HSC TOPIC 2: Australia’s place in the Global Economy

Australia’s trade and financial flows

Value, composition and direction of Australia’s trade and financial flows

Trends in Australia’s trade pattern

Composition of Aus trade flows Direction of Aus trade flows

Primary industry has been the main focus of Aus X due to comparative advantage Change in key export markets in recent decades: previously it used to be Japan,
in commodities because of vast natural resources. (agriculture + minerals) UK and Europe → South Korea, China, ASEAN.
Reason:
Change in composition of Aus exports (1990 → 2020) (% of total exports) - EU trading bloc → barrier to Europe market for X
- Minerals/metals: 39 → 66 - Japan = high eco growth + D: largest X market for Aus before 1990s
- Rural: 23 → 10 - China = high eco growth + global dominance + demand for
- Services: 20 → 13 commodities: dominant X market for Aus in 21st century.
- Manufacturing: 13 → 8 - Asian economies: expected to dominate world trade in 2020s
Reasons for decline in agriculture exports as % of Aus trade: Change in direction of merchandise trade(1990 → 2020)
- Large fluctuations in world price + trade protection policies → Annual exports (% of total)
influenced export revenue. - China: 5.8 → 38.5
- Agricultural commodity items have little extra value added from - Japan: 26.5 → 10.7
processing compared to other areas eg. transformed manufactures - ASEAN: 12.6 → 11.2
- More extreme weather patterns → reducing output and productivity. - EU: 16.9 → 5.5
Manufacturing decline due to ↑competition from Asian low-cost economies - USA: 13.1 → 6.3
Annual imports (% of total)
Aus imports are relatively unchanged from the 1980s with intermediate goods - China: 4.4 → 23.9
dropping 10% of total and consumer goods ↑ by 15% due to shift away from - Japan: 15.6 → 5.5
domestic manufacturing and the reduction of tariffs + local content rules. - ASEAN: 7.0 → 14.5
- EU: 26.1 → 19.4
- USA: 23.4 → 12.6

Value of Aus trade

- Exports: $457 billion
- Imports: $368 billion
- Average tariff: 1.8% in 2021, was 25% in 1983
- Net foreign debt servicing: $14 billion
- Net returns to foreign investors: $25 billion
- Foreign investment in Aus: $4 trillion
- Aus investment overseas: $3.1 trillion
- Net foreign debt: $1.2 trillion

Trends in financial flows - debt and equity

Investment composition
Foreign investment in Aus
- 1990-91: Direct = 107B, Portfolio = 145 B | Total = 309B
- 2020-21: Direct = 1.1 trillion, Portfolio = 2.1 trillion | Total = 4 trillion
Aus investment abroad
- 1990-91: Direct = 45B, Portfolio = 23B | Total = 115B
- 2020-21: Direct = 874B, portfolio = 1.5 trillion | Total = 3.1 trillion
 Reasons for trend
International financial flows began growing rapidly in the 1980s after the deregulation of the financial
sector, floating of the AUD + no foreign ownership rules.
Aus has always been a net capital importer, meaning that FDI levels are way higher than Aus investment
levels abroad.
● This is due to Aus historically low level of domestic savings → relying on overseas financial flows
to make up for the shortfall between S and I in Australia.
● Aus also has significant overseas assets: due to overseas capital markets becoming more open to
foreigners and Australia’s super funds pursuing investment opportunities o/s.
○ Superannuation assets valued at $3.3 trillion at June 2021

Australia’s balance of payments

Structure (Current Account, Capital and Financial Account)

Balance of payments (BOP) → the record of the transactions between Australia and the rest of the world
during a given time period (usually one year)

The Current Account (CA) The Capital and Financial Account (KFA)

External transactions that are not reversible External transactions that are reversible (can be repaid/resold)

a) Net Goods - goods X minus goods M | 76 $bn
b) Net Services - services X minus services M | 13.1 $bn
a) + b) = Balance of Goods and Services (BOGS) | 89 $bn
c) Net Primary Income (NPY) - refers to income earnings from FOPs flowing
in and out of Australia | -18.8 $bn
d) Net Secondary Income - refers to current non-market transfers when
flows of money occur without a specific g/s in return. | -2.3 $bn
- Eg: payouts on insurance claims, workers working o/s, pensions
provided by foreign gov, general unconditional aid given to
another country.
a) + b) + c) + d) totals the balance on the CA. | 68 $bn
Net errors and omissions - refers to statistical discrepancies to ensure that
the BOP = 0 as it does under a floating exchange rate system. Included in
the KFA. -10.2 $bn
a) Capital Account - comprises of capital transfers | -0.7 $bn
● Transferring of ownership (conditional grants, aid to a foreign
country that is tied to a capital project, assets
● Transactions involving intangible assets: patents, copyrights,
trademarks, franchises
b) Financial Account - Australia’s transactions in foreign financial assets
and liabilities | -57.1 $bn
● Direct investment → establishment of new company or 10%
ownership of existing company 10.1 $bn
● Portfolio investment → loans, other forms of securities,
speculative shares -57.1 $bn
● Financial Derivatives → complex financial assets derived off the
performance of other instruments (IRs, XRs, assets) -19.2 $bn
● Reserve Assets → monetary gold, SDRs, foreign exchange held by
RBA. -4. $bn
● Other investment → residual category which captures
transactions that don’t belong elsewhere eg: loans, trade credits.
13.2 $bn
a) + b) totals the balance on the KFA | -57.8 $bn

Current Account

Debits (outflow) Credits (inflow)

Imports of g/s Exports of g/s

 Factor incomes:
● Interest paid to foreign firms
● Profits of foriegn firms operating in Aus
● Payments to offshore employees by Aus firms
Non-market transfers out of Australia
Factor incomes:
● Interest received by Australian firms from o/s
● Profits of Australian firms earned offshore
● Payments to offshore employees working in Aus
Non-market transfers into Australia

Capital and Financial Account

Debits (outflow) Credits (inflow)

Capital transfer out of Aus Capital transfer into Aus

Direct or portfolio I o/s Direct or portfolio I into Aus
Loans made to foreigners Loans made to Australians by foreigners
Deposits in foreign banks Deposits into Australian banks
RBA selling A$, buying foreign currency. ↑ in reserve assets RBA buying A$, selling foreign currency. ↓ in reserve assets.

