Australia’s International Trade – Topic 1 Notes
Australia’s Linkages Between Economies:
Australia’s Linkages Between Economies, Including Trade, Investment, Tourism, and Immigration
- Trade
o Global Trade is evident in Australia, as our commodities are exported to countries such as China, Japan, and the United States.
o Other countries rely on our commodity exports to build infrastructure, goods and provide services, in particular services of a professional nature.
o In addition, we rely on other countries for imports such as cars, electrical goods and clothing textiles as Australia cannot produce these on their own, or it is too costly to produce.
o Australia suffers from an expensive labour force which makes it uncompetitive to produce large scale, low value goods and services.
- Investment
o Australia relies on foreign investment to finance large capital projects.
o This is because Australia’s small population means we cannot produce a sufficient level of savings to meet our investment needs, hence relying on outside sources of finance.
o Countries such as China and Japan have large populations with high savings ratios, providing a surplus in savings which is reinvested into capital poor countries such as Australia.
o The Foreign Investment Review Board reviews proposals of foreign investments such as the purchase of Australian property from an overseas resident.
o Without foreign investment, Australia would not be able to achieve its high levels of investment, with many mining projects unable to access sufficient capital to develop.
- Tourism
o Tourism is an essential component of Australia’s exports.
o Education related travel, this is overseas students studying at Australian educational institutions, makes up Australia’s 4th largest export bringing a total $17.037 billion into the Australian economy.
o Personal tourism, which is visits to Australia for leisure reasons, is Australia’s 5th largest export, bringing in a total $14.227 billion to the Australian economy.
o Tourism is also Australia’s largest import, with many Australians choosing to travel overseas, causing an outflow of $24.597 billion from the Australian economy.
- Immigration
o Immigration has played a crucial role in Australian history, with European migrants coming to Australia after World War Two.
o In the year ending 30th June 2022, overseas migration contributed to a net gain of 171,000 people into Australia’s population.
o This represents an exceptionally large increase in net overseas migration on the 2020-1 financial year – which saw a net loss of 85,000 people.
o Historically, more people migrate to Australia that migrate away each year, meaning overseas migration has been a significant source of population gain for Australia rather than loss.
o Overseas migration data in Australia shows a pattern of variability over time, due to the ever-changing global and domestic factors affecting migration.
o The impact of the COVID-19 pandemic and international travel restrictions added to this vulnerability, as did the easing of these international travel restrictions from late 2021 which has resulted in people being able to migrate to Australia again.
The Extent and Importance of Trade for the Australian Economy:
Global Trade to GDP:
- Top global trade was 60% in 2008.
- Current (2023) global trade to world GDP ratio is 56.5%.
- Meaning trade accounts for over half of all global financial transactions.
- Trade is the sum of exports and imports of goods and services measure as a share of gross domestic product.
- Current (2023) trade to GDP ratio for Australia is 45.75%.
- This is also known as trade intensity.
Extent of Trade: Australia:
- Australia has substantially lower trade openness than the OECD average, however this is expected given certain characteristics.
- Australia is geographically far away from the highly trade intensive economies of North America and Western Europe.
- This is a significant factor accounting for Australia’s relatively low trade openness, remoteness from large economies and its large land mass.
- It is the only major economy in the southern hemisphere, so location is a disadvantage as it costs more to import and export goods and services.
- A countries level of imports or exports are determined by the size of the economy, the structure of the economy, relative to competitiveness and location.
Significance of Trade to the Australian Economy:
- Expands a country’s consumption possibilities by accessing other country’s production through imports.
- Increases a nation’s output through exporting.
- Exports pay for a country’s needs to enjoy high standards of living.
- Exporting enables Australian firms to produce for a world market – potential seven billion rather than a smaller domestic market.
- Importing allows Australian households to consume goods that cannot be produced domestically or is too expensive to be produced domestically.
- Engaging in trade permits increases specialisation, economies of scale, increased productivity, and higher real incomes.
- There is a strong correlation between countries with fast growth rates in trade and high rates of economic growth.
