Trade Liberalization in Australia - Literature review Example

Trade Liberation in Australia Name Professor Institution Course Date Trade Liberation in Australia Executive summary In the 21st century, trade has become a very important factor for growth and development within countries. Since countries cannot produce every product, they rely on one another for exchange products. For that reason, trade liberalization has recently increased greatly. This report will focus on trade liberation in Australia. In this topic, the report will provide the definition of trade liberalization, discuss the evolution of Australian trade and labour market policy, its benefits and effects on trade liberalization on economy, globalization and individual competitive firms and industries. At the end this report will provide a comprehensive picture of how trade liberalization has shaped Australian economy. Table of Contents Trade Liberation in Australia 2 Executive summary 2 Table of Contents 3 1.0 Introduction 4 2.0 Definition and overview 5 3.0 The evolution of Australian trade and labour market policy 5 4.0 Benefits Trade Liberation in Australia 6 4.1 Consumers gain 7 4.2 Competitive companies and industries also benefits 7 4.3 The auto industry illustrates the benefits 7 5.0 Effect on the economy 8 6.0 Effect on the globalization 9 7.0 Effect on the firm (competitive firms and industries) 9 8.0 Conclusion 10 9.0 References 11 10.0 Appendices 13 1.0 Introduction In the previous decades, Australia has undergone various rapid changes. In the process, the competition with its Asian pacific counterparts such as India, China and South Korea has intensified in terms of trade (Department of Foreign Affairs and Trade 2009, p.5). There has been rapid development, huge growth in demand and capacity, improved commodity prices and growth of global trade. The country realized due to comparative advantages they cannot satisfy all the societal needs, therefore have to depend on other countries to supply goods they are not endowed with. Hence, the country enforced trade liberalization policies from 1970s which has enabled it to open its market for global trade (Murtough, Pearson & Wreford 1998, p.1). Since then, Australia has imported goods from low-income countries to satisfy product demands. Based on the information, this report will focus on trade liberation in Australia. Also, the report will discuss the evolution of Australian trade and labour market policy, its benefits and effects on trade liberalization on economy, globalization and individual competitive firms and industries. To put this report into perspective, it will first define trade liberalization. 2.0 Definition and overview According to Pugel (2007), trade liberalization is defined as the process of removing or reducing of barriers or restrictions on free exchange of products between different countries. Such process entails eradication or just the reduction of non-tariff such as quotas and licensing rules, and tariff such as duties. WacZiarg & Welch, (2008, p.189) contend that this has been adopted by many countries on the account that advocates of this school of law believe that trade liberalization reduces consumer costs, foster economic growth and creates efficiency. There are two simple means to understand trade liberalization; this topic can be understood through analysis of comparative advantage and analysis of effects of tariff (Blinder 2008). Not similar to numerous nations, Australia adopted trade liberalization through its policies which is separate from the usual bargaining process which is done under WTO and GATT policies. Its efforts were however rewarded through its reforms that were conducted in following multilateral trade concessions. Department of Foreign Affairs and Trade (2009, p.5) believe that Australia will gain much from trade liberalization in the next 20 years despites the challenges. 3.0 The evolution of Australian trade and labour market policy The trade policies in Australia dates back in 1970 when there was a widespread theory that creating trade barriers is likely to increase wages (Murtough, Pearson & Wreford 1998, p.2). Within this period, it was hypothesized that Australia required to admit more immigrants and this could simply by done by applying protection measures to increase wages in the manufacturing industry. Murtough Pearson & Wreford (1998, p.2) claim that the same logic is supported by Brigden Report of 1929 on tariff policy which was ordered by the government of Australia. However, Brigden Report was against raising tariffs beyond the 1929 level. Fundamentally, economic strategy of Australia before 80’s was to reallocate income made by its successful export industries that were mainly capital intensive operation and land to more labour demanding manufacturing sector (Murtough, Pearson & Wreford 1998, p.3. The characteristic of this approach was a centralized wage fixation system which ensured that gains from local manufactures were from the protection strategy and was shared with the