Links between key Balance of Payments categories

Equilibrium of exchange rate

M + Y debits + K outflow = X + Y credits + K inflow

M-X + Y debits - Y credits = K inflow - K outflow
CAD = Surplus on KFA (vice versa)

Link between CA and KFA

Strongest link between accounts can be seen through the NPY and KFA.
Every K inflow must earn an income return for the owner. This return is recorded as an NPY debit.
The NPY is the structural cause of a CAD.
K inflow affects NPY in 2 ways:
● International borrowing → debt servicing costs are recorded as NPY debits. So when Australians
borrow money from o/s, this causes a greater NPY deficit as there are more NPY debits as K
inflows increase.
● Foreign investment → require returns on the equity investment in the form of interest, rent,
dividends or profits which is recorded as an NPY debit.
Another link: Australia’s low savings level relative to investment demand has made it necessary to
attract a large inflow on the KFA. Large K inflow = more NPY debits due to debt servicing costs.

Trends in the size and composition of Australia’s Balance of Payments

CA trends
CAD averaged (% of GDP) - 70s = 1.1, 80s = 4, 90s = 4.1, 2000s = 4.9, 2010s = 2.5%
CAS achieved in 2019-20 and 2020-21 due to strong commodity prices, low global IRs, larger contraction
in M than X during the Covid-19 recession.
Treasury forecast of a CAD of 2.25% of GDP in 2022-23 due to the short-term nature of above factors.

BOGS - cyclical factors

1) Terms of Trade → the relative movements in the price of an economy’s imports and exports over a
period of time. (Export price index / import price index ) x 100
- An improvement in the Tot (unless ↓ X volumes) = improvement in BOGS.
- Global commodities boom in 2000s led to significant improvement in BOGS X
- ToT peaked in 2011 (85% above average level of 20th century)
- ToT low point in March 2016 (89)
- ToT increased rapidly in 2019 - ↑iron ore price due to supply shortage in Brazil
- ToT in Dec 2019 fell to 99 - Covid, global output/trade ↓, imposition of tariffs on Aus
agricultural products by China (beef, barley)
- ToT in Nov 2020 back to 101.3 as China rebuilds economy after Covid
- ToT reached all time high of 128 in 3rd quarter of 2021
2) Exchange rate of the A$ → sustained appreciation during mining boom, depreciation in early 2016 to
less than US$0.70, averaging US$0.77 in 17-18, US$0.67 in 19-20
- Low of US$0.48 in April 2001, high of US$1.1 in July 2011
- Recent depreciation in March 2020 (US$0.55) due to:
- ↑in risk aversion and ↓ in investor confidence globally due to Covid. ↑financial market
volatility.
- ↓ in Aus IR differential with other major advanced economies
- Falling commodity prices w/ exception of iron ore → reduced ToT + D for $A
- Effect of depreciation on BOGS:
- ↑BOGS credits from non-mining sectors such as service X (education/tourism) and
↓BOGS debits from ↓imports as they are more expensive
3) International BC → impacts upon the demand for our X, especially from China, India, Asian region
- Prior to Covid, China’s economy was slowing from 10% to 6-7% which led to slower growth in
demand for commodities → fall in commodity prices + worsening of ToT and BOGS.
- Increased demand for X due to greater trade links with faster growing economies such as India
- Growing protectionism and trade tensions since Covid has reduced demand for our X.
4) Domestic eco growth → ↑eco growth = ↑Y, ↑C, ↑X and M.
- Increase in investment in the mining sector has led to ↑M of mining capital goods, worsening
the BOGS during mining investment phases
- Prior to Covid, M were subdued due to weaker household consumption (low wage growth)
- Covid led to Aus recession - ↓ in demand for M, fall in BOGS debits, contributed to BOGS
surplus
- During 2020 higher levels of domestic savings , slower wage growth and soft eco growth in
Australia resulted in ↓growth for M.
 - Recently due to Covid, the household saving ratio climbed to an all time high of 22.1.
Restrictions on service M contributing to BOGS surplus.
BOGS - structural factors
1) Australia’s narrow export base
- ⅔ of our X revenue comes from low value added primary goods (mining/agri)
- Aus imports high value added consumer/capital goods (Aus lack IC in these areas)
- Global commodity prices are more volatile resulting in large fluctuations in the BOGS every year
- Economists encourage diversification of our X base away from carbon-intensive exports and
towards ETMs and service exports (recent FTAs should support this)
2) Capacity constraints
- Infrastructure bottlenecks (rail, road, port) were key issues during mining investment phase
- Skill shortages (especially pre GFC as UE rate was at 4% and below NAIRU)
- Supply issues in mining - an inability to increase BOGS credits to potential during mining booms
- Recent years - greater investment in infrastructure have reduced capacity constraints and X
volumes have grown.
3) Global supply chains -
- Rise in the number of TNCs and taking advantage of abundant low wage labour in developing
economies has decreased the price of M → improvement in BOGS.
NPY - cyclical factors
1) XRs (valuation effect) - affects foreign debt valued in foreign currencies
- An appreciation of A$ leads to a ↓ in $A value of our debt, resulting in ↓ NPY debits
- A depreciation of A$ causes an ↑ in value of our debt, leading to an ↑ in NPY debits
- However since most of our foriegn debt is valued in A$ or hedged (65-70%), the valuation effect
has a limited impact on NPY.
2) Global/domestic IRs - changes in IRs can change the level of our debt servicing requirements
- Decline in IRs globally and in Australia has reduced debt servicing costs. Net debt servicing = 14
$bn in 2020-21
- Increase in the share of foreign liabilities owned by the government which pays a lower IR
- Results in narrowing of the NPY deficit recently.
3) Profits + investment returns
- Domestic BC directly influences equity servicing costs. Strong growth results in a rise in profits
distributed as dividends.
- An improvement in the ToT increased X revenue for mining companies. As 80% of mining shares
are owned o/s, this resulted in an ↑ in equity servicing costs to foreigners.
- Strong performance of Aus super funds resulting in high Australian ownership of foreign equity
should offset debt servicing costs in the NPY.
NPY - structural factors
1) Savings-investment gap
- Australia has historically a low level of national savings. Household savings ratio averaged at
1.7% between 2000 and 2008. Following GFC, it ↑ to 10.7% and has fallen back to 2.1%
recently.
 - Australians have to borrow from o/s to meet our investment needs as domestic savings are too
low. ↑ debt/equity servicing costs (NPY debits)
- Federal government budget deficits → NPY deficit
- In 2018, 55-60% of Commonwealth Government Securities (CGS) were owned by
foreigners.
KFA trends
Net foreign debt (NFD) = value of what Australia owes to the rest of the world - value of what foreigners
owe to Australia → 59.6% of GDP (June 2021)
Net foreign equity (NFE) = value of o/s assets owned by Australia minus value of domestic assets owned
by foreigners. → -15.1% of GDP (June 2021)
Net foreign liabilities (NFL) = NFD + NFE → 44.5% of GDP (June 2021)

