Aus Place in Global Economy

Composition of Aus Trade

• Commodities - 55%

• Agriculture - 15%

• Services - 20%

• Manufacturing - 10%

Historical Changes

 

Overall reduction in protection since the 1990s, with a more integrated global economy

• • Multiple new FTA's

  • Allowed Aus to access its comparative advantage in services, while allow access to the cheaper world price

  • In 1980s Japan become major trading partner for AUS

  • China joining of WTO in 2001

• Growth of Asian nations:

  • The growing middle class lead to an improvement in income and hence increased demand for services, including tourism

    • Value increase from $10bn to $30bn

Trends in Aus Trade

• Trade rising from 12% of GDP in 1980 to 22% of GDP by 2023-2024

  • Aus classed as "small open economy"

• Shift from UK/Eurocentric trade to focused on newly inustrialised economies in Asia

  • Due to UK's entrance of trading bloc (European Economic Community)

  • Fast growing economies in Asia

    • Changing cultural and economic sentiment

  • Increase in services investment from $10bn to $30bn

• Increase in resources

  • During the mining investment boom, Aus productive capacity developed, increased commodities

• 2020, China had a trade war with Aus, including 200% tariff on Barley

  • This forced Aus to shift its trading patterns

• 2025, Donald Trump tariffs, 10% on Aus, up to 30% on China

Aus Imports

• Aus import capital equipment and consumer goods (German Cars), from other advanced economies

  • High living standards and mining boom

• Aus import of consumer goods from Asia

  • Increased demand for manufactured goods

  • China share of Aus imports have increased significantly over the past 30 year

• Importing transportation services

  • To meet regulatory requirements,

• Australia has switched its traditional trading partners of Europe, Japan, and the US to the growing markets of China, and the geographically proximate nation of China

  • 2007, China became Australia's largest trading partner

Historical Changes Financial Flows

• Financial Deregulation:

  • Allowed firms to access capitol from overseas easier, such as loans

  • This allowed them to expand productive capacity

• Floating of the exchange rate:

  • This made currency more volatile

  • Allowed Aus companies to engage in Aus trade and investment

Foreign Investment by Australia

• Australia foreign investment has increased significantly

  • Increased from $325bn in 1980 before de-regulation to $4 Trillion

• Increased with super-annuation funds

  • Don't want to over saturate the domestic market

Positive of FDI

• Domestic Economic Growth

• Domestic employment

• Allow building of productive capacity

Negative of FDI

• Loss of ownership

  • Rejection of the 2016 grid to buy Ausgrid by Chinese State Grid Corporation

• Increased debt servicing, drive into CAD

  

Direct Investment

Obtaining a controlling share/interest in a foreign firm, more than 10% of total shares

Portfolio Investment

Refers to investment in equity (shares, options), less than 10% of total shares

F

Financial Derivatives

• The value of something is based off the value of something else

• Currency swap, futures

AUD against TWI

Measures movements in the AUD against a weighted basket of currencies of Aus major trading partners

AUD Cross Rate

Measures the value of domestic currency relative to another currency, usually a major trading partner

Floating Advantage

• Will discourage speculation over future value of the currency

• Allow more flexible monetary policy, as BoP changes would be absorbed by exchange rate

Floating Disadvantage

• Increase in volatility over time, this can make trade difficult

• Uncertainty in acquiring capitol for firms from overseas

Fixed Exchange Rate

• Value of a countries currency is set by the government of a reserve bank, ie the HKD pegged to the USD

• Countries central bank need to have sufficient supply of foreign currency

  • Central banks have the ability to only control supply of currency

Managed Exchange Rate

• The currency is allowed to fluctuate within a centrally determined band

• The RMB is an example

• Still require central bank influencing supply

Terms of Trade

 

Exports/Imports

• Higher ToT means increased value of exports

Net Foreign Liability

Total financial obligations owed world

• Debt + Equity

Net Foreign Debt

Aus Owe to Foreigners - Foreigners Owe to Aus

Net Foreign Equity

Foreign Equity in Aus - Aus Equity Abroad

Balance of Payments

• A record of all financial transactions between Aus and the rest of the world

Current Account

Non Reversible Transactions

• Untied foreign aid, can’t get money back

Net sum of BOGS + NPY + NSY

Capital and Financial Account

Capital Account:

