Economics Topic 2: Aus place in global eco

1987 policy protection

Commenced phasing out of TCF (textiles, clothing, footwear) quotas Affects Textile, clothing and footwear industries.

Changing composition of Aus trade

- 2016-17 Aus top 5 g and s exports were iron ore and concentrates ($62.8 billion), coal ($54.3 billion), education related travel services ($28.0 billion), natural gas (22.3 billion) and personal travel services (21.7 bill) - Aus top 5 g and s imports in 16-17 were personal travel (37.6 billion), passenger motor vehicles (21.8 bill), refined petroleum (17.4 billion), telecommunication equipment and parts (12.0 bill) and crude petroleum (8.6 billion) - Primary industries always been main focus of exports due to CA - Exported high volumes of agricultural products, eg: wheat, wool, beef, and minerals, eg: coal, iron ore. - Less competitive in manufacturing, rely on its primary exports while importing large quantities of capital G and manufactured consumer goods. - 16-17 = total exports increased from $312 billion to $365 billion - Agriculture and manufacturing have declined as export earners, minerals and metals increased due to global commodities boom, trend likely to increase ○ Agricultural and mineral decreased due to large fluctuations in world prices as well as trade protection policies of other countries - Service exports hold greatest potential for growth over the medium to long term. Aus have sophisticated service industry and highly skilled workforce ○ In recent decades, grown substantial export markets for education services, financial services, insurance and tourism.

Australian Foreign investment o/s

- Aus I o/s generally refers to the stock foreign financial assets owned by Aus residents and grew significantly from $108,000 million in 1990 to $2.2 trillion in 2016-17 - The reasons for the increased in Aus foreign I abroad include the rising offshore interests of large Aus companies, eg: Rio-Tinto, BHP Billiton, NAB and businesses securing new export markets and seeking higher rates of return on their I and spreading the financial risks associated with their business activities. (Spread it out all over, not all concentrated here so if something here goes wrong = bad)

Capital account

- Capital and financial account: This is a combination of two accounts which are reversible, ie: can be undone. - Capital account: transactions of acquisitions/disposals or non-produced, non-financial assets and capital transfers. Relates to capital investment and consists of two main components: - Acquisitions/disposal of non-produced non-financial assets, purchase or sale of intangible, non-financial assets, such as patents, copyrights, trademarks, franchises and licenses - Capital transfers: 'Conditional' foreign aid grants and debt forgiveness???

Changing direction of Aus trade

- China was Aus largest two way goods and s trading partner in 2016-17, accounting for 23.8% (174.7 billion) of total trade. - Japan was 2nd largest trading partner accounting for 9.3% ($68.6 billion) followed by USA=9% ($66.5 billion) - APEC members accounted for 71.9% of Aus total trade - ASEAN members accounted for 13.7% - European union= 13.5% - G20 members = 69.8% - OECD countries = 43.7% - China was Aus largest export destination (valued $110,4 billion) and import source (valued at $64.3 billion) - In the 1950's, mainly traded with a and other European countries. Changed at UK joined the Eu in 1973 = 1973 trading bloc = restrictions against us ○ Recent decades trade patterns shifted to Japan became major buyer of Aus exports, due to their standards of living increasing an development/growth, resource poor, need ours ○ More recently, China, Sth Korea and ASEAN countries have become increasingly important. China early 200s increased dramatically making it largest trading partner. 2016-17 accounted for more than 1/3 of Aus exports earnings from merchandise trade, more than double that of Japan - 2020: further shift in direction of Aus trade towards other rapidly growing Asian eco ○ By 2020, Asia expected to account for 43% of global trade flows and be responsible for the majority of world trade growth ○ While trade with North Asia will still account for Aus largest trading relationships, with China and Japan remaining top 2 trading partners, Aus likely to experience strong growth in markets in Sth East Asia and Sth Asia, eg: India, which is now a larger export market for Aus than US.

Formula's

- Current account + Capital and financial account = 0 - Current account = Goods (exports - imports) + services (exports - imports) + net primary income + net secondary income - Net goods + net services = balance of G and S (BOG) - Capital and financial account = capital account + foreign account + direct investment + portfolio investment + financial derivatives + other investments + reserve assets

Current account

- Current account: all transactions which are current in nature and are non-reversible, ie: they can't be undone. Transactions include: goods, services, primary income and secondary income

Exchange rate def

- Def: the exchange rate is the price of one currency expressed in terms of another, eg: AUD 1 = $US 0.77

Australia's top 10 goods and services imports: (tends to M capital and intermediate goods, then consumer goods. Consumer goods not main one.

1) Personal travel (excl education) services 2) Passenger motor vehicles (not cars) 3) Refined petroleum (intermediate) 4) Telecom equipment and parts (capital) 5) Crude petroleum (intermediate) 6) Freight transportation services 7) Goods vehicles 8) Computers 9) Medicaments (incl vetinary) 10) Gold

Who demands AUD

- Demand for Aus dollars is represents by all those people who wish to buy $A, examples of these buyers (in order of their impact on currency price) (due to globalisation as tech and communications increa - se) ○ FOREX speculators buying AUD when they anticipate it to appreciate ○ O/S investors (FD and portfolio i) in Aus (demand due to increase in IBC, Aus I rates higher than majority of world = more return) § However, FOREX spec and O/S investors can swap places ○ O/S buyers of Aus X's (demand due to increase in IBC) ○ Overseas tourist visiting Aus and therefore exchange their money to ours.