Effects of these trends on Australia’s Balance of Payments

Risks of high CAD
● Growth of foreign liabilities - a CAD involves financial inflow through borrowing from o/s or
selling equity. Results in lenders becoming more reluctant to lend to or invest in Australia.
● ↑ servicing costs - High levels of foreign debt can result in foreign lenders demanding a “risk
premium” on loans, forcing up IRs.
● ↑ volatility for XRs - high CAD can undermine the confidence of o/s investors in the Australian
economy. Can reduce demand for AUD → depreciation of A$
● Constraint on future eco growth - high levels of eco growth involve an ↑ in imports which
deteriorates CAD. Therefore eco growth may have to be limited to make CAD sustainable. (BOP
constraint)
● More contractionary economic policy - governments may want to reduce a high CAD, using
tighter FP/MP
● Sudden loss in international investor confidence - countries with high CADs are more vulnerable
to shifts in investor sentiment. Loss of investor confidence due to unsustainable debt.
The IMF considers a CAD to be too high if it averages over 4% in the medium to long term or over 6% in
the short term.

Exchange rates

Measurement of relative exchange rates

A currency can be measured through:
● Bilateral XRs - measures the value of a unit of domestic currency relative to another currency.
● Trade Weighted Index (TWI) - measures the movements in the AUD against a basket of
currencies of Australia’s major trading partners (weighted according to Aus trade importance)
○ Includes 18 currencies, a more accurate measure of currency value.

Factors affecting the demand for and supply of Australian dollars

Demand for A$ - people who want to buy A$
 ● Size of financial flows into Australia from foreign investors who want to invest in Aus affected
by:
○ Level of Aus IRs relative to o/s IRs. Higher domestic IR is more attractive to foreigners.
○ Availability of investment opportunities in Australia. Need A$ to invest in Aus
● Expectations of future movements of the A$ - speculators may expect an appreciation leading to
an increase in demand currently which brings about an appreciation.
● The demand for Australian exports affected by:
○ Changes in commodity prices / ToT - can increase/decrease X value
○ IC of domestic exporters and Aus inflation rate relative to o/s countries -
○ Changes in global economic conditions - influences demand for X
○ Tastes/preferences of o/s consumers affects X demand.
Demand for currency is a derived demand - derived from the demand for Australian g/s and assets by
foreigners.
Supply for A$ - people who want to sell A$
● Level of financial flows out of Aus by Australian investors who want to invest o/s affected by:
○ Level of Aus IRs relative to o/s IRs. Higher o/s IR is more attractive for Aus investors
○ Availability of investment opportunities o/s. Sell A$ for other currency to invest o/s.
● Speculators - eg: may anticipate a depreciation and sell A$ thus increasing supply.
● Domestic demand for imports affected by:
○ Level of domestic income, more income = more demand for M, more supply of A$
○ Domestic inflation rate, IC of import-competing domestic firms. Eg: high domestic
inflation, low IC can make imports more attractive, thus increasing demand for M
○ Taste/preferences of domestic consumers + preference for g/s from o/s
Supply of currency is derived from the domestic demand for foreign g/s and assets.

