Professional Documents
Culture Documents
International trade: The exchange of goods and services across national boundaries
-Portfolio: (where an investor has less than 10% share in the company, therefore they do
not have a direct influence on the management of the company). Eg: Shares
-Direct investment: (Where an investor has 10% or greater share in the company and
the investor has a say on the actions of the company). You could buy an existing
company or buy shares in an existing company or even start up a new business. TNC,
open branches/subside in other countries
1.Trade in more than one national currency: US dollars, Euros or Yen, most global trade
occurs in US dollars, its the world benchmark currency
2.Carries risks such as loss of earning from currency movements, changes in market
demand, interest rates or changes in government policy
3.Usually is dominated by the role of MNC's (global operating countries) which have a
large power and influence which affects global trade and investment patterns
Exports:
• Main source is commodities, risen in the recent years due to global resources
boom, 2004-2007
• Composed of things such as wheat and beef
• Agricultural exports have declined due to increased protection in foreign nations
and droughts
Imports:
Foreign investment in Australia: Refers to the stock of Australian liabilities (debt and
equity) owned to non residents
Foreign investment Abroad: Refers to the stock of foreign financial assets owned by
Australian residents
International investment involves both foreign investment into Australia and Australian
investment overseas
• Portfolio investment- The investor holds less than 10% share of the company. Is
investment in equity (eg shares or options) and debt securities (other than direct
investment). This does not allow for the management of the company
• Other foreign investment includes: trade credits, loans, currency and deposits
USA, Britain, Japan, Hong Kong, China, Singapore and New Zealand
-Australian's can invest overseas through: FDI, Portfolio investment, Loans, Credits,
Financial derivatives (currency swaps, options) and Reserve assets
-The main types of companies are mining companies and manufacturing companies,
however has spread to retailing, banking, media and airlines
-The main factor has been Australian businesses securing new export markets in foreign
countries, seeking higher rates of return on their investments and also spreading the
financial risks associated with business activities
-Australia has become a net borrower of funds in the international financial market.
Australia imports capital to supplement the domestic savings which are too low to
finance all of the domestic investment. Hence, borrowing money and credit from the
international financial market count as an increase in the foreign liabilities and the total
value of foreign assets is less than the total amount of foreign liabilities, therefore has
contributed to a larger foreign debt.
The costs associated with Australia’s large stock of net external debt and equity:
-Servicing costs of debt such as interest that is paid to foreign companies and loss of
profit and revenue to domestic Australian companies as well as investors in general. The
rent, profits, dividents and income have to be sent overseas if the asset is not owned by
an Australian investor
Current Account: Is the part of the balance of payments that show the receipts and
payments for trade in goods and services, transfers payments, income flows between
Australia and the rest of the world in a given time period. These are non- reversible
transactions
Capital and financial account: Records the borrowing, lending, sales and purchases of
assets between Australia and the rest of the world. Financial inflow has the immediate
effect of increasing the supply of foreign exchange to Australia where as outflow reduces
it
It is a double entry system of accounts I.e Uses debits and credits. These are known as
the Current Account and the Capital the Financial Accounts
BOP= the Current account +/- the Capital and Financial Account
Structure
Credits:
•Exports of goods and services
•Income receivable
•Financial transactions involving either a reduction In a country's holding of foreign
assets or an increase in its foreign liabilities
•Activities generating a flow of funds into Australia
Debits:
•Imports of goods and services
•Income payable
•Financial transactions involving either an increase in a countries holding of foreign
assets or a decrease in its foreign liabilities
•Activities associated with an outflow of funds from Australia
Because the BOP is a double entry system every transactions is represented by two
equal and opposite transactions, a debit and a credit. As a result the BOP will always
equal zero
Current account:
•Net goods and services
•Net primary income
•Net secondary income
Current Account:
Record all transactions of a current nature between Australia and the rest of the world
over a financial period
Money flows into Australia are credits. Money going out of Australia is debits
Good Balance:
