Australia's International Trade

***Do not study globalization or international interdependence since these were taken out of the course***

Trade

Four trends that have affected the relationship between trade and development since the start of the millennium.

1. Economics growth of developing countries
2. Growing integration of global production though supply chains
3. Higher prices for agricultural goods and natural resources
4. Increasing interdependence of the world economy, which causes shows to reverberate more quickly.

Four Key Linkages between Countries:

• Trade
  • Purchase and exchange of goods and services from other countries
• Tourism
  • Business of providing services for people on holiday
    • Leisure, Business, and other personal purposes
    • Will be short term
• Migration
  • Movement of people from one country to another to benefit from greater economic opportunities in the receiving country
• Investment
  • Purchase of assets that are used in the future to generate wealth

Trade Patterns

Trade Patterns refers to the composition and direction of goods and services a country trades

Composition: Refers to the different categories of goods and services a country can import and export.

Direction: Refers to the export destination and the origin of imports in terms of countries or groups of countries

The direction of Australia’s trade is reflected in its close proximity of the Asia Pacific region, while the composition of its trade reflects the nation’s natural resource wealth.

• Australia is very abundant in its natural resources

Trade Intensity measures an economy’s integration with the world economy. A higher trade intensity means an economy is more susceptible to external shocks in the world economy.

Trade Intensity = ((X+M) / GDP) x 100

Factors that determine a country’s trade intensity

• Relative size of the economy
• Location relative to foreign markets (proximity)
• Extent of barriers to trade (natural and artificial)

Factors that influence economic transactions between economies

• Exchange Rates
• World Economic Growth (RoW)
• Domestic Economic Growth
• Relative Inflation Rates
• Relative Interest Rates
  • High Interest Rates in Australia
    • Less investment in capital
• Productivity and Cost Efficiency - Cheap price to produce, cheaper prices for other countries to buy

Patterns - Composition

Exports

Primary Industries dominate Australian exports

• Manufactured goods have been Australia’s most important import category.
• Changes to composition have been associated with rapid increase in mineral and energy exports and the decline in rural exports.

The composition of Australia’s trade will reflect its comparative advantage

• Traditionally Australia has been a major exporter of primary commodities
• Comparative advantage comes from land and natural resources in Australia

Over the past few decades there has been a significant increase in the relative importance of mineral and energy exports and a decline in the importance of rural exports

Commodities take up a large proportion of Australia’s total exports, making up 67%.

• Rural exports decreased significantly
• Natural Resources such as minerals increased

Reasons for Change:

• Rapid growth of China and other Asian economies that resulted in a major resources boom in Australia

Major Changes in the composition of Australia’s Exports

1. Dramatic decline in rural exports
2. A significant increase in resource (minerals and fuels) exports
3. A relative decline in manufacturing exports
4. The increasing importance of services exports (especially tourism and education)

Imports

For imports the largest category is intermediate goods, consisting mainly of fuels and processed industrial goods.

Most imported foods are manufactured goods - either in the form of consumers goods or as inputs for Australian industry

The composition of our trade is a reflection of the structure of the economy.

• Australia has a very efficient and internationally competitive primary sector both mining and agriculture, while our manufacturing sector is smaller and relatively less efficient.

Australia’s most important service export is education, which is almost equal to all of Australia’s rural exports.

Australia’s largest import is personal travel - Australian tourists travelling overseas: which is now greater than the value of imported consumer motor vehicles.

Top Ten Exports and Imports in 2020

• Iron ore and coal are Australia’s largest exports
• Natural gas and education services are surprising for Australia’s 3rd and 4th for exports
• Top four export account for 50% of our exports

Economies that have been growing economically rapidly:

• China
• Korea
• India

As incomes and standard of living rise the demand for services such as travel (tourism), health and education will increase significantly.

• This is because services are highly income elastic

Patterns: Direction

Majority is from Asia - Exports

The replacement of Europe by China and the United States as Australia’s most important source of IMPORTS is the key difference.

The 3 most important 2 way trade partners of Australia are China, Japan and USA

Australia has a comparative advantage in the supply of food crops and livestock.

Comparative Advantage

• Countries gain from trade when they produce goods and services for which they have a comparative advantage
• Lowest opportunity cost

Competitive Advantage

• Producers develop an advantage over their competitors in international markets
• Concerned with advantage created not given
• For example: Health, Education, Infrastructure.

Historically Australia’s trade pattern has reflected comparative advantage

• But as a result of globalization and the freer movement of resources, financial capital, technology, competitive advantage has become much more important.

Contribution to Competitive Advantage

1. Comparative Advantage
2. Free Trade
3. Foreign Investment
4. Workforce
5. Non-Price Competitiveness
6. Strong Institutions

• Comparative Advantage
  • Australia is endowed with an abundance of rural, mineral and energy resources.
• Free Trade
  • Australian Government promotes free trade through regional trade agreements and forums (e.g. TPP (Trans-Pacific Partnership) and APEC (Asia-Pacific Economic Cooperation)) and through Bilateral Trade Agreements (e.g. China, Japan etc.)
• Foreign Investment
  • Australia is able to attract both portfolio and direct foreign investment. This funds investment in productive capacity and allows for the transfer of technology and knowledge into Australia.
• Workforce
  • Australia has leading experts in many fields for e.g. science, medicine, engineering and architecture. Generally, Australian workers are fully literate and skilful.
• Non-price Competitiveness
  • This includes factors such as product design, innovation, reliability, after-sales support and quality of service that affect the overall competitiveness of a product.
• Strong Institutions
  • Commerce is supported by a number of institutions such as banking and financial systems, legal system and systems of government. It is important that each system is stable and honest.

Detractions to Competitive Advantage:

1. Currency (AUD)
2. Regulated Economy
3. High Direct Taxes
4. Labour Supply
5. High Wages and Low Productivity
6. Lack of Economies of Scales

• Currency (AUD)
  • Commodity prices are less stable than manufacturing prices, hence greater movement. Instability can create uncertainty and reduce business confidence.
• Regulated Economy
  • Higher regulations mean more costs for businesses/producers within Australia. Regulations include Occupational Health and Safety, environmental, native title, employment, parental leave etc.
• High Direct Taxes
  • Company tax and income tax. Some international firms may be benefited against domestic firms by circumventing these direct taxes.
• Labour Supply
  • Unlike South –East Asian countries, Australia does not have access to a large low cost labour supply suited to volume production of manufacturing products.
• High Wages and Low Productivity
  • High wages can be justified if there is high productivity as well. However in Australia productivity growth has remained relatively low as support for economic reform policies has faltered.
• Lack of Economies of Scales
  • Australia has a relatively small domestic market compared to other countries. Our producers operate at a disadvantage compared to those in countries where economies of scale are achieved through large-scale manufacturers.