Direct intervention by RBA with exchange rate

- Direct intervention: - The RBA may enter the FOREX market as either a buyer or a seller of AUD in order to reduce the fluctuations in the exchange rate. They make it publically known that they are going into the market. - To reduce the extent of a depreciation of the AUD the RBA will enter the FOREX market as a buyer of AUD (in order to increase the demand for AUD) - To reduce the extent of an appreciation of the AUD the RBA will enter the FOREX market as a seller in order to increase demand for AUD. - Limitations of RBA direct intervention: § Don't have unlimited reserves of foreign currencies § Don't have capacity to move ex rate up very far, only 1 cent, eg: from 0.55 to 0.56 § Market forces, usally speculators can come in and change what RBA have done. It is not a real attempt to alter to X rate, rather give fin markets an indication where it should be

Composition, foreign investment flows

- Direct investment: lasting interest, 10% interest in equity or ownership promoted - Portfolio investment: shares, options, bonds, notes, <10% speculative - Other - Financial derivatives, trade credits, loans, derivatives.

Five categories of financial account are:

- Direct investment: which is investment by resident in another country in another economy of 10% or more of voting power - Portfolio investment: This comprises of bonds, notes and money market instruments???? The owner is assumed not to have an influence on operation of the enterprise - Financial derivatives: Used for risk management hedging a bridge and to generate a return - Other investments - Reserve assets: foreign financial assets owned by Central Bank of Aus????? Balance of Payments: uses a double entry system of accounting in principle the sum of all credit entries is identical to the sum of all debit entries and the net balance of all entries in a BoP is zero. BOP always equals zero

Financial account

- Financial account: transactions in foreign financial assets and liabilities, eg: shares, bonds and loans, between residents and non-residents ○ Financial assets: Financial claims by Aus residents or non residents, ie: Australian investments abroad, eg: Aus bank loans money to non-resident ○ Financial liabilities: Financial claims on Aus residents by non-residents, eg: an Aus company issues euro bonds which are held by non residents

Inter I has 2 dimensions

- Foreign investment in Aus (capital inflow): refers to the stock of Aus liabilities owed to o/s (money, not equipment and tech of financial) - Aus foreign I o/s (capital outflow): refers to the stock of foreign financial assets owned by Aus. How much capital flowing out of Aus

Four categories of BOGS

- Four categories: net goods, net services, net primary income, net secondary income ○ Net goods: physically produced items, eg: iron ore, cars ○ Net services: Services rendered??? Eg: UK backpacker holiday at Barrier reef ○ Call net goods + net services a trade balance ○ Net primary income: Return from the factors of production, eg: labour: income, Land: rent, etc. ○ Net secondary income: Income with no return, eg: insurance claim, pension. ?????? ○ Net primary income + net secondary income = Net income balance

Value of Aus trade

- In 2016-17, the value of Aus' exports of g and s rose 16.8% to $373.2 billion - Aus imports of g and s grew 1.4% to $362.2 billion in 2016-17 - Aus export volumes rose 5.4% in 2016-17 with values of minerals and fuels up 5.3%, rural g up 11.7% and services up 7.5% - Import values increased 4.8% with gold up 18.6%, consumption goods up 3.6% and capital goods up 11.6% - Produce around 2% of GWP - Export around 1/5 of what we produce and import around 1/5 of Gdp.

Australia's Top 10 foreign investment destinations 2015:

1) US: total investment 594425 2) UK: 353204 3) New Zealand: 98693 4) Japan: 93164 5) China: 70230 6) Singapore: 67056 7) Germany: 66914 8) Hong Kong: 50,696 9) Cayman Islands: 49516 10) France: 45616

Aus top 10 foreign investment sources 2015

1) US: total investment: 860, 313 2) UK: total investment: 499930 3) Belgium: 238544 4) Japan: 199596 5) Singapore: 98579 6) Hong Kong: 85359 7) China: 74862 8) The Netherlands: 62995 9) Luxembourg: 58322 10) Switzerland: 50198

Other cyclical factors affecting the current Acc and BoP

- In addition to movement in the T of T, there are a range of other cyclical factors that can influence the size of Aus's current ac and B of P. - These include: 1) Movements in the exchange rate - affect our levels of inter comp of Aus x's and the relative price of our M's. - A depreciation of the AUD decreases the price of our x's on overseas markets while increasing the price of M's in Aus, thus increase Aus' inter comp. This increases exports credits and decreases M debits, leading to an improvement in the BOGS and a decrease of the CAD - An appreciation of the AUD increases the price of our x's on overseas markets while decreases the price of M's in aus, thus decreasing Aus inter comp. This decreases X credits and increases M debits leading to a deterioration in the BOGS and an increases in the CAD. - A recent depreciation of the AUD resulted in the BOGS recording a surplus of $12billion in 2016-17. This was also assisted by a surge in the terms of trade of 21% in the year to June 2017. 2) Domestic eco growth: affects the BOGS component of the current acc - Strong domestic growth -> higher Y -> increased spending on M's, worsening the BOGS. - Slow domestic growth -> reduced Y -> decreased spending on M's, helps BOGS move into surplus (improving BOGS) - During the GFC, the slowdown in growth in Aus led to a decrease in spending on M and helped the BOGS move into surplus in 2008-09. - Since 2010, growth in household spending has remained subdued, business I has declined from around 8% to 3% of GDP and household savings have remained higher than historical averages. This is partially due to increased uncertainty in global eco. This has reduced the extent to which increaaes in domestic Y levels have spilled over into higher M expenditure, reducing the growth in M. 3) International business cycle, can impact on the BOGS by affecting the global demand for Aus x's. - Strong global growth can increase demand for Aus x's, improving the BOGS. - Slowdown in global eco growth and weaker growth in Aus' key regional trading partners both reduce growth in demand for Aus exports, worsening the BOGS. - Over the last decade, our eco has been more closely integrated to faster growing eco than many other developed countries. A continuation of this success depends on strengthen trade linkages with the eco that are most likely to drive global eco growth in the 2020's, such as India.