Changes in exchange rates - appreciation/depreciation

Factors causing an appreciation/depreciation
Determination of exchange rates incl. fixed, flexible and managed rates
Fixed
In a fixed XR system, a country’s XR is fixed by the central bank (usually on a daily basis) to another
currency (eg: reserve currency like the $US).
China, Hong Kong SAR fixed their currency to the US$ until 2005.
Government intervention to fix exchange rate
● A devaluation of a currency occurs when there is deliberate action taken by a government to
decrease the value in the forex market.
● A revaluation of a currency occurs when there is deliberate action taken by a government to
increase the value in the forex market.
Advantages:
● Certainty - trade and investment less risky
● Absence of speculation - no speculation as investors know what the rate would be beforehand
● Constraint on gov policy - gov is unable to pursue extreme or irresponsible macroeconomic
policies as it would be unsustainable in the medium term and put pressure on forex reserves.
Disadvantages:
● Economy may be unable to respond to shocks - no mechanism for gov to act during BOP crises
● Problems with reserves - requires large foreign reserves, international liquidity problems
● Speculation - forex market believe there would be a change, run of speculation could occur.
● Deflation - countries with BOP deficits deflate their economies to correct deficits, this will
reduce the surpluses of other countries as well as deflating their own economies to restore the
surplus (creates deflationary bias)
Flexible/floating
Supply and demand determine XR.
The Australian government floated the AUD in 1983
Advantages:
● Protection from external shocks - free XRs can change in response to external shocks due to
demand and supply mechanisms (shock-absorber)
● Lack of policy constraints - government are free to pursue policies appropriate for the domestic
economy without worrying about XR policy
● Correction of BOP deficits - floating XR can depreciate to compensate for a BOP deficit. Restores
IC of exports (J-Curve theory)
● Government could pursue more independent and effective MP as BOP outcomes would not
impact on the money supply and cause MP to be less effective in controlling inflation.
Disadvantages:
● Instability - prone to large fluctuations in value. Investment/trade may be adversely affected.
Known as 'overshooting' where the currency changes in value by more than anticipated.
Derivatives, hedging options prevent this.
● No constraints on domestic policy - governments can pursue inappropriate domestic policies.
● Speculation - existence of speculation can lead to exchange rate changes which are unrelated to
trade patterns.
 Managed
Similar to fixed as the currency is pegged/adjusted daily to variations in major trading partners currency.
Australia’s XR was pegged to the UK pound in the 1950s (most of Aus trade was with the UK back then).
In the 1960s, it was pegged to the $US as it was the international reserve currency,
Between 1978 and 1983, a 'crawling peg' was used with the XR pegged to the TWI.
In this system, the central bank would set the XR daily, keeping it within a 'target band'. It would buy
and sell currency to ensure that the currency remained in the target area.

The influence of the RBA on exchange rates

Currency trader in the forex market
The RBA has reserves of foreign currencies and gold so it can affect the XR directly by intervening in the
forex market as a buyer or seller. (Dirtying the float)
Two main strategies:
● Targeting → when the RBA aims for a precise currency value, it would then buy/sell currencies
to achieve this target. This undermines the flexible XR system.
○ Problems: RBA’s currency reserves are very small and can only affect XRs for less than a
day. Prolonged selling of A$ can create inflationary pressures by increasing the money
supply.
● Smoothing and testing → the RBA 'smooths out' large fluctuations in the currency’s value.
○ XR is still largely determined by D/S but only has a small effect to ensure that the
economy does not destabilise.
Interest rates
RBA indirectly influences the XR through its MP activity
MP affects domestic IRs. If Australia’s IR is higher than the rest of the world we attract more foreign
investment. More K inflow = increased demand for A$ = appreciation.
RBA uses MP for inflation controlling purposes rather than for external stability.
Jawboning
Practice where officials try to affect the forex market outcomes through public statements.
Eg: officials can cause an appreciation by ‘talking up’ the economy. Predictions of strong eco growth can
encourage foreign investment in Australia, resulting in an appreciation.
Speculators in particular try to seize on hints/clues given by officials to act quickly in forex markets.

