Australia's Place in the Global Economy - Trade and Financial Flows
Australia's Place in the Global Economy
Free Trade and Protection
Theory (Why and How)
Australia’s Policies
Australia’s Trade and Financial Flows
Exchange Rates
Australia’s Balance of Payments
External Stability
Trade Flows
Exchange of goods & services (Exports & Imports)
All flows require the AUD to be bought/demanded or sold/supplied
All flows are recorded in the Balance of Payments (BOP)
Trade and financial flows have significantly shaped Australia’s economic performance and impact all economic objectives and sectors.
Historical Value of Trade
Value of trade was relatively low as a percentage of GDP until the 1970s due to high levels of protection for domestic industries.
Two-way trade was 25% of GDP in 1974.
From the 1970s, Australia introduced micro reforms including floating the AUD, reduced protection, and financial deregulation.
Australia embraced globalization and sought to integrate into the global economy, leading to a gradual increase in the value of trade.
China’s industrialization from 2000 also helped to supercharge trade flows.
Two-way trade peaked at 46% of GDP in 2011. Approximated 40% since then, which is still high by world standards.
This level of integration makes Australia susceptible to developments and global shocks such as the GFC, COVID, and trade tariffs.
The value of trade is generally split evenly between import and export values, but more exports have occurred in recent years due to mining production and a low AUD.
Two-Way Trade as a Percentage of GDP
1974: 25%
2011: 46%
2024: 40%
Resources Boom Investment happened between on 2000-2011 and production is current
Historical Composition & Direction
In the first half of the 20th century, Australia traded a small range of products (mainly agriculture) to a small number of countries (mainly the UK).
A number of factors have changed this:
Formation of the EU (trade diversion for Australia)
Deregulation, trade, and industry policies in the 80s and 90s
Growth of Asia (especially China, who joined the WTO in 2001)
As a result:
There has been a significant directional shift away from Europe to Asia (especially China).
Compositionally, Australia has a comparative advantage in commodities, leading to a significant increase in mineral exports. Agricultural exports have increased in dollar terms but fallen in relative terms. Services have also increased over time.
Australia is less competitive in manufacturing and continues to import capital and consumer goods.
Composition & direction for M are largely unchanged
Trade Composition (Exports)
1950: Rural 81%, Resources 7%, Manufacturing 8%, Services 4%
2024: Rural 11%, Resources 60%, Manufacturing 8%, Services 20%
Contemporary Exports
Value: $500 billion total in 2024 ($560 billion in 2023).
Exports have increased significantly in recent years and doubled since 2016.
Rapid increase after COVID, peaking in 2023, and is softer in the past two years.
Composition: Dominated by resources, the big 3:
Coal
Iron Ore
LNG
Services (especially education) was increasing at a fast rate but was impacted due to COVID; since recovered for the most part
$50 billion trade surplus/BOGS in 2024 ($124 billion in 2023).
Export Direction
Reliance on China is high; EU27 is only 3%.
2024 Trade
China: Exports 37%, Imports 27%, Two-Way 33%
Japan: Exports 11%, Imports 6%, Two-Way 9%
Korea: Exports 7%, Imports 6%, Two-Way 7%
USA: Exports 5%, Imports 12%, Two-Way 8%
India: Exports 6%, Imports 3%, Two-Way 5%
Asia: Exports 70%, Imports 60%, Two-Way 66%
Not-Asia: Exports 30%, Imports 40%, Two-Way 34%
Deep Dive - China
Exports have tripled since 2015 (ChAFTA).
Free trade except for agriculture exports to China.
ChAFTA has provisions to phase out agricultural protection and support two-way tourism/education.
Despite COVID, which decimated education and tourism, and despite sanctions on coal and agricultural products, exports to China continue to soar (mainly due to iron ore). Last sanction (wine) removed in 2024.
Demand from China for resources has softened since 2023.
Reasons for Export Increase
Mining Production phase – good supply of resources (cf Brazil – iron ore supply issues - Vale dam collapse in 2019).
Demand for resources – especially China (iron ore), India (coal), Japan (LNG).
Growing middle classes across Asia – services/education and agriculture ‘dining boom’.
Australia has benefited from countries pivoting from Russia due to sanctions for the Ukraine invasion – esp gas.
AUD down since 2011 ($1.10) – increase IC. 64c means 42% depreciation.
Increased FTAs across Asia means less protection and greater access to overseas markets; only some limited protection on agriculture.
BFTA’s - ChAFTA and JAFTA (both 2015); Indonesia 2022
MFTA’s – RCEP 2020 (see later)
BUT!!! exports have reduced or softened in past 2 years due to less demand for resources from China. Peaked in 2023.
