Lately in 2004, Australia is working on Australia – United States Free Trade Agreement ( AUSFTA). The aim for the negotiation is try to convince the US to reduce its barriers for the heavily subsidized agricultural industry. Since Australia is a primary based exporter, the AUSFTA would benefit Australia as US open its agricultural market by reducing tariffs from 9% to zero on Australian key exports such as beef, diary, and lamb products within a four-year period. TCF tariffs will be phased out until 2015 according to the AUSFTA key outcomes list.
In 1994 – 1995, Australia’s domestic growth increased as economic growth recovered in Australia and import rose faster than exports. The increase on imports raised the Current Account Deficit (CAD), the amount of money we owe to foreign countries, to an unsustainable level of $28,645m. In 1995 – 1996, the CAD became more sustainable as did the rate of domestic growth. Between 1998- 99 to 1999- 00, the Asian Crisis reduced exports while at the same time domestic growth increased the demand for imports, as the CAD incr3ase d to $33, 481m. In 2000- 01, higher interest rate reduced import demand and therefore resulted in a smaller CAD of $18,686m.
Before a country would increase its economic growth, it must increase the level of exports then imports by increasing productivity, level of output per unit of resource input over a set period of time. According to the Production Possibility Frontier Figure 1.1, Country A will need to increase its production level in order to move the frontier outwards, which means more resources are to be used to produce more Goods and Services (G&S). When the production has increased, this means that there can be more export if there’s strong export demand. If the country has more export than import, the country is improving in economic growth and owes less CAD.
Graph 1.1
Normally if one country reduce its trade barriers for another country, then that country will do the same. For example, the Australian – Thailand FTA in 2003 where Australia has provided Thailand with more investment opportunities in return Thailand sweeps away all the tariffs on products imported from Australia. By encouraging free trade, Australia could benefit from the high export revenue, therefore reducing the level of CAD.
Australia’s import and export volumes has increased dramatically over the past 30 years. In Table 1.1, it shows that the export of G&S has raise from $245m in 1973 to $8066 in 2003. While imports increased from $476m to $8298m within the same period. This indicates that the rapid growth in export and import levels were influenced by the reduction in protection and how free trade of Australia and other countries has stimulated as a result of globalisation.
Table 1.1
Year Export ($million) Import ($million)
1973 245 476
1983 1204 1946
1993 4437 5064
2003 8066 8298
The reduction in protection levels benefits both foreign import industries and domestic export industries, which promotes the idea of free trade. Less protection means a decrease in tariff and subsidy levels. When tariffs are reduced, more overseas companies would import their G&S into the country. This increased number of imports would force local industries to achieve its economies of scale in the short period through restructures and innovations, to be able to compete in the global market. This means that more allocation of resources after the improved reform will increase productivity and export performances.
However, infant industry usually have high costs per unit of output and are cost disadvantaged compared with more established overseas industries. These industries need protection in the short- term to become internationally competitive. When reduction in protection occurs that means more foreign companies would be competing against domestic firms. If the domestic industries have not yet developed to its economies of scale to promote efficiency, to reduce costs, then it would not be able to compete with the fully developed foreign firms. In this case, consumers will prefer cheaper overseas products than domestic products. Therefore the disadvantage of free trade and less protection is that the lack of demand for domestic products would eventually phase out local industries, which would lead to structural unemployment and had a direct impact on the individuals.
During the process of restructuring of industries and cuts in local protection, the level of unemployment is likely to increase in the short term, However, free trade enables countries to specialize in production by concentrating on industries in which Australia has a comparative advantage of. If so, there should be an increased sale and therefore increased employment opportunities in export industries.
On the other hand, free trade improves the efficiency of resouce allocation, which leads to higher productivity and increasing G&S output. Lower protection results in lower costs prices and also a more diversity of choice. Competition between foreign and domestic companies would improve the quality of G&S as it also improves the standard of living for individuals. Individuals as in the roleof consumers now can benefit from the greater variety and better quality of G&S.
As to the Government sector, reduction in protection means cutting tariffs, which will lead to a reduction in government revenue. In the short term, the government would need to increase its expenditure on unemployment to those individuals who lost their job resulted by less trade barriers. The gov also needs to consider on the political consequences of tariff reduction. In the short term, structural unemployment rate would rise and this would affect the voting ratios for the government as benefits of tariff reductions and free trade promotion would take a much longer period to arrive.
Through the significant change of Australia’s protection levels and the promotion of free trade, it is obvious that Australia’s major trading partners is shifting from European countries to the high trading potential Asian countries. This is due the enormous demand in many developing countries, which results in a greater market for export. This has brought a positive impact on Australia’s primary base industries such as minerals, therefore increasing the amount of export revenue for Australia. Free trade and the reduction in Protection result in the better performance of export as it generates Australia’s economic growth, which in turn benefits firms, individuals and the government sectors overall.
