Econ 1002 : Australia In Assessment Answers

Terms of Trade
Facts and figures
Which area are increasing/decreasing
Between Australia and China, Japan, UK, US, Germany, India, Indonesia, Korea.
Factors affecting this trade

To do this, you will need to research at least 5 to 10 sources /articles for your paper. Simply cut and paste from Google is not acceptable. Academic research is the key to get good marks with proper references .

The Status of the Terms of Trade between Australia and other Economies

Introduction: 

There exists the problem of scarcity of resources for all nations in the world. There is no single country that can be said to have all the necessary resources necessary for it to produce all goods that are needed in its economy (McDonald, 2017). This thus creates a need for trading among countries. What the economies does is to produce a surplus of what they can produce more efficiently and trade it with other countries for other goods and services that they may need. Trading among countries is dated many 1000 years ago. The globalization of world economies have led to improvements in the industrialization of nations and has played an important part in promoting international trade. International trade involves importation of foreign goods and the exportation of domestic goods. There are many reason as to why nations make a decision to import certain goods or services. One is that some imports are cheaper than local goods, this helps in lowering the prices for domestic goods thus improving consumers’ standards of living. Other imports may be of better quality. Others may be easily available in comparison to local goods. In some instances, a good may be completely unavailable. An example is oil in Japan, Japan imports all the oil it consumes, and it’s one of the largest oil consumer nations.

Australia is one of the nation that greatly embraces international trading. This economy is both a great exporter and importer. Terms of trade is a ratio of the changes in exports index prices to changes in imports index prices. The terms of trade for an economy is said to be increasing if the increase in exports is greater than the change in imports. Terms of trade = (Index of export prices / Index of import prices *100). The result is thus as a percentage such that if above 100%, the terms are improving, and if below, the terms are worsening (Economicsonline.co.uk, 2018). The terms are improving if for every unit of export sold, more units of imports can be bought. This paper will analyze how Australia has performed in terms of trade with countries like; China, US, UK, Japan, Indonesia, Korea, India and Germany. Factors affecting this trade will also be discussed. The data used in the analysis is obtained from the Australian Department of Foreign Affairs and Trade (Dfat.gov.au, 2018).

Terms of Trade between Australia and China

The terms of trade between Australia and China are increasing given that the growth on export from the year 2016 to 2017 had been greater than the growth on imports during the same period. The growth on exports was 21.8% and the growth on imports was 8.4%. When these two percentage increments are divided and the result multiplied by 100 the result is 12.4% improvement in terms of trade. The article “China trade with Australia soars, along with war of words” by (Needham, 2018) confirms that there has actually been a significant growth in the terms of trade between these two economies relying on the records made in 2017. In fact he noted that there was a 23% increase with Chinese importation from Australia growing by 37%.

The major factor contributing to this trade growth in the increment in the demand of Australian resources by China (Holmes, 2017). Needham also noted that the existence of free trade agreement between these two economies resulted in the increased benefits to Australia; this information was provided by Huang Songping the spokesman of General Administration of Customs. Myers (2016) and Hurst (2015) noted that the trade agreements was put in place in December 2015 with 86% of Australian exports entering China duty free. In overall, trade between the two economies is 14% of China’s foreign trade in general. Amadeo (2018) pointed out that terms of trade determines the efficiency of a country in trading with the other. Before this 14% growth in China-Australia foreign trade, there had been a decline for two consecutive years.

The major factors driving this growth in trade are; Australia’s supply of natural gas and Iron ore is huge, so the growth in demand for these products by china by 27% and 5% respectively raise the overall imports. Huang said that owing to the environment impacts of the usage of coal, China is trying to shift from consuming coal to gas; this has resulted in increased demand for liquefied natural gas. Again the Australian suppliers of iron ore has benefited much from the rise in average import price by 28.6%. The enforcement of United Nations Security Council sanctions by China may have contributed to increased trade with Australia since it resulted in a fall in the imports that China made from North Korea; the fall was 81.6% (Needham, 2018).

According to Gruen (2017), from Australia there has been a big improvement in the prices of mineral commodities exported; the rising development and urbanization of China has resulted in an increased demand which has resulted in rising prices. Thirlwell (2016) noted that China is undergoing an economic transition to become more market-based and this has had direct and indirect impacts on terms of trade. The direct impacts are by its increased demand for imports and the indirect impacts is on the rising price of imports. The economic ties between the two countries has promoted their trading terms; China considers Australia to be a popular position for its direct investment (Myers, 2016).

Terms of Trade between Australia and Japan

The terms of trade between Australia and Japan is increasing given that the growth on export from the year 2016 to 2017 had been greater than the growth on imports during the same period. The growth on exports was 24.0% and the growth on imports was 7.4%. When these two percentage increments are divided and the result multiplied by 100 the result is 15.5% improvement in terms of trade. Trade between Australia and Japan was enhance by the establishment of free trade agreement that led to elimination of bilateral tariffs between the two (Siriwardana, 2015). The article “Australia-Japan trade relations: From mines to the lab and back” by Ciobo (2018) explains that Australia and Japan economic ties is dated back to 1957 when they had their commerce agreement.

Currently, Japan is the second largest Australian export destination market, with China being the leading destination. The major drivers of the trade between the two is that there has been a mutual trust in their trade relationship which has resulted in Japan increasing its capital investment in Australia thereby promoting its accelerated growth. In 2014, the two economies signed the Japan-Australia Economic Partnership Agreement (Japan.embassy.gov.au, 2018). In 2018 the new report “Japanese Investment in Australia - a trusted partnership’ helped in opening Australian regional vast areas such as Pilbara iron ore, the Bowen Basin coal and the North-West Shelf gas (Ciobo, 2018). Japanese banks and large financial institutions plays an important role in the Australian financial service sector.

