International Trade and Payment - Essay Example

Name: Tutor: Course: Date: International Trade and Payment Introduction Australia is aggressively engaged with the global world not only due to its people who have their origins from many parts of the world but also long-term recognition that its security and prosperity are integrally connected to global engagement. Australia is committed to creating a rules-based international order that advances as well as protects the interests all people and nations (Kunkel, 2002). The most prevalent economic integration or coalition is known as the free trade agreement that provides a free trade area among member states. Regional and bilateral agreements have proliferated since 1990s especially in the Asia-Pacific region. Increased economy means loss of control in the domestic market by the implementing country. Elimination of barriers to regional trade can lead to increased competition and lose of first place to local industry to international competitors. The effects of an open economy can be seen in the declining automobile manufacturing industry in Australia following reduction of tariff on automobile imports. The growth in economy has been accentuated through globalization and regional as well as bilateral integration (Dollar & Aart, 2004). However, elimination trade barriers and increased globalization has led to rising inequality and increased challenges to the local industry. There is bipartisanship in the economic policy of Australia leading to more economic liberalization instead of protectionist. This essay explores Australia’s experience with Free Trade Areas and their impact on trade. Australia’s regional and bilateral integration and its challenges Commenters and policy-makers have been cajoling Australians for long into accepting that they make up the global economy meaning accepting an entire range of new realities. Main theme of the pro-globalization perspective is that Australia has permitted these realities and adapted perfectly to globalization through embracing economic liberalism (Conley, 2002). Global trade and investment architecture is very dynamic. It is directed by the needs of the commercial environment and propelled by various policy and economic developments. A new driver and new factor is the increasing role as well as influence of Asia, particularly India and China. Advanced production networks in Asia that is behind its wonderful global export success over the past years have increased regionally. The processes of production have been broken down into independent small processes, with every process located in an economy that is cost-effective hence improving efficiency. The world economy has been witnessing growing number of regional trade agreements (RTAs). The number of RTs together with free trade agreements (FTA) is about 350 in number according to the World Trade Organization (WTO) statistics ( October 2013). The manner in which Australia responds to the various developments really matters to Australian business. The long run prosperity of Australia is anchored on persistent institutionalization of open economies within emerging markets together with the capacity of business to freely open in global markets. Hence to advance these interests, Australia needs well-crafted responses and approaches to proposals for regional integration like free trade agreement (FTAs). Tony Abbot, Australian Prime Minister, paid a visit to Japan early April in 2014, and an agreement was arrived at concerning Japan-Australia Economic Partnership Agreement (EPA), with the aim of developing a comprehensive free investment and trade environment between the two nations. The defense and economic deals led Abbot and Shinzo Abe, Japanese Prime Minister, to applaud the strong relationship between Australia and Japan. Whereas the Japan-Australia EPA took about seven years of negotiations, this is the first free trade agreement for Japan with a main agricultural exporter, going against Japan’s trade policy prohibition against agricultural protection (Siriwardana, 2007). Japan consented to implement unprecedented concessions to Australia in terms of its agricultural liberalization regardless of the fact that some Australian farmers, who wished for the removal of tariffs, were not happy with the deal. Australia is currently having five bilateral FTAs as well as one regional FTA with her trading partners in the Asia-Pacific region. Other trade agreements are underway or proposed. Analyzing the contribution of FTAs to the growth of investment and trade may not produce substantial quantifiable results in various cases. Australia has low barriers to investment and trade going but the global standards. FTAs are important in securing commitments that are desirable but not obtained through multilateral system for instance reducing barriers to investment, as well as introducing competition policy (Siriwardana & Yang, 2008). The agreements also occasion legal rights for commitments that are binding which have been negotiated in WTO but not yet implemented. They can occasion broader commitments to liberalize services that have been attained in the WTO. The success and gains of FTAs are best quantified by the degree to which they result in more open markets in Australia as well as in partner countries; improving the business environment for investment and trade, improving competitiveness, promoting structuring reform and being consistent with WTO. Australia is 10th largest trading partner of Japan and second-largest market for automobile, and automobiles represent more than 50% of total exports of Japan to Australia. The elimination of tariffs on automobiles is one of the main demands that Japan has lobbied as a requirement for the conclusion of the EPA, hence the change in government was important in the elimination of the hindrance towards the conclusion of the EPA (Siriwardana, 2007). Australia also benefits from the Japan’s concession on agricultural products like beef. Under the agreement the Japan-Australia EPA, Japan’s frozen beef tariff will be reduced in the course of the first year from 38.5% to 30.5%, and further reduced to 19.5% over a period of eighteen years. Moreover, the tariff imposed on refrigerated beef will drop to 32.5% in the course of the first year, and will be reduced within the next fifteen years to 23.5% (Siriwardana & Dollery, 2004). This is the first time that Japan is reducing tariff on beef and it is a good outcome for Australia. Expanding FTA and economic integration agenda of Australia brings about new challenges for optimization of use of finite resources. It occasions new demands on business and pressures on resources for the government. FTAs often result into a political game that cannot be terminated with just a single agreement owing to the exclusive nature of FTA whereby accrued benefits like tariff elimination come at the expanse of third party countries (Moller et al, 2003) This political game prompted Australia to rush the concluded Korea-Australia FTA largely owing to the fact that it had already exposed to discrimination against American products in the market of South Korea for more than two years owing to U.S.