AUSTRALIAN TRADE POLICY BRIEF
By,
Karen Pavlisko
Keith Hummel
Tara Rose
Group Project
Pavlisko, Rose, Hummel
Introduction:
As the whole world moves towards further globalization, so does Australia. This
large island country and continent located in the southern hemisphere is taking on a
continually larger role in the world economy. Due to the current increased stature of the
G20 as compared to the G-8, Australia has newly increased power of influence in world
trade policies than it did just a few years prior.
The purpose of this paper will be to show how current worldwide economic issues
affect the policy decisions made by the Australian government relating to its foreign
trade, and how decreased trade barriers affect the Australian economy, welfare, and
growth. From there, suggestions to promote openness in economic policies will be made,
such as further free trade between Australia and China. However, we feel this change
should be gradual, so as to not shock the economy.
History of Trade Flows and Policy:
The institutions that are responsible for the tariff policies of Australia are the
Tariff Board, the Industries Assistance Commission and the Industry Commission. In
1921, the Tariff Board Act 1921-1966 was passed. This act created the Tariff Board
whose main function is to help the Australian government make decisions that deal with
trade factors such as duties and subsidies. During the 1930’s, Australia was hit hard by
the depression. In order to protect their industries, Australia put trade barriers in the form
of tariffs into effect. The Scullin Tariffs were passed in order to protect the home
economy and jobs. Although Australia had tariffs in place it was among the first
countries to sign the General Agreement on Tariffs and Trade (GATT) in January of 1947
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to encourage economic recovery. The main objective of GATT was the reduction of
barriers to international trade (A Brief History).
In the 1950’s, Australia had very stiff import quotas in order to help with a
balance of payments problem (A Success Global Trader, 2009). Australian policy in the
1960’s allowed it to begin opening its doors in the trade of primary goods, yet still tariffmanufactured goods. This included tariff and nontariff trade barriers (such as quotas and
tariff rate quotas) on manufactured goods. The reasoning behind this policy decision was
to allow Australian industries producing manufactured goods to develop. However, two
free trade agreements made this policy rather difficult. These agreements were GATT
and the United Kingdom-Australia Free Trade Agreement (Snape, 1998).
In 1989, Australia was one of the founding members of the Asia-Pacific
Economic Cooperation forum. This forum aimed for free trade in the Asia-Pacific area.
Beginning in the 1970’s, Australia shifted to a more global outlook with freer trade
policies. Australia started to drop their tariff rates causing all tariffs to fall to 5% or
below by 1996, with very few exceptions. The only items that did not fall below 5%
were textiles, footwear, and clothing (A Success Global Trader, 2009).
Australia joined the World Trade Organization January 1st, 1995. Due to the
Uruguay Round commitments, Australia had to change many of its import quotas to
tariffs, especially in the agricultural market; but they were able to implement a quarantine
program. This quarantine program restricted trade and imports of many different food
and agricultural products in an attempt to protect the people from different health risks
and conditions from tainted imports.
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According to the World Trade Organization, “The unilateral trade liberalization
measures and internal structural reforms launched by Australia in the early 1990s have
led to higher rates of growth of GDP and productivity, and to lower unemployment
(WTO).” Tariff reform, subsidy reduction, and deregulation and privatization of many
services, as forms of economic reform have made Australian business more competitive
and helped the growth of exports (Australia should push ahead, 1998). According to
Australia’s Department of Foreign Affairs and Trade, the average tariff rate in 1988 was
approximately 15% while the average tariff rate today is around 3%.
Current Trade Patterns and Partners:
Australia is amongst the top contemporary countries for economic openness, i.e.
free trade, being number 44 overall. However, the European Union as a whole is ranked
just above Australia for openness, and this number includes every member of EU. If the
European Union is considered as one economic entity then Australia’s standing in world
openness would be 18th. Leading the way in openness is Hong Kong (The Heritage
Foundation, 2009). The Heritage Foundation has a ranking system based on a scale from
0 to 100 (100 being complete free trade and openness and 0 being complete isolationism
or no trade). According to this scale Australia ranks at 84.8 trade freedom. It could have
a score of 94.8; however, 10 points were deducted for nontariff trade barriers.
