Australian Trade Flows - Development of Policy - Statistics Project Example

Australian Trade Flows One can trace the history of contemporary Australian trade flows to the Australian policies during the Great Depression and the inter war period. During the Great Depression, Australia followed a policy of general retreat into high protectionism and beggar-thy-neighbor policies. In the decade of the 1930s the Sculin government, drastically curtailed imports in order to arrest Australia’s spiraling trade deficit. Australia, post war had to undergo a reconstruction phase like any other country in the world and this reconstruction was driven by the notion and the need for complete employment of the population (Capling, p176, 2001). There was also an imperial bias as far as the overall policies of trade were concerned given the fact that the multitude of trade that Australia took up in this period focused on the Commonwealth- primarily England and Canada. This was also known as trade discrimination and was strongly opposed by the USA. One would also have to understand the fact that Australia overall is an importer of manufactured products and an exporter of commodities, leading ore often than not to a situation characterized by an imbalance of trade and high levels of trade deficits for Australia. To demonstrate the point it follows that in the fiscal 1948-49, wool and wheat together accounted for over 60 per cent of Australia’s exports, followed by dairy products (6.3 per cent), lead and zinc (5.4 per cent), meat (5.3 percent) and sugar and dried tinned food commanding 2 per cent of the exports (Capling, p176, 2001). The trend has continued overall. Even today Australia as a nation is more of an exporter of commodities than it is of manufactured products. This is proved by the Figure 1, that displays the share of the various sectors in the Australian export bouquet in 2008. Export share: Sectoral View It has been suggested by economic theory that countries that rely primarily on the export of commodities and import of manufactured products would face imbalance of trade and trade deficit given the fact that commodities enjoy lower income elasticity as opposed to manufactured products and the fact that manufactured goods are differentiable, unlike homogenous commodities. As a result, producers of manufactured goods may have greater market power (Prebisch, 1950; Singer 1950). From the end of World War I until the mid 1950s the terms of trade experienced many large shocks, frequently doubling or halving within a matter of years. Such abrupt relative price changes have the potential to cause severe economic dislocation. It is important to know why volatility was so much higher in this period and why it has declined. Understanding this can help us to consider whether a return to such volatility is likely.       The most ardent supporters of the retention if the imperial preferences were the sugar, dried and tinned fruit, beef and processed milk industries. They were the principal beneficiaries and thus preferred access to the Commonwealth markets (Capling, p176, 2001). In contrast there were those that believed that preferential trade agreements with the Commonwealth had not only outlived their effectiveness but had started having detrimental effect on the overall Australian trade equations. This group consisted of the departments of Commerce and Agriculture, external affairs and post-war reconstruction.             The GATS agreement provided another instance where the new found multilateral trade tendencies of the Australian regime became apparent. It was decided here with vocal support from Australia that each country would provide a positive list of sectors where national treatment would apply, with a negative list of exemptions for each sector. The era of aggressive multilateralism also saw Australia lobby in favor of strong disciplines over the conditions of the most favored nation clause. The principle of MFN enshrined in the GATT Article I commitment guarantees that any advantage, favor, privilege or immunity granted by one signatory to the products of other signatory is granted immediately and unconditionally to the like products of all other signatories. In the decade of the late 1980s, for Australia a strong binding obligation for MFN was the single most vital component of the GATS. The stand was that without it there could be no curbs on unilateralism and bilateralism which had been so harmful to the interests of the small countries. Fig: 2 Growth of Australian Trade from 1980s-2004 The volume of trade and the overall trade flow has been affected in the western more developed countries of the world including the EU nations and Australia due to the recessionist trend that has characterized the American economy in recent times (UN Report, p37, 2009). The reason for the trend is the extreme softening of the import demand in the US leading to a softening of import demand elsewhere in the world as well. Australia nevertheless managed to curtail its trade deficit owing to the fact that there was a sharp increase in the negotiated prices on its iron ore and coal exports underpinning an increase in the country’s total export revenues by more than 20 per cent in 2008.  Given the fact that much of the imports that the country had was from Japan in the decade of the 1960s and the 1970s, owing to the fact that Japan in this period was the manufacturer to much of the world, the change in positions in the from the early part of the 1990s took everyone by surprise. China has since come to occupy the primary position as far the trade with Australia is concerned. Exports and imports with the emerging superpower have soared over the past three years and, in the year to March, reached a combined total of $52.7billion, eclipsing two-way trade with Japan of $50.6billion. As of 2007, Australia still runs a trade deficit with China, reaching $4.6billion over the past 12months, down from $5.1billion in the previous year. Commodities dominate Australia's sales to China, with manufactured goods only 4per cent of the total. Nearly all Australia's imports from China are manufactured goods. Fig: 3 Increase in Australia’s Trade with China Fig 4: Decline of Trade with Japan Commodities have long constituted the majority of Australia’s exports, averaging 73 per cent by value over the past century. While there has been a diversification away from commodity exports, they still account for over half of goods exports (Gillitzer and Kearns, 2001). Given that the majority of imports have been manufactures, the Prebisch-Singer hypothesis of falling relative commodity prices suggests that there should be a negative trend in Australia’s terms of trade. But the trend is no more than 0.1 per cent per annum over the full sample. The trend appears to have changed at several times during the century, notably there was seemingly a stronger negative trend in the period 1955–1987 (Refer Fig:2), which has since largely been reversed. But statistical tests are not able to identify changes in the trend. The fact that