•Is a record of imports and exports of goods (physical), known as the merchandise
account
•Exports are credits
•Imports are debits
Services Balance:
Records all financial flows resulting from international borrowing and lending
transactions and the buying and selling of assets. Eg: shares, loans, real assets such as
property
Capital Account:
Records all capital transfers:
•Transfers from people migrating into or out of Australia of a capital nature
•Foreign aid in the form of capital eg: building a bridge
•The purchase and sale of non produced, non financial assets eg: intellectuals
property rights, patents, copyrights, trademarks and franchises
Financial Account:
-Records all transactions in financial assets and liabilities
-Credits entries are net inflows, these come about either because of an increase in
foreign investment in Australia or a reduction in Australian investment overseas
-Debits represent net outflows
•Direct investment: purchase/takeover of companies with greater than 10% holding
•Portfolio investment: records changes in the value of a assets eg: shares and other
tradable assets (This is where most foreign debt is recorded)
•Financial derivatives
•Other investment: Eg: trade credits
•Reserve assets includes:
• RBA holding of foreign currency
• Financial assets controlled by RBA
• Reserves held with the IMF
K=capital
Current account balance = Goods balance + Net Services + Net primary income + Net
secondary income
Capital and Financial account = Capital account balance + Financial account balance
Balance of payments = Current account balance + Capital and Financial account balance
+/- Net Errors and Emissions
• The Current Account and the Capital and Financial account add to zero. Together
they represents the Balance of payments CA + L and Fa = zero
• With a floating exchange rate if there is a Current Account Deficit (CAD) then
there is an equal and offsetting K (capital account) and Fa (financial account)
surplus ei: the BOP is zero
• An increase in the current account deficit (CAD) will result in an increase in the
capital and financial account surplus
Supply of $A (ANYTHING GOING OUT) = Demand of $A (ANYTHING GOING IN)
Payments for imports of goods and Receipts for exports of goods and
services (M) services (X)
Primary and Secondary Primary and Secondary
income/transfers overseas (Y debits) income/transfers from overseas (Y
credits)
Capital and financial outflow (K Capital and financial inflow (K inflow)
outflow)
Supply of $A:
Represented by:
Payments for imports of G & S income transfers overseas, Capital and Financial outflows
=
Demand for $A
Represented by:
Payments for exports of G&S income transfers from overseas Capital and financial
inflows
Exchange rate changes bring about equality between supply and demand of foreign
currency
Deficit in the current account = Surplus on the capital of the capital and financial
account
• -There is a strong link between capital and financial account and the net income
part of the current account. This is because any financial inflow to Australia must
earn return for its owner and is recorded as a debit in the net primary income
• Foreign financial flows in the form of equity will require returns on the equity
investment, foreign equity can be foreign ownership of Australian land,
shares or companies. The rent, dividends and profits flow out of Australia and
will be included as a debit in the net income section
• Australia’s low savings makes it necessary to attract foreign inflows but however
the net primary income deficit that results from this increases the CAD
• There is relationship between the CAD, growth in foreign debt and growth in
foreign liabilities
• Net capital inflow can be Net foreign borrowing or Equity inflow (direct or
portfolio)
• If over a period of tie, a high level of capital and financial account surpluses
occurs, it will result in a widening CAD because of the servicing costs associated
with increased foreign liabilities (higher foreign debt and foreign equity) , hence
can lead to the “dept trap” scenario
Current Account:
• Usually has a deficit, this is influenced by the size of the deficit in the good and
services balance and the size of net primary income deficit
• Goods and services balance is in deficit, this deficit decreased during the global
resources boom 2005 to 2007. Increased capital imports increased the deficit
until a mining boom meant a surplus is 2008-09 but due to GFC it fell to a deficit
again
• The net primary income deficit represents the large servicing costs of Australia’s
net foreign liabilities
• The capital account usually records a small surplus or deficit between $100
million and $600 million
• The financial account balance is always in a surplus and mainly represents debt
and equity borrowings (net direct, net portfolio investment and reserve assets),
this surplus grew during 2001 to 2010
• The balance on the capital and financial account is always a surplus to finance the
deficit in the current account
General trends:
• Because the BOP is always zero is it more appropriate to consider the Current
Account Deficit rather than the overall balance.