Interestingly, the world average on this scale is 73.2, according to this organization,
putting Australia well above the average for world openness. The average weighted tariff
rate in Australia was only 2.6% as of 2006.
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Australia is highly dependent on its exports (which make up a huge portion of
GDP) (Australia's Trade Fast Facts, 2003). Its top ten exporting partners in order from
highest to lowest are Japan, China, USA, South Korea, the United Kingdom, New
Zealand, India, Singapore, Taiwan, and Thailand. These trading partners make up 70%
of Australia’s total exports of goods and services. The major exports from Australia
include coal, iron ore, gold, aluminum, meat, wheat, oil, and natural gas (in order from
most exported to least exported) (Workman, 2007). Total exports fell 3% from July 2009
to August 2009. Exports now stand at A$19,029 million (Australian Bureau of Statistics,
2009).
Major imports of Australia come from the following ten countries in order of
most to least: the USA, China, Japan, Singapore, the United Kingdom, Germany, New
Zealand, Malaysia, South Korea, and finally Thailand. These ten countries make up 65%
of Australian imports. The major goods that Australia imports from the rest of the world
involve mostly manufactured goods, such as petroleum products, motor vehicles,
computers, pharmaceuticals, and telecommunication equipment (Workman, 2007). Total
imports fell by A$61 million from July to August 2009 to put Australian imports at
A$20,752 million1 (Australian Bureau of Statistics, 2009).
It can be noted that in general, Australia’s top ten trading partners for its exports
are nearly the same as its top ten trading partners for imports. It is interesting to see that,
for the most part, these countries are either geographically close to Australia, or huge
economic powers in the world. Also, it can be noted that Australia exports mainly
resource type goods and services, while it imports more manufactured goods and
1
Money in Australian Dollars (A$)
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services. This shows an import majority of skilled labor products versus export majority
of unskilled labor products.
Current Trade Policy:
Clothing and textiles are two still heavily tariffed goods in Australia. According
to the Department of Foreign Affairs, in 2007, average clothing tariffs were around 42%.
Automobiles, or PMVs (passenger motor vehicles), are other manufactured goods that are
also still seriously tariffed today.
Australia is currently involved in several free trade agreements. One specific
agreement Australia entered into was with Chile in 2008; however it did not go into
action until March 2009. With Chile, Australia imports more goods and services than it
exports, and these goods include goods similar to those that it trades with Japan: coal and
fuel, and also machinery or equipment. As part of this free trade agreement, Chile and
Australia also agreed upon preferential rates of customs duties, thereby tariffing specific
goods at the same rates from both countries, which are not tariffed amongst the two.
The Australia-Chile trade policy is intended to result in immediate reduction of
tariffs on 97% of goods currently traded with tariffs. All other merchandise trade tariffs
will be eliminated by 2015.
March 6, 2009 saw the beginning of the immediate
reductions (“Chile Profile”, 2009).
Another FTA that Australia is currently working on is with Japan, a major trading
partner of Australia. Exports to Japan include mainly resource materials such as coal,
metals, and fuels, as well as other primary goods such as food and minerals. From Japan
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however, they import many of the manufactured goods that their resources go into
making. In fact, about 90% of the goods Australia imports from Japan are manufactured.
More free trade agreements that Australia is currently becoming involved in
include AANZFTA, or the Australia and New Zealand Free Trade Area, which involves a
substantial reduction of tariffs with all member nations of ASEAN (Australia and South
Eastern Asian Nations) and Australian and New Zealand. ASEAN includes Australia,
Brunei, Burma, New Zealand, Philippines, Singapore, and Vietnam, making up the
largest free trade area Australia has ever seen. In fact, this region comprises 20% of
Australia’s total trade in goods and services; making trade here larger than any single
trade with any one country. Although this agreement has not yet taken affect, it will enter
force Jan 1, 2010. This agreement will not completely remove all tariffs in the region,
but its enactment should free trade immensely among member nations.
