Australia’s Place in the Global Economy – Key Vocabulary

Value, Composition & Direction of Australia’s Trade

Trends in Trade Patterns

  • Australia’s comparative advantage lies in:
    • Commodities (≈30 % of exports) – iron ore, LNG, coal, gold
    • Agricultural products – wheat, beef, wool
    • Services – inbound tourism, tertiary education
  • Value of exports & imports has risen sharply since 1970s
    • Driven by tariff reductions, globalisation, rapid Asian industrialisation
    • Net trade position usually a deficit (X < M)
  • Changing composition of exports
    • Rising share of minerals & metals (iron ore, coal, LNG)
    • Falling share of rural exports until AUD\text{AUD} depreciation post-2012 → rural + services recovered
    • COVID-19 (March 2020 →) severely reduced services exports (tourism, education)
  • Changing composition of imports
    • Intermediate goods share down
    • Services imports fell with COVID border closures (tourism outflows)
  • Changing direction of trade
    • Decline of traditional partners (UK, USA) after UK joined EU (1973) and EU CAP barriers
    • Strong pivot to Asia-Pacific (ASEAN, esp. China) – commodity demand

Factors Affecting V-C-D of Exports & Imports

  • Structural
    • High wages → uncompetitive manufacturing → higher imports
    • Abundant high-grade resources + high wages → narrow export base = volatility
    • Skilled labour, tourist appeal, quality universities → strong services exports
  • Cyclical
    • Chinese growth strongly sets commodity prices/volumes
    • World growth cycle alters export markets
    • Exchange rate shifts affect non-mining trade (tourism, education, agriculture, mfg)
    • Weather events change agricultural trade volumes
    • Domestic demand, wages, unemployment alter import demand

Financial Flows – Debt & Equity

Core Definitions

  • Foreign debt: gross Australian borrowing from non-residents
  • Net Foreign Debt=Overseas Borrowing−Lending Abroad\text{Net Foreign Debt}=\text{Overseas Borrowing}-\text{Lending Abroad}
  • Foreign equity: foreign ownership of Australian assets
  • Net Foreign Equity=Foreign Assets in AUS−AUS Assets Overseas\text{Net Foreign Equity}=\text{Foreign Assets in AUS}-\text{AUS Assets Overseas}
  • Net Foreign Liabilities=Net Foreign Debt+Net Foreign Equity\text{Net Foreign Liabilities}=\text{Net Foreign Debt}+\text{Net Foreign Equity}

Historical Context

  • 1950s-70s: limited post-war capital flows, fixed AUD\text{AUD}
  • 1970s: end of Bretton Woods → floating rates, tech → easier flows
  • 1983: financial deregulation – access to world capital; major sources USA, UK, Japan, HK, China, Singapore, NZ
    • Advantages: tech & skills transfer, FX access, jobs, export markets
    • Disadvantages: loss of control, servicing costs, volatile portfolio flows

Factors Affecting Financial Flows

  • Structural
    • Savings–investment gap → consistent capital importer → high inbound investment & outbound factor-income debits
    • Attractive quality resource & agri assets + educated workforce
  • Cyclical
    • Relative interest rates
    • Exchange-rate expectations – appreciation deters foreign buyers
    • Domestic & global growth/inflation conditions

Balance of Payments (BoP)

Framework

  • Double-entry identity: every credit matched by equal debit → BoP=0\text{BoP}=0 (offset by Net Errors & Omissions)
  • BoP=Current Account+Capital &amp; Financial Account+Net Errors &amp; Omissions\text{BoP}=\text{Current Account}+\text{Capital \&amp; Financial Account}+\text{Net Errors \&amp; Omissions}

Current Account (CA) – irreversible flows

  • CA Balance=BOGS+Net Primary Income+Net Secondary Income\text{CA Balance}=\text{BOGS}+\text{Net Primary Income}+\text{Net Secondary Income}
  • Balance on Goods & Services (BOGS)
    • Net Goods=X<em>G−M</em>G\text{Net Goods}=X<em>G-M</em>G
    • Net Services=X<em>S−M</em>S\text{Net Services}=X<em>S-M</em>S
  • Net Primary Income (NPI)
    • Factor returns: interest, dividends, profits, rents
    • Persistent deficit from servicing net foreign liabilities
  • Net Secondary Income
    • Non-factor transfers: remittances, foreign aid, gifts