Impact of Covid
Immediate term impact on ‘visitor economy’ – tourism and education. But total exports ROARED back to be well above pre-covid levels within one year
Potential longer-term impact of nations seeking more ‘self-sufficiency’ & ‘economic sovereignty’ – less reliance on imports, increase local manufacturing in industries which impact national security such as defense and energy. This is one of the motivations for the tariff regime being implemented by Trump
The Australia-China relationship deteriorated sharply in 2020 when Australia called for an independent inquiry into the CV origins. China churlishly retaliated by implementing ‘non-tariff’ trade restrictions on exports including barley, beef, wine, wheat, coal, cotton, lobster and timber. Not the big one, iron ore. Australia demonstrated dynamic efficiency by pivoting to new markets, eg. barley to Mexico, coal to India. The last of these temporary protectionist measures was removed by China in 2024 (wine).
Some evidence of directional change away from China to other parts of Asia or even back to Europe/UK where we have closer social & political ties. However, the impact of the US tariffs and the US/China trade war on the global trading system remains unclear.
Australia’s industry policy has undergone significant transformation over the last 30 years. Barrier protection for manufacturing industries, mainly via tariffs, was reduced from 35% to 5% in 2000-01, aligning Australia with the APEC goal of free trade access for developed countries by 2010. The debate around protectionism seems to have been largely settled in favor of trade liberalization.
The COVID-19 pandemic has significantly shifted perceptions of globalization, leading to a renewed emphasis on national self-sufficiency. The pursuit of ‘economic sovereignty’ may be politically appealing but necessitates extensive government intervention, often through large subsidies and tariffs, potentially distorting markets, reducing competitiveness, and curtailing global trade.
Contemporary Imports
Value: $450 billion in 2024
Value of imports has increased significantly in recent years but at a slower rate than exports.
Fell during COVID due to tourism, education, MV’s, and petrol
Unlike exports, imports haven’t reduced since 2023, and as a result…
$50 billion trade surplus year to December 2024 ($124 billion in 2023)
The composition has remained largely unchanged but with a slight shift from intermediate to consumer goods, suggesting more and more value add is overseas - not even ‘assembling’ in Australia.
The direction has remained largely unchanged except for a little arbitrage between China and US/UK – reflecting changing economic ties
2024 Import Composition
Intermediate: 31% (includes raw materials & semi-finished)
Consumables: 26%
Services: 22%
Capital: 18% (**finished goods used in production)
2024 Import Details
Travel (out): 8%
Petrol: 6%
PMV: 5%
Other: 81%
Trade Balance
You should know these stats
Trade surplus of $50 billion in 2024 ($124 billion in 2023) (surplus since 2016)
Feb 2024 was the 75th consecutive month with a trade surplus
CAS of 32 billion or 1.2% of GDP in 2023 (CAS surplus since 2019)
slight shift from intermediate to consumer goods - suggests that more & more value add is overseas - not even ‘assembling’ in Australia
Balance of Trade
You should know these stats:
Trade surplus of $50bn in 2024 ($124bn in 2023)
8th straight year with a trade surplus
Feb 2025 was the 86th consecutive month with a trade surplus
CA Deficit of 52bn or 1.9% of GDP in 2024 (Had 4 years of CA surpluses from 2019 to 2022)
BOGS (Balance on Goods and Services)
Exports
Goods Volume
Production Phase of Mining
Very strong demand for commodities: big 3: iron ore to China, coal to India & LNG to Japan
CV impact was minor for our goods exports
China sanctions – not a major impact, ended in 2024
Price
TOT Q4 2024 still high (120). Driven by high commodity prices
Lower than 2022 peak of 144, but higher than MIB of 100
Services
Very strong pre-CV
Especially – ‘Visitor Economy’
Tourism – 9m visitors in 2019 (record). 1.4m from China (most)
Education – 4th largest X, 800,000 o/s students (220,000 from China)
CV dramatically impacted ‘visitor economy’ in 2020/21. Back to Pre-CV levels by 2024
Imports
Volume
Strong growth – CV only impacted inbound travel, PMV and petrol
Strong growth since in all other import types
Price
Price effect of AUD depreciation (imported inflation) has been offset by fall in manufacturing costs
For example, Electronics down 74% in 20 years
How to think about trade flows and some contemporary points to make Net Exports
Trade surplus in 2024 of $50bn
Feb 2024 was the 86th consecutive month with a trade surplus
CAD of $52bn or 1.9% of GDP in 2024 (CA surplus 2019-22)
Financial Flows
Importance of Inbound Financial Flows
According to DFAT:
Stimulates economic activity and creates jobs
Supplements domestic savings
Leads to increased trade opportunities
Encourages competition, innovation, and productivity
There are two main financial flows – debt and equity.