Australia’s terms of trade declined by less than the decline in the ratio of world commodity prices to world manufactures prices is due to two factors. First, the commodities that Australia has traditionally exported experienced faster price growth than a broader basket of commodities. Second, the export base diversified toward commodities that experienced relatively faster price growth. Perhaps surprisingly, the growth in manufactures exports had little role in ameliorating the negative trend. Manufactures export prices have risen more slowly than those of commodities, at least over the past 30 years. Overall, the negative trend is so slight that it is economically insignificant. Of more significance is the fact that shocks to the terms of trade have become shorter-lived. Arguably, the more notable feature of Australia’s terms of trade is their significant volatility. The trade policy breakthrough started to take place in 1973, when the government executed its 25 per cent across-the-board tariff reductions. The decade of the 1980s was also characterized by the desire of aggressive agricultural liberalization premised on the argument that the adoption of these policies would generate significant gains to national income, since the Uruguay round in 1986, there have been a number of attempts made to study the exact nature and size of these benefits. Notwithstanding the shortcomings in the analysis and reporting of trade liberalization, protectionism in Australia’s would-be export markets undeniably inhibits export opportunities (Pritchard and McManus, p96, 2000). In 1998, the EU common agricultural policy (CAP) fed $A75 million to the European farming sector. Closer Economic Relations Trade Agreement between Australia and New Zealand has delivered an increase of over 600 per cent in total trade in goods since it came into force in 1983. Bilateral trade was valued at $15 billion in 2006–07. The Singapore–Australia Free Trade Agreement entered into force in July 2003. It offers practical trade and investment benefits for Australia in the professional, financial and education services sectors. In the three years to 2006–07, Australia’s services exports to Singapore increased by 36 per cent to $3 billion in 2006–07. The Thailand–Australia Free Trade Agreement came into force in January 2005. As a result, more than three-quarters of current Australian exports receive tariff-free access to the Thai market. Two-way trade grew to $13.7 billion in 2006–07, up from $3.75 billion in 2003–04. Australian exports to Thailand rose from $3.1 billion to $5 billion over the same period. The Australia–United States Free Trade Agreement, which came into force in January 2005, aims to boost Australia’s trade relationship with the world’s largest and most dynamic economy. In 2006–07, the United States was Australia’s third-largest two-way trading partner and third largest export market (including services). Two-way goods and services trade grew by 8 per cent to over $48 billion in 2006–07. The Australian Government is engaged in negotiations with China, Malaysia, Japan, Chile, the Gulf Cooperation Council and, together with New Zealand, ASEAN (the Association of Southeast Asian Nations). Feasibility studies are under way on free trade agreements with Indonesia, India and the Republic of Korea. Contemporary Australian trade and trade policies would havce to be understood in line with the WTO norms. In keeping with the WTO’s assessment, it can be assumed that Australia’s trade policies are “in line with the scheduled implementation of Australia’s WTO commitments” (WTO, 2002); that is to say that there are no major trade policy violations of rules or guidelines set up by the WTO and agreed by Australian governments (Molnar K, 2003). Furthermore, the WTO’s assertion regarding Australia’s transparent trade policies also conveys the WTO’s appreciation towards Australian trade policy. World trade has started to decrease sharply weakening its role as a major engine of the global economic growth in recent years. Growth in the volume of trade is estimated to have slowed to 4.4 per cent in 2008, nearly half if the average annual growth of 8.6 per cent in the fiscal year 2004-2005 (UN Report, p35, 2009). The trend is in fact continued well into 2009 with the volume of world exports anticipated to slow further to about 2 per cent. In 2008, the proof of the slowdown and it affecting international trade were specifically visible in terms of the Baltic index (it measures the demand for shipping capacity in transport commodities vis-à-vis bulk carriers) when it declined to an unprecedented 85 per cent in the six months between March and September, 2008. The Baltic Slump In the final analysis if one were to identify once and for all the standing of Australian trade in terms of exports vis-à-vis imports one would find that Australia as a nation has been a net importer given its strong reliance on commodity and services exports as opposed to manufacture imports. Australia’s imports appear to have followed the country’s opening process: they have constantly been increasing in the last few decades. Since the beginning of the 1990s, the imports have grown by approximately 150 per cent, whereas the exports have increased by roughly 130 per cent (from $48,312 million in 1990-91 to $119,649 million in 2001-02, and from $52,399 million in 1990-91 to $121,108 million in 2001-02, respectively) (Australian Bureau of Statistics, 2003). Generally, over the period of 1990-2002, Australia’s imports outweighed its exports, i.e. the trade balance showed deficiency (trade deficit). However, in 2000-01 and 2001-02, exports were marginally higher than imports. This many have attributed to the Olympic Games above all factors. The largest trade partner remains the EU with the US coming in a close second. Reference: UN Report, 2009, World Economic Situation and Prospects 2009, pub, UN Publications ICTY, pp35-41   Prebisch R, 1950, The economic development of Latin America and its principal problems, pub, Economic Commission for Latin America, United Nations, New York. Reprinted in Economic Bulletin for Latin America, Vol.7 No.1, pp 1–22   Singer HW, 1950, U.S. foreign investment in underdeveloped areas: the distribution of gains between investing and borrowing countries, pub, American Economic Review, Papers and Proceedings, Vol. 40, pp 473–485. Pritchard B and McManus P, Land of discontent: the dynamics of change in rural and regional Australia, pub, UNSW Press, 2000 Australian Bureau of Statistics, 2003, International Merchandise Trade, Australia, March Quarter 2003, Catalogue number: 5422.0 Molnar K, Impacts of Globalisation on Australian Trade Policy: Changes in Government Export Promotion Policy, pub, Australasian Political Studies Association Conference University of Tasmania, Hobart 29 September – 1 October 2003 Capling A, Australia and the global trade system: from Havana to Seattle, pub, Cambridge University Press, 2001 Gillitzer C and Kearns J, Long Term Patterns in Australian Terms of Trade, Research Discussion paper, 2001 Read More