009
to 2012-13 from US$0.74 to US$1.02
A fall in value or purchasing power of Australian
Dollar is known as depreciation
Largest appreciation between 2007-2012 due to
the global resources boom
Most significant depreciation seen against all
countries occurred in 2008-09 as GFC and global
recession led to fall in commodity prices
o The Trade Weighted Index (TWI):
Measures movement in the Australian dollar
against numerous other currencies of major trading
partners
Weighed according to importance of trade with
Australia
TWI includes 21 countries that make up 90% of
goods and services in Australia
More accurate and important than Bilateral
Last revised in 2013 by RBA
80% of TWI was made up of Asia-Pacific currencies
China, Japan, US, Europe, South Korea and
Singapore in order of weighting for trade

 Calculated and published daily by RBA

Strength of Australian dollar between 2009-11 due
to rising world commodity prices, favourable terms
of trade, sustained direct and portfolio investment

Factors affecting the demand for and supply of Australian

Dollars

Demand derived demand Australias exports of goods and

services and the sale of domestic assets
Supply derived from demand by Australians for foreign
goods and services and purchasing of foreign assets
Transactions in Current and Capital and Financial Account
Changes in demand and supply affect the equilibrium
exchange rate
Factors affecting demand for AUD:
o Demand for Australian exports by foreigners (goods and
services credit in CA)
o Demand of domestic assets shares, real estate,
government bonds, currency and thus capital inflow
(credit in CFA)
Factors affecting supply for AUD:
o Demand for foreign imports by Australians (goods and
services debit in CA)
o Demand for foreign assets by Australians shares, real
estate, government bonds, currency and thus capital
outflow (debit in CFA)
Current Account influences on demand for Australia
exports/imports:
o Relative inflation rate:
Between Australia and trading partners
Affects prices or competitiveness of
exports/imports
Measured by changes in real exchange rate
Rise in relative inflation reduced export
competitiveness and demand and increase in
demand for imports
Fall in relative inflation increased export
competitiveness and demand and a decrease for
imports and import substitutes become cheaper
and more competitive
o Australias Terms of trade:
Effects demand for exports
Rise in world economic growth and income
higher commodity prices and export income
increase in demand for Australian dollars
appreciation

Fall in world economic growth decline in

commodity prices and export income less
demand for Australian dollar depreciation
o Rates of Domestic and World Growth
Strong world growth increased demand for
export and AUD
Weaker economic growth decreased demand for
export and AUD
Increased domestic growth higher growth in
demand for imports and supply of AUD
Decreased domestic growth lower growth in
demand for imports and supply of AUD
Capital and Financial account influences on demand for
Aus/foreign assets:
o Interest rate differentials and change in investment
expectations:
Influence exchange rate short term lead to
volatility
Rise relative to overseas more foreign
direct/portfolio investment domestically
increased demand for assets/AUD
Fall in rates relative to oversease outflow
increase foreign asset demand increase supply
of Australian dollar
o Exchange rate expectations:
Foreign speculators appreciation of Dollar buy
more and sell foreign exchange to make capital
gain and profit
Appreciation increases demand for AUD
Depreciation sell AUD and buy more foreign
exchange increase in supply of AUD.
Role of Exchange Rate in the Balance of Payments:
o Equilibrium exchange rate when supply and demand of
AUD is equal to one another
o Demand = sum of people associated amongst exports,
net income credits and capital inflow in BOP
o Supply = sum of payments associated with imports,
income debits and capital outflow in the BOP
o Current account must be equal to Capital and Financial
Account for there to be a balance under the floating
exchange rate system
o Depreciation of the exchange rate raises the price
competitiveness of exports and import substitutes helps
control the CAD

Changes in the Exchange Rates Appreciation and

Depreciation:

CAUSES OF APPRECIATION FACTORS

Increase in AU interest rates OR decrease in overseas interest
rates.
Improved invest opportunities in AU or deteriorated in foreign
opportunities.
Rise in commodity prices + improvement in AU terms of trade.

Improvement in AUs international competitiveness.

Lower domestic inflation + increased demand for AU exports.
Expectations of AUD appreciation based on forecasts of above
factors.
CAUSES OF DEPRECIATION FACTORS
Decrease in AU interest rates OR increase in overseas interest
rates.
Deterioration in investment opportunities in AU OR
improvement in foreign opportunities.
Fall in commodity prices + deterioration in terms of trade.
Deterioration in AUs international competitiveness.
Higher domestic inflation + increased demand for imports.
Expectations of AUD depreciation based on forecasts of above
factors.

