Explain the bilateral trade flow between China and Australia through the traditional and modern trade theories - Essay Example

?BILATERAL TRADE FLOW BETWEEN CHINA AND AUSTRALIA THROUGH TRADITIONAL AND MODERN TRADE THEORIES First 29-05 INTRUDUCTION: The country of China is one of the biggest and stands at third position among the countries of the world. The population of China is largest of all. The country has gone through a number of crucial events but the enthusiastic and painstaking people of this country never gave up their determination in being the fastest growing economy in the world. (Chambers, 2006). On the other hand, Australia’s economy has turned out to be extremely prominent and so the bilateral trade between China and Australia. The economic boom in China cannot be ignored world wide and constitutes a number of opportunities to trade with Australia. The gas treaty between the two countries had established as the predecessor in order strengthen their trade relationship. However, China needs to have raw materials and is an eminent buyer of liquid gas and minerals from Australia. The Prime Minister of Australia John Howard and President Hu Jintao of China decided on a Free Trade Agreement (FTA) as well. Hence china has become Australia’s chief customer whether it is Australia’s natural possessions or it the iron ore, which has made Australia expand its seaport to export more iron to China. The international relationship of China with Australia has been progressing since the year 1973 when the two governments signed the trade agreement and the bond between these two countries is growing even stronger day by day. The joint accords have been established since past 32 years related to numerous commodities such as dairy products, agriculture, raw materials, natural gas, iron ore, energy, hygiene guidelines along with capital protection and support for traditional aspects that have developed the business association of the two countries. *Footnote: Thomas Nicholas, Re-orienting Australia- china relations 1972 to the present, Great Britain, MPG Books LTd.2004. The relationship has further enhanced due to their combined Participation in APEC (Asia Pacific Economic Cooperation). The study also focuses on the Free Trade Agreement (FTA) and the challenges along with opportunities for Australia and China where the involvement of WTO (world trade organization) also plays a vital role. Initially the conciliation tool place in Sydney in 2005, May and continued till the beginning of year 2008 and had 11 negotiable meetings. A free trade agreement is a contract between two countries where tariffs are excluded from deals and it lies under the rules set by WTO.( Thomas, 2004) A gauge to determine the economic conditions of a country is its gross domestic product (GDP) which refers to a final worth of every product in a particular time frame and is measured in terms of comparison with last year (quarter of full year), e.g. if the current GDP of a country comes out to be 5%, it shows that the economy has raised by 5% in the current year. A negative GDP value indicates a state of recession in a country, leaving the investors in trouble due to economic crisis. A strong economy will lead to good salary increments as the companies stay in profit, while a fluctuation in GDP (up or down) will also affect the stock market and the investors. GDP may be calculated in two ways: first method is to calculate the total earnings and profits, and second way is the calculation of expenditure (amount spent in a year). China is considered as one of the largest economies in the world. According to The Economist 2004a, china stood at 3rd number in increasing global GDP and importing goods from the year 2000 – 2003. The country is famous for a wide range of products whether food stuff, machines, toys, plastics goods, electronic products, appliances, industrial goods such as food processing units, rubber goods, furniture, etc. The GDP of China is increasing by seven percent every year since last 5 years. The contribution of China to global economy is growing gradually and trade constitutes as a chief feature in making its economy stronger. Considering the gross domestic product of Australia from the year 1980 to 2010, due to economic fluctuation the percent change from 1980 to 1981 was 59.97% and was 140.93 % in the year 2010. China stands as 3rd biggest business and trade associate of Australia. Any prominent alteration in the China’s trade strategies may greatly affect Australia’s economy; therefore moderate and open-minded trade policies by China are essential for the economic growth of Australia through a bilateral trade between the two countries. (Australian Book of Statistics, 2008) INTERNATIONAL TRADE THEORIES: One major concern about bilateral trade between Australia and China is whether they obey the Principle of Comparative Advantage, according to which a state must focus on its export and import considering the areas where it is blessed with plenty of resources and products to be exported while on the other hand import those objects which it is deprived of. Hence Australia having ample of natural crops, dairy products and minerals, stays at beneficial side and able to export these products which are in abundance. The free trade agreement between Australia and China will affect the economies in 2 ways, first local manufacture of products may be substituted by low import price, second due to implementation of Preferential Tariffs to both trading partners there may be a substitution of *Footnote: Anderson: 1995, Heckscher: 1919, Ohlin, 1933. supplier (low cost