Economics Assignment: Research Paper On Trade Policy Of Australia
Question
Task: Write a research report on economics assignment on Trade policy- comment on Australia’s trade policy (both positive and negative impacts on Australian economy, industries and employment).
Answer
Introduction
As per the report by World Bank, Trade is the central key to tackle global economic issue. Trade has the capability to eradicate poverty within an economy or reduce its extent(Desai and Rudra, 2019). This realization of trade is not a phenomenon rather several economists have pointed out how trade can bring about massive changes within an economy and its impactsare not limited within the geographical boundaries of the economies its impact rather can be observed in the global economy. Studies upon trade have shown that countries those who were from the initial periods open to internationaltrade have generated higher growth rate as compared to countries who opened itself gradually to trading patterns (Han, 2018) (Kollmann, 2019). Trade along with the generation of growth also liable for the innovation process upliftmentand in the improvements of the productivity level within the economy.Thus,trade help the economy’s both at the macro level and at the micro level.
Countries with labour abundancy are identified as labour-intensive economy while countries with capital abundancy are identified as capital-intensive economy (Tridico, 2018).Countriesthus by opting trading process may reap benefits from the trading activities by providingaffordable goods and services to its population. Trading activities were prevalent from the initial periods howeveralong with the globalization processtrading changed its outlook and new opportunities created for both the developing and the developed nations. Along with the globalization process thus each country devised their own trade policy’s which mostly designed to implement internal structural changes within the countries.
In this report study Australian economy is considered with respect to the impact of the trade policy’s effects upon it. This study will evaluate the trade policy of Australia and itspositive and negative impacts upon the Australian economy. Study will mainly shed light upon the economic growth generated within the Australian after the incorporation of the trade policy. Along with the idea about economic growth of Australia study will shed light upon the impact of trade policy upon the industries of the country. Lastly study will discuss about the employment sectors influences due to trade policy of the economy.
Discussion
Australia is one such country that over the past three decades have generated a positive economic growth within it. As per OECD,Australia is the only country that has not entered recessionary period in the last 26 years and not only this Australia also shown generation of highest growth rates(Nursey-Bray and Palmer, 2018). Hence due to this growth ratesAustralia at the global scale holds the position of the 13th largest economy. Australianeconomy over the last years has witnessed several changes within it. Globalization however, the most significant process that brought about the massivechanges within the economy. Globalization process is concern about the economic interdependence among the countries,the process mainly has played the role catalyst to fuel the movement of tradebetween countries and not only trading process globalization also paved path for the investment, technology and labour movements between countries. Hence due to globalizationa massive change in the globaloutlook took place.
Impact of trade policy upon Australian economy
Australian economy from its initial years of globalization took the process very seriously and this aggressive nature of the Australianeconomy thus moved it towards the path of sustainability. Australia is recognized as one of the developed nations where all the macroeconomic indicators are placed at right position. Australian economy from time to time revamped its trade policies to support the economy financially and safeguard it against the goods coming its way. The unilateral trade liberalization policies were launched by the Australian economy from the initial period of 1990s and theincorporation of the measures resulted in generation high economic growth within the economy along with the higher productivity level and lower unemployment level(Ward et al., 2016).From the below figure 1.1 upon GDP growth rate it can be assessed that Australian economy over the last decades since after 1990s only witnessed negative growth rate in the years of 1991 and the growth rate was -0.397231659. However, after 1991, Australian economy took its pace and gradually gained its momentum at the world market and witnessed highest economic growth. From the figure 1.1 thus it is evident that initially the generation of growth within the economy failed to witness positivity however, with revamp of the trade policies over time the growth rate achieved by the economy witnessed positive number and even in some years such as 1998 even generated growth rate of 5.073585258.
Figure 1.1 :GDP growth (annual %)
(Source: Worldbank, 2020)
Australia as part of its economic liberalization policy incorporated economic reforms such as the tariffreform, deregulation of some sectors of the economy, privatization of several sectors and reduction in subsidies. All these economic reforms helped Australia to achieve competitive edge within its production process and this stimulated trading activities within the economy, In the initial period of economic liberalization what was observed within the Australian economy was country did not alter the policies of economic liberalization with respect to some of its sectors such as textiles and clothing and the automotive sector. However, due to protection of thesesectors economy could not achieve its full potentiality. As opined by the study of Pandya and Sisombat (2017), due to unnecessary regulations and rigidities in some of the sectorsAustralian economy even after incorporation of economic liberalization within it could not reap maximum benefits out of it. Thus, positive impacts of trade policy are generation of high growth, achievement of competitive edge while negative impact is less capability of reaping benefits from trading activities.