The Singapore-Australian Free Trade Agreement (SAFTA) began on July 28,
2003. It initiated further trade and investment links between the two nations, made tariff
elimination more prevalent, and opened the business environment further, including
business travel, competition, and customs procedures. It has also made it easier for
Australians to export their services. For example, one such service export is education,
such as professors and teachers, who have been traveling easier, faster, and cheaper since
the beginning of this agreement.
The Thailand-Australian Free Trade Agreement, or TAFTA, is an important
agreement between Thailand and Australia. It is supposed to virtually eliminate all Thai
tariffs on goods and services from Australia by 2010. Enacted in January 1, 2005; it
urges Australian businesses to take advantage of business opportunities located in
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Thailand. Because of the major reduction in Thai tariff rates, this is allowing Australian
exports to become more practical to purchase in Thailand. Also, this agreement was
designed to help bring opportunities to Thailand by bringing manufactures and investors
into the country. Hopefully, this will allow Thailand to become more globalized and
speed up its productivity growth.
Australia-United States Free Trade Agreement, or AUSFTA, took action on
January 1, 2005. This agreement covers goods, services, investment, financial services,
government procurement, standards and technical regulations, telecommunications,
competition related matters, e-commerce, intellectual property rights, labor, and the
environment as elements of trade between the two countries, and it also eliminates tariffs
in these fore mentioned things. The objective of the agreement was to improve U.S.
investment in Australia, to help Australia maintain growth and competitiveness with the
rest of the world, and to improve Australian export growth by exporting with the largest
world economy, the United States (Department of Foreign Affairs, 2009).
Policy Evaluation:
The Australia-Chile Free Trade Agreement has already held major implications
on the Australian economy. A small growth of imports from Chile has already taken
place. Based on the import data from the months June through September in the years
2005 to 2009, the percentage change of imports was calculated from year to year. The
percent change from 2008 to 2009 was calculated at roughly 7%. This shows a change in
growth of imports just after the Australia-Chile Free Trade Agreement went into effect in
March of 2009. The import growth with Chile was not as substantial as anticipated, but
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nonetheless growth did occur.
Also, although imports from Chile did increase,
Australia’s total imports have declined from 2008 to 2009 by roughly 10%.
It is impressive that imports from Chile had even a small increase when the
Australian economy as a whole has decreased. To better understand why the growth of
imports was weak after the initiation of the free trade agreement, one must realize that
Australia, like the rest of the world is in a significant recession. Australia has a predicted
decline in GDP growth for 2009. The GDP in 2008 was at $1.013 trillion (U.S. dollars)
and in forecasted growth in 2009 is currently at only $920 billion. This could help
explain why there is not a huge increase in Australia’s imports, but imports from Chile
have increased during a declining GDP for Australia. It should be noted, however, that
no economectric work went into calculating these values, so it cannot be concluded that
the sudden rise in imports is directly correlated to the free trade agreement with Chile.
However, with such a strong difference in percentage change in imports, one might
suspect that it did have an effect on import trade.
With tariffs and quotas on imported products from Chile prior to the agreement,
Australians were paying a much higher price than they needed to for these products. For
example, if the price of goods in Chile is P1 and the equilibrium price of goods in
Australia is P2, where P1 is less than P2, then in a situation in which no trade takes place,
Australians are paying a higher price for goods (see Figure 1). With complete free trade,
Chile is selling goods at a much lower price and therefore it would be much cheaper for
Australian consumers to purchase goods from Chile. Assuming no transportation costs,
Australians would be able to purchase goods at the same exact price as Chileans can. For
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the purposes of this model, the Ricardian Classical Model will be used and shall therefore
exclude transportation costs as negligible in comparison to tariff prices and world prices.