• CAD rises when domestic growth is stronger than world growth, this indicates
that Australia are importing more products the import spending increases
relatively to the export income
• The drought in 2002-03 increased the CAD further as farm exports fell by nearly
25% meaning Australia would have to import to compensate other substitutes
• Throughout the 1970's Australia averaged a CAD -2.5% of GDP. During the 1980's
Australia CAD rose to -4.75% making it one of the highest results of the high
income economies.
• 1998/99 the CAD rose to -5.6% due to the impact of the Asian financial crisis
reducing demand for Australian exports together with high domestic growth
Cyclical factors: Factors those who vary with the level of economic activity
•When the domestic economy grows faster than the world economy, the demand for
imports rise
•The increase in imports means a debit in the current account goods, hence
contributes to a greater CAD
•If the world growth becomes faster than domestic growth such as in 2004 to 2007
(global resources boom), the demand and prices for Australian commodities
would rise
•The issue that most of the CAD is contributed by the servicing costs of Australia’s
debt and equity borrowings through net primary income
•Increased net payments of interest, profits and dividends to foreign lends and
investors can also increase the CAD
• If the CAD is greater than GDP growth in the economy will only occur if imports
are increased. This in turn will lead to an increase in the good balance of the CAD
• When Australia's CAD has exceeded GDP for example rom 2002 to 2006 the RBA
acted on slow economic growth by the use of Monetary Policy to increase
interest rates
• Growth in foreign liabilities: A CAD growth results in financial inflow either in the
form of borrowings from overseas (foreign debt) or through selling equity in
items such as property and companies (foreign equity). Lenders may be resultant
to lend to Australia or invest in Australia due to this growth in liabilities
• Increased volatility in exchange rates: High CAD deficit can undermine the
confidence of Australia dollars from foreign investors and reduce demand, this
will lead to a depreciation of the Australian dollar and worsen the debt as
servicing costs would rise due to a low exchange rate
• Loss of investor confidence, the high CAD may turn off investors as they may see
it as too risky to invest in Australia or lend to Australia. This can result in decrease
in financial inflows, due to low financial inflows the financial account balance can
deteriorate and in turn will become harder to offset the CAD to zero, hence as a
chain reaction the CAD would likely increase
1992-95: The deregulation and cuts in the maximum quotas enabled exports to export
more Australian products to foreign nations, this meant that the exports in the goods
account rose, hence the current account deficit was reduced due to this extra income
1997-98: The current account reached to high levels of deficit at around -6% of GDP, this
was because of the Asian Financial Crisis reducing the number of Australian exports
whilst increasing the demand for foreign imports creating a deficit in goods account
resulting in current account deficit
2001-02: The current account deficit declined due to strong growth in the exports which
was triggered by the depreciation in the exchange rate of the dollar meaning more of
Australian exports could be brought by foreign investors.
2002-03: The severe effects of the drought drastically reduced the amount of Australian
farming exports by around 25%, hence the goods and services deficit rose to $-16.3
billion dollars causing the current account deficit to rise to over -$40,000
2005-06: The global resources boom meant that the commodity prices went up,
therefore the Australian exports increased, hence reducing the CAD to -$51,000 million
2006-07: The current account deficit increased due to a high net primary income deficit
of -$47 billion, therefore the CAD increased to -$58,000 million
2007-08: Due to increased consumer spending, the CAD deficit rose to -$73.9 billion
2008-09: Due to low net primary income deficit and a strong goods and services surplus,
the CAD fell to -$40.5 billion dollars, due to less imports coming in due to the GFC,
consumers were not spending much
International competitiveness:
International competitiveness: refers to ability of Australian business to complete with
overseas producer both domestically and overseas. IC will affect the volume of goods
sold domestically by import competing industries. Changes to IC will impact on the
balance of goods and services accounts and in turn the CAD. IC is influenced by price and
non price factors
Price factors:
• Costs are a major contributor to the price of goods and services, when costs fall
due to higher worker efficiency or productivity for example IC will rise. Higher
inflation increases the cost of all factors of production leading to a decrease is IC
• The exchange rate has a significant impact on IC. When g & s are purchases from
overseas they are paid for in that country's currency requiring the domestic
currency to be converted. When the Australian dollar depreciates it makes
Australian exports cheaper, hence increases IC. IF the Australian dollar
appreciates, it will result in an decrease in the international competitiveness
Non-price factors:
• IC has major impacts on the goods & services balances of the Current Account
and the CAD contributing to the consistently high CAD in Australia
Terms of Trade:
Terms of Trade: Is an index that measures the relationship between the relative price of
a country's imports and the relative price of a country's exports. Ie the relative price a
country pays for its imports to exports. (If its over 100 its good, less than 100 is bad)
The terms of trade index is calculated by:
• The export price index measure the relative changes in prices received for
exports and the import price index measures the relative changes in the prices
received for imports over a certain period.