Capital & Financial Account (KAFA) – reversible

  • KAFA=Capital Account+Financial Account\text{KAFA}=\text{Capital Account}+\text{Financial Account}
  • Capital Account: non-produced, non-financial asset transfers; conditional aid
  • Financial Account components
    1. Direct investment ((>10\%) ownership)
    2. Portfolio investment ((<10\%))
    3. Financial derivatives
    4. Reserve assets (RBA holdings)
    5. Other investment (loans, trade credit)

Inter-account Linkages

  • Each KAFA credit (capital inflow) later generates CA debit (profit/interest outflow) & vice-versa
  • Australia typically runs a CAD, funded by KAFA surplus

Trends in CAD/CAS

  • Cyclical drivers
    • Domestic growth > world → import boom → BOGS deficit
    • World boom/resource boom → commodity prices ↑ → TOT ↑ → BOGS surplus
  • Structural driver
    • Large NPI deficit from servicing foreign liabilities (e.g. 2020−21:−$1.8 m2020{-}21: -\$1.8\text{ m})

International Competitiveness & Other Influences

  • Exchange-rate “valuation effect”: appreciation ↓ AUD value of foreign-currency debt, improving NPI; depreciation opposite
  • TOT Index=(Export Price IndexImport Price Index)×100\text{TOT Index}=\left(\dfrac{\text{Export Price Index}}{\text{Import Price Index}}\right)\times100
    • Improvement raises export revenues for same volume → BOGS ↑
  • Foreign investment raises productive capacity but future income debits

Risks & Concerns

  • CAD should remain < GDP growth to keep liability ratios stable
  • High foreign debt sensitive to ii, ee, income shocks → confidence risk
  • Dutch-disease: commodity-boom appreciation hurts other tradeables

Exchange Rates

Measurement

  • Indirect quote (used in AUS): 0.67 USD=1 AUD0.67\text{ USD}=1\text{ AUD} (27/02/23)
  • Direct quote: 1.49 AUD=1 USD1.49\text{ AUD}=1\text{ USD}
  • Trade-Weighted Index (TWI): basket of 17 partner currencies, weighted by trade shares
    • Smoother than bilateral rates but may mask USD dominance (≈2/3 of export invoicing)

Demand & Supply of AUD

  • Demand derives from:
    • Export purchases of AUD, foreign investment in AUS assets
  • Supply derives from:
    • Australians buying imports, investing abroad
Key Determinants (mirror for D & S)
  • World vs domestic growth cycles
  • Commodity prices & TOT
  • Interest-rate differentials
  • Investment opportunities & expectations
  • Inflation differentials
  • Speculation on future ee movements
  • CA surplus ↔ KAFA deficit → upward pressure on AUD (appreciation)
  • CA deficit ↔ KAFA surplus → downward pressure (depreciation)

Impacts of Exchange-Rate Movements

Appreciation
  • Cheaper imports → lower inflation, ↑ real incomes, ↓ input costs
  • Valuation effect ↓ AUD-value of foreign debt → NPI improves
    − Exports dearer → volumes & investment fall (long run)
    − Import-competing firms lose market share → unemployment
    − Lower foreign investment inflow; AUD value of offshore income ↓
Depreciation
  • Exports cheaper → volumes ↑ → growth, employment, BOGS improve
  • Import-competing firms gain → structural adjustment
  • AUD value of offshore assets ↑ → NPI credits ↑
    − Dearer imports → cost-push inflation, living-standard hit
    − Valuation effect ↑ AUD debt & servicing → NPI debits ↑
J-Curve Effect
  • Short run: price effect dominates → trade balance worsens
  • Long run: volume effect dominates → trade balance improves

