Often discussed, Australia is a unilaterally trade liberalised economy- that is, the nation actively and openly advocates for free trade through low tariffs, strong regional economic connections and a both extremely competitive and dominant mining and service sector. The ability to balance government-based industry protection, whilst also having the restraint to accept structural change through trade liberalisation has been a driving factor behind consistent economic growth (pre pandemic) and the high efficiency in key domestic sectors.
The Pandemic and now, a re-structured world, has exposed the importance of this stance for the Australian economy. Through great trade relations, Australia are able to exploit inelastic demand for its exports, supporting Aggregate demand through a recession, whilst also gaining access to low cost imports and other essential products to aid our economic recovery, particularly in elaborately transformed manufacturers (ETM’s), key for manufacturing and healthcare services.
Despite testing geopolitical tensions, Australia’s most important bi-lateral Free trade agreement is ChAFTA – the China-Australia Free trade agreement. Formed in Dec 2015, it has “unlocked significant export opportunities for Australia’s third largest export market”, and upon full implementation in 2025, this agreement will ensure 95% of exports to China will be tariff free. Such a deal will prove pivotal in addressing a 10% contraction in Australian manufacturing exports, as access to a large middle-class consumer pool with high demand and willingness to pay for quality Australian manufactured goods will support this domestic industry, which has been on a small ‘resurgence’ during COVID.
The Pandemic has also exposed Australia’s need to diversify its large trade agreements beyond exclusively China. The Comprehensive and Progressive Trans-Pacific Partnership is a multi-lateral agreement made between 11 countries, representing 500 million people and 13% of global GDP, expected to eliminate 98% of tariffs in the trans-pacific marketplace – this is especially vital to Australia, providing unmatched access to a growing amount of consumers who possess high service demand. This effect is equally matched by the AANZFTA (ASEAN-Australian-NZ FTA) which is modelled to provide a $19b economic boost over the next 3 years through stronger trade as all economies intend to bounce back to pre-COVID growth levels.
Australia’s largest trade agreements drive economic growth predominately through Aggregate Demand. In accordance with the formula (AD = C+I+G+(X-M)), increasing exports to high demand economies like China through free trade will increase the X component of AD and provide much needed economic stimulus, whilst increasing the revenues of domestic firms producing the goods/services. Under ChAFTA, Australia will benefit from tariff free market access for beef and dairy (despite recent Barley trade disputes) - supporting Agricultural exports, whilst also removing tariffs on 14% of manufactured exports by 2024.
ChAFTA is also extremely important for the future development of services – corporates are able to operate tourism and hospital subsidiaries under complete Australian control, whilst introducing Australian owned healthcare services in China.
Additionally, the CPTPP intends to provide Australian agriculture another boost through tariff reductions for Beef exports to Japan, and new access for Australian grain exports, the first of its kind since 2000. Further, the CPTPP has also allowed for heightened financial service access via cross border advice on investments and portfolio management.
A shift in the Aggregate Demand to the right will increase GDP levels, but also increase the domestic price level. Hence, Aggregate Supply growth is equally important.
By providing opportunities to emerging sectors within the Australian economy (particularly services) trade partnerships increase the competitiveness and efficiency of these areas, and hence increases Aggregate Supply. Equally, these stronger sectors also hold the potential for strong long-term growth. Growth in AS results in an increase in GDP, and a decrease in price level.
Australia’s key free trade agreements are a fundamental example of microeconomic reform. Consequently, this induces structural change, which occurs when policy changes induce restructuring of the composition of industry and patterns in production over time. The removal of protection and the encouragement of free export and import flows exposes inefficient Australian firms to stronger foreign competition, resulting in a decrease of output and employment in these industries.
This has not been more evident than in Australia’s PMV (personal motor vehicle) industry, where 50,000 individuals lost their jobs and vacated major manufacturing centres in Geelong and Regional Victoria. Similarly, the downsizing of BlueScope Steel domestic operations has created significant structural change in the Port Kembla region, revealing how the ‘losers’ of Australia’s free trade agreements are incredibly ‘concentrated’.
Australia’s labour market is set to be impacted by ChAFTA in particular, propagating structural change. Key to the agreement was increased ‘free capital flows’ between the economies, with the intention of increasing investment in Australia. However, Chinese investors in projects over $150mil in value will receive the right to import temporary working migrants without labour market testing, limiting the employment benefits for the Australian employment.
Free trade agreements made by Australia have the capacity to address inflation directly through imported inflation. One overarching benefit of stronger imports is that Australian consumers can gain greater utility from cheaper, quality goods and services, and additionally, Australian businesses can import technical or non-technical factors of production at a lower cost. On average, business production inputs comprise 20% of total cost structure. This allows firms to produce goods with stronger profit margins, in a more efficient manner.
According to the productivity commission, Tariff reductions over the last decade, synonymous with trade liberalisation, have reduced input costs in service industries by $4.9 billion, reflecting the magnitude of greater import variety afforded by free trade.
This economic benefit is encapsulated by lower imported inflation, which occurs where the price of imports reduces. Because input goods are also heavily imported due to their competitive price, lower imported inflation also leads to reduced cost push inflation (a decrease in the prices of factors of production). This is beneficial because it reduces the threats of stagflation, where there are simultaneous reductions in GDP levels and increases in the level of inflation.
Australia’s experience of low imported inflation is captured by its membership in the CPTPP. Of the 11 countries involved, 3 are considered low cost, high productivity manufacturing centres – Mexico, Malaysia, Vietnam. Specifically, Mexico is a growing global influence, with Tijuana elected the second China of the world, becoming a focal point for strong productivity and low cost ‘Simple Transformed Manufactures’.