import supplier) with greater price supplier within the country acting as a trade partner. The idea of free trade mutual benefits was explained in the Theory of Absolute Advantage (Smith, Adam). The theory of Comparative Advantage says if a country has abundance of agricultural goods like Australia, then it is having a comparative advantage to produce crops and promoting cultivation. Whereas China has a comparative advantage due to production of foot wears and clothes making both countries in a good symbiotic association as trade partners and for imports of scarce products and export of abundant goods. (David Ricardo) Hecksher- Ohlin Theory explains global trade patterns and manufacture. It gives an idea a country rich in specific goods is able to promote the export of those commodities whereas able to fulfill their scarce needs by means of import from trading partner.(Heckscher,Ohlin). Following two organizations play a significant role in China-Australia bilateral trade: World Trade Organization (WTO): This international organization helps various countries in stabilizing their economies by means of trade and works on agreements and negotiations to make better trade policies. It also helps them carrying out import and export easily and efficiently thus helping the producers and suppliers of trade partners. Since both Australia and China are the members of WTO therefore, had to comply with the trade policies set by WTO. APEC (Asia-Pacific Economic Cooperation): This organization acts as a standard in order to carry our bilateral or multilateral trade between China and Australia, it is important to know which way would be superior for these countries to make free trade agreements. Both these countries are dynamic elements of APEC and doing great with APEC as well as the area outside this organization. TRADE BETWEEN AUSTRALIA AND CHINA: International relations between countries is a broader term where many aspects have to be kept in view, but here we shall discuss the foreign trade affecting the economies of countries. When talking about China and Australia bilateral trade, it is observed that tariff rates for non-agricultural products of China are comparatively greater particularly for textile industry and clothes compared to Australia’s tariff rates on import of non-agricultural goods such as clothes, shoes and motors. Between the year 1998 to 1999 the two-sided trade of Australia with china raised from 10.1 billions of A$ to 22.6 billions (of A$) in the year 2002 to 2003. During the same interval, the whole sum of Australian exports to China raised from 3.9 billions (A$) to 8.8 billions, whereas the entire sum of import raised from 6.1 to 13.8 (billion A $). The chief commodities being export from Australia are crops, minerals and energies. Wool export to China remained extremely prominent which was about forty five percent in the year 2003. China is also famous for cultivation of various types of seeds, use of skin of animals, mineral assets, woods, rough form of oil. In the year 2003, 4 billion of US Dollars were gained by China while exporting its goods which was seventy percent of its export to Australia, that included machines, electronic items, shoes/sandals, along with clothes and other dress materials. (Mackerras, 1996). Trade between Australia and China, Year 2003 Product Name Export from Australia- China $(USm) Australian share of product % Export from China to Australia $ (USm) Chinese share of product % Wheat 0.7 0.00 0.0 0.0 Oil seeds 0.6 0.2 3.4 0.6 Forestry 17.5 23.5 0.8 0.1 Fish 5.2 1.3 0.9 0.1 Meat stuff 6.6 2.2 0.7 0.1 Dairy products 42.9 3.1 2.3 3.5 Iron products 206.8 27.6 0.0 0.0 Textile 103.1 12.3 687.2 1.8 Minerals 13.9 1.9 462.1 2.1 Edible oil (and fats) 3.8 4.8 1.1 0.3 Leather goods 26 6.8 234.9 1.2 Paper goods 60.6 8.2 79.8 2.6 Wool and silk 527.6 45.0 0.0 0.4 Machines and electronic items 244.7 3.7 2152.3 1.1 Tariffs in china are greater than in Australia but the policies of China are concerned with te reformation of its economy. Tariffs of China prior to its association with WTO was 15.3 percent but a gradual reduction was observed as follows: *Footnote: China Foreign economic relations and trade and Publishing House, Almanac of China’s Foregign economic relations and trade, China, 2000. 2003 11 % 2004 10.4% 2005 9.9% On the whole , Australian tariffs remained at 3.5 percent. Whenever there is any increase above 5 percent, policies are set to minimize the tariff rates in Australia to 5 %. ECONOMIES OF CHINA AND AUSTRALIA IN GLOBAL MARKET: The economies of these countries stand at separately at their respective developing phases. Both these countries complement each other and both are of specific importance within Asia and Pacific region and worldwide as well.( Vinod, Urata, 2006). Considering the gross domestic product(GDP), the economy of China stays at 4th number ( fourth largest in the world), whereas that of Australia is at 14th position globally. Globalization will lead to a situation where various cultures, culture, social aspects and customs mingled together and homogenize e.g. the products made in China are common in almost every part of the world like toys, clothing materials etc. *Footnote: Mackerras Colin, Australia and China: Partners in Asia, Malaysia, Macmillan Education Australia Pty ltd. 1996. If we consider globalization in terms of modernism, e.g. American culture is seen within Australia and a student coming to Australia for higher studies will adopt Australian culture and after getting back to the homeland, will tend to influence his own traditions. China 2005 Population 1.315.840.000 GDP 