Booklet 1 - Australia's International Trade

What do you discuss when asked about Australia’s Linkages between Economies:

Trade, Investment, Tourism, Immigration

Trade:

In 2024 Australia imported $44billion in goods & $143billion in services while exporting $536billion in goods & $143billionin services. Australia has a comparative advantage in supplying (exporting) commodities & a comparative disadvantage in manufacturing meaning Australia exports commodities & imports manufactures between the developed & developing economies of the Indo-Pacific region due to its economic, political & strategic interconnectedness of this area which accounts for 60% of GWP. Trade stimulates economic growth with approximately 25% of Australians being directly involved in trade related activities.

Investment:

Australia has a deficit of domestic savings to fund its investment creating a savings investment gap due to Australia’s small pool of savings on account of its small population & high number of investment projects especially in the mining sector. Consequently Australia relies on foreign investment inflows (stock of financial assets in Australia owned by foreign residents/firms & the financial transactions in the Balance of Payments that increase or decrease this stock) to fund economic development or growth supplementing its domestic savings. Australia’s major sources of foreign investment includes the United States, United Kingdom, Japan & recently China (72%).

Tourism:

International tourism has grown in importance due to improvements in transport & communications & ranks fourth in world exports, it is Australia’s sixth largest export but is its largest import. In 2024 8milliom tourist visited Australia while 11.3million Australians travelled overseas. Australia aims to build its market share of targeted travellers by increasing demand with organisations like tourism Australia working to influence people to travel to & within Australia maximalising tourism spending & visitation helping deliver economic benefits of increased economic growth. In 2023 total spending by international students in Australia was $40792million accounting for 36.2% of total services imports.

Immigration:

The Indo-Pacific region has become an increasingly important source of migrants in recent years for Australia. Migrants arrive both as a means of filling skill & labour shortages & for humanitarian reasons. Over 30% of Australian residents are born overseas with England, India, & China being the top three sources of migrants. The movement of labour through immigration between economies is concentrated at the top end of the labour market while highly skilled workers are attracted towards the richest economies due to the higher pay & better opportunities. However smaller economies like Australia suffer from brain drain where talented & skilled workers are attracted to other countries by greater rewards.

What do you discuss when asked about the extent & importance of trade for the Australian economy:

1. Increases Australia’s Economic Growth

2. Increased Real Incomes for Australian Households

3. Fosters Job Creation Increasing Employment Opportunities

4. Increases Living Standards for Australian Consumers

What is the Most Important Reason for Australia to engage in Trade:

International trade is a key driver of increases in Australia’s economic growth as the exchange of exports & imports stimulates higher levels of production, investment & employment. By 2024, total trade accounted for nearly 50% of Australia’s GDP, highlighting the extent to which the nation relies on global markets. This integration into international trade not only expands opportunities for domestic industries but also underscores its importance as a central factor in sustaining & accelerating economic growth.

What is the Second Most Important Reason for Australia to engage in Trade:

International trade contributes to increased real incomes for Australian households by providing access to wider markets that boost export revenue & stimulate economic opportunities & activity. This revenue circulates through the economy via the multiplier effect, supporting job creation, wage growth & improved living standards. The extent of Australia’s reliance on trade highlights its importance as increased global integration directly enhances household purchasing power & overall economic wellbeing.

What is the Third Most Important Reason for Australia to Engage in Trade:

International trade fosters job creation increasing employment opportunities by enabling businesses to expand into global markets which arrives higher production & increases demand for Australian workers. This expansion reduces unemployment & supports broader economic growth demonstrating the extent & importance of trade as a key factor in generating employment opportunities & strengthening the labour market.

What is the Fourth Most Important Reason for Australia to Engage in Trade:

International trade increases living standards for Australian consumers by providing access to a wider variety of goods & services at more competitive prices. Through global connects households can access products that are not produced domestically or would otherwise be too costly, improving affordability, choice & quality of life. This underscores the extent & importance of trade as a key factor in raising overall living standards.

What do you Discuss when asked about the Composition of Australia’s Trade:

Australia’s Export Products

Australia’s Import Products

Australia’s Export Products:

Australia’s exports are dominated by resource-based products, reflecting its comparative advantage in mineral wealth & pastural land. In 2023-2024, iron ore (21%), coal (14%) & natural gas (11%) accounted for the largest shares while education (7.5%) & gold (5%) also features predominantly. Alothough agricultural exports such as beef, wheat & wool remain significant, rural exports have declined, whereas resource exports have doubled & manufactured goods have halved. This trend highlights Australia’s increasing reliance on commodity exports, particuarly to major markets such as China, Japan, South Korea, India & the United States.