The effects of fluctuations in exchange rates on the Australian economy

Appreciation Depreciation

X X becomes relatively more expensive o/s X becomes relatively cheaper o/s

X volumes + revenue may ↓ X volumes/revenue ↑

M M becomes relatively more cheaper in Australia M becomes relatively more expensive in Australia
More spending on M + domestic firms may stop Less spending on M + more domestic firm production
producing goods that have import substitutes. + greater domestic market share.
KFA O/s asset price is reduced, easier for Australian
investors to purchase = ↑ in KFA outflow
Less debt, more equity
Becomes more expensive for foreign investors to
invest in Australia = ↓ KFA inflow
Foreign debt Reduce the A$ value of foreign debt borrowed in
foreign currency (valuation effect)
NPY account ↓ the interest servicing cost on foreign debt (due
to ↓ in NFL)
Reduces outflow on the NPY account
CAD ↓X, ↑M = ↓BOGS
↑NPY
CAD likely to worsen but offsetted by
improvement in NPY
Domestic investment May reduce domestic investment as capital
equipment is not in high demand due to lower
production output from domestic firms.
Eco growth AD = C + I + G + (X-M)
↓I, ↓X, ↑M = reduced eco growth rate
Inflation Demand pull inflation: ↓
↓ net X can slow AD causing supply surpluses.
Widespread price discounting = low inflation
Cost-push inflation: ↓
Costs of inputs for local producers become
cheaper thus easing cost push inflation.
Government policy Less spending on repaying public sector debt,
more funds available for other policy initiatives.
MP is not as necessary for lowering Inflation.
J CURVE
The J curve suggests that a depreciation in currency will
lead to the trade deficit to worsen before having positive
effects on trade. J shape.
O/s asset price becomes more expensive for
Australian investors to purchase = ↓ in KFA outflow
More debt, less equity
Becomes cheaper for foreign investors to invest in
Australia = ↑ KFA inflow
Increases the A$ value of foreign debt borrowed in
foreign currency.
↑ the interest servicing costs on foreign debt (due to
↑ in NFL) Increases outflow on the NPY account
↑X, ↓M = ↑BOGS
↓NPY
CAD is likely to improve but would be slowed by
worsening of NPY.
Can encourage an ↑ in domestic investment through
purchasing capital equipment for X-competing firms
to boost production (eg. mining)
AD = C + I + G + (X-M)
↑I, ↑X, ↓M = increased eco growth
Demand pull inflation: ↑
↑ net X can cause excessive demand and supply
shortages = ↑ demand pull inflation
Cost push inflation: ↑
Costs of inputs for local producers become expensive
(from o/s) thus adding to cost push inflation
More spending on repaying public sector debt due to
valuation effects → less funds available for other
policies.
More inflation → gov policy needs to be more
focussed on this
Free trade and protection
Australia’s policies regarding free trade + protection
Government’s main aims in reducing protection:
● Force domestic industries to become internationally competitive by exposing them to overseas
competition.
● Reallocating resources to industries which have a comparative advantage.
● Giving consumers/firms access to global g/s at lowest possible price through global integration.
● Promote structural change with a long term aim of encouraging efficient industries producing
goods for the global economy.
Government initiatives to reduce protection
● Gradual decline in average tariff level: 1969 = 36%, 2018 = 0.9%
● Historically, some manufacturing industries such as PMV or TCF were protected by high tariff
levels but these have been phased out by 2015.
● Australia is one of the least protectionist economies in the world + provides less subsidies
compared to North America, EU, East Asia.
● Instead of subsidies, the government provides export assistance through the Export Market
Development Grants (EMDG) scheme which reimburses export costs
○ The EMDG scheme was effective (2015 review). Each dollar had an economic benefit of
$1.50 to $7.
● Few ways where policy changes could liberalise trade (as per WTO, 2020):
○ Abolish tax on luxury cars (hurts exports from some countries)
○ Abolish certain foreign investment restrictions.
○ Less prolific use of anti-dumping measures.
Trade examples/policy
● 2016 - DCNS Group 25 year, $50 billion contract to build 12 submarines. Reason: its promise to
do the bulk of the manufacturing work in SA. Expected to add 30-40% to the total cost but
deepens domestic skill base for vessel maintenance.
● 2018 - Aus gov announced a telecommunications industry policy that banned Chinese telecom
giants, Huawei + ZTE from involvement in 5G mobile telecommunications network rollout.
Makes the rollout more expensive + lower quality.
● 2020 - Chinese government imposed tariffs on >80% on Aus exports on barley. Reason: anti-
dumping + anti-subsidy penalties (no evidence however), retaliation for Aus advocacy into China
inquiry of Covid-19 origins.

Australia’s multilateral + bilateral free trade agreements

List of FTAs for Australia
Bilateral: (12)
● ANZCERTA → NZ est 1983
● SAFTA → Singapore, est 2003
 ● TAFTA → Thailand, est 2005
● AUSFTA → USA, est 2005
● ACI-FTA → Chile, est 2009
● MAFTA → Malaysia, est 2013
● KAFTA → Korea, est 2014
● ChAFTA → China, est 2015
● JAEPA → Japan, est 2015
● IA-CEPA → Indonesia, est 2019
● A-HKFTA → Hong Kong, est 2020
● PAFTA → Peru, est 2020
Multilateral (3)
● APEC forum, est 1989
● AANZFTA → ASEAN + NZ, est 2010
● CPTPP → Aus + 19 other countries, est 2018

Agreements overview

Bilateral Agreement JAEPA ChAFTA

Agreement date July 8th 2014, implemented in Jan 2015 Nov 17th 2014, implemented Dec 2015

Economic importance to Aus: Trade Trade

- Trade • Japan is 3rd largest economy in the world • China is Aus largest trading partner
- investment • Aus 2nd largest trading partner due to large • important for Aus to establish trade agreement to
amounts of exports. maximise agricultural exports as China demand
• Rapid eco growth in Asian economies, essential increases.
for Aus continued prosperity.
Investment
Investment • China is Aus 8th largest source of investment
• Japan was the 4th largest source of investment
stock in Australia (ÅUD 241B in 2019)
• Japan is Aus 4th largest investment destination
(AUD 139B in 2019)

Main exports/imports Top 5 exports to Japan Top 5 exports to China

1. Natural Gas 1. Iron ores/concentrates
2. Coal 2. Natural gas
3. Iron ore + concentrates 3. Coal
4. Beef 4. Education-related travel
5. Copper ore + concentrates 5. Beef
Aus is 3rd largest source of Japan’s M Aus is 5th largest source of China’s M
Top 5 imports from Japan Top 5 imports from China
1. PMV 1. Telecom equipment + parts
2. Refined petroleum 2. Computers
3. Goods vehicles 3. Furniture, mattresses + cushions
4. Gold 4. Refined petroleum
5. Rubber tyres/treads/tubes 5. Toys, games, sporting goods.
China is 13th largest source of Aus’s M

Trade position (19-20 figures) Total X to Japan = 53 Billion AUD Total X to China = 151 Billion AUD