Who Supply AUD

- Supply of Aus dollars is represented by all those people who wish to sell $A, examples of such sellers are: ○ FOREX speculators selling AUD ○ Aus investors undertaking FDI and PI o/s ○ Aus buying o/s imports ○ Aus tourist travelling o/s

Key info about terms of trade

- Terms of trade is not in the balance of payments but affects it - Favourable: price of exports goes up but imports don't go up as high. Thus we are getting more money from exports and now have more money to buy imports. - Unfavourable: price of imports goes up but exports don't go up as high. Thus, we are paying more for imports and have less money - Favourable movement: positive for Aus eco as it improves international purchasing power, this then causes an improvement in export contribution to Current Account. Due to nation able to purchase more (volume) of imports as export prices increased. Favourable = improves exports in CA. Also export prices have risen therefore exporters receive more money for selling same amount of G and S. This improves Good balance of CA. - Improvement/favourable in T of T (export more expensive, m cheaper) = deterioration in CA, decrease in CAD (decreasing deficit as more coming in and less going out). - Deterioration in T of T (X cheaper, M more expensive) = improvement in CA, improves CAD (more going out, less coming in, increasing deficit)

Terms of trade

- Terms of trade measures the relative movement in the prices of an eco's M and X over a period of time. The terms of trade index is calculated as X price index divided by M price index, multiplied by 100. - Terms of trade: export price index/import price index x 100/1 - The X price index: represents a weighted (whether it has an impact) average of prices Aus received for its main exports. - The M price index: represents a weighted average of prices paid for Aus's main imports. - Index number diff to %, T of T improved/favourable or deteriorated/unfavourable, not increased or decreased. Year Export price index Import price index Terms of Trade 1 100 100 100 2 110 100 110.0 3 115 120 95.8 § Comparisons against the base year can be made. For example, in Year 2, the X price index has risen to 110. This means that X prices have increased in value by 10%. M prices have stayed the same. The overall terms of trade value is now 110 which means that with the same volume of X we are able to purchase a greater volume of imports . This is referred to as being a favourable movement in the terms of trade. (More money, thus buy more) § In Year 3, the x price has once again risen but the M price index has risen at a higher rate. In the case the overall value of the terms of trade has deteriorated to 95.8. This is referred to as being an unfavourable movement in the terms of trade because with a given volume of X, we can buy less M than the previous years.

Trends in financial flows - debt and equity borrowings from abroad:

Another way to view Aus financial flows is to divide Aus' International I into 2 categories - Debt: borrowing from and lendig to o/s - Equity: Investment (direct and portfolio)

Indirect intervention by RBA with ex rate

- The RBA can affect the demand for the AUD through its manipulation of the cash rate via monetary policy. - Increasing the cash rate and raising the level of interest rates in the economy will lead to a change in interest rate differentials, making investing into Aus more attractive, thus increasing foreign capital inflow into Aus. This leads to an increase demand and decrease in supply for AUD, resulting in an appreciation in the AUD. Decreasing the cash rate and lowering the level of interest rates in the economy will lead to a change in interest rate differentials, making investing in Aus less attractive thus decreasing foreign capital inflow. This leads to a decrease in demand for AUD and increase in supply, resulting in a depreciation in the AUD.

Australia's balance of payments

- The balance of payments is a record of all financial transactions between Aus and the rest of the world over a given period of time § Recorded, data collected by ABS § Annual or quartely data - It is comprised of 2 accounts: 1) The Current Account: records the receipts (income) and payments for trade in G and S and flows of Y between Aus and the rest of the world over a given time period. 2) The capital and financial account: records the borrowing, lending, sales (FDI) and purchases of assets between Aus and the rest of the world over a given time period. - Current account + capital and financial account = 0 § CAD, current account deficit, negative, means more going out than in this account § Capital and financial account: have to run surplus to equal zero, positive, more coming in than going out in this account.

Capital and financial account

- The capital and financial account records flows of investment funds and capital transfers between Australia and the rest of the world. - The capital account consists of two main components 1) Capital transfers mainly in the form of 'conditional' foreign loa grants, linked to specific capital project, eg: to help build infrastructure or capital stock and debt forgiveness. 2) Second item is entries for the purchase and sale of non produced, non financial assets, mainly intellectual property rights eg: patents, copyrights, trademarks, franchises eg: Australian company buying the rights from US company to operate a Subway outlets in Australia. - The financial account records flows of investment funds between Australia and the rest of the world. The most important parts in this account are the four main types of investment flows it records: • Direct investment: involves the expansion or purchase of companies and assets by foreigners. More than 10% of shares in existing company. Usually in surplus • Portfolio investment: transactions involving the purchase of shares, debt and securities in existing companies. Largest item on the capital of financial account and it is usually in deficit. Where most foreign debt is recorded • Other investment: financial derivatives are instruments used for risk management (hedging), arbitrage and to generate return. Other investment predominantly covers trade credits and loans and deposits. Cvoers trade credits, loans, including financial leases, currency and deposits and other accounts payable and receive • Reserve assets: Refer to those foreign financial assets that are available to and controlled by, monetary authority, the Reserve Bank of Australia, for financing or regulating payment imbalances. Reserve assets include monetary gold, special drawing rights, reserve position in the International Monetary Fund and foreign exchange held by the RBA. - Being a relatively small nation, Australia needs foreign investment to finance expansion and growth. Consequently foreign investors who see that the economy is performing well are willing to invest into the Australian economy under the above three categories. However, the consequences for Australia of relying on foreign investment is that it adds to debt and future primary income debit which is recorded as debit items in the current account and subsequently impact on future current account deficits. - The current account deficit is financed by the net flow funds into Australia recorded under the capital and financial account. This is always equal to the size of the CAD. For example if the CAD were equal -$50 billion dollars then the capital and financial account balance would be $$5 billion. This makes the two accounts balance each other out and leave the overall balance equal to zero. - However it also means that Australians have increased the overall level of debt to the owners of these overseas funds and that Australia is level of foreign debt increase is partly due to the need to finance the cat each year.