Australia’s Import Products:

Australia’s import products are dominated by manufactured goods reflecting its comparative disadvantage in productivity technology intensive products due to higher labour costs. In 2023-2024 major imports included personal travel services (10.5%) refined petroleum (9%), passenger motor vehicles (6.2%), goods vehicles (2.5%) & tele-communications equipment (3%). These imports largely originate from key partners such as China, the European Union, the United States, Japan & South Korea, highlighting Australia’s reliance on international trade to meet domestic demand for manufactured & technology-based products.

What do you Discuss the Direction of Australia’s Trade:

Indo Pacific region

Largest two way trading partners 

Key export destinations 

Key import sources

Pattern

Reasons for Australia’s Direction in Trade Towards the Indo Pacific:

1. Geographical Proximity 

2. Limited Supply of Raw Resources relative to Population 

3. Growing Markets

4. Increased Trade Liberalisation.

The Direction of Australia’s Trade

The direction of Australia’s trade is strongly focused on the Indo-Pacific region, which accounts for around 75% of total trade agreements. China is Australia’s largest two way trading partners, taking 32% of exports & supplying 20% of imports, reflecting its role as both a major consumer of Australia’s mining resources & the worlds most efficient manufacturer. Other key export destinations include Japan, South Korea, India & the United States while major import sources include the European Union, United States, Japan & South Korea. This pattern highlights Australia’s reliance on economies in the Indo-Pacific region for resource exports & advanced economies for manufactured imports.

Reasons for Australia’s Direction in Trade Towards the Indo Pacific Region:

1. Geographical Proximity:
   Due to Australia’s geographical proximity to the Indo-Pacific region it can trade with these nations wiht relatively low transportation costs making trade more profitable.

2. Limited Supply of Raw Resources relative to Population:
   Australia’s relatively low population in comparison to its rich endowment of natural resources complements the Indo-Pacific’s limited supply of natural resources compared to its relatively large population.

3. Growing Markets:
   Many countries in the Indo-Pacific are still developing at fast rates with strong economic growth (e.g., China) growing potential markets for Australian exports. For example ‘tiger economies’ such as India & Vietnam.

4. Increased Trade Liberalisation:
   An increase in free trade agreements (preferential trade agreements) with many countries in this region allows for increased exports & imports. For example 14 out of the 18FTAs Australia has in force are within the Indo-Pacific region.

What do you Discuss when asked about Australia’s Trade Policy Including Regional & Bilateral Free Trade Agreements:

Define: Free Trade Agreement & Bilateral Free Trade Agreement

Provide an example of a Bilateral Free Trade Agreement

Define: Multilateral Free Trade Agreement

Provide an example of a Multilateral Free Trade Agreement

Describe the Effects of Free Trade Agreements:

• Positive Effect: Trade Creation

• Negative Effect: Trade Diversion

Define Free Trade Agreement:

An international treaty between two or more economies that reduces or removes certain barriers to trade of goods & services.

Define Bilateral Trade Agreement:

Where only two countries are signatories.

Example of a Bilateral Trade Agreement:

The China-Australia Free Trade Agreement (ChaFTA), which came into force on the 20th December 2015, exemplifies a bilateral Free Trade Agreement that strengthens economic ties by reducing barriers to trade & investment. It has eliminated/significantly reduced tariffs on Australia’s key exports including resources, energy, manufacturing & agricultural products, enhancing international competitiveness & market access. key outcomes include the removal of tariffs on iron ore, coal, LNG, car parts, dairy, beef, wine & wool with full implementation scheduled by 2029. ChaFTA also facilitates Chinese investment in Australia, highlighting the agreements role in promoting mutual economic growth & deepening bilateral trade agreements.

Define Multilateral Free Trade Agreement:

Where three or more countries are signatories

Example of a Multilateral Free Trade Agreement:

The Comprehensive & Progressive Agreement for Trans-Pacific Partnership was signed during March of 2018 & came into effect on December 30th 2018. A total of 11 countries are involved including Australia. Its key outcomes include tariff reductions on 95% of goods trade among numbers - for Australia this meant new duty-free access to key markets like Japan, Canada, Mexico & Peru. Additionally Australia’s trade has grown exponentially with its exports to CPTTP countries worth over A$100billion annually representing ¼ of Australia’s total goods exports. The CPTTP is one of Australia’s most important multilateral trade agreements, boosting export competitiveness in Asia-Pacific markets, diversifying trade beyond reliance on China & Reinforcing Australia’s role in regional economic intergration.

