Analysis the Effects of Domestic and Global Free Trade

Analyse the effects of domestic and global free trade and protection policies on the Australian economy

Free trade is the unrestricted purchase and sale of goods and services between countries without the imposition of protection such as tariffs and quotas. This enables economies to focus on their core competitive advantage(s), thereby maximizing economic output and fostering income growth for their citizens. Australian exports rose from $66.6 billion in 1990-91 to $300.4 billion in 2012-13, with an average growth in export volumes of 4.

6 per cent per annum since 1990-91. This is reflective of Australia’s proactive actions to phase out protection since the 1970s. The major effects of domestic and global free trade and protection policies on the Australian economy are structural change, competitiveness and efficiency, unemployment, living standards and economic growth.

A move to trade liberalisation since the 1970s in Australia has drastically changed the structure of the economy. Structural change involves changes in the patterns of production that reflect changes in technology, consumer demand, global competitiveness and other factors.

Australia’s rural and manufacturing industries have suffered sustained negative growth over the past decade due to a reduction in domestic protection policies. On the contrary, the minerals and metals industry has grown significantly over this period. The removal of protectionism can jeopardise employment, especially in import competing industries and low-skilled labour industries. For example, Toyota and Holden will close their manufacturing operations partly due to tariffs on imported cars being reduced from a previous 50% to 5% in 2010, ending Australia’s car manufacturing sector by 2017. However, removing protectionism should lead to new employment opportunities and up-skilling of the workforce into new and emerging growth sectors such as Biotech and Green Engineering industries etc.

Australia’s composition of exports was relatively equal in 1989-90 with 33% being minerals and metals, rural 23%, services 20% and manufacturing 13%. As of 2012-13, minerals and metals dominated Australia’s composition of exports at 57%, whilst rural exports dropped to 12%, with a general decline in others. This not only shows the large impact of the mining boom on the Australia’s composition of exports, but also how a move to free trade has influenced the structure of the economy, especially agriculture and manufacturing. Globalisation has been both a benefit and a hindrance as regional trade blocs and other agreements work on a ‘most favoured nation’ principle, making export-competing industries suffer all around the world in small economies, and limiting the advancement of global free trade.

Because Australia has a high level of agricultural trade (12% of total exports), and is a relatively small economy, they suffer disadvantages as a result of protectionist policies of other nations and trading blocs. One of the most infamous trading blocs in relation to agriculture is the European Union. The EU for several decades has subsidised agricultural production through the Common Agricultural Policy. Additionally, farmers receive significant subsidies in other areas of the world, such as the US, Japan, Korea and Switzerland. In 2012, the Australian Bureau of Agricultural Resource Economics and Sciences (ABARES) estimated that the removal of China and Korea’s wine tariffs would increase the export revenue of the Australian wine industry by $47 million.

Unfortunately, there has been poor progress in reducing agricultural protection in recent years. In fact, if global trade liberalisation was achieved by the WTO’s Doha Round, it could have boosted Australia’s agricultural exports by US$9 billion by 2020; thus displaying how highly protectionist economies and trade blocs adversely affect the Australian economy.

Since Australia’s first free trade agreement (FTA) with New Zealand in 1983, Bilateral and Multilateral FTA’s have been a great advantage and focus in securing economic prosperity for Australia. Australia’s two-way trade in goods and services was A$616 bn in 2012. Australia has seven FTAs currently in force with New Zealand, Singapore, Thailand, US, Chile, ASEAN (with New Zealand) and Malaysia. Together, these countries account for 28% of Australia’s total trade, which displays the great benefit of bilateral FTAs to the Australian economy. Additionally, there are four bilateral FTA negotiations currently in place, two of which are substantial trading partners; China, being Australia’s largest export market (A$78.7 bn) and Japan, being Australia’s second largest export market (A$49.8 bn).

The Japanese Free Trade Agreement has been negotiated, and will be a great benefit to the Australian economy, especially the agricultural sector, for example tariffs on beef and dairy exports will be reduced from 38% to 23.5% over 20 years. Australia’s main multilateral agreement is the AANZFTA which came into effect in 2010, and covers 20% of Australia’s trade in goods and services and effectively creates a free trade area of over 600 million people. This agreement is forecast to boost the Australian economy by US$19 bn during the decade following its implementation in 2010. These examples of Australia’s FTAs show the positive effects of global free trade on the Australian economy. As Australia continually lowers protection levels and trade barriers, there will be both positive and negative effects, leading to a long term decrease in the current account deficit. When protection is lowered, there will be a short term increase in the CAD, as tariffs and quotas will be waived leading to higher export volumes. However, since less protection leads to a more competitive economy, the CAD will decrease in the longer term as exports will generally increase.

The government’s reluctance to lower trade barriers up until the 1970-80s is arguably the reason for Australia’s lower competiveness and higher CAD, being a deficit of $23 bn in 2012, and $10 bn in the fourth quarter of 2013. Australia’s growth in exports reached 6% in 2012, double the average rate over the last 10 years. However, this has not contributed to any decrease in the CAD, as export prices declined by 10.2%, and Australia’s terms of trade decreased by 10.7% mainly due to the slowing of the mining boom. As protection levels reduce, hopefully the competitiveness of the Australian economy picks up during this period of structural change, leading to a long term decrease in the CAD. The effects of domestic and global free trade, although mostly negative in the short term, will increase Australia’s competitiveness and benefit the Australian economy in the long term. Unfortunately, many regional and unilateral protection polices still remain in place, disadvantaging the economy in many ways, and limiting the advancement of global free trade.