• These changes are measured against a base year which always has a value of 100
• If another year has a TOT index of 100, there have been no relative changes in
the prices of exports and imports. IF the TOT index is greater than 100 the price
of exports has increased relative to imports. This indicates favourable or
improving terms of trade and means a country can purchase more imports with
the same quantity of exports. If the TOT is less than 100 the prices of exports has
fallen relative to the price of imports. This indicates unfavourable or
deteriorating TOT. Since the mid 1950's Australia's TOT have been deteriorating
because of the composition of exports and imports.
• Australia's exports are primarily commodities whose prices have generally been
increasing slower than the prices for the manufactured goods Australia imports.
This deterioration in the terms of trade caused problems with the current
account deficit because Australia has constantly been under pressure to produce
more exports just to pay for the same levels of imports.
• Recent years has seen an improvement in the TOT as a result of higher prices for
commodity exports together with slow growth in import prices with 2007 TOT
reaching the highest level since 1950's
• This trend changed with the global financial in 2008/09 with weaker world
growth and lower global commodity prices resulting in an 18% decline in
Australia's TOT. The recovery in 2009/10 has seen n improvement in the TOT led
by strong demand for China for our resources. Declining or worsening TOT
decreases the goods balance in the Current account, contributing to a potentially
higher CAD.
Example:
Year Export Price Index Import Price Index Terms of Trade Index
1 100 100 100
2 115 105 109.5
3 120 130 92.3
Eg: Year 3 was calculated by
International Borrowing:
Gross Foreign debt: total of Australia's liabilities to the rest of the world
Net Foreign Debt: gross foreign debt less the rest of the world's liabilities to Australia's
• Australia's foreign debt liability has changed significantly over the past 20 years
with an increasing reliance on debt capital. In 1980's debt was less than $10 and
was 6% of GDP. This is increased to $596 in 2007/08 and was 53% of GDP
• From: 1994 to 2006 net foreign debt has averaged 42.5% of GDP. By 2006 91% of
Australia's borrowing was in the form of foreign debt. In 2009/1 foreign debt was
$672 billion or 53% GDP. Foreign debt has averaged 50% of the GDP from 2002 to
2010
Deb Servicing Ratio: DSR is expressed as the percentage of export income that has to be
paid in interest for debt.
• This reached a peak of 20% in the late 1980's but has fallen into an average of
10% in the 1990's and 2000's as a result of slowing debt accumulation and
relatively low world interest rates.