Positive Effect of Trade Agreements:

Trade creation is a positive effect of Free Trade Agreements occurring when the formation of an FTA leads to the replacement of high cost domestic production to low cost imports from signatory members of the FTA. The removal of trade barriers through FTAs helps to increase the volume of trade between specific countries. For instance the Australia-UK FTA came into force in 2023 & removed tariffs on 99% of exports to the UK increasing trade opportunities.

Negative Effect of Trade Agreements:

Trade diversion is a negative effect of Free Trade Agreements occurring when the formation of the FTA leads to the replacement of low cost imports from non-members to high cost imports from members to the FTA. If an FTA is signed with a less effective nation the importing country would acquire products form a higher-cost producer, instead of the low-cost producer from which it was importing & diverting trade. For instance the European Union Trade bloc has removed tariffs on goods & services traded within the 27 countries of the EU but applies tariffs on goods & services imported from countries outside of the bloc.

What do you Discuss when Asked about the Concept of International Competitiveness & its Determinants

International Competitiveness

Factors Affecting International Competitiveness:

1. Changes in Inflation Relative to Trading Partners

2. Changes in Australia’s Wages Relative to Trading Partners

3. Changes in Exchange Rates Relative to Trading Partners

4. Changes in Labour Productivity due to Training & Technology

5. Trade Liberalisation

Define International Competitiveness

The ability of a country to compete successfully against other countries in international trade, competitiveness is important as it can improve a country’s economic growth (increasing exports therefore increasing production), provide jobs & increase the level of disposable income & standard of living.

Factors Affecting International Competitiveness:

1. Changes in Inflation Relative to Trading Partners:
   If Australia’s inflation rate is relatively lower compared to our trade competitors, this will improve our international competitiveness since its comparatively cheaper for overseas markets to purchase our exports compared to the competitors exports since theirs are more expensive.

2. Changes in Australia’s Wages Relative to Trading Partners:
   If Australia’s wages were to decrease relative to our trading partners, this will improve our international competitiveness since it will be cheaper to produce/manufacture (decreased cost of production) domestic products for export therefore reduce the price of these exports.

3. Changes in Exchange Rates Relative to Trading Partners:
   If the Australian dollar were to depreciate relative to our trading partners, will mean Australia exports are cheaper to purchase since overseas markets have great purchasing power. This will improve our international competitiveness.

4. Changes in Labour Productivity due to Training & Technology:
   If Australia can improve productivity through training, technology or investment, it will mean the domestic production process is more efficient therefore reduce the price of our exports.

5. Trade Liberalisation:
   If the Australian government can increase trade liberalisation (i.e., through more FTAs it will reduce/eliminate the cost of tariffs & subsidies therefore improving economic efficiency. This will ultimately reduce the cost of both exports & imports in trade.

What do you Discuss when asked about Australia’s Trade Intensity:

Trade Intensity Formula:

Factors that Determine a Country’s Trade Intensity:

1. The Relative Size of the Economy

2. The Location of the Country Relative to Foreign Markets

3. The Extent of Trade Barriers (both Physical & Artificial)

Trends in Australia’s Trade Intensity

Trade Intensity Formula:

Trade Intensity = ((Exports + Imports) / GDP) x 100

Factors Determining a Country’s Trade Intensity:

The Relative Size of the Economy:

Countries with a large nominal GDP will likely have a lower trade intensity. For example Japan, China & the USA have low trade intensities due to the enormous size of their economies.

The Location of the Country Relative to Foreign Markets:

Most of the world’s population lives in the Northern Hemisphere, therefore most of the world’s economic activity is concentrated there. If Australia was located in Europe than its ranking in world performance would be much higher. In fact per capita, Australia’s current export performance could be considered quite remarkable especially considering it suffers from the ‘tyranny of distance’.

The Extent of Trade Barriers (both Physical & Artificial):

Tariffs, trading blocs (e.g., the EU) & high transport costs will all reduce a nation’s trade intensity.

Trends in Australia’s Trade Intensity

Australia’s trade intensity has increased significantly over the last few decades, but is now considered low compared to other developed countries. Australia’s trade intensity has risen from 34% in 1992 to 48% in 2023, reflecting Australia’s increasingly open economy. Australia’s relatively low trade intensity can be partly explained by its geographic isolation.