Exchange-Rate Regimes

  • Fixed (pre-1983 AUD)
    • RBA sets rate; revaluation/devaluation via reserve use
    • Pros: certainty, aligned monetary stance
    • Cons: reserve cost, speculation, money-supply impacts
  • Floating (post-Dec 1983)
    • Clean vs dirty float; market determined
    • Pros: shock absorber, independent monetary policy, less reserve need
    • Cons: volatility, overshooting (e.g. COVID-19 to 0.55 USD0.55\text{ USD})
  • Managed/pegged bands (e.g. RMB to basket)

RBA Intervention (“Dirtying the Float”)

  • Objectives: smooth volatility, counter overshooting, buy time for policy review
  • Tools
    1. Direct intervention – buy/sell AUD
    • Sterilised (offset via govt-bond ops) vs un-sterilised (money-supply impact)
    1. Indirect – alter cash rate to change interest-rate differential
  • Policy stance
    • Expansionary (rate cuts, deficits) → AUD depreciation
    • Contractionary (rate hikes, surplus) → AUD appreciation

Free Trade & Protection

Policy Evolution

  • 1973 Whitlam: 25 % tariff cut → shift to CA deficit
  • Late-1970s-80s: sector lobbying → PMV, TCF protection spikes
  • 1983 Hawke/Keating: financial deregulation + commitment to tariff phase-down
  • 1988 Industry Statement: general tariffs 15 %→10 % (1993)→5 % (2000)
  • 1991 “Building a Competitive Australia”: accelerated cuts; PMV to 15 % by 2000; quotas abolished
  • Result: avg tariff 9 % (1995) → 0.8 % (2018); export volume ↑8.6 %; GDP ↑$4 b\$4\text{ b}
  • Remaining support: targeted subsidies (e.g. drought-affected farmers) & EMDG grants (≈$140 m\$140\text{ m}/yr to ≈4 000 firms)

Effects of Reduced Protection

  • Individuals
    • Short-run structural unemployment (e.g. Holden closure 2017, 2 500 jobs)
    • Skill erosion risk; long-run job creation in competitive sectors; cheap imports ↑ living standard
  • Businesses
    • Import-competing closures; forced innovation & productivity ↑; cheaper imported inputs
  • Government
    • Lower tariff revenue, ↑ adjustment assistance costs
    • Long-run higher growth & revenue; potential political costs

Trade Agreements

Bilateral
  • AUSFTA (2004)
    • All tariffs eliminated by 2015; larger quotas for beef, sugar; ↑ manufactured exports
    • Downsides: US cultural products inflow, AUS trade deficit in mfg/services
  • ChAFTA (2015)
    • 86 % AUS exports tariff-free (98 % on full implementation)
    • Benefits: agri competitiveness (beef, wine); service-sector access
    • Concerns: Chinese labour entry, investor-state dispute provisions
Multilateral/Regional
  • AANZFTA (2010) – ASEAN + AUS + NZ
    • Access to 650 m people; projected $19 b US\$19\text{ b US} gain; 20 % of AUS exports
  • APEC (1989- )
    • 21 economies; 2.9 b people, 60 % world GDP, 48 % trade
    • Bogor Declaration (1994): free trade goal by 2020; open regionalism; anti-protection stance during GFC

Overseas Protection & Sector Impacts

  • Agriculture: EU CAP, US/Japan subsidies undermine AUS competitiveness
  • Mining/resources: few barriers; strong global demand keeps sector dominant (>50%50\% exports; >$200 b\$200\text{ b} 2018-19)
  • Manufacturing: sporadic tariffs (e.g. 20 % on cars in China); non-tariff barriers limit access
  • Services: natural/geographic barriers, cultural preferences constrain export growth

Sectoral Outlook

  • Mining & Energy – continue as primary export earners; commodity-price volatility key risk
  • Agriculture – benefitting from global food demand & weaker AUD but challenged by protectionism, climate, water, rising foreign efficiency
  • Services – tourism exports >$60 b\$60\text{ b}; education & conferencing exports recovering post-COVID; exchange-rate movements critical