• The debt servicing ratio has risen slightly to 11% in 2006 as a result of higher
world interest rates and increased levels of debt accumulation
Foreign Investment:
• FI has grown due to removal of protective trade barriers (quotas, taxes and
subsidies), increased integration
• Portfolio investment: usually shares which provides less than 10% share in a
company
Advantages:
• Profits are also paid to the foreign investors again adding to the CAD
• Some loss of control over domestic companies will result in increased foreign
direct investment
-The major distribution 58% in portfolio investment, 23% direct investment, 15%
investment liabilities, 4% from financial derivatives
• Australian primary industries such as agriculture and mining have come more
efficient and capital intensive and the extra resources have been release to the
services industry
• Structural change can contribute to the balance of payments, the efficient use of
resources and the latest use of technology has lead to the growth in Australia’s
primary industries. Hence, has increased the international competiveness and
increased exports resulting in greater revenue
• This revenue reduces the CAD, this was evident during the global resources boom
from 2004-2007 which caused a rise in commodity prices from which Australia
benefited via increased income for exports
Methods of quotation:
Indirect method: Is the rate of exchange between a unit of domestic currency and the
equivalent amount of foreign currency
• Gives the price of one Australia dollar in the foreign exchange market
Direct method: Is the number of units of domestic currency needed purchase a unit of
foreign currency
Eg: $A 1.11 is equal to $US1.00
• Exchange rates can be determined by the market forces of supply and demand
(floating or flexible exchange rate) or fixed by a government’s central banking
authority
• Australia went from a flexible peg exchange rate to a floating exchange rate in
1983
• Before 1983, the dollar was pegged to the British pound
Bilateral or Cross rates: Is the measure of the value of a unit of domestic currency
relative to another currency, usually a major trading partner
Eg: the Australian dollar relative to the US dollar, Japanese Yen, Euro or UK pound
Changes in relative exchange rates measure the rise and fall in the Australian dollars
relative purchasing power against other currencies.
Trade Weighted Index (TWI): Is a measure of the value of the Australian dollar against a
basket of foreign currencies of major trading partners. These currencies are weighted
according to their significance to Australia’s trade frequency/flows
• Measures general changes in the value of the Australian dollar rather than
specific changes against one currency
• Measures Australian dollars against a basket of currency of Australia's major
trading partners (22 nations) compare with a base
• The currencies of countries that are more prominent in Australia's trade are given
a higher weighting so they have a greater influence on the TWI
• Seen as a more accurate measure because it is trade weighted and related to
changes in the balance of payments
• The size of financial flows into Australia from foreign investors who wish to
invest in Australia
• The level of Australian interest rates relative to overseas interest rates (A
higher interest rate in Australia makes it more attractive for investing, hence
increases the demand for $A)
• The availability of investment opportunities (If more opportunities for
investors to start a new business or buy into an existing one, the demand for
$A would increase)
• Deregulation of markets
Under a floating exchange rate there are two main types of movements that can occur,
appreciation and depreciation. These movements result in a change in equilibrium.
Appreciation (increase): A rise in the value or purchasing power of an exchange rate and
may be caused by an increase in demand for $A or a decrease in supply of $A
Depreciation (decrease): A fall in the value or purchasing power of an exchange rate and
maybe caused by a decrease in demand and an increase in supply
Appreciation of $A
-The most efficient method of determining the value of the Australian currency
-The expose the Australian economy to international competitive pressures
-To allow for more effective and independent monetary policy within a deregulated
financial environment
Under a clean float, (no government intervention) the exchange rate is determined
solely by the forces for supply and demand for Australian dollars. The balance of
payments will be zero
Disadvantages:
• Increased volatility over time, caused by changes in exchange rate expectations
• Floating exchange rate can be subject to sudden shifts in market sentiment,
causing the exchange rate to deviate from its long run equilibrium path
• Exchange rate can “overshoot”, occurs when a currency appreciates or
depreciates in value by more than it is anticipated to
• “overshooting” can be caused by a “bandwagon effect” as speculators follow
market trends, causing the exchange rate to become volatile
Fixed Exchange Rate:
• Under a fixed exchange rate system the government or the RBA, the central bank
would set the exchange rate
• A fixed exchange rate is depicted in the image above, in this case the official rate
has been set at $A1 = US 90 cents (Above the US 80 cents rate that would apply if
it was left up to market forces)
• The government can attempt to maintain a fixed exchange rate by either buying
or selling foreign currency in exchange for $A. In this case it would be buying the
excess supply of $A (Q1 Q2) at a price of $US 90 cents
• If the central bank fixed the exchange rate above equilibrium it would have to
buy $A to limit supply. If those set rate below equlbirium they would need to sell
$A to reduce demand
• A fixed exchange rate system does not imply that the rate will stay at the same
level all the time. The government may decide to change the rate because of
adverse effects on the economy. For example if the currency is overvalued
exporting industries will become less internationally competitive, affecting
international trade and the balance of payments
• Certainty about the immediate short term value of the exchange rate, assists
exporters and importers in their decision making
• Reserve bank has to hold large foreign exchange reserves to keep the
exchange rate at its pre determined value
-By reducing supply of Australian dollars will put upward pressure on exchange rates-
appreciate
-By increasing supply of Australian dollars it will put downward pressure on exchange
rates- depreiciate
The RBA can also influence exchange rates indirectly by changing domestic interest rates.