Current account

- The current account of the B of P records transactions involving the export and import of g and s, primary and secondary Y - Major components are: ○ Goods, this is the difference between the value of exports of goods (eg coal, iron ore, ect) and imports (eg: capital, intermediate goods, etc) ○ Services, the difference between service credits and debits (eg: tourism, telecommunications, education and insurance) ○ Primary Y, the diff between credits and debits (c-d) for activities such as interest paid on foreign borrowings, profits paid to owners of overseas owned businesses and dividends paid to shareholders of major companies. Much larger in dollar value than trade is. Deficit in current account because of this is not exports and imports ○ Secondary Y, the diff between credits and debits (c-d) for gifts, pensions, taxes and foreign aid (unconditional, just giving money for them to use however, eg: emergency relief), non market transfers. - In Aus case, most important components influencing the current account are 'goods' and the 'primary incomes' figures. - In Aus case, the CA balance is always a negative figure, ie Aus has a CAD. This is because the sum of the credits recorded under the CA is less than the sum of debits recorded - The goods figure is often negative because our demand for M of g usually outweighs the value of our X of G. However, it has improved over recent years because of increased demand for commodity exports and the prices we are receiving for them as a result of the expanding market in Asia - Aus CAD has been below 4% of GDP, this had mostly been due to a positive G Balance and the stabilisation of the value of the primary incomes component. Influenced by cyclical factors, if inter bus cycle in upturn, we export more and if Aus has eco growth we import more. - Generally the CA is in def and tend to deteriorate during times when the eco grows rapidly, as Aus increase their demand for M. The CAD decreases in size when eco slows. Also greater inflow of for cap into the country - Recent trends in current account: ○ Usually in def, however the size of CAD varies greatly depending on the state of the Aus and world eco ○ Over the years, it has fluctuated in terms of its contribution to the overall current account balance. During the peark years of the mining boom (10-13) export receipts (money we earn from exports) from commodities such as irson ore and coal made a sign contribution to the G balance and helped to reduce the size of the current account def ○ However, despite record high volumes of exports of commodities during the period of 2014 to 2016 the goods balance became less favourable, mostly as a result of weaker world commodity prices due to increase world supply. This has resulted in the current account deficit increasing in value during those years. ○ During the peak years of the mining boom 2010 to 2013, the value of the Australian dollar was high. This encouraged Australians to travel overseas but discouraged foreign tourism to Australia. It also had an impact on international students travelling to Australia to study. However since 2015, the value of the Australian dollar has fallen, reversing the above trends and having opposite effect on the overall current account balance. ○ Throughout the period shown, the primary incomes figure has been high. By its nature this component represents Australia net obligations concerning interest payments for loans, dividends and profits. ○ Fortunately for Australia the figure has been falling mostly as a result of lower world interest rates which have made for and borrowing cheaper. ○ Australia relies heavily on foreign investment to finance it's growth and has accumulated large levels of debt obligations to overseas investors. ○ The key feature of the CAD is the fluctuations in its size are mostly brought about by changes to the goods balance. ○ If Australia is to continue to reduce its CAD then it must ensure that it strives to increase the value of it's exports relative to Imports.

Exchange rate info

- The exchange rate for the AUD can be defined as the value of another currency which 1 aus dollar can purchase on foreign exchange markets (FOREX) - The foreign exchange market (FOREX) is anywhere where foreign currencies can be bought and sold, exchanged - A fall in the exchange rate is called a depreciation - A rise in the exchange rate if called an appreciation - If the exchange rate falls, a given amount of AUD will buy less of another currency - If the exchange rate rises, a given amount of AUD will buy more of another currency - Trade weighted index: is a measure of the value of the Aus dollar against a basket of foreign currencies of major trading partners. These currencies are weighted according to their significance to Aus trade flows. Measures the movement of the AUD against a range of currencies - Downward movements in the TWI represent a depreciation of AUD against other currencies - Upward movements in the TWI represent an appreciation of AUD against other currencies - Since 2000, the Aus exchange rate appreciates until about 2011 before it depreciates - Aus is concerned the most with movements against Us and Japan Yen - AUD floated in 1983 - When TWI =100 then it is the base year, the year you compare it to.