2.243.688.000.000 Australia 2005 20.160.000 712.436.000.000 Therefore GDP of Australia was much less than that of China despite of its huge population. There are various commodities that are abundant in China and not in Australia, however the countries are perfectly able to compensate the scarcity and abundance by means of carrying out imports and exports. For example, tourism is an important source where arrival and departure of tourists including visitors on vacations, businessmen, family and friends play a vital role in improving economy by tourism. According to statistics of the year 2005, China had 5.9 percent of tourists including those arrived and departed, and it took the position at 59, whereas Australia had 50.8 percent arrival and departure of tourists (approx 50.8% of total population) that made Australia at position 36 worldwide. International calls interchange in Australia kept it at position 11, while China at 64. It shows that Australia has been more into connecting with the worlds compared to China. Considering internet use, browsing, web hosting, emailing and using online transaction methods, Australia is extremely far away from China where in 2005 it had 70.39 percent of internet users (of its total population) that made Australia stood at third rank while China’ rank was at 55 having only 8.4 percent of internet users. (Australian Book of Statistics, 1988). The involvement of Australia and China with various international organizations such UN Peace keeping mission and participation in other accords and organizations was same for both countries in the year 2005, and both had 42nd rank for their contribution in global agencies. RECENT GDP ANALYSIS OF CHINA AND AUSTRALIA: Year China Australia 2006 11.1% 2.7% 2007 11.4% 2.7% 2008 9.6% 4.3% 2009 up to first quarter of 2010 8.7% 2.3% 2010 8.9% 1.2% 2011 9.6% 3.3% BARRIERS FOR TRADE: Despite of advantages of APEC and its cooperation, a number of issues and obstructions may arise due to increase in the number of members of the organization. Subsidy by government could be one of the barriers in trade that reduces the price of products. This will result in reduction of imports due to increase in the prices of international products compared to local goods. Tariffs are also potent barriers in carrying out trade between nations. Tariffs are taxes implemented on the import of goods. A tariff increases the cost of foreign products compared to local ones. Embargo is another obstacle in carrying out trade. It is the political influence by the government over trade that ceases imports of foreign products as well the exports Size of the population of a country may constitutes as a potential barrier in trade and development as the need of domestic products will increase within the country leaving it with less possibility to export outside the state of its own. Misunderstandings or poor understanding may also be one of the barriers. Below the standards quality of products. CONCLUSION: The economy of Australia is well-built, powerful, and energetic among other global economies. Having friendly trade policies with less dependence on tariffs and a true believer of neo-liberalism since 1980s. Australia and China have almost same perspectives regarding free trade agreements, reduction of taxes, lower inflation and reformation. The data in 2008 shows Australia is a highly productive country and capable of making use of all its natural resources as well as others specially in carrying out bilateral trade with its exceptionally potent 3rd trading partner that is China. (Cassen, 1982). The high GDP growth rate of China approx 7% to 9 % from 2000 to 2004. The GDP of Australia grew by 3.5 % from 2004 to 2005-06 with a continuous high productivity rate. The China Both countries believe in lowering inflation, making constant product prices, low taxes, increasing employment, promoting foreign trade, proper budgeting, high education, strict laws and mutual understanding. Australia is helping China in removing poverty from rural areas having less access to basic necessities. *Footnote: Chambers R. Micheal, Trade, interdependence and security, Canada, Donohue Group Inc, 2006. The bilateral trade relationship between Australia and China is progressing by 20 percent in past 5 years. Currently China is considered as 2nd largest trading partner of Australia which is China’s 11th biggest trade collaborator. It is clearly evident that FTA is mutually accepted by both Australia and China considering the economic growth of both countries and will also helps in increasing productivity and making favorable trade policies. China is a labor intensive country and the drastic boom in its economy is also due to the extreme efforts of its labors engaged in various industries such as clothing, electronic goods, computers, cell phones, appliances cameras etc. Similarly one of the strongest economy in the world that is of Australia rich in natural resources are working together for the same goal of removing poverty, lower the inflation, fixing commodity prices, education, employment opportunities through bilateral trade and help and negotiate with each other to keep their trade relationship committed leading to a further boom in their economies. *Footnote: Mackerras Colin, Australia and China: Partners in Asia, Malaysia, Macmillan Education Australia Pty ltd. 1996. *Australian Book of Statistics, 2008 Year Book Australia No. 90, Australia, ABS publication, 2008 BIBILIOGRAPHY: Australian Book of Statistics, 2008 Year Book Australia No. 90, Australia, ABS publication, 2008. 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