Determination of Exchange Rates including fixed, flexible and

managed rates
Fixed Exchange Rate System:
Fixed exchange rate system fixed by the Central Bank or in
the case of Australia the Reserve Bank of Australia did this
Usually on a daily basis to another country
Fixed rate is either above or below what the equilibrium
exchange rate would be
RBA has to buy or sell foreign currency or foreign exchange to
keep the exchange rate at a pre-determined level has to
have sufficient reserve assets
Advantages include:
o Certainty about the immediate short term value of the
exchange rate assists exporters and importers in
decision making
o Allows RBA to alter monetary policy to that of the country
that they are pegging currency to
Disadvantages include:
o Increased speculation due to undetermined market
destabilizes the exchange rate in which RBA/government
revalue or devalue currency in future
o RBA to possess large exchange reserves to keep the
pegged rate at its determined point if overvalued, RBA
force to devalue, if undervalued, RBA forced to revalue
o Balance of Payments outcome impacts on domestic
money supply Current Account Surpluses increase the
money supply and can cause inflation. CAD on other
hand causes a fall in the money supply and lower
economic growth and raises unemployment
o Currency crises will lead to the devaluation/revaluation of
currency and policy adjustments forced ones mean
adjustments to policy to allow for structural changes
Flexible/Floating Exchange Rate System:
Australian government floated the Australian Dollar (AUD) on
December 10th 1983
Three main reasons most efficient exchange rate, expose
the Australian economy to international competitive market

pressures, more independent and effective monetary policy in

deregulated environment
Demand is derived from foreign deman d for Australian g&s,
assets by foreigners where supply is from Australian demand
for foreign g&s, assets.
Clean floating exchange rate (no intervention) is determined by
forces of demand and supply of AUD
Demand curve negatively sloped, as exchange rate rises
Australia becomes cheaper and less AUD is demanded
Supply curve positively sloped as any fall in exchange rate
means US products cheaper relative to Australian products
Advantages:
o More realistic market prices for the currency that was
reflected by fundamentals of Australian economy that
buyers and sellers would factor when making
transactions involving Australian dollar.
o Discourages destabilizing speculation unlike fixed
exchange which resulted in excessive speculation over
future value of currency that undermined confidence
o Pursues more independent and effective monetary policy
where BOP would not impact money supply and any
changes would be absorbed by exchange rate to fix
disequilibrium in the BOP
o Provide insulation during external real and financial
shocks by moving new market equilibrium positions
o Is consistent and allows for greater global capital market
integration that allows domestic monetary policy to
contain inflation.
Disadvantages:
o Increases in volatility over time due to exchange rate
expectations due to foreign reaction to short term
economic/political events.
o Subject to sudden shifts in market sentiment leading to
shifts away from long run equilibrium path
o Bandwagon effects (speculators follow market trends)
Overshooting appreciate/depreciate in value more
than expected. misalignment of currency in relation to
TWI
o Speculative bubble market participants expect
exchange rate to continue recent movements
Managed Rates Exchange System:
Similar to fixed exchange rate system
Currency pegged/adjusted daily to variations in major trading
partners currency
An adjusted/crawling peg was used between 1978 and 1983
with exchange rate being pegged to TWI
Central bank sets exchange rate daily to keep within target
band or zone of intervention

The influences of the Reserve Bank of Australia on the

Exchange Rates:

Relies primarily on market forces to determine the exchange

rate, RBA sometimes plays a role in influencing currency

RBA cannot make change for long term, it is able to smooth

out bumps in the short term

Dirtying the float:

o Major short term change in exchange rate that is harmful
to economy RBA steps in
o Performs role of either buyer or sell to stabilize $A
o Curb rapid depreciation RBA buys $A to put upward
pressure on currency
o Curb Rapid Appreciation RBA will sell $A to put a
downward pressure on currency
o Later in 2008 AUD lost 1/3 of value against US RBA
purchased $3.3 billion of $A to control depreciation and
provide support in FOREX market
o Sold back $3.4 billion in 2009 as the currency recovered
value
o FOREX interventions contribute to RBAs dividend
payment to government
o RBA limited by size of foreign currency holdings
Monetary Policy Decisions:
o Indirect way of influencing the exchange rate
o Curb Rapid Depreciation increase demand for $A by
raising interest rates high interest rates attract foreign
savings and place upward pressure on exchange rates
o Policy is effective for only a limited time
o Unusual for RBA to change interest rates in response to
movements in currency primary focus of monetary
policy influence domestic economy and in particular,
the interest rates.
o Exchange Rates movement affect stability of
economy/level of inflation