Supply for AUD will be affected by

- The level of financial flows out of Aus by Aus investors who wish to invest overseas and who will need to sell $A and purchase foreign currency ○ The level of Aus interest rates relative to overseas interest rates will also be a critical factor influencing financial flows out of Aus and the supply of $A. Relatively lower Aus interest rates will make investing savings overseas more attractive and hence increase the supply of $A ○ The availability of investment opp overseas will also influence financial flow out of Aus. Great opps to start businesses overseas or to purchase shares in overseas companies will increase financial flows out of Aus and increase the supply of $A - Speculators in the FOREX market who expect the value of the $A to go down will sell $A, increasing the supply of $A and thus contributing to the anticipated depreciation - The ex rate will be affected by the dom demand for imports since Aus importer who buy from overseas need to sell $A in order to obtain foreign currencies to make import payments ○ Demand for imports will be determined by a range of factors within Aus. One of the most important levels of domestic Y. Strong eco growth and risingY and employment will result in the demand for M also rising, increasing the supply of Aus ○ The dom inflation rate and the competitiveness of dom firms that compete with imports will also influence M levels. If Aus dom inflation rate is higher and its M competing forms are relatively uncompetitive, M will be relatively cheaper than dom products and demand for M will be higher ○ Tastes and preferences of dom consumers change over time, and an increasing preference for G and S from overseas will raise the supply of Aus dollars on the foreign exchange market. - Increase in supply causes depreciation - Aus has many exchange rates, one for each of the currencies around the world, thus it is possible that at any given time, Aus exchange rate may be appreciating against some currencies, and depreciating against others. - SIMPLE: Supply of A$, shifts in the supply curve of A$ caused by factors other than price changes ○ When Aus buy o/s g and s and assets, they offer A$ in exchange for foreign currencies. This increases the supply of A$ in the forex market. As the A$ appreciates, the quantity (supply) of A$ increases because imports are now cheaper. Some of rhe important non price factors which affect the supply of A$ include: § The state of Aus eco: one of the most important determinants of the level of M is the level of Aus Gdp. When GDP increases then M increase (Aus has a high MPM). The supply curve shifts to the right and the value of A$ depreciates. When GDP falls then imports decrease. The supply curve shifts to the left and the value of A$ appreciates § Inflation rate differentials: when our inflation rate is higher than o/s, a reduction in the competitiveness of import competing occurs. Thus Aus by more M and the supply curve for A$ shifts to the right and the value of the A$ depreciates. (eg: our cars, so more expensive, so other countries not importing them as much cause get better price elsewhere § Interest rate differentials: When ir in Aus increase relative to o/s, there is a reduction in capital outflow. Aus investors prefer to increase their dom investment and decrease their o/s investment. The supply curve shifts to the left and the value of the A$ appreciates. (earn a greater return here then investing overseas, so invest here. Money is staying here and less going out) § Speculative factors: Speculation of a depreciation is associated with an increase in the supply of A$ and the supply curve shift to the right because Aus speculators which to hold assets in other currencies.

Disadvantages of foreign i in Aus

- The loss of ownership and control of resources - The cost of servincing overseas debt and equity repayments - The volatile nature of speculative portfolio flows on the exchange rates

Demand for AUD will be affected by

- The size of financial flows into Aus from foreign investors who wish to invest in Aus and need to convert their currency into $A ○ The level of Aus interest rates relative to overseas interest rates has a critical influence on the demand for $A. Relatively higher Aus interest rates make Aus a more attractive location for foreign savings and thus increase the demand for $A ○ The availability of investment opportunities in Aus will also strongly influence the demand for $A. If there are more opps for investors overseas, to start new businesses or buy into existing businesses via the share market, the demand for A$ will increase - Expectations of a future appreciation of the $A will increase current demand for $A by speculators, thus contributing to the expected appreciation - The demand for Aus exports, since the foreigners who buy Aus exports need to convert their currency into $A to pay Aus exporters ○ Changes in commodity prices and in terms of trade have tended to have an immediate effect on the dollar. A rise in commodity prices and an improvement in the terms of trade are generally associated with an increase in Aus exports. Fin markets will often respond to these changes by increasing the value of the dollar with an expectation that exports will increase over the short to medium term. ○ The demand for Aus exports will be influenced by the degree of international competitiveness of dom exporters and Aus inflation rate relative to overseas countries. If dom forms are competitive in world markets and Aus inflation rate is relatively low, Aus exports will generally be relatively cheaper and more attractive to foreign buyers ○ Changes in global eco conditions will also influence the overseas demand for exports. The demand for Aus commodity exports is highly dependent on the growth rates of Aus trading partners, when the world eco is on an upturn, demand and prices for Aus exports rise and vice versa. ○ Tastes and preferences of overseas consumers will also affect the demand for Aus exports - SIMPLE: Demand for A$ shifts the demand curve for A$ caused by factors other than price changes ○ Changes in state of inter eco: Any increase or decrease in world Y, ie world recessions or booms in eco growth can effect the demand for Aus's exports and hence A$. Upturn in BC = increased demand for X = increased demand for AUD ○ Changes in interest rate differentials: When Aus ir rise faster than ir overseas, Aus assets are made more attractive to o/s buyers and hence increase the demand for A$. When overseas ir rise faster than those in Aus the demand for A$ falls. Higher ir = increased FDI and PI = increased AUD = appreciates ○ Changes in inflation rate differentials: If the inflation rate in Aus rises above the inflation rate overseas, then Aus products become more expensive than their overseas equivalents. Demand for Aus exports will decrease, demand for the A$ will decrease and the demand curve shirts to the left, not one that really affects it cause all have low inflation ○ Speculative factors: demand for A$ is also influenced by expectations about future values of the ex rate. If speculators expect the value of the exchange rate to fall, they buy less and the value of the A$ will depreciate. This can be shown by a shift in the demand curve to the left. If they expect the ex rate to rise, they buy more A$ and the value of the A$ will appreciate. This can be shown by a shift in the demand curve to the right.

why Reserve bank intervention in the exchange rate

- The value of the ex. Rate is not specifically targeted by the RBA. For the most part, it is allowed to float "cleanly" through it s determination by the forces of demand and supply in the FOREX market. - However, the RBA may intervene directly and indirectly periodically to influence the value of the ex. Rate for 3 main reasons: - If the ex. Rate deviates from its long term path and becomes misaligned with other currencies, this may have adverse effects on key economic variables such as inflation, GDP and employment. Going away from normal direction - The RBA may view that changes in the ex. Rate are being bought about by volatile factors and excessive movements of speculators. In this case, the RBA may enter the forex market to "smooth" such volatility. Most likely to affect path and have RBA intervene, pushing it up or down for no real reason. - To prevent an excessive depreciation / appreciation and allow the RBA / Govt time to re-evaluate the conduct of Monetary and Fiscal Policies.