-Korea FTA. The main player left in the FTA game of Australia is China. The greatest hindrance to the conclusion of the Australia-China negotiations is whether Australia will permit investment by Chinese state-owned enterprises in agricultural and resources sectors and further relax conditions for the admission of Chinese workers. While in the opposition Abbot was of the view that such conditions have to be stringent rather than relaxed but he has begun talking about deregulation hence lowering the obstacles for the conclusion of the Australia-China FTA (Lloyd & Maclaren, 2004). It becomes some kind of blackmailing for Australia to open up its domestic market for competition from China and other trading partners. The local industry players face the threat of imminent competition from foreign investors from other Asia-Pacific free trade areas. Loss of control of the local market spells doom for the local producers who grapple with increased production costs owing to the strong Australian dollar. The elimination of trade barriers may lead to structural unemployment in the short term. This has an impact on large numbers of workers and the local economies. It can be challenging for these workers to find employment in local industries and the government has to intervene. Australia also faces the risk of increased instability in the domestic economy from global trade cycles as economies rely on global markets for growth (Siriwardana, 2006). Local consumers, employees and businesses face increased vulnerability from downturns in the economies of trading partners. The pressure by countries like Chine poses pressure to local labour market hence making it difficult for an Australia native citizen to get meaningful employment. Recession in the US market leads to reduced demand for exports from Australia hence occasioning a drop in export income, lower domestic demand, lower GDP, and increase in unemployment. Moreover, international markets are normally not a level playing ground because surplus products can be dumped in the world market at a low cost hence affecting the local market. Countries whose economies are dominantly agricultural-based face the challenge of unfavorable terms of trade whereby their income from exports is much less as compared the import payments made from high value added imports and hence large foreign debt levels (Siriwardana, 2008). New and developing industries find it difficult to establish themselves in competitive environment having no short-term protection policies by governments in the perspective of infant industries argument. Australia automobile manufacturers have been unable to compete in the international market owing to unfovourable conditions and increased relaxed trade barriers. It is not easy to gain economies of scale in the wake of competition from foreign multinationals. Environmental problems have increased as companies try to outdo each other in production but others are under weak environmental legislations. In the course of the recession and global financial crisis of 2008-9 the effect of shrinking employment led to increased protection pressures in many countries since they experience the negative effects of an open economy. Bilateral and regional economic integration has to be done with cause because it can lead to economic unprecedented instability of the local industries. In New South Wales, for instance, the state government came under pressure for buying imported uniforms for firefighters and police at cheaper rates as opposed to purchasing uniform made by Australian companies to promote the local industry. Similar pressures have been witnessed in countries like Britain, United States, as well as in some European countries (Garrett, 1998). The local industries have to be protected from the menace of international players who can make them to close shop owing to increased competition and unfavorable business environment. Conclusion Government resources have to be prioritized to emphasize on negotiating of FTAs which offer the greatest opportunities for expanding of business interests and which serve best the long term strategic and economic interest of Australia. Protectionist policies should not be discarded altogether as Australia seeks to be integrated in the global economy. Open economy and increased globalization has supported the growth of Australian economy but local industry players have been hurt in some sectors due to increased competition in uneven playing ground. Inequalities have been accentuated with some countries taking advantage of others. China has demanded relaxing of obstacles towards its workers joining the Australian labour market. Some kind of blackmail is being experienced as local industries are forced to bow to external pressure. The policies of Australia have to target to protect the domestic industry from unnecessary aggressiveness from international or foreign investors. Too much of liberalization can hurt the local producers to the extent of giving up in the wake of increasing competition. References Conley, Tom (2002) “Globalization as Constraint and Opportunity: The Restructuring of the Australian Political Economy”, Global Society, 16(4). Dollar, David and Aart Kraay (2004) “Trade, Growth and Poverty”, Economic Journal, 114, p. 27 Garrett, Geoffrey (1998) Partisan Politics in the Global Economy, New York, Cambridge University Press. Kunkel, J. (2002), “Australian trade policy in an age of globalization”, Australian Journal of International Affairs, Vol.56, pp.237-251. Moller, Stephanie et al (2003) “Determinants of Relative Poverty in Advanced Capitalist Democracies”, American Sociological Review, 68. Lloyd, P. & Maclaren, D. (2004), “Gains and losses from regional trading agreements: a survey", Economic Record, Vol.80, pp.445-467. Siriwardana, M. (2008), " The Sensitivity of the Agricultural Trade in the proposed FTA between Australia and Japan: A Quantitative Assessment", ICFAI Journal of Agricultural Economics, Vol.5, pp.35-53. Siriwardana, M. and Yang, J. (2008), "GTAP Model Analysis of the Economic Effects of an Australia-China FTA: Welfare and Sectoral Aspects", Global Economic Review, Vol.37, pp.341-362. Siriwardana, M. (2006), "Australia's involvement in free trade agreements: An economic evaluation", Global Economic Review, Vol.35, pp.3-20. Siriwardana, M. (2007) "Assessing the Impact of the Australia-United States Free Trade Agreement", The North American Journal of Economics and Finance, Vol.18, pp.117-133. Siriwardana, M. and Dollery, B. (2004), "An Empirical Analysis of the Proposed Australia-Japan Free Trade Agreement", Journal of Contemporary Issues in Business and Government, Vol.9: pp.1-21. . Read More