The influences of the Reserve Bank of Australia on the

Exchange Rates:

TRENDS - RECENT MOVEMENTS OF AUD:

2000s One of the most volatile periods for the AU dollar
since 1983 floating.
Sustained appreciation from 2007 saw dollar achieve almost
parity with US dollar by mid-2008, only to lose 1/3 of value and
sink down to US$0.63 in early 2009 (GFC).
Against TWI, dollar climbed back to a 25-year high of 74 before
falling to a six-year low.
By mid-2012, AUD appreciated to over $US1, highest level in
three decades.
RBA research identified another cause for AUD recent volatility
when AU cash rate is higher than that of advanced
economies, foreigners (from high savings nations like Japan)
likely to invest savings in AU. Known as carry trade
supported AUD through last decade.
External risk factors in global economy when investors loss
of confidence occurs due to high public debt levels. Australias
AAA credit rating upgraded and low public debt levels

contributed to AUDs appreciation in 2012 as investors fled

European investments due to Europes sovereign debt crisis.
REASONS FOR STRENGTH IN AUD from 2009 onwards:
As a significant commodity exporter (1/2 exports from
mining/agriculture), AUs TOT is influenced by world
commodity prices (prices rising by 5% in 2010 and 4% in
2011).
After commodities prices soared to over 3 times their value
before 2003 resources boom, this fuelled demand from trade +
speculative investment in AUD (reflecting Chinas growth along
with our other major trading partners).
AUs favourable TOT supported AUD appreciation as
commodity export prices lifted TOT by 20% between 2010 &
2011 TOT was 95% higher than average in 1990s.
Sustained portfolio/direct investment in AU by foreign
investors reflects Australias export boom + rising profits.
Higher AU interest rates in 2009 + 2010 attracted foreign
investment.
THEORY OF THE J-CURVE
Theory suggests that country with CAD experiencing currency
depreciation will experience a worsening trade balance in
the short run. As export price fall and import prices rise
export income declines and import expenditure increases in
short term.
In long term, depreciation improves countrys international
competitiveness selling greater volumes of exports and
purchase less imports (reducing trade deficit).
Appreciation:
NEGATIVE EFFECTS:
Increasing value of $A
compared to other countries,
exports can become more
expensive on global markets
and become harder to sell
decrease in export income and
reduction of CAD
Due to cheaper imports,
consumption would increase
and worsen the CAD alongside
fall of domestic production of
import substitutes
Increased import
spending/lower export revenue
reduced domestic growth
rate
Appreciation reduces value of
AUD of foreign income earned
on Australias investment
abroad and causes
deterioration in net primary
income component of the CAD
Appreciation will lower value of

POSITIVE EFFECTS:
Australian consumers enjoy
increased purchasing power
buy more goods for the same
amount of $A
Appreciation lowers interest
servicing costs on foreign debt
as Australia can buy more of
the currency with AUD
lowers outflow on net primary
income and reduces CAD
Appreciation will also reduce
the value of foreign debt that
has been borrowed from that
country due to valuation effect
Inflationary pressures in
Australia reduced as imports
becomes less expensive
reduce pressure on RBA to
raise interest rates to defend
inflation target

foreign assets in terms of AUD

known as valuation effect

Depreciation:

NEGATIVE EFFECTS:
Australians experience
lowered purchasing power
fewer goods for same amount
Depreciating increases the
servicing costs as they now
have to pay more as Australia
can buy less foreign currency
with AUD increases income
outflow on net income
component on the current
account increases CAD
Depreciation will raise amount
of foreign debt that has been
borrowed in foreign currency
through AUD known as
valuation effect
Inflationary pressures in
Australia will increase as
imports would be more
expensive pressure on RBA
to raise interest rates to
maintain inflation target

POSITIVE EFFECTS:
Decreasing the value in terms
of other currencies, Australias
exports will become cheaper on
global markets and easier to
sell increase in export
income and improve CAD in
medium term.
Positive impacts on CAD due to
boost in competitiveness of
exports.
Reduced imported consumption
and higher export revenue
increases Australias growth
rate which cannot be done
unless Australia can replace
imports domestically
Depreciation increases value of
foreign income earned on
Australias investments abroad
and would cause improvements
in net primary income section
of the CAD
Depreciation increases value of

foreign assets in Australian

dollar terms known as valuation
effect.
Foreign investors find it less
expensive to have investments
in Australia therefore increases
financial inflows can dry up

AUSTRALIA IN THE GLOBAL ECONOMY

FREE TRADE AND PROTECTION
Australias policies regarding free trade and protection
- 1973, the Labour Government had a 25% national wide cut in
protection to stimulate industry efficiency and the prices of
imported consumer,capital and other goods were lowered.
- Protection was increased in the late 1970s and 1980s as domestic
industries as passenger motor vehicles (PMV) and others due to
intensified international competitiveness.
1968-9
36%
-

1982-3
25%

1986-7
19%

1994-5
9%

2002
3.5%

2011
1.8%

2014
1.3%

Protection policies were scrutinized and were said to increase

prices, misallocate resources and damaged the trading
performance and living standards for the long term.
1988 started a program for trade liberation in Australia and over
the following decade, the tariffs for Australia were reduced faster
than any other advanced economy.

