Australia's Trade and Financial Flows

Australia's Trade and Financial Flows

• High levels of two-way trade exists with China
• For Australia, China is a significant market for importing low-cost manufactured consumer goods
• Because of its low-cost labor, China has an advantage in the production of these goods
• For Australia, China is a significant market for exports of natural resources as there is rapid industrialisation and reliance on mineral resources such as iron ore
• In the 1950s Australia mostly traded with the UK and EU
• In the 1960s-1970s Japan become a major trading partner
• Due to globalisation, China, South Korea and ASEAN are major export markets
• Reasons for the changes include rising emerging economies, changing global trade patterns (regional trade agreements), resource endowment, transportation and geopolitical factors
• Australia's exports have generally been agriculture (wheat, wool, and beef) and minerals (coal, iron ore, gold, and alumina)
• Export quantities are still mainly dominated by these groups, with large quantities of capital goods, transport equipment, industrial supplies and manufactured consumer goods also being exported
• Top exports encompass coal, iron ores and concentrates, natural gas, education-related travel services
• Top imports cover personal travel services, refined petroleum, passenger motor vehicles, telecommunications equipment and parts
• Minerals have grown in importance, while rural and manufacturing have decreased in importance
• There is a significant rate of growth in financial flows
• As Australia is a net capital importer, inflows > Outflows
• In 1983, Australia floated the AUD with financial flows beginning to grow rapidly as international capital markets opened up, exchange rates were floated and advancements in technological shifts make it easier to shift finance between countries
• Australia has always been a net capital importer with the level of foreign investment in Australia consistently remaining well above the level of Australian investment abroad
• Because Australia has a small pool of available funds due to small population that require significant amounts of investment, Australians save a very small percentage of their income, resulting in a small household savings ratio
• Direct Investment is defined as an investment of 10% or more in an existing business or the establishment of a new business
• Portfolio Investment is defined as an investment of less than 10% in an existing business

Australia's Balance of Payments

• It is made up of the Current Account and Capital and Financial Account
• The Current Account includes exports, imports and net goods and services
• Note is takes into account Net Primary Income (NPI), which is returns on all foreign investment
• Note is also accounts for Net Secondary Income (NSI), which is non-market transfers, payout on insurance claims, workers' remittances and unconditional foreign aid
• Capital Account includes capital transfers to other countries and non-produced, non-financial assets
• Financial Account accounts for direct investment, portfolio investment, financial derivatives, other investment and reserve assets
• Funds that flow into Australia are credits, while funds that flow out of Australia are debits
• Increased FDI (Foreign Direct Investment) results in an increase in the financial account surplus or a decrease in the deficit
• Increased FDI means NPI decreases as the foreign country gets the return on the investment
• Principle of foreign debt (mostly in portfolio investment) is recorded in the financial account, while repayments/returns are recorded in the current account as primary income

Exchange Rates

• Measurement of relative exchange rates refers to other individual currencies and the Trade Weighted Index
• Factors that affect the demand for and supply of Australian dollars
• Changes in exchange rates are either appreciation or depreciation
• Determination of exchange rates includes fixed, flexible and managed rates
• The Reserve Bank of Australia influences the exchange rates
• Fluctuations in exchange rates have effects on the Australian economy

Free Trade and Protection

• Australia has transitioned from a highly protectionist economy to one of the most trade liberalised economies in the world
• Protectionist policies aimed to protect textiles, clothing and footwear (TCF) and passenger motor vehicles (PMV) sectors
• Pulling back in protection resulted in short-term structural unemployment and long-term reallocation of resources
• Australia’s trade liberalisation began with unilateral trade policies and a 25% economy wide reduction in tariffs in 1973
• In the 1980’s Australia participated in multilateral trade negotiations through GATT, succeeded by the WTO in 1995
• Since the mid-2000's Australia's trade liberalisation efforts have shifted towards bilateral or regional grade agreements
• Export assistance is provided by the Australian Government (through AusTrade) which includes financial assistance, information and marketing advice
• The main form of financial assistance is the Export Market Development Grant
• Main goals of reducing protection includes international competitiveness, efficient resource allocation, increased integration and structural change
• Bilateral agreements involve just two nations and are the easiest to negotiate
• The Australia-New Zealand Closer Economic Relations Trade Agreement (ANZCERTA) is the most comprehensive bilateral agreement for Australia, leading to free trade between the two countries, and increased standardisation of laws, business practices and commercial structures
• Examples of Multilateral Trade Agreements are those that provide free or preferential grade between many countries, and are often regional basis, examples include ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA), Regional Comprehensive Economic Partnership (RCEP) and Asia-Pacific Economic Cooperation (APEC)

Implications For Australia

• Individuals negatively experience structural unemployment caused by a mismatch between the skills that workers in the economy can offer, and the skills demanded of workers by employers
• Individuals positively experience increased competition, resulting in goods able to be bought goods at lower prices
• Firms in the short-run experience cessation of these industries, and lower input costs such that new firms are more competitive
• Firms experience operational restructuring, improving international competitiveness, as well as increased innovation and investment in these industries
• Governments experience decreased government revenue, increased government spending and political consequences

Australia has high levels of two-way trade with China, importing low-cost manufactured goods and exporting natural resources. Trade partners have shifted over time, from the UK and EU in the 1950s to Japan in the 1960s-70s, and now China, South Korea, and ASEAN due to globalization.