Investment activity with country
(2019 figures)
Main benefits of agreement
JAPAN
Agriculture
- beef, ↓ tariffs
- dairy ↓ tariffs, ↑ quotas
- horticulture, tariff elimination
Provides comp adv for Aus exporters
over major competitors such as USA
Resources, energy, manufacturing
Immediate tariff elimination
Phased tariff elimination (5-10yrs)
Duty free exports
Total M from Japan = 19 billion AUD
• Aus investment in Japan = AUD 139 Billion
• Japan investment in Aus = AUD 241 Billion
Agriculture
● Beef (comp adv for Aus)
- Frozen beef tariff facing Aus = 38.5% to 30.5% (in
2015) - phases down to 19.5% over 18yrs.
- Fresh beef tariff facing Aus = 38.5% to 32.5% (in
2015) - phases down to 23.5% over 15yrs.
- Aus can never be subjected to an auto 50% global
snapback tariff
● Dairy
- Immediate Aus-only duty free quotas for
Natural cheese for processing (4000T → 20
thousand T over 20yrs)
Shredding cheese (1000 → 5000 T ovr 10yrs)
- Immediate elimination of tariffs upto 8.5% on
casein, lactose, albumin & milk protein
concentrates.
- Preferential Aus-only quotas for ice cream,
yoghurt, grated cheese.
- Preferential access for blue veined cheese with no
volume restrictions.
● Horticulture
- Immediate elimination of tariffs on fresh veg, eg:
asparagus, carrots, potatoes, truffles.
- Immediate elimination of tariffs upto 6% on
macadamia nuts, almonds, pecans, hazelnuts +
phased elimination of 10% tariff on walnuts (5yrs)
and chestnuts (10yrs)
- Immediate elimination of tariffs on fresh mangoes,
dried grapes + range of berries.
Resources, energy, manufacturing
- Almost all resource, energy, manufacturing
exports entered Japan duty free (all by 2034)
- Immediate elimination of tariffs on coke (+ semi)
of coal, non-crude petroleum oils, aluminium
hydroxide & titanium dioxide
- Phased elimination of tariffs for unwrought nickel
and ferro-manganese
- Immediate elimination of tariffs on paints, key
plastic products and pearl jewelry.
- provides boost to Aus exporters (greater market
share in Jap)
Intellectual property + electronic commerce
- no custom duties on electronic transmissions
- cooperation on regulating spam, cyber-security,
Total M from China = 81 Billion AUD
Aus investment in China = AUD 85 billion
China investment in Aus = AUD 78 billion
Agriculture
● Dairy (2019 ones done)
Tariff eliminations:
- 15% tariff on infant formula (by 2019)
- 10-19% tariff on ice cream, lactose, casein (by 2019)
- 15% tariff on liquid milk (by 2024)
- 10-15% tariff on cheese, butter and yoghurt (2024)
- 10% tariff on milk powders (by 2026)
Aus faces discretionary safeguard on whole milk
powders ONLY.
● Hides, skin, leather (2019 ones done)
Tariff eliminations:
- 7% tariff on sheepskins (by 2019)
- 5-8.4% tariff on cow hides/skins (by 2022)
- 9% tariff on kangaroo hides/skins, 14% kangaroo
leather (by 2019)
- 5-15% tariff on a range of leather products (done)
● Wine/spirits by 2019
- Tariffs of 14-20% on Aus wine M eliminated
- Tariffs upto 65% on alcoholic beverages eliminated
Resources, energy, manufacturing
Elimination of a wide-range of tariffs on mining
products by 2019 or immediately:
- Tariff of 3% on coking coal ($8B market - 2017)
- Tariff of 6% on thermal coal ($3.8B - 2017)
- Tariff of 3% on unwrought zinc ($661M - 2017)
Elimination of a wide-range of tariffs on manufactured
goods by 2019 or immediately:
- 3-10% tariffs on pharmaceutical products
- Tariff of 20% on car parts, engines
- Tariff of 6.5-14% on plastic products
Closer collaboration between regulators, authorities,
relevant professional bodies on both sides to facilitate
traditional Chinese meds + complementary meds.
Services
Australian service providers gain significant access into
Chinese markets eg:
Aus firms can conduct construction projects in China,
Aus tourism companies operate hotels in China,
Aus subsidiaries can contract Chinese manufacturing
services to lower production costs.
Investment
Under ChAFTA, the Gov will continue to screen Chinese
investments at lower thresholds for agriculture, media,
telecommunications, and defence.

Main criticisms of agreement
Multilateral Agreements
When + who
Importance to Australia
Main benefits
telemarketing
- Aus innovators will enjoy protection for their
intellectual property in Japan.
Services
ASEAN-Aus-NZ FTA (AANZFTA)
Signed 2009, in force since 2010
Updated in 2015 to streamline certification
processes for the movement of goods through
AANZFTA countries.
Australia, NZ, ASEAN (10 countries): Brunei,
Darussalam, Cambodia, Indonesia, Laos, Malaysia,
Myanmar, the Philippines, Singapore, Thailand,
Vietnam
GDP: US$3.9 trillion (2015)
GDP per capita: US$5,948 (2015)
Population: 658.2 million (2015)
Trade with Aus: $120 bn (2015)
2019 estimated GDP of all ASEAN: 9.34 trillion USD
Aus total 2-way g/s trade with ASEAN has increased
by 16.4% since 2010. 2019 total trade = $122 bn
ASEAN accounts for 13.8% of Aus 2-way g/s trade
(2016)
Aus direct investment in ASEAN in 2019 accounted
for 5.5% of Aus total FDI abroad. (AUD 45 bn)
Trends in shifts to emerging sectors - clean energy,
financial services, professional services, health
Reflects shifts in ASEAN region with a 600m
China granted Aus a Renminbi quota of RMB 50B to
invest in Chinese securities to allow Aus institutions to
invest offshore Chinese currency in Chinese financial
products.
Investor State DIspute Settlement (ISDS)
A mechanism which prompts investor confidence and
resolves disputes between China and Aus.
Aus investors in China can use the ISDS mechanism to
protect their investments from discriminatory
treatment compared with Chinese domestic investors
Labour market
Higher skilled workforce for Aus greater geographical
mobility between Aus and China with more reasons for
access for Chinese citizens.
More workers are coming to Aus to fill occupations
related specifically to China such as martial arts,
traditional Chinese medicine practitioner, Mandarin
language tutors.
Regional Comprehensive Economic
Partnership (RCEP)
15 countries including Australia, China, Japan, NZ and
ASEAN countries + Indo-Pacific Region.
Signed November 2020 after 8 years of negotiation.
World’s largest trade deal, covers 30% of global GDP 30
% of world's exports.
Bigger than CP-TPP and inclusive of almost all Asian
regions (except India)
 population which is young + growing middle class
demand high quality services from Aus.