Note: ‘Equity’ and ‘Investment’ are interchangeable, as are ’loans’, ‘borrowings’ and ‘debt’.
The income that is subsequently earnt on this debt and equity are also financial flows, but we will worry about this income aspect when we do the BOP sub-topic. For now, we will only focus on the flows relating to the original debt or equity instruments that are issued.
Key Formula
Net Foreign Liabilities = Net Foreign Debt + Net Foreign Equity
This is calculated every quarter, and the published figures are always cumulative (not just the flows within that quarter). This contrasts with the BOP, which records movements over a given period
Net position is a liability (+ve number) because inbound loans have always exceeded outbound loans. For HSC purposes, just use the word ‘debt’)
Net position for past 12 years is a net asset (-ve number) because we invest more o/s than o/s invests in Oz. An investment can be in any asset, but for HSC purposes, you van use the terms ‘equity’ or ‘investment’ interchangeably and assume all investments are in shares (and the corresponding oncome flow are dividends
NFL = is a +ve amount (meaning we have an overall net ‘liability’) because our NFD ‘liability’ has always been larger than than the NFE ‘asset’ “in” first
Key Trends - NFD
NFD had increased since the 1990s, mainly due to a savings–investment gap and the need for inbound debt to support industries like mining in expanding their productive capacity. Financial deregulation and technologies such as EFT also made it easier to access overseas debt markets.
However, GDP was also rising - partly due to those inbound loans - so NFD as a share of GDP remained stable for many years, hovering between 55–60%.
More recently, NFD has remained steady in dollar terms and declined as a percentage of GDP. This reflects stronger domestic savings - driven by compulsory superannuation - and a shift from inbound debt toward inbound equity.
As of December 2024, NFD was a liability of , or 50% of GDP. GFC = more prudent and preference for LT debt rather than ST
Key Trends - NFE
Throughout the 1990s and 2000s, NFE was in a liability position, as Australia relied on inbound equity investment for the same reasons it relied on inbound debt—mainly to support domestic productive capacity.
However, from 2013, NFE shifted into a net asset position, meaning Australians began investing more overseas than foreigners invested here. This shift is due to four main factors:
Compulsory superannuation and the need for diversification - over 50% of Australia’s in superannuation assets is now invested overseas.
Stronger overseas market growth, particularly in indices like the NASDAQ and S&P500, compared to the ASX200.
AUD depreciation since 2011 has increased the value of overseas assets when converted into Australian dollars (the ‘revaluation effect’).
Lack of a replacement for the scale of investment required during the mining boom.
As of December 2024, Australia’s NFE position was , or 25% of GDP
Key Trends - NFL
At Dec 2024:
NFL had been within the range of 50% to 60% of GDP since the 1990’s.
However, over past 5 years, NFL has fallen and was only 25% of GDP at 12/24. Lowest in 35 years
This is due to:
NFE moving into a net asset position around 2013 (being 25% of GDP at 12/24) and
NFD is not increasing in $ terms and therefore falling in % of GDP terms (being 50% of GDP at 12/24).
In 2024, GDP was
Summary of Key Financial Flow Stats (Dec 2024)
Debt: Net $1.4tn, 50% of GDP
$ value largely unchanged. % of GDP is lower. Banks more reluctant for cross-border lending. Australia has more savings
Equity: Net -$0.7tn, (25%) of GDP
Significant increase in asset position due to compulsory super and revaluation effect (AUD down since 2011)
NFL: Net $0.7tn, 25% of GDP
Low due to NFE asset increasing as a % of GDP and NFD is decreasing as % of GDP
Revaluation Effect
Each ¼, all overseas owned assets and all loans in foreign currency must be ‘revalued’ and reported in their AUD value.
Intuitively, because we have an NFL, you would think a depreciation of the AUD would worsen our NFL because of the large amount of inbound loans which are revalued higher.
BUT. 90% of inbound loans are either in AUD or are hedged. Therefore, AUD movements have little revaluation impact on NFD, but do impact the value of our outbound investments and NFE.
Categorizing Financial Flows - Equity
Equity can be further split between:
‘Direct’ investment (FDI) is an equity investment of >10% of the shares in a company. This is seen as a longer term commitment and also having a level of control
‘Portfolio’ investment – includes equity investments of less than 10%. This is seen as being more speculative and volatile. Looking for short term profits rather than long term commitment.
There has been a large shift from FDI to portfolio
Inbound Equity/Investment
US (25%) and and UK (19%) make up 44% of total inbound financial flows. Cultural and political ties matter.