Australia’s Context Regarding Trade:
- Export-Oriented Economy
o Australia is a major exporter of commodities such as coal, iron ore, natural gas, agricultural products (like wheat and beef), minerals, and services such as education and tourism.
o These exports play a crucial role in sustaining the country's economic growth.
- Key trading partners
o China, Japan, Korea, and the United States are among Australia’s primary trading partners.
o These nations import a large portion of Australian goods and services.
- Dependency on Commodities
o Australia’s economy has historically relied heavily on the export of commodities, particularly minerals like iron ore and coal.
o The demand for these resources from growing economies, particularly in Asia, significantly impacts Australia’s trade balance.
- Diversification Efforts
o There has been a push in recent years to diversify Australia’s trade portfolio beyond commodities.
o Services such as education, tourism and professional services have become increasingly important export sectors.
o In 2022, services trade was valued at $171 billion and made up 11% of Australia’s total exports.
Globalisation Arguments:
- Arguments for globalisation
o It provides access to a wider variety of goods and services
o It lowers prices
o It provides more and better-paying jobs
o It increases market efficiency
o It reduces global poverty
o It increases economic growth
o It increases overall living standards
o It has enabled developing economies to access foreign investment
o It increases multiculturalism
- Arguments against globalisation
o It results in higher unemployment among low-skilled workers
o It lowers wages
o It destroys local cultures
o It erodes democracy
o It increases poverty
o It is unfair to developing economies
o It increases environmental damage
o Volatile capital flows have destabilised developing economies
o It can enable the rapid spread of a pandemic
How Does Increased Trade Lead to Economic Growth?
- Expands product variety - Global trade provides access to a broader selection of goods and services, enhancing living standards
- Boosts production and employment - Countries can achieve greater output, job creation, and higher incomes.
- Enhances firm competitiveness - International trade encourages businesses to improve efficiency and innovation
- Accelerates knowledge sharing - Countries benefit from faster adoption of new technologies and ideas globally
- Promotes economies of scale - Trade allows for large-scale production that wouldn’t be feasible in small domestic markets
- Strengthens global ties - Trade helps develop beneficial political and cultural relationships with other nations
Measuring Trade Intensity Formula:
Trade Intensity = ((X + M)/GDP) × 100
Composition of Trade
- Australia’s exports have always been dominated by primary industries whilst imports are dominated by manufactured products
Direction of Trade:
- There has been a significant shift in Australia’s direction of trade for the early 20th century to present time.
- The most notable shift has been from Europe to the Asia-Pacific region
- China is Australia’s main trading partner – a result of strong growth in the country for the past two decades (14.1% GDP growth rate 2007, 8.2% GDP growth rate 2021) and trade agreements
- Trading bloc – a type of intergovernmental agreement, often part of a regional intergovernmental organisation, where barriers to trade (tariffs and others) are reduced or eliminated among the participating states.
Two-Way Trade
- Two-way trade is determined by the sum of exports and imports
- Asian partners dominate Australia’s two-way trade flows, as Australia’s economy continues to complement those of a growing Asia.
- Dynamic changes underway in our region will continue to drive our economy and offer Australia significant opportunities.
- Asia overall stands to deliver nearly two-thirds of global growth to 2030.
Comparative Advantage:
- Comparative advantage is an economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partners
- Comparative advantage is used to explain why companies, countries, or individuals can benefit from trade.
- When used to describe international trade, comparative advantage refers to the products that a country can produce more cheaply or easily than other countries.
- While this usually illustrates the benefits of trade, some contemporary economists now acknowledge that focusing on only on comparative advantages can result in the exploitation and depletion of a country’s resources.
- Comparative advantage is one of the most important concepts in economic theory and a fundamental tenet of the argument that all actors, always, can mutually benefit from cooperation and voluntary trade.
- It is also a foundational principle in the theory of international trade.
- The key to understanding comparative advantage is a solid grasp of opportunity cost.
- Put simply, an opportunity cost is a potential benefit that someone loses out on t=when selecting a particular option over another.
- In the case of comparative advantage, the opportunity cost for one company is lower than that of another.
- The company with the lower opportunity cost, and thus the smallest potential benefit, which was lost, holds this type of advantage.
- Another way to think of comparative advantage is as the best option given a trade-off.