Terms of Trade between Australia and UK

The terms of trade between Australia and UK is decreasing given that the growth on export from the year 2016 to 2017 had been lower than the growth on imports during the same period. The growth on exports was -39.8% and the growth on imports was -3.5%. When these two percentage increments are divided and the result multiplied by 100 the result is -37.6% worsening in terms of trade. The economic, investment and trade relationship between the two is extensive; the two has a bilateral relationship (DFAT, 2018). The UK has a greater potential for expanding its trading relationship with Australia. However, the two lacks a trading agreement. This explains why both the exports from Australia to UK has fallen significantly and also the imports from UK to Australia.

The Brexit issue is the major factor behind the sluggish trade between UK and Australia. It is responsible for slowing down the negotiation of trading agreement between the two. The article “Australia’s Trade Strategy in Europe: UK or the Rest?” by (Lieto and Treisman, 2017) explain that Brexit is expected to bring negative political implications to the Australian economy and thus the efforts of trade negotiations have been limited. This has been intensified by the fear that trade negotiations with the UK might allow the inflow of workers to Australia of which the agreement will lower the ability of Australia to have control (Crowe, 2018).

Terms of Trade between Australia and US

The terms of trade between Australia and US is decreasing given that the growth on export from the year 2016 to 2017 had been lower than the growth on imports during the same period. The growth on exports was -1.3% and the growth on imports was 5.2%. When these two percentage increments are divided and the result multiplied by 100 the result is -6.2% worsening in terms of trade. According to Makin (2018), the US president levied a tariff on imported steel and aluminium, 25% and 10% respectively. The article “Australia could be a winner in China-US trade battle” by (Reynolds, 2018) explained that Australia’s gain on the trade wars between US and China is great.

Reynolds noted after the US tariff imposition on steel and aluminium, China reacted by imposing a 25% tariff on US’s 128 agricultural products. This resulted in Australia benefiting from its ability to export more affordable agricultural products to China. There exist a free trade agreement that protects the major products the US trades with Australia, this explains why the US- Australian trade is not impacted by the imposed tariff. Everything imported from US to Australia is tariff free and this explains the increment in imports.

Terms of Trade between Australia and Germany

The terms of trade between Australia and UK is decreasing given that the growth on export from the year 2016 to 2017 had been lower than the growth on imports during the same period. The growth on exports was -0.5% and the growth on imports was 1.5%. When these two percentage increments are divided and the result multiplied by 100 the result is -2% worsening in terms of trade. There has been a reduction on invested capital in Germany for the exporters which has resulted on great shifts for several major companies. German businesses cut producer prices in order to boost exports as per the European commission (Mauldin, 2016). In January 2016, there was a 3% decline in producer prices, followed by a 4.2% decrease in February. Even though Germany is boosting exports, the revenue on businesses in not improving significantly which exposes it to production risks.

Terms of Trade between Australia and India

The terms of trade between Australia and Japan is increasing given that the growth on export from the year 2016 to 2017 had been greater than the growth on imports during the same period. The growth on exports was 38.0% and the growth on imports was 17%. When these two percentage increments are divided and the result multiplied by 100 the result is 17.9% improvement in terms of trade. The trade between these two economies has been doing well and they have been negotiating on free trade agreement. The Indian and Australian negotiation for FTA started in 2011 (Bennett and Coleman, 2018). Since then, the two nations has reached some level of trade agreements which has boosted their trade. Finally in June 2018, a balanced FTA between the two was achieved and a great boost to their trading level.

Terms of Trade between Australia and Indonesia

The terms of trade between Australia and Japan is increasing given that the growth on export from the year 2016 to 2017 had been greater than the growth on imports during the same period. The growth on exports was 16.7% and the growth on imports was -14.2%. When these two percentage increments are divided and the result multiplied by 100 the result is 36.0% improvement in terms of trade. Even though Australia has Indonesian as an important market destination for its wheat, there has been a decline on the imports it receives from Indonesia. According to Haan (2017), the reduction in commodity export by Indonesia to Australia has resulted in a fall in bilateral trade. He also noted that the poor general business in Indonesia has contributed to low Australian investment.

Terms of Trade between Australia and Korea

The terms of trade between Australia and Korea is decreasing given that the growth on export from the year 2016 to 2017 had been lower than the growth on imports during the same period. The growth on exports was 16.3% and the growth on imports was 181.3%. When these two percentage increments are divided and the result multiplied by 100 the result is -58.7% worsening in terms of trade. In the current period, Korea has grown to be a major exporter; it grew by 20% in 2017 (Hktdc.com, 2018). Having a good trade relationship with Australia resulted in its export to Australia almost doubling during the same period. The FTA between the two was signed in December 2014 (Clark, 2014).

Conclusion:

The research has shown that Australian trade relationship with most of these countries is well developed. The only two countries where trade relationship is not much developed is UK and Indonesia. While there exist some political uncertainty between UK and Australia, there is no clear issue indicating why the relationship with Indonesia still remain under developed. However, there are expectations that the two economies are looking forward for an FTA. FTAs have been noted to be the greatest boost on international trading between all these economies. Whereas there has been a reduction of demand for some Australian exports such as coal in China, the impact is neutralized by an increase in demand for other export commodities such as liquefied natural gas by China. The other contributing factor to improvement in terms of trade for Australia has been contributed by the rising prices of its export commodities.

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