Different exchange rate regimes

- There are a number of methods that can be used to determine an ex rate 1) A flexible or floating ex rate is where the market forces of supply and demand determine the ex rate, clean float, when nothing else intervenes, RBA dirtying the float is when RBA goes in 2) A fixed exchange is where the gov (Central bank) determines the ex rate for a period of time based on the value of another countries currency such as the US dollar 3) A managed exchange rate is where the gov intervenes in the market to influence the exchange rate or set rate for short periods such as a day or week

History of TofT

- Throughout the secoIntnd half of the 20th Century, export prices for Australia's rural goods and commodities had been stable and even falling due to world oversupply. Prices for manufactured goods had been constantly rising over the same period which meant that the terms of trade were generally unfavourable for Australia. - This changed dramatically from the start of this century once China and India increased their rates of economic growth and development. Rising living standards in Asia have contributed to increased demand for rural products and commodities, helping to bring about a dramatic rise in rural and commodity prices. This has been of benefit to Australia with the export price index rising strongly and the overall terms of trade index reaching record high levels. - Australia has benefitted greatly from a favourable movement in its terms of trade over recent years. Table (and Figure) 22.1 show that the export price index has risen significantly before declining while overall there has been very little change in the import price index. This is very much related to the nature of Australia's exports and imports and the changes that have taken place with their prices. - For Australians this improvement in the T of T has effectively lifted the nation's level of national income as these producers receive higher income for their exports. - A favorable movement in the terms of trade (a rise in its value) is very positive for the economy as Australia improves its international purchasing power, which improves the export contribution to the current account. This is because, with a given volume of exports, the nation is able to purchase a greater volume of imports (due to the fact that export prices have risen relative to import prices). Also, because export prices have risen, exporters receive more for selling the same volume of goods or services. This helps to improve the goods balance of the current account. Since 2013, world supply has caught up with world demand and China's economy has entered a rebalancing phase which has seen its demand for mineral resources level off. These factors brought about a dramatic fall in Bulk Commodity prices although some improvement in prices did emerge in the later months of 2016 (refer to Chart 15.1). Consequently the Terms of Trade have fallen sharply which has had an impact on commodity export receipts. However, this fall in prices has been somewhat offset by high export volumes.

Determining the ex rate under a floating exchange

- When a currency is floating, the supply and demand for the currency determines its price (E/R). This can be illustrated with the use of simple supply and demand curves

Trends in Aus current acc

-Since 1960, only 3 years have been in surplus - 2017 current account deficit of $29,469

Australia's top export markets

1) China 2) Japan 3) Republic of Korea 4) United States 5) India 6) Hong Kong 7) New Zealand 8) United Kingdom 9) Singapore 10) Taiwan

Australia's top 10 trading partners

1) China 2) Japan 3) USA 4) Republic of Korea 5) UK 6) New Zealand 7) India 8) Singapore 9) Thailand 10) Germany

Australia's top import markets

1) China 2) United States 3) Japan 4) Thailand 5) Germany 6) Republic of Korea 7) United Kingdom 8) Singapore 9) New Zealand 10) Malaysia

For investment in Aus (capital inflow) can take four forms

1) Direct investment: refers to movement of funds between eco fro the purpose of est a new company or buying a substantial proportion of shares in an existing company (10% or more). Generally long term investment 2) Portfolio investment: consists of securities and other financial assets passively held by foreign investors. Less than 10% 3) Other foreign investment: industries trade credits, loans, currency and deposits 4) Financial derivatives: currency swaps and options

Australia's top 10 goods and services exports: (typically commodity export)

1) Iron ore and concentrates 2) Coal 3) Education related travel services (international students coming here. It is an export because they are paying money here. 4) Natural gas 5) Personal travel (excl education) services 6) Gold 7) Aluminium ores and conc (including aluminium) 8) Beef 9) Wheat 10) Crude petroleum

Gov aims in reducing protection are to:

1. Force domestic industries to become internationally competitive by exposing them to competition from imported goods. 2. Encourage resources to move away from industries and firms that cannot improve their competitiveness to those that can be more competitive - in other words, to focus on areas of the economy where Australia has a comparative advantage 3. Allow Australia to benefit from greater integration with the global economy, by giving consumers and businesses access to goods and services available on global markets at the lowest possible price 4. Promote structural changes in the economy with the long-term aim of encouraging efficient firms to produce what the global economy demands.

ASEAN-Australia-New Zealand

1. MEMBERS ○ Australia ○ New Zealand ○ Brunei ○ Cambodia ○ Indonesia ○ Laos ○ Malaysia ○ Myanmar ○ The Philippines ○ Singapore ○ Thailand ○ Vietnam 2. DATE SIGNED ○ Signed on the 27th of February 2007 and came into force in January 2010 3. COVERAGE ○ Covers around 20% of Australia's trade in goods and services and efficiently creates a free trade area of 650 million people with a combined GDP over US$4 trillion ○ Australia and the ASEAN economies are complementary economies, meaning that the type of goods that Australia can export - namely commodities which are in heavy demand in the industrialising nations of Southeast Asia ○ Southeast Asia can export to Australia those goods that we cannot produce competitively such as transformed manufactures produced in labour intensive industries 4. BENEFITS TO BE GAINED BY EACH MEMBER • Increased market access via progressive tariff reduction and elimination. ○ Zero tariffs at entry into force of the Agreement in 2010 for 96.5 percent, and 84.7 percent of Australia and New Zealand's tariff lines. ○ Further tariff reduction during transition until final tariff elimination for all tariff lines of Australia and New Zealand is achieved in 2020. • Application of the rules of origin will be further enhanced by the "advance ruling in writing" provisions in the Chapter on Customs Procedures as regards "tariff classification, question arising from the application of the principles in the WTO Agreement on Customs Valuation and/or origin of goods" which Parties agreed to adopt, subject to their domestic laws and regulations. The advance ruling provision would help shorten the time for checking and assessing goods at the ports of entry, thus, helping speed up the release of goods. • Improved market access and national treatment for trade in services. Australia and New Zealand's commitments in trade in services have gone beyond their commitments in the WTO. • Significant protection measures for covered investments including provision of an investor-state dispute settlement mechanism. • Inclusion of provisions that will facilitate the temporary movement of business persons such as business visitors, installers and services, executives of a business, intra-corporate transferee, or contractual contract service suppliers.