Before the agreement, Australia imposed tariffs and quotas on imports from
Chile. Although joining the World Trade Organization, or WTO, in January of 1995
brought down some of the tariffs and eliminated many of the quotas, Australia still had
many trade barriers in place. According to the Australia-Chile FTA, Australia hopes to
phase out all tariffs on existing merchandise trade with Chile by 2015. Phasing out these
tariffs will make prices on imported goods in Australia cheaper.
The tariff price before the agreement is represented in Figure 1 as t; therefore the
price paid by Australians was P1+t. This price is clearly higher than the price Australians
are paying with freer trade, and Australia is also importing more than it would have been
without freed trade (imports with tariffs are Q2-Q1 and without tariffs are Q4-Q3). This is
because with prices for goods at P1+t domestic suppliers would only wish to produce Q1
amounts of goods, while the consumer wishes to purchase Q2 amounts. Consequently,
the shortage in goods is made up for in the form of exports. With free trade, exports
would be greater, because domestic producers would wish to produce fewer goods at
lower prices, yet the consumer would like to purchase even more (Q3 and Q4 amounts
respectively).
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* Q4 – Q3 = $330 total amount of imports from Chile to Australia after FTA, and Q2
– Q1 = $130 amount of imports before FTA (“Chile Profile”, 2009).
Tariffs are usually put in place to protect the domestic producer. As is shown in
Figure 1, after the tariff comes into effect, domestic producers produce more quantities
(of in this case goods) at higher prices. This can be shown in the movement from Q3 to
Q1, and the movement from P1 to P1+t.
There are major implications that tariffs have on the economy of Australia as a
whole, other than just higher prices for producers and consumers. First off, deadweight
loss is always accumulated with the enactment of a tariff. Deadweight loss is depicted in
Figure 2 as the yellow areas b + d. These areas represent the money lost in the macroeconomy due to consumers buying less and the increase in less efficient production
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levels. The combination of these two areas (“b” and “d”) represents a net welfare loss for
Australia due to the implementation of prior tariffs.
The areas labeled “a” and “c” represent redistribution and revenue effects of
tariffs respectively. The revenue effect (area “c”) is the revenue that the Australian
government collects on the taxes it gains from the sale of a tariffed good.
The
redistribution effect is simply the transferred amount of producer surplus that used to be
consumer surplus. For example, consumers enjoy higher consumer surplus at the lower
free trade price of goods after the free trade agreement is enacted. Conversely, producers
face the opposite trend, where producer surplus is greater with the enactment of the tariff
than after it is revoked. In figure 3, consumer surplus is represented by the area in the
green triangles, and producer surplus is represented by the area in the blue triangles.
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It can be shown (specifically in Figures 2 and 3) that the removal of tariffs have
positive net welfare gains on the Australian economy. For example, areas “b” and “d”
become the gain in welfare because they get absorbed into consumer surplus with the
reduction of tariffs.
Currently Australia and Japan are working on a Region Trade Agreement. This
agreement would benefit both countries because trade between the two would be freer.
Australia would benefit from Japan as a growing nation and one of the biggest economies
in the world.
This agreement would help Japanese producers gain access to the
Australian market; it would also help the Australian producers to get footing in the
Japanese market.
Foreign investment into Australia would surge due to decreased
regulations. During debates for Japan and Australia to enter into an RTA, an estimated
net welfare gain was calculated for both.
It was estimated that Australia would
experience a 7.7% increase of real GDP and Japan would have a .5% increase of real
GDP (Kawasaki, 2005). Real consumption as a percent of GDP would rise by 3.9% and
1.3% respectively for Australia and Japan.