• Records credits and debits for the acquisition and/or disposal of non produced and non financial assets (ie intellectual property)

Financial Account:

• Records transactions associated with investments, and changes in value of reserve assets

ToT Theoretical Effect

• If export prices are higher than import prices, then there will be an improvement in BOGS as value of goods are worth more

ToT Evidence

Mining Investment Boom:

• Large importation of capital to build productive capacity

• Increase in capital import volumes from 4% to 25% between 2005 and 2013

• Worsen net exports

Pre-Covid Boom

• Aus saw an increase in ToT from 50 in 2013 to 105 in 2020, due to increase in commodity price, increasing value of Aus exports

• Increase in trade balance from -3% to 6% during same time period

  Post-Covid Slowdown:

• Decrease in ToT from 105 in 2020 to 90 in 2025. Slowdown in Chinese demand, lead to RBA index of commodity prices decreasing from 140 to 90.

• Simultaneous increase in import demands post covid

• Decline in trade balance from 6% to 1%

 

FOREX Theoretical

Dutch Disease, increase in demand for particular sectors exports, hence lead to an appreciation, but will negatively effect elastic sectors, hence while in SR improvement, in the LR lead to a worsening trade balance

FOREX Evidence

Appreciation

• From 0.62 to 1.12 Aud to USD between end of GFC and 2012, development of a two speed economy/Dutch disease

• Trade balance remained negative

 

Depreciation

• Decrease from 1.12 to 0.64, increase international competitiveness

• Increase in trade balance from -3% to 6%

BOGS International Business Cycle Theoretical

Improvement in international business cycle will lead to more demand for exports, for Aus especially mineral

BOGS International Business Cycle Evidence

Major trading partner growth between 4-5% between 2010 and 2020

• Sustained demand for imports

BOGS Domestic Business Cycle Theoretical

• High domestic growth, increased income for domestic consumers, increasing disposable income leading to higher imports

• When Aus EG > Overseas EG

BOGS Domestic Business Cycle Evidence

Post Covid growth of 10% in Aus increase demand for imports domestically
-Rebound in services from $20bn to $38bn

BOGS Aus Structural

• Structural change in economy, during different phases of the mining investment boom

• Aus narrow export base, leaves BOGS vulnerable to commodity prices

PYA Global Interest Rates Theory

• Global interest rates, central banks will enact MP in order to counter changes in the business cycle

  • This will impact the level of debt servicing in the short run, High interest rates mean increase in loan repayments, hence more money leaving overseas

  • In long run, will reduce EG, reduce firm profit, and hence reduce dividend payments, less equity servicing, less money come into Aus.

PYA Global Interest Rates Evidence

Post Covid:

• Increase in average global interest rates of advanced economies from 0.3% to 5.1% between 2021 and 2024

• Increase in Net Foreign Debt (NFD) from $1165 to $1462, outflow

 

Post Covid Slowdown in NFD:

• NFD remain stagnant between Dec 24 and Jun 25, at $760bn

PYA International Business Cycle Theory

• Affect the revenue of firms, hence profit, reduce amount of dividends paid

PYA International Business Cycle Evidence

Covid:

• Global slowdown in EG during Covid-19, IMF projecting -3% slowdown.

• -310.5bn in NFE to -136.4bn between March and June 2020, through valuation effect, foreign shares owned by Aus firms lost value

PYA Domestic Business Cycle Theory

• If high EG, lead to contractionary MP stance

Valuation Effect

Changes in the value of NFL’s caused by movement of exchange rates and prices

ie Appreciation:

• Dividends are worth less

• Debt servicing costs rise

PYA Structural Theory + Evidence

Mining Investment Boom:

• Large importation of capitol

Savings and Investment Gap:

• Addressed by super, increase the amount of overseas equity

External Stability

Seeks to promote sustainability on the external account to meet foreign liabilities

Consequences of External Instability

• Capitol Flight

• Depreciation of currency

• Higher interest rates

• Slower economic growth

Measurement of External Stability

• CAD as a percentage of GDP

• Net Foreign Liabilities