Impact of trade policy upon the industries of Australia
In 1998 Australia in its Uruguay round commitments changed all the quantitative restrictions upon agricultural sector of the economy and imposed quotas to protect the sector of the economy. As opined by the study of Voon (2017), Australia imposed economic liberalization measures within its economy to attract foreign direct investments into it. Australian economy is one of the economies that after 1991 never generated negative economic growth. This feature of the economy thus been able to attract huge FDI inflow into it. Further the Australiangovernment’s trade policies also supported the FDI inflow within the economy. Over the pastyears FDI inflow within the Australian economy have been strong because of its energy sector. Australia as per the study of Gasanova, Medvedev and Komotskiy (2017), is placed among topeconomy’s where FDI inflow is very high. Australia is one of the most open economy to foreign direct investments among all the OECD member states and thisopennessraised due to economic liberalization, stability, strongecnomidgrowthrates and transparency in the legal system of the economy.
Figure 1.2: Australia Foreign direct investment, net inflows
(Source: Foreign investment statistics, 2020)
Australia trade policy over the years have made the businessenvironment of the country a favourable one for the global investors and by investing in the business environment companies are undertaking conducive business activities.The main investing countries that invested in Australian economy are United States, Belgium, United Kingdom, Hong Kong, Japan, China, France, Netherlands, Singapore and France. All these countries mainly invested in the mining sector of the economy. However, in the manufacturing sector, financial sector, real estate sector and trade sector also FDI inflow can be observed. TraditionalAustralian resources sector was the one which attracted foreigninvestors investments however, with the changing businessenvironment now service sector of the economy is attractinginvestorstowards it.
Figure 1.3: Foreign direct investments in Australian industries (2019)
(Source: Foreign investment statistics, 2020)
From the above figure 1.3 it can be observed that the FDI inflow mainly takes place within the mining sector of the economy. A heavy amount of FDI inflow witnessed by the economy because series of changes have been implemented in the foreign investment framework of the country. As per the study of Treisman and Di Lieto (2018), it has been stated that Australia has involved itself in mega trade agreements such as Regional Comprehensive Economic Partnership and Comprehensive and Progressive Agreement for Trans-Pacific Partnershipto support the financial aspects of the economy by increasing FDI inflow within it. Australian government have incorporated new legalisations in its FDI inflows and further have undertaken flexible approach and the core reason behind adoption of such approach is to discard rigid laws that acts as hindrance behind occurrence of valuable investments.
From 1993 to 1998 tariff fall in Australia is observed to be 0.9 percent to 0.3 percent particularly in the agricultural sector, in the mining sector the tariff reduction took place from 1.1 per cent to 0.6 percent and in the manufacturing sector the tariff fall observed to fall from 11.1 per cent to 6.0 percent. This tariff reduction laid in the trade policy resulted in growth of the Australian economy at the global scale becausetraffic fall resulted in price fall and made the Australian products in demand in the global markets. Higher tariff although helps the domestic producers to gain from the internationaltrade along with providing higher revenue to the governmental body however, fall of it makes the products of the economy to face great demand of it. In the clothing and textile sector and in the automotive sector Australia however, did not reduced its tariff rate and this decision was took to protect these sectors of the economy.
Australian economy is known for its agricultural sector. Production of primary ranges of crops, milks, fruits and many more is liable for significant share of contribution to the GDP of the country (Anderson, 2018). Australia export bundle shows that its majorly mastered itself in the export of beef, wheat, wine, wool lamb and barley. In Australialeastsupport is provided to the agricultural sector andthishas resulted in several issue within the sector of the economy. Agricultural sector is one of the top contributing sectors but yet this sector receives minimum aid from the governmental body. Tarif and non-tariffassistances towards the agricultural sector of the economy thus is low.
Figure1.4: Total support for agricultural sectors
(Source: Australian Farm Institute, 2020)
Crop production by the Australian economy showsthat economy after providing food to its local population opts to sale at the international level. This activity undertaken by the Australian economy indicates the functioning of the Linder’s theory of representation demand model where the pattern of trade is determined from the overlapping of demand process. As per the theory the production of the items mainly undertaken for the local market and further the surplus items are served at the international market as part of the exporting activities. The demand generated at the global market as per the theory is also considered to be essential by the economy. In the current context this theory in practice thus can be observed where wide ranges of crop production are seen to serve both the local and the global markets. The impact of trade policies can be heavily observed in the Australian diary industry. Diary industry of Australia is deregulated one and both the import and export activities are observed in this industry(Byrne et al., 2016). Employment generation is high in the dairy industry of Australia and this is because this industry requires individuals for several diary processing steps for the diary products.
From the initial years of globalization Australian economy observed to be significant user of the anti-dumping measures. Imports percentage of the economy was affected by the anti-dumping policies and for this reason countervailing actions increased from 1993 to 1996. Anti-dumping policies are introduced by the Australian economy in order to relief the companies who are hurt by the overseas goods sold at lower process issues.
The service sector of the economy which is liable for 70 percent contribution towards the GDP of the country also witnessed several changes due to trade policy. One of the notable changes in the services sectorof the Australian economy is the banking sector revamp (Nguyen and La Cava, 2020). Due toglobalization several banks entered the Australian market and even operated well and reaped maximum profits put of it. However, with growing competition levels the domestic and as well as the international banks faced huge competition and failed to sustain in the market and this resulted in banking sector evolution within the economy. To support the sector and to safeguard the economy in 1997 as part of economic reform Australia’sgovernment announced merge between four largest banks of the economy and the two insurance companies.