US, UK and EU make up almost 66% of the total, Asia 33% (the inverse of trade)
China is only 2%. They are a trading nation.
For past 10 years, the split between portfolio and FDI has been approx. 75% and 25%
Top 10 countries for Inbound total financial flows “Direction”
USA 25%
UK 19%
Belgium 8%
Japan 6%
Hong Kong 3%
Singapore 3%
Luxembourg 2%
Canada 2%
Netherlands 2%
China (excludes HK) 2%
Outbound Equity/Investment
US (31%) and and UK (19%) make up 50% of total outbound investment
US, UK and EU make up 66%
China is only 2%. The $ amount not changed since ChAFTA (are the ‘investment’ provisions working?)
As with inbound, for past 10 years, the split between outbound portfolio and direct investment has been approx. 75% and 25% respectively. Our superfunds buy small parcels of shares.
Summary – both inbound & outbound
US,UK and EU make up 60%
China is only 2%.
2/3’s of trade flows are with Asia and 2/3’s of financial flows are with US/UK/Europe - roughly
USA 31%
UK 19%
New Zealand 4%
Japan 4%
Canada 3%
Cayman Islands 3%
France 2%
Germany 2%
Singapore 2%
Hong Kong 2%
**Chinese investment in Australia plunges to record lows
*KPMG and the University of Sydney's latest Demystifying Chinese Investment in Australia report said Chinese investment in Australia fell by 37 per cent to $US892 million ($1.36 billion) last year. It was the lowest level since 2006, excluding the pandemic year of 2021.*
Essay Questions
There are two broad types of essay questions:
What are the influences on Australia’s trade and financial flows
What is the impact or effect of Australia’s trade and financial flows
These take two different perspectives, but there is cross over
HSC 2016
Introduction:
Both domestic and global factors have had significant implications for Aust’s trade and financial flows. Refer to VCD.
Trade Flows
Background: Trade = Imports/exports – G&S; Both up over past 30 years, recently strong trade surpluses since 2016 – $50bn in 2024; Feb 2025 was the 86th consecutive month with a trade surplus. (value)
Trade & Industry Policy - lower protection, FTA’s. Comp advantage. Trading nation. We export commodities, import consumables, intermediate and capital goods (composition)
Global economic Shift to Asia/China – including resources boom (mention high TOT, commodity prices, direction)
Depreciation – AUD down 44% since 2011. Moving to services – especially visitor economy (composition)
Coronavirus – impact of visitor economy
Impact of ‘deglobalisation’ and Trump tariffs?
Financial Flows
Background: Financial Flows = Debt and Equity (direct and portfolio). NFL = NFE+NFD. NFL only 25% of GDP in 2024.
Financial Deregulation 1990’s + savings/investment gap = increased inbound to find industry eg. mining
Compulsory Superannuation – increased outbound foreign equity (why the NFE is an asset)
Cultural and political ties are important – most FF’s is with US/UK/EU, but the majority of trade with Asia.
Revaluation effect – NFL decreases as AUD depreciates; NFE increases, NFD largely unchanged because 90% of loans.
Interest Rates differentials – we are normally higher to attract inbound. But recently lower. Switch to inbound E over D
This will be an easier essay to complete once BOP has been completed.
HSC 2023
Introduction:
Trade flows have had a significant impact on Australia’s economic performance. The impact on all sectors and on the economic objectives – including EG, FE and PS – has been generally favourable
Trade - definition Trade – Value refers to…
More X and M today as we have embraced globalization and become a trading nation - lower protection, FTA’s. Comp advantage etc. X was $500bn in 2024. Trade surplus since 2016. X is component of AD and important driver of EG (draw AD/AS diagram). X helped weak C and I during transition. EG has driven strong employment growth contributed to current low level of Ue of 4.1%. All very good for external stability
Covid – contribution of X-M was actually improved, X of resources continued, but net impact of border closures saw less M
Production costs of many imports have declined (eg. Electronics) – less imported inflation (and cost -push) has contributed to lower inflation
Composition refers to…
Shift to resources and services. Less manufacturing. S/T structural Ue (eg. PMV), but longer term allocative efficiency into mining and services.
However, ‘narrow export base’ means that we are at mercy of commodity prices (good now for value, but….)
Direction – refers to…
Shift to Asia. Especially reliant on China (approx. 1/3 of two-trade). Can be an issue if China slows or political tensions
Penultimate para – impact of ‘slowbalisation’ and Trump tariffs. US/China trade war could impact VC and D
This will be an easier essay to complete once all of Topic 2 has been completed. Keep in mind the “Learn To’s” for this sub-topic: We will circle back to these at the end of this sub-topic.