Merchandise trade and service trade would rise in both countries, but foreign
direct investment would only increase for Australia. Australians would not invest any
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more in Japan as a consequence of this agreement because the agreement does not
provide incentive for them to do so. In Australia’s case, merchandise trade would
account for roughly 66% of the increase in real GDP. Investment from the Japanese
would increase and help contribute to 23% of the increase in real GDP. Bilateral trade in
services would simultaneously help real GDP increase by 11%. Meanwhile the gains that
Japan would also receive from this free trade agreement involve bilateral merchandise
trade increases that would lead to an additional increase in real GDP by 79%, and
bilateral trade in services would help GDP by 21%.
While gains are happening in Australia and Japan, other externalities produce
positive happenings to other countries. The two combined would trade a smaller amount
to the world. However, there would be gains and losses in world trade as a whole. This
is due to trade diversion effect, because Australian exporters would divert trade in some
Japanese markets from other countries that were previously exporting to Japan.
Australian exports would decrease to the rest of the world, but Australian imports from
the rest of the world are expected to increase by 2020.
Australian’s exports in the service sector would decline, but overall output would
increase. This is due to re-allocation of resources from exporting sectors to the expanding
domestic markets. Service exports would decline but this is offset by a greater rise in
exporting in merchandising. Most of the exports that would increase would come from
the agricultural sector.
Increases in demand for agricultural goods will lead to an
increase in demand for land. Therefore, initially some of the Australian farmers might
lose, but many more will reap the benefits of trade. This is because the more efficient
farmers will gain land from those less efficient. Most of the manufacturing jobs would
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suffer, because Australians would be producing chiefly primary goods over manufactured
ones, but real wages in general would increase by 1.72%. While some sectors may lose,
the overall effect of free trade would help out Australia’s economy.
Australia exports a lot of items to Japan. One major item Japan receives from
Australia is asparagus. In 2008, Australia was second in the most exports of asparagus
to Japan only to Mexico. Australia exported 2,542,692 kilograms of asparagus while
Mexico exported 2,639,093 kilograms.
Australia is just nipping at Mexico’s heel.
However, Mexico is the lower cost producer of asparagus compared to Australia.
Mexico has a cost of $4.80 per kilogram and Australia has an average cost from $5.80 to
$6.202.
Since Australia and Japan are in trade talks now, Australia could come out after
the agreement as the country that Japan gets the majority of its asparagus imports from.
This could help the Australian farmers who grow asparagus and the workers who ship the
asparagus to Japan to make profits. This could also help close the gap of the Australian
trade deficit, because its exports to should rise (See Figure 4). But Australia is not the
only that will be winning in this case; Japan will gain consumer surplus by buying from a
now lower cost producer (Japan Imports Trade Analysis, 2009).
2
These in 2008 U.S. Dollars
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* Chart also from Japan Imports Trade Analysis, 2009
Recommendations:
Because 1 in 5 Australian jobs rely on exports3 it is important for Australia to
maintain good trading policies. Not only do Australian businesses reap the benefits of
trade but so do its citizens. The Australian Trade Commission stated: “On average, gains
from more open trade have put an extra $1000 into the pockets of each Australian family
every year since 1986 (ATC).”
Based on the findings throughout our research and models, we believe that further
decreasing trade barriers between not only the mentioned nations in this paper, but all
nations would greatly benefit the welfare and economy of Australia.
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It is our
Pavlisko, Rose, Hummel
recommendation as studied members of the IMF that Australia should consider joining
into more free trade agreements.
We suggest a 20% reduction of all tariffs over a five year period. This suggestion
covers all goods and services, including agricultural products. We give a five year time
span for these changes to occur because we feel that although the immediate reduction of
tariffs will right away begin to have positive effects on the welfare of the Australian
economy, a somewhat gradual process should be taken. We feel this is true because
initially, some Australian producers will see losses of profits, as more efficient foreign
producers have the ability to charge lower prices to Australian customers. This step by
step process will give industries a few years to prepare for complete free trade and
openness from Australia.
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