Issues/challenges Implementing rules of origin requirements

Delays in conducting mandated interviews
stipulated for non-tariff measures.
Limited use of the FTA as a regional agreement to
offer opportunities additional to bilateral FTAs.
Micro, Small + Medium Enterprises account for 98%
of business in Asia, and need to be incorporated in
the FTA framework to allow greater access in supply
chains.

The implications of Australia’s policies for individuals, firms and governments

Summary Table (reduced protection):
Individuals Firms Governments

Short Structural UE ↑ as inefficient firms close Import-competing industries go out of business Cutting tariffs will reduce gov revenue
Run (non-transferrable skills → LT UE)
↓tariffs provide ↓input costs for firms ↓protection → adverse political consequences
Consumers gain ↑access to ↑variety of
g/s at ↓prices, higher living standards ↑gov spending on structural adjustment programs
(long run as well)

Long run ↑job opportunities in internationally Efficient firms restructure operations to compete Sustainable eco growth → ↑revenue
competitive sectors on global stage

Example Low-skilled, production-line jobs in
s manufacturing sector → ↓ occupational
mobility
Detail
Clothing tariff cuts: 17.5% to 10% in 2010
Created unemployment of over 1500 jobs
Lower prices for consumers.
2021 Aus was the largest LNG exporter in
the world
New job opportunities in export
industries such as LNG.
(liquefied natural gas)
Individual firms in marginal import-competing
industries will shrink unless they improve
competitiveness.
Eg: Manufacturing of consumer electronics
ceased in Australia in 2017 → cannot compete
with low wage costs of China/Viet
Restructuring operations to stay in business or
raise profits. Eg; Consolidate process to one
plant, eliminate unprofitable product lines, more
exports, new tech, less staff etc.
Productivity Commission 2020: abolishing tariffs
Reduction in gov revenue - $1.5B collected by gov (19-20_
However, it's less than 1% of total revenue.
Assist with structural adjustment programs through
increased expenditure + UE benefits, retraining programs.
Eg: $155 mil Growth Fund to support transition away
from PMV industry when domestic car production ended
in 2017.
Political consequences because the costs of ↓protection
are easily visible: structural UE, factory closure, damage
to regional Aus.

Between 1985 and 2011: ↓54% in real

price for manufactures e.g., footwear,
electronics, furniture, motor vehicles.
Improved customer service due to
increased competition.
on production inputs → ↓$2B per year in input
costs. ↓
Makes it unpopular with communities
Winner/loser firms → changes composition of X
1990 - 2021 (Aus exports)
Minerals/metals: 33% → 58%
Rural: 23% → 10%
Services: 20% → 14%

Implications for Australia of protectionist policies of other countries and trading blocs
Agriculture
- EU trading bloc → CAP heavily subsidies farmers
- The USA, Japan, Korea, Switzerland all give subsidies to farmers.
 - ChAFTA → Aus wine X to China worth $1.1 bn in 2019-20. However, tariffs in 2020 have caused
major damage.
- Reducing agricultural protection in recent years has slowed down (reflecting protectionism
trend) due to taking advantage of WTO loopholes
Manufacturing/mining
- Mining and resources sector face very few barriers to trade due to high global demand.
Countries importing Aus energy do not have their own resources to produce alternatives
- Most industrialised economies have low manufacturing tariffs. Some Aussie exporters face non-
tariff barriers such as technical restrictions and licensing rules
Services
- Many natural barriers to services trade due to geography, transport costs, language, cultural,
local preferences rather than protectionism.
- 70% of Aus economy but only ¼ of our X.
- Government regulations restrict services, eg. banking licences, monopoly government providers,

Future of Aus Industry in the Global Economy

- Mining will likely remain Australia’s most important industry. 2020-21: mining/resources
earnings exceeded $200 billion
- Expansion of LNG exports, 36 $bn in 2020
- Agriculture faces a mixed outlook: wilder weather (climate change, disasters etc) + subsidy
effect o/s.
- Digital g/s. 4th largest X at $5 bn in 2018 (Export Council of Australia.)
- Environmental services: annual global investment in clean energy is now over US$280 billion,
taking total investment since 2004 over $3 trillion. (Global Trends in Renewable Energy
Investment Report 2020)

TOPIC 3: ECO OBJECTIVES CONFLICTS (TEST)

Economic Objectives

Objective Measured By? Why is this an objective Recent Issues/2022 goals

Economic Growth GDP per annum An ↑in EG helps keep UE low = Economic Recovery
Real GDP = Nom GDP x 100/CPI ↑ in Y and ↑material living standards Most severe economic downturn since 1930s
↑ G finances + capacity to provide services LT EG rate = 2.75%
 Growth rate = (Cur GDP - Prev GDP) x
Prev GDP
+ welfare
↑ non-material living standards → reduced
crime, mental health ↑
↑X, more consumer variety through M
Encourages I for future growth
ST high rebound EG rate (2022) - budget forecast: 21-22
→ 4.5%, 22-23 → 2.5%
Largest fiscal stimulus in history (-8% of GDP)
Lowest ever cash rate - 0.1%
Industry specific measures to support affected industries
(aviation, tourism, art etc)
Issues =
Covid variants
Global downturn - trade tensions, geopolitical risk, oil
prices (Rus-ukr)
Supply chain constraints (transport costs)
USA rising inflation
Domestic conditions - recent floods. (-0.2% impact on
march quarter)

↑ productivity and sustainable LT EG rate

Need measures to improve productivity and workforce
participation to address capacity constraints.
Need reforms in edu + training, competition, national
regulation, infrastructure.