- If you’re comparing two different options, each of which has a trade-off, the one with the best overall package is the one with the comparative advantage.
Trade Policy & FTA:
World Trade Organization:
- The world trade organization (WTO) is an international body that determines international trade rules.
- At its heart are the WTO agreements, negotiated and signed by the bulk of the worlds trading nations and ratified in their parliaments.
- The goal is to ensure that trade flows as smoothly, predictably and freely as possible.
- Established in Geneva, Switzerland 1995.
- Currently there are 166 members representing 98% of world trade.
Free Trade Agreements:
- Free trade agreements (FTAs) are a vital part of Australia’s continued economic growth.
- FTAs are treaties between two or more countries designed to reduce or eliminate certain barriers to trade and investment, and to facilitate stronger trade and commercial ties between participating countries.
- Bilateral trade agreements are agreements between two countries, focusing on reducing trade restrictions and enhancing economic cooperation.
- Regional trade agreements (RTAs) are agreements involving multiple countries, aiming to reduce trade barriers and promote economic integration.
Bilateral and Regional FTA Examples:
- Regional Free Trade Agreements
o ASEAN-Australia-New Zealand (AANZFTA) – 1st January 2010
o Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) – 30th December 2018
o Pacific Agreement on Closer Economic Relations Plus (PACER Plus) – 13th December 2020
o Regional Comprehensive Economic Partnership (RCEP) – 1st January 2022
- Bilateral Trade Agreements
o China-Australia (ChAFTA) – 20th December 2015
o Korea-Australia (KAFTA) – 12th December 2014
o Japan-Australia (JAEPA) – 15th January 2015
o Australia-India Economic Cooperation and Trade Agreement (ECTA) – 29th December 2022
Trade Liberalisation:
- Trade Liberalisation is the opposite of protection.
- Liberalising trade is achieved by removing or reducing any restrictions which limit trade in goods and services.
The Benefits of Trade Liberalisation:
- Wider Product Range - Free trade agreements give Australian businesses and consumers improved access to a wider range of competitively priced goods and services, new technologies, and innovative practices.
- Promote Regional Economic Integration - Free trade agreements promote regional economic integration and build shared approaches to trade and investment between Australia and our trading partners.
- Enhanced Trade/Investment Opportunities - Free trade agreements can deliver enhanced trade and investment opportunities that contribute to the economic growth of less-developed economies.
- Stronger Relationships - Free trade agreements support stronger people-to-people and business-to-business links that enhance Australia’s overall bilateral relationships with FTA partners
- Long term benefits - Free trade agreements can continue to provide additional benefits to Australia and trading partners over time, including via in-built agendas that encourage ongoing domestic reform and trade liberalisation.
Arguments for Protection:
- Anti-dumping - Protection prevents foreign companies from flooding the domestic market with products sold below cost to eliminate competition and gain future price control.
- Infant industry protection - Protects new or emerging industries that are not yet efficient, giving them time to grow, achieve economies of scale, and eventually compete on a global level.
- Diversification of industry - Protection helps diversify the industrial base and reduces reliance on specific sectors, protecting the economy from price shocks and changes in global demand.
- National security (defence) – maintains key industries essential for national defence and security in times of emergency or conflict, reducing overreliance on foreign suppliers.
- Increased employment – shields domestic industries, potentially boosting employment in protected sectors by diverting consumer spending away from foreign goods.
Arguments for Protection:
- Anti-Dumping – protection prevents foreign companies from flooding the domestic market with products sold below cost to eliminate competition and gain future price control.
- Infant industry protection – protects new or emerging industries that are not yet efficient, giving them time to grow, achieve economies of scale, and eventually compete on a global level.
- Diversification of Industry – protection helps diversify the industrial base and reduces reliance on specific sectors, protecting the economy from the price shocks and changes in global demand.
- National security (defence) – maintains key industries essential for national defence and security in times of emergency or conflict, reducing overreliance on foreign importers.
- Increased employment – shields domestic industries, potentially boosting employment in protected sectors by diverting spending away from foreign goods.
- Cheap foreign labour – protects domestic producers from unfair competition where wages are significantly lower abroad, preventing exploitation and market distortions.