Increasing interest rates will generally lead to an inflow of investment funds. This
method while possible is really used due to the impacts it would have on the domestic
economy such as increasing inflation
-When pressure is put on economic growth and the balance of payments because our
exchange rate is out of line with other countries due to the effects of inflation and high
levels of foreign debt
-To correct excessive depreciation which could lead to increased import costs leading to
higher domestic inflation and increased foreign debt
• If the government sells foreign currency and buys $A to reduce the supply of $A,
causing a appreciation of $A, the government would have to go back into the
domestic market and buy back the “government securities” and sell the $A to
offset the reduction in supply of $A
• If the government buys foreign currency and sells $A to increase the supply of
$A, causing a depreciation of $A, the government would have to go back into the
domestic market and sell the “government” securities to buy back the $A to
offset the increase in supply of $A
Unsterilised Intervention:
This occurs when the government/RBA does not go back and adjust the domestic
interest rates. This means that there will be a change in the domestic interest rates
• If the government sells foreign currency and buys $A to reduce the supply of $A,
causing a appreciation of $A, without sterilisation the domestic interest rates
would rise
• If the government buys foreign currency and sells $A to increase the supply of
$A, causing a depreciation of $A, without sterilisation the domestic interest rates
will fall
• Greater inefficiency
• Increased misallocation of resources
• Australia being less internationally competitive
• Reduced standards of living
• 1973 The Whitlam government announced a 25% reduction in all tariffs to lower
prices and stimulate greater industry efficiency
• Today nearly half all imported goods and tariff free and only mostly
manufactured goods are subject to the 5% tariff
• In 2008, Australia’s tariff level was 2.5% and is similar to other industrialised
countries such as USA (1.5%) and EU (1.7%)
• Tariffs on imported goods increase the price at which those goods are sold in
Australia and allow the domestic producers of similar products to raise their
prices
• When other methods of protection such as subsidies are also taken into account,
Australia is one of the least protected economies in the world
• Over 07-08 period Australia had the lowest agricultural protection in OECD
nations
Rent seeking behaviour: When industries attempt lobby to win favourable treatment
from the government through maintenance of protective assistance or asking for more
assistance by using the argument that higher imports will mean loss of jobs in local
manufacturing
• Australia’s subsidy programs include: New Car Plans for a Greener Future and
Innovation Package for textile, clothing and footwear industries
• These are provided so that these firms can undergo structural changes to be
competitive with foreign imports
Nominal rate of assistance: The percentage difference between the price the domestic
producer receives with protection and the price the producer would receive in the
absence of protection
Plan Industries: Are industries that are making structural changes to them, clothing,
textiles and clothing, given special arrangements so they can be more competitive with
imported goods
The decision to reduce protection was due to the belief that it would increase
international competition and promote free trade
Australian governments have actively negotiated many trade agreements with trading
partners eg:
Why????