50% of imported goods are tariff free.

Australias average tariff rate is similar to America and the
European Union.
- Australia is one of the least protectionist economies in the world
(including other protectionist methods)
- Australias agriculture protection levels were third lowest with
only 3% being subsidized unlike 7% for US, 19% for EU and 52%
for Japan.
- While protection has been drastically reduced, there are still some
programs to provide the companies with assistance, such as
programs through Austrade, which is the Australian Trade
Commission. It provides export assistance like financial assistance,
helps find information on export markets and marketing advice
through the Export Market Development Grants Scheme (EMDG).
- The EMDG has been seen to be successful as each dollar generates
$13.50 to 27 worth of exports, and EMDG is able to assist 4,000
businesses with 150 million dollars for export promotion and
assistance with markets.
- Australias lowering of protection has exceeded expectations of
International Trade Agreements such as WTO as Australia has tried
to phase it out.
- 2011 Trade Policy Review from WTO commended Australia on its
policies and pointed out minor adjustments needed to be made
such as quarantine laws for agriculture sector, foreign investment
restrictions, anti-dumping approaches etc.
Australias policies regarding free trade and protection
Bilateral Trade Agreements:
- involvement of two nations and are easy as they can be altered
to suit the needs of both participants.
- Recent years had led to agreements with Chile, Singapore,
Thailand and US.
- Two examples of Bilateral Trade Agreements are:
o Signapore- Australia Free Trade Agreements (SAFTA). It was
the first trade agreement that included an Asian Country in
2003. It covers the extraction of tariffs and the increased
accessibility for services such as telecommunications, etc. It
also allows for agreements for other areas that can impact
business like education, competition policy etc.
o Australia-United States Free Trade Agreement (AUSFTA) has
been signed since 2005 and has a huge tariff reduction on
goods, like agriculture and manufacturing. Tariffs on all goods
were removed by 2015. Trades for goods and services has
increased with US and is now the third largest trading partner
of Australia. It incorporates 8.9% of Australias two way trade.
- Although it does help reduce protection of Australian industries, it
doesnt create large economic benefits like multi-trade
agreements.
Multilateral Trade Agreements:
- Provides free or reduced tariff trades amongst many countries,
which is usually done through a regional agreement.
- Can be referenced as agreements made by the WTO.
- They provide greater economic wide benefits but may be hard to
find a suitable agreement due to more members to accommodate

for.
Two examples of Multilateral Trade Agreements are:
o ASEAN (Association of South East Asia Nations) and AANZFTA
(Australia New Zealand Trade Agreement) is an agreement
that came into effect in 2010. It covers 20% if Australias
goods and services trades. It has also lead to effective free
trade for 600 million people and more. They are
complementary economies as each demand each others
resources. It has boosted the Australian economy by US
dollars of 19 billion over the decade since it has been
established.
o APEC (Asia Pacific Economic Cooperation Forum) is a
negotiation that has been around for a while as seen in 1994
when the target of free trade was set by 2020 worldwide and
2010 for developed countries. Also since 1994, the tariffs
levels have dropped from 17% to 6% showing improvement in
less protection as seen by the proportion of goods without
tariffs shooting up to 40%. It has accommodated for the
signing of 37 agreements amongst the APEC members.