workforce. Banks (2003) asserts that this rendered Australia as one of the most protected economies within OECD by early 70’s and the country was bearing huge costs on an economy based on the strategy. It made economic policy makers and thinker to question time and again whether the strongly regulated labour market and protection strategy maintained employment and real wages. The decisive moment was actually in 1973 when government of day lowered tariffs by 25% so as to ease inflationary pressures, but again reversed the decision the following year terming it ineffective (Department of Foreign Affairs and Trade 2009, p.7). Another momentum change in the 80’s Australian products’ prices declined in global markets. In the process, the approach of taxing its own mining exports and agricultural produce to support import of products had turned out to be unprofitable. In 1988, the government of Australia reacted through its Economic Statement by initiating tariff reduction on a general basis (Murtough, Pearson & Wreford 1998, p2). Since then, Australia has made great strides based on economic growth perspective. 4.0 Benefits Trade Liberation in Australia In Australia, trade liberalization and deregulation started in 70s. Since then, Australia has undergone an economic transformation where the set policies have played a critical role. In a nutshell, trade has led to several benefits on an individual basis and the whole country. Benefits from trade liberalization in Australia include consumer gain, gains from competitive firms and industries and benefits in the auto industry. 4.1 Consumers gain This perspective will be analyzed on the basis of tariffs and tax. Normally, tariffs are described as tax of use. According to Banks (2003, p.4), the tariffs raise not just the import costs but also the costs which domestic manufactures and producers charge for the competing goods. Removing or reducing that form of tax implies that with time, Australian customers will be able to purchase similar quantity of product and services will less amount of money. This will leave consumer with some money to spend further. Removing trade tariffs means there are more products on the market, hence variety products to choose from (Banks 2003, p.5). 4.2 Competitive companies and industries also benefits Low tariffs for one Australian Industry make more benefits for companies in other sectors. This is because additional consumer spending power increases the demand for products or services (Banks 2003, p.5). In a better sense is that low tariffs imply that Australian business will have low cots of inputs. Banks (2003, p.5) claims that Australian companies that export farm produces has benefited because tariffs were lowered on machineries. 4.3 The auto industry illustrates the benefits While opponents claim that trade liberalization has brought negative effect on Australian auto industry, it has also brought more benefits. The growing import competition of cars has apparently inspired local vehicle producers and assemblers to embrace more innovative and effective manufacturing practices, to improve quality standards stare at new global market (Banks 2003, p.6). One of such Australian companies is an Elfin Sports Cars Company which has produced cars which participates in Formula 1. 5.0 Effect on the economy The revolution towards trade liberalization started way back in mid-1970s and has been accompanied by major economic changes in Australia (Department of Foreign Affairs and Trade 2009, p.7). It can be argued that trade liberalization has positive and negative effects on the economy. Particularly, it influences consumer, competition, innovation and employment, among others. Department of Foreign Affairs and Trade (2009, p.8) posits that usually, tariff has a great bearing on household spending. When the Australian government imposes tariff on one product and leave other, others which are left will be in demand. This is because producers will hike the price of products of with high tariffs to recover the cost of production hence consumers will look for alternatives which is cheaper (Department of Foreign Affairs and Trade 2009, p.8). When the demand is created on goods with no or lower tariffs, manufacturers will produce more compared to products with higher tariffs. The same department claim that Trade liberalization leads to increase in imports (p.8). In the process, it will increase competition between local producers and international producers. On the consumer front, Australian citizens will have quality and variety of products to choose in the market. However, this have may worse balance of trade thus in the long run could lead to economic stagnation of the country (Ghani 2011, p.4). Trade liberalization leads to competition because more business enters into the market. When competition increase, firms are likely to innovate and produce high quality product competitive. According to Kneller, Morgan & Kanchanahatakij (2008) p.707), trade liberalization also has some dynamic effects on employment. Open economy like Australia has over the years open up new investment opportunities resulting in capital accumulation and transfer of technical knowledge, and as a result improved productivity leading to economic growth (Banks 2003, p.6). 