During this period of 1997, it can also be observed that in the telecommunications sector of the economy does not face any sort of restrictions and further it can be seen that foreign equity restrictions were removed with respect to the second basic provider of the telecommunications services. Trade liberalization in the service sector of the economy have shown that economy opened up to new utilities such as electricity and gas services. Thus, from the outlook of the major sectors of the economy it can be assessed that trade reforms were undertaken by the Australianeconomy toassure that the economy faces economic growth in the long run and all the macroeconomic indicators are positioned well. Negative impacts of trade policy can be observed significantly upon the agricultural industry where low aid is provided while positive impacts observed can be listed as heavy FDI inflow, higher employment generation within industries and opening up of new utilities.
Impact of trade policy upon budget of the economy
Despite of higher economic growth generated by the country Australia from initial years of trading suffering from current account balance deficit issue. From the study of Bonizzi, Kaltenbrunner and Powell (2020), it can be found that emerging economies often witness surplus with respect to current account balance however developednationsfaces a trend within it which indicates a high deficit in budgets. A current account deficit may arise mainly when importing goods and services are larger in extent as compared to exporting goods and services. In Australia although FDI inflow is higher as compared to outflow of it but the importing products extent is higher than the exporting items and the has resulted Australia to face higher budget deficit.
Figure 1.5:Australia Current account balance (BoP, current US$)
(Source: World bank, 2020)
From the above figure it can be stated that Australian economy from initial years is facing huge deficit with respect to the current account balance. Recently Australian government incorporated policy of reducing budget deficit. From the above figure hence, it is evident why in 2019 Australian economy generated surplus within it and the amount of surplus was 7121606894. Recent enaction of the competition policy showsa review of all legislations required that are implemented by the supreme body. Trade reforms along with the competition policy and deregulation policy thus has increasedthe ability of the Australian economy to compete at the global market and pose threats to its competitors. Since 1994 particularly after trade policy revamp Australian economy took its peak in economic growth and further economy reflected implementation of low inflation levels (Fenna, 2016). Inflation rate within Australia as compared to other countries is high however, with incorporation of trade policy and changes of its government over the years have been able to reduce the extent of the inflation rate prevailing within the country. Hence a positive impact can be observed due to trade policy changes.
Figure 1.6 : Inflation rate of Australia
(Source: Worldbank, 2020)
After 1994 Australian GDP began to fall due to growing budget deficits. However, in 1998 economy generated highest economic growth. Trade is thus an integral part of the Australian economy, here country has developed numerousnumbers of free trade agreements with other countries to support the exporting and importing activities. Thus, trade policy over the year have supported Australian economy and helped it to achieveits objectives. Negative impact of trade policy is the existence of large deficit in Australian current account balance while the positive impacts is fall of inflation rate and upliftment in the capability of the economy to compete at global market.
Impact of trade policy upon the employment rate of the country
Impact of the trade policy upon the unemployment rate of the Australian economy shows that over the years unemployment rate prevailing within the economy has reduced. This reduction can be evident if figure 1.7 is considered which shows that gradually unemployment rate has reduced. The changes in trade policy from time to time have created its impacts upon the different industries of the country and these changes which were basically undertaken to uplift performance of the different industry have directly created their impact upon the unemployment rate within the country. From the below figure 1.7 it is evident that unemployment rate mainly reduced after 1990s the years which marked the onset of the globalization process.
Figure 1.7 : Unemployment rate of Australia
(Source: Worldbank, 2020)
Positive impact of trade policy is the generation of employment in different sectors of the economy. Negative impact of trade policy is the generation of employment in certain sectors only.
Conclusion
From the above analysis regarding the trade policy of Australiathus it can be assessed that over the years particularly after the 1990s Australian economy engaged itself heavily with the trading activities and this engagement of the country urged the country to revamp its policy time to time. The decision of devising the trade policy by the Australian government simply reflects the factshow country from the initial periods of globalization process was safeguarded. The positive impactsof the trade policy show that the strong economic growth was generated and further this strong economic growth helped the country to occupy the title of industrialized country. However, among the negative impacts it can be observed that due to trade policy some of the sectors have suffered and still now is suffering. Among the suffering sectors agricultural sector is the most significant one because here a minimal support is provided by the governmental body. The anti-dumping measures of the trade policy further deteriorated the condition of the sector. From the industries positive aspect that evolved due totrade policy if considered then it can be said that trade policy resulted in the heavy flow of FDI within Australian economy. From the study finally if the employment aspects are considered then it can be observed that due to trade policy of Australia the employment of the country uplifted and the unemployment issues that were prevailing within it were escaped to large extent. Progress achieved by different industries directly impacts the employment rate of the country.
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