Implications of Australias policies for individuals, firms and

governments.
- Most significant structural change in the recent decades as it has
increased the integration of Australia with other global economies
alongside the way trade relationships operate for Australia aswell.
Effect on Individuals:
- Can lead to increased unemployment as companies restructure the
industries and make cutbacks on the local production, people in
these industries may have a hard time finding other job prospects.
The industries include import-competing industries and
manufacturing industries.
- This is known as structurally unemployed because their skills do
not apply to the vacancies available for other jobs.
- The government has stepped in and funded retraining programs to
help redundant workers adapt to other industries.
- The positives for short term employment is long term job
opportunities may increase as industries are now more efficient
and internationally competitive.
- Consumers also benefit as it allows them the ability to buy more
goods at lower prices alongside given purchasing power.
- 2011 Trade Policy Statement stated RRP of goods have fallen by
54% since 1985 for items like electronics, footwear and furniture.
- phasing out of protection intended to improve the living standard
for indiviudals by increasing the quality of goods and services due
to competitiveness of the domestic and global companies.
Effect on Firms:
- Individual firms such as import-competing industries will shrink
unless they are able to match the competitiveness of global
companies.
- Some production companies can entirely cease such as
microwave, sound systems and televisions in advanced
economies as they cannot compete with low wages of developing
countries like China.
- Some companies will focus on one aspect of production or
changing their company structure to accommodate with the

changes of production to stay in business. They may adopt ways

such as reducing staff members and limiting to fewer production
lines for profitable ones.
- Productivity Commission stated that the reduction of innovation
and productivity due to international competitiveness.
- Lower tariffs in one industry generate benefits for firms in other
industries
- Reduction in the 1990s for protection lead to growth in the
manufacturing industries.
- Lead to growth in export volumes due to integration into the
world economy and increased amounts of goods and services
have been exported, while also being imported for Australian
Consumers.
Effect on Government:
- Reduction in government revenue since tariffs allow for indirect tax
revenue to governments.
- Tariffs were the largest source of revenue for the Commonwealth
Government but have slowly declined to a minority of the value.
- In 2013-4 it makes up 3 billion dollars of revenue which is less than
1% of the total revenue.
- Program to reduce levels of protection has impacted government
spending as they may be required to assist the process that has
resulted in unemployment benefits being provided and retraining
for those who have lost their jobs.
- There have also been political consequences of tariff reductions.
- Despite protection cutting being stated as beneficial for the
economy by economists, it is still seen as unpopular amongst the
community.
- Structural unemployment, closing of factories and other damages
have occurred due to this.
- Benefits are slower to come as they are long term and spread
across the economy therefore less visible.
Implications of Australia of protectionist policies of other
countries and trading blocs.
- Other countries putting tariffs on Australias goods and services
reduces the exports ability to become competitive and gain
access to the foreign market.
- International protectionism lowers the output levels of Australias
economy.
- Productivity Commission Report 2010 stated worldwide tariff
abolition would lead to the GDP of Australia to increase by 1% a
year.
- Due to being a small economy with such high levels of
agricultural trade, trading blocs and protectionist policies lead to
disadvantages for Australia.
- Australias agricultural sector plays a rule for trade with
developing countries.
- 2012 Australian Bureau of Agricultural Resource Economics
stated that the wine tariff removals from China and Korea will
increase the revenue of Australias exports by $47 million
- If the Doha Round can accommodate global trade liberation, it
can lead to an increase of US$9 billion for Australian agricultural
exports by 2020.
Non-agricultural goods:

Australias non-agricultural goods have less barriers to trade as

the agricultural sector. Mining and Resource sector contribute to
the largest share of Australias exports.
Coal, natural gas, oil etc are in very high demand worldwide.
Due to situations such as Chinas economic growth and sudden
interest in infrastructure has contributed to the boom of the
mining and resources sector.
Due to the large amount of exports from the mining sector, the
Australian Government may restrict exports for domestic use.
WA Government Policy uses this for natural gas for domestic use.
Other countries that import from Australia do not have any other
domestic alternatives to rely on.
Even if the foreign countries were to impost tariffs, the consumers
and businesses would still pay as they wouldnt encourage the
exploration of other energy resources which may use more
money for research.

Manufacturing Industries:
- It has lower tariffs lately due to multilateral trade agreements and Australia
lowering tariffs to encourage trade as Australia usually imports in
manufacturing goods.
- Most countries protect motor industries, as they are not able to compete
internationally as other industries.
- Other methods of trade barriers are imposed such as technical restrictions,
licensing acts to protect Australia rather than just protection.
- Due to diferent barriers in different parts of the country, it
makes it hard for Australian exporters to penetrate the
foreign markets. To avoid all this, technical barriers to trade
are now apart of negotiations in WTO and in bilateral trade
agreements.
Service Industries:
- Accounts for of the Australian economy but less than of their exports.
- 2010 WTO analysis states that trade costs in services are 2 to 3x higher
than trade costs in goods.
- The barriers are not trade barriers but natural barriers due to geography,
transport costs, language and cultural differences.
- Restrictions to servicing trade are not protectionism but government
regulations and practices that restrict service trade.
- Monopoly government providers or local providers dominate over
competitive Australian firms.