Full Employment UE rate = (UE / labour force) x 100 ↑ in human resources = ↑ in productive Reducing UE
Labour force = UE + FT + PT capacity Prevent labour market scarring (LT UE)
Occurs at the Participation rate = (working age Closer to full production (PPF curve) Stimulus - JobKeeper
natural rate of UE popln / labour force) x 100 ↑ in Y = ↑ in living standards. UE to fall to 4.25% by end of 2022
(NAIRU) Job recovery thru tax cuts for L&MIT earners and
Elimination of business, I in new projects, labour market initiatives,
cyclical UE. JobTrainer, childcare support
Issues = migration restrictions,

Price Stability Inflation rate = (Cur Infl - Prev Infl) / Inflation results in a reduction in the
Prev Infl x 100 purchasing power of money = ↓ SOL
Low inflation within Underlying inflation removes one-off Results in distortion of resource allocation
target band (3-4%) events. Producers put up higher prices or reduce
labour costs = ↑UE
“Internal stability” Y redistribution from fixed Y and wage
earners to those receiving profits/dividends
↓ in real savings and real I
Loss of IC as X prices ↑
Maintain low + stable inflation
Inflation target of 2-3% - currently at 3.5% (March 22)
Priority in recovery for higher EG + lower UE ahead of
inflation.
Issues =
Underlying inflation has picked up to 3.25% (mid-22) →
2.75% in 2023 as microeconomic problems are resolved
and consumption patterns normalise. Will spike due to:
- Higher oil prices
- Fanned by labour shortages
- Demand in construction / durables
- Supply constraints - flood / transport costs
- Imported inflation from the US

External Stability As a % of GDP: Lowers external balances which results in Two phase approach to FP
- CAD less vulnerability to adverse developments Budget deficit used to support EG and job creation
- NFL in global financial markets Fiscal discipline once UE back to pre-crisis level + reduce
- NFD debt as %GDP (↓ crowding-out)
- TOT LT effects on EG, inflation, internal stability Government debt to GDP ratio → improve stability of
- XR public finances and investor confidence.
- IC Issues =
Rising commodity prices and favourable ToT
Budget deficits projected until 2061 due to ageing
popln, lower participation rate

Fair Income Lorenz curve: outward shift = Reducing the gap → ↑ in C and ↑ in utility Improving distribution of income/wealth
Distribution ↑inequality Reduces G spending on welfare in LT LT objective:
Gini coefficient: Decreases tax burden on households + G Policy response - education funding reforms, ↑ in age
Area A / (Area A + Area B) fiscal position pensions, NDIS
Where GC approaches 1, inequality Address economic costs of poverty + LT ST-policy - to minimise effects on vulnerable groups due
↑ social negatives (alienation, poverty trap) to Covid thru JobKeeper, double UE benefit, access to
Super funds.
21-22 budget ($bn) - 3.4 for women’s safety, 18 for aged
care
 Issue = access to super → depletes savings of lower Y
earners - ↑ inequality.

Environmental Various measurements eg:
Sustainability. - Gas emissions
- Loss of biodiversity
- Loss of habitat
- Deterioration of common
access goods
- Deforestation
Need to minimise environmental costs of
EG in LT
Minimise negative externalities, climate
change economic impacts .
Environmental damage leads to loss of life +
potentially reducing production output with
fewer resources.
Weakens G finances (↓T, ↑G on repairs,
infrastructure, assistance etc)
Promoting environmental sustainability
LT EG dependent on overcoming environmental
challenges (climate change, water shortages, diversity)
ST trade-off with EG and inflation
Committed to net-0 emissions by 2030 - using tech not
taxes.
Issues =
Phase down, not out approach for coal/methane at
COP26
Removal of Biodiversity Conservation Act
Covid recovery stimulus → no environmental focus
Plans for $600m gas fired power station for carbon
capture.

Economic Conflicts

Conflicting Objectives Explanation of the Conflict

1. UE and inflation
Full employment + price stability The Phillips Curve - governments face a trade off b/w lower UE and
inflation in the short to medium term.

Stronger AD caused job growth and reduces UE but puts upward

pressure on prices (higher labour costs + shift in demand)

Weaker AD forces firms to restrain price rises but that can lead to an
increase in UE (as firms need less labour)

A 2015 RBA research paper concluded that inflation targeting had

resulted in a “flatter” Phillips Curve → less trade-off b/w UE and
inflation.

Since 1993, Australia has had an explicit inflation target of 2-3% → priority over low UE.

2. EG and external balance Strong EG often results in a deterioration in the CA of the BOP. Higher EG is usually associated with increases in C
and I which will cause the M volume to rise. This is known as the BOP constraint → the limitation on the growth
rate because of the impact of high growth on the CAD.

3. EG and environmental
sustainability
Pursuit of EG can come at the cost of environmental damage. Eg. a government approves mining projects to
boost I and X but disregards their environmental effects → could have faster EG but can damage air quality,
cause lung cancer or water pollution and affect industries such as tourism.
A government that attempts to reduce Australia’s carbon emissions may impose costs on households and firms
that slow down EG (through lower C from lower purchasing power)

4. EG and income inequality Economic reforms can have negative social effects. G spending on infrastructure can lead to a reliance on toll
roads or user-pay charges for public services which can disadvantage low-income earners as it becomes a higher
proportion of their income compared to high-Y earners.