• Can increase capital and technological flows into Australia via other nations
Disadvantages:
• May lead to “dumping” if one nations has a greater comparative advantage in
producing one product compare to the other nation
• The local producers may have to shut down due to them not being able to
compete with the foreign imports, decrease in profits for local producers
• Some nations may have a greater say in the decisions that will be made by the
nations, such as the WTO, the more advanced economies will have a greater
share and this can disadvantage the smaller economies, again can result in a
greater sense of dumping
• Infant industries might not be able to keep with the increased competitions in
the market; this can prevent local manufactures from entering the product
market due to fear of being shut down from foreign imports
-Textile, Clothing and Footwear, steel and personal motor vehicle (PMV) industries have
experienced restricting and rising levels of structural unemployment
-Firms need the latest technology and substitute’s capital for labour to achieve higher
productivity
-The government announced a $ 6.2 billion package for the Automotive industry
between 2009 and 2021
-$747 million of subsidies were spent on textiles clothing and footwear industries
Effects on individuals:
• Unemployment can rise as a result of restructuring and cuts in local production
• People in import competing industries will be the most effected
• People manufacturing areas such as Victoria and South Australia, where few
alternative sources of employment exist, unemployment rates have risen
dramatically
• Also due to the reduction in jobs, it is harder for these individuals to get new jobs
• Structural unemployment occurs as a result of this decrease in protection, their
skills do not match the job vacancies in the economy
• Most jobs losses are low skills and due to limited skills these cannot be easily
transferred to other workplaces
• The government is forced to fund retraining programs to help workers made
redundant through these structural changes due to a reduction in protection
• However in the long term, after structural change the demand for workers may
increase as domestic firms become more internationally competitive and hence
expand
• Consumers with be able to have access to move variety of goods at cheaper
prices, consumer price index has estimated to fall by 3.8%
• Reduced protection has allowed greater options and access to different products
coming in from all around the world
• Higher competition between domestic and international firms leads to an
improvement in living standards because consumers are looking for higher
quality goods, therefore the global market has to keep up with the demand of
consumers
Effect on governments:
Reduction in protection ---> cutting of tariffs ------> reduction in government revenue as
it provides indirect tax revenue to the government
Government expenditure is required to assist firms undergoing structural adjustment
process through unemployment benefit schemes, retraining programs and even financial
support due to “rent seeking behaviour” eg: motor car and textile industries
Governments can lose votes by pursuing policies to reduce protection due to loss of jobs
Implications for Australian protectionist policies of other countries and trading blocs:
The Uruguay Round - GATT:
• -The absence of the GATT codes for trade in agricultural commodities left
Australia in a vulnerable position because US wheat subsides and EU wheat
subsidies denied market access to Australian wheat exporters and depressed
global wheat prices and cut export return to Australian farmers
• -Non tariff forms of protection such as “voluntary export restraints” and “anti
dumping” measures penalised producers like Australia in favour of less efficient
producers such as US and EU, led to trade diversion from Australia
• GATT Implications:
• -GATT agreement on trade in agriculture resulted in reduction in agricultural
subsidies, reducing in quotes to tariffs and reduced by 35%
• -GATT agreements on trade and services brought trade in services such as
finance, insurance, banking, technology and entertainment under WTO rules
• -GATT agreement on intellectual property led to new framework in
trademarks and copyrights
• -GATT agreement on manufactured goods lead to tariffs being cut by 15%
• Benefits to Australia suggested an increased output and faster growth export
volumes than import volumes and capital investment was projected to rise in all
sectors
Main Implications of Uruguay Round:
• The scaling down of agricultural subsidies in the EU and USA
• Increased market access for trade in services was a boost for Australia’s service
exports
• The GATT was replaced by the WTO which has greater powers to monitor and
control world trade, hence more benefits for Australia in terms of equality and
greater say
Overall the WTO has greater power to monitor and control world trade, some of the
significant powers include:
• The WTO has powers extending to goods, services and intellectual property
rights
• The WTO has greater power to limit the use of anti-dumping actions
• The WTO can use sanctions/penalties to resolve trade disputes
• The WTO can restrict government support for industry through control over
subsidies
Doha Round:
• In agriculture: negotiating for the complete elimination of agricultural export
subsidies
• In manufacturing: negations for greater market access for exports than the
average 15% cut in tariffs negotiated at the Uruguay round
Deadlock in DOHA:
• EU was unwilling to cut agricultural subsidies by more than an average 50%,
whilst Australia and other countries wanted a cut of at least 60%
• The USA was unwilling to cut its farm subsidies from US$20b to US$15 b per year
• Developing countries such as Brazil and India wanted to exclude many industrial
and consumer products (cars and electrical goods) from tariff cuts and not open
to their markets to overseas competition from other developing as well as
developed nations
• The unwillingness of EU and USA to cut agricultural subsidies and improve
market access to developing countries represent the greatest impediment to
global free trade and economic development