CHAFTA more info

1. MEMBERS ○ China and Australia 2. DATE SIGNED ○ Signed on the 17th of June 2015 and entered into force on the 20th of December 2015 3. COVERAGE ○ 86% of imports are tariff free ○ China granted Australia greater market access for certain services than most other nations with Chinese agreements , in particular for Australian financial, professional and educational service providers ○ Investor-state dispute settlement (ISDS) provisions allow provisions allow foreign investors to directly bring arbitration claims against the government for alleged breaches of FTAs ○ Includes other investment facilitation arrangements that critics argue would allow Chinese companies to bring in Chinese migrant workers to work on major projects at the cost of Australian workers. 4. BENEFITS TO BE GAINED BY EACH MEMBER Australia: ○ Improves the competitiveness of Australia's key agricultural industries such as beef, diary, wine, fruit and seafood ○ Consumers may see cheaper prices with the 5 per cent tariff on Chinese manufactured products, such as electronics and whitegoods, phased out ○ Tariffs on various Australian commodities (including coal and alumina) and gemstones of between 3-10 per cent eliminated either immediately or within between two and four years ○ Tariffs of between 3-14 per cent on various Australian manufactured exports eliminated within four years ○ Tariffs of up to 30 per cent for beef, dairy, sheep, pork, live animals, hides, skins and leather, horticulture, wine and seafood to be eliminated within 2-9 years ○ Tariff reductions or elimination for some processed foods including canned fruit, orange juice, and natural honey ○ Guarantee that Australian tourism and hospitality operators can operate wholly-owned subsidiaries in China, including hotels and restaurants ○ China will permit Australian firms to establish profit-making aged care institutions throughout China, and wholly Australian-owned hospitals in certain provinces China ○ No tariff reductions for sugar, rice, wool, cotton, wheat, maize or canola ○ If Chinese imports of beef or milk powders exceed certain limits, China has the discretion to apply additional customs duties ○ Threshold for Foreign Investment Review Board screening of Chinese investments in "non-sensitive sectors" (ie. excludes agriculture, media, telecoms and defence) rises from $252 million to $1,094 million ○ Chinese firms will have some rights to sue Australian governments for policy changes that adversely affect their interests ○ Chinese investors in projects valued over $150 million will receive additional rights to bring in temporary migrant workers to Australia without local labour market testing

Breaking WTO rules

1. Trading partners breaking WTO rules ○ When breaking rules, they go to Dispute Settlement Body in WTO. When a country is found to be in violation of WTO rules, it is required to change its laws to comply with them. If countries choose not to do so, the winning state can take retaliatory action in the form of trade sanctions, eg: introducing higher tariffs. Means Australia can increase tariffs against trading partners. ○ https://fullfact.org/europe/introduction-world-trade-organisation/ 2. Australia breaking WTO rules ○ When breaking rules, they go to Dispute Settlement Body in WTO. When a country is found to be in violation of WTO rules, it is required to change its laws to comply with them. If countries choose not to do so, the winning state can take retaliatory action in the form of trade sanctions, eg: introducing higher tariffs. Means tariffs can be raised against Australia, meaning Aus lose inter competitiveness ○ https://fullfact.org/europe/introduction-world-trade-organisation/ 3. Policies of non-WTO members ○ If policies match Australia, ie: low protection, then it benefits Australia as Aus can trade with them and make agreements with them. However, if they do not, then it does not benefit Australia. 4. WTO agreement to commence negotiation on a new round of protection reductions ○ Negotiations can take a very long time, so protection reductions may not even occur or be put into place for a long time, which means Australia does not receive the economic benefits of reducing protectionism for a long time or ever. 5. The widespread moves towards regional FTA's ○ Means Australia gets the benefits of more FTA's ○ Also means Australia can miss out on benefits as excluded from FTA as Aus is not part of the region, eg: FTA in Europe that Australia can not be a part of because Aus is not in Europe.

2015 policy protection

After the termination of tariff quotas in 1993 and the phasing of tariffs to a maximum of 25 per cent by the year 2000, maximum TCF tariffs were reduced to 17.5 per cent in January 2005, 10 per cent in January 2010, and 5 per cent in January 2015. Affects TCF industry

Why does Aus always run a large Prim Y deficit

Aus always runs a large primary Y deficit, this is because ○ Aus has a high level of foreign debt which results in the need to pay interest back to overseas lenders each year, recorded in current account in Primary Y ○ There are many large foreign owned companies in Aus which make profits that are sent back overseas, recorded in cap and fin account under other, credit, direct investment and primary Y ○ Foreign investors who own shares in aus companies receive dividends which also get sent back overseas. Portfolio I and primary Y ○ The links between the CA and the cap and fin account

Aus policies regarding free trade and protection

Australia has a long history of protection in the manufacturing sector where tariffs and quotas were used to protect domestic firms from import competition. Much of this protection was put in place after 1901 when Australian Govt's used a policy of protection to shield infant industries and protect domestic employment. Levels of protection were increased during the Great depression (1930's) with the GTR (General Tariff Rate) for non-commonwealth countries reaching over 60%. These high levels of protection remained in force until the 70's. Since the late 1970's, successive Australian Govt's have adopted policies of reducing protection as part of a broader strategy to seek the gains of increased specialisation and a greater role for trade in the GDP of the nation.