6.0 Effect on the globalization In the recent years, globalization has intensified as companies cross borders to invest in foreign companies. Economics experts claim that trade liberalization is responsible for the increase in globalization. Steven et al (2006) stated that trade liberalization policies at different levels, such as regional, bilateral and multilateral have become extremely successful now and in the past 30 years. Wniters (2004, p.117) argues that increase in trade liberalization has made countries to streamline their trade policies to match those of other global countries. This is because countries are interested in forming an economic bloc to be able to conduct business with others. For example, Australia today exports its products to other members of Asia-Pacific Economic Cooperation including Japan, South Korea, New Zealand Malaysia, Russia, and Singapore (Fazzone 2012, p.699). Similarly, these countries also imports goods to Australia. Trade liberalization also has negative effect such as product dumping and unemployment. 7.0 Effect on the firm (competitive firms and industries) Trade liberalization has impacted companies and industries on different levels. During protectionism practice, Australian auto industry could not grow and stayed many years as infant (Department of Foreign Affairs and Trade 2009, p.46). However, in dairy industry, companies and individual farmers were first affected by trade liberalization but later benefited from its reforms (see figure appendix 1). Between 1968 and 1985, Australian motor industry received government support on the basis of non-tariffs and trade tariffs (Department of Foreign Affairs and Trade 2009). This did not even make the industry grow as its companies like Holden Motors were registering low performance. The department of tread went ahead to say that it was until in 2003 when the government lowered tariffs to 10 percent that it made a substantial growth and is now optimistic concerning the future (46). Increase in importation has made local producers to be more innovative and also target new external markets. Similar effects were also experienced in the dairy industry as farm products increased by 26 percent (Department of Foreign Affairs and Trade 2009, p.44). 8.0 Conclusion The report has established that Australia has received significant economic growth from trade liberalization for more than 30 years. Over this time, trade liberalization has involved policies which facilitate investment flows and national welfare gains. However, the country has also faced challenges that come with trade liberalization such unemployment, dumping of goods and imbalance of trade. This is because liberalization is not an end to itself and there must be grounds for particular measures which restrict trade to some extent. In that case, Australian government has role to ensure that local companies and industries are protected from external competition. 9.0 References Banks, G 2003, Gaining from trade liberalization: some reflections on Australia’s experience, Productivity Commission, pp.1-17. Blinder, A.S 2008, "Free Trade", In David R. Henderson (ed.), Concise Encyclopedia of Economics (2nd ed.), Indianapolis, Library of Economics and Liberty Department of Foreign Affairs and Trade (DFAT), 2009, Benefits of trade and trade liberalization, Centre for International Economics Canberra & Sydney, pp.1-50. Fazzone, P.B.2012, The Trans-Pacific Partnership—Towards a Free Trade Agreement of Asia Pacific? Georgetown Journal of International Law, Vol. 43, No.3, pp. 695–743. Ghani, G.M 2011, The Impact of Trade Liberation on the Economic Performance of OIC Member Countries, Journal of Economic Cooperation and development, Vol.32, No.1, pp.1-18. Kneller, R, Morgan, C.W & Kanchanahatakij, S 2008, Trade Liberalization and Economic Growth, World Economy, Vol. 31, pp. 701-719. Murtough, G, Pearson, K & Wreford, P 1998, Trade Liberalization and Earnings Distribution in Australia, Industry Commission Staff Research Paper, AGPS, Canberra, pp.1-67. Pugel, T. A 2007, International Economics, 13th edition, New York, McGraw-Hill Irwin. Steven, B, Garretsen, H, Marrewijk, C.V, Witteloostuijn, A.V 2006, Nations and Firms in the Global Economy : An Introduction to International Economics and Business, Cambridge: Cambridge University Press. WacZiarg, R & Welch, 2008, Trade Liberalization and Growth: New Evidence, World Bank Economic Review, Vol. 22, pp187-231. Wniters, L.A, 2004, Trade Liberalization and Economic Performance: An Overview, Economic Journal, pp. 114-127. 10.0 Appendices Appendix 1: shows minimal performance of dairy industry during protection Appendix 1: shows high performance of dairy industry during deregulation Source: (Department of Foreign Affairs and Trade 2009, p.45) Read More