Effects of depreciation in the AUD

Export prices: Become cheaper on world markets, easier to sell leading to an increase in export income and an improvement in Aus CAD in the medium term. Import prices: More expensive, discouraging import spending and potentially improving Aus CAD. Domestic production of import substitutes should also rise. BOGS: Initially improves, as credits are bigger than debits. • Improves CAD. Aus Inter Competitiveness: Improves international competitiveness due to exports being cheaper. Inflation: Inflationary pressures increase due to paying more on Imports. Interest Rates: Due to inflationary pressures, imports will be more expensive, this may increase pressure on RBA to raise interest rates to defend its inflation target. Eco growth: Lower import spending and greater export revenue will increase Aus growth rate, but this may not happen if Aus is unable to replace its imports with domestically produced goods. Foreign investment in Aus: A depreciation increases the interest servicing costs on Aus foreign debt because Aus can buy less foreign currency with its domestic currency with which to pay interest. This increases income outflow on the net income component on the CA and thus increases Aus CAD. • A depreciation will also raise the A$ level of foreign debt that has been borrowed in foreign currency as expressed in Aus dollar terms, a phenomenon known as the valuation effect. • Foreign investors will find it less expensive in invest in Aus, generally leading to greater financial inflows. However, financial inflows may dry up if foreign investors expect the currency to continue falling. Net Foreign Liabilities: A depreciation increases the A$ value of foreign income earned on Aus investment abroad and would cause an improvement in the net primary income component of the CAS. • A depreciation will also increase the value of foreign assets in Aus dollar terms, a phenomenon known as the valuation effect. - Increases debt and debt servicing costs

EFFECTS OF APPRECIATIONS IN THE AUD

Export prices: Become more expensive on world markets, making them more difficult to sell, causing a decrease in export income, and deterioration in CAD Import prices: Cheaper, encouraging import spending and worsening Aus CAD. BOGS: Deterioration due to exports being more expensive, and worsens CAD. Australia's international competitiveness: Decreases due to exports being more expensive Inflation: Inflationary pressures in Aus will be reduced as imports become cheaper. This is likely to reduce pressure on the RBA to raise interest rates to defend its inflation target. Interest rates: Less pressure on RBA to increase interest rates, macro ecumenic effect. Economic growth: High import spending and reduced revenue will reduce Australia's eco growth rate. • In long term, it will increase living standards cause buy more imports and increase employment due to increased spending. • In short term, less eco growth cause exporting less, Dutch disease where one industry push up price of AUD. Foreign Investment in Australia: Decrease due to foreign investors find it more expensive to invest in Aus, generally leading to lower financial inflows. However, financial inflows may continue if foreign investors expect the currency to continue rising. • An application reduces the $A value of foreign income earned on Aus investments abroad and would cause a deterioration in the net primary income component of the CAD • In short term, increases investment due increased confidence • Long term: invest less or want increased return on investment due to it costing more to invest here. Net Foreign Liabilities (debt): An appreciation will also reduce the value of foreign assets in Aus dollar terms, a phenomenon known as the valuation effect. • An appreciation decreases the interest servicing costs on foreign debt because Aus can buy more foreign currency with Aus dollars. This would reduce outflow on net primary Y component of the current account in future years and help reduce Aus CAD. • Decreases debt and debt servicing costs in short term • Long term: increases debt servicing costs because have to attract more foreign investment to finance saving and investment gap.

1993 policy protection

For textiles, clothing and footwear activities import quotas were abolished by 1993 and tariffs passed down to a max of 25% by 2000. Termination of tariff quotas in 1993 Affects TCF industry

Consequences of a high CAD

Growth of foreign liabilities - Over a period of time a high CAD will contribute to an increased level of foreign liabilities. A deficit on the c/a presupposes financial inflows on the capital and financial account, either in the form of borrowing from overseas (foreign debt) or through selling equity in items such as property and companies (foreign equity). This will mean Australian lenders will become more reluctant to lend to Australia or to invest in Australia Increased servicing costs - Lead to larger outflows on the net primary income account, worsening the CAD. Foreign debt must be serviced through interest payments that vary according to the level of interest rates in Australia and o/s and profits must be returned on foreign equity investment. Higher levels of foreign debt can result in foreign lenders demanding a "risk premium" on loans, forcing up interest rates Volatility of exchange rates - High current account deficits may undermine the confidence of o/s investors in the Australian economy and by reducing the demand for Australia's currency, may result in a depreciation of the AUD Constrain future eco growth - In the long term, a high CAD may become a speed limit on economic growth. High levels of economic growth generally involve an increase in imports and a deterioration in the CAD. Economies with a CAD problem are therefore forced to limit growth to the level at which the CAD is sustainable. This is known as the balance of payments constraint (is the extent to which an economy's capacity to grow is constrained by its need to keep the CAD at a sustainable level) Contractionary policies - If they find it necessary to reduce a high CAD in the short term, governments may use tighter macroeconomics policies and accelerate the implementation of microeconomic reform. In the short run, tighter fiscal and monetary policies will reduce economic growth and contribute to a lower CAD Loss of international investor confidence - Economic crises can sometimes be triggered by a sudden shift in the attitude of global markets towards a country whose external imbalance appears unstainable. A major financial crises was triggered in Asia by concerns over Thailand's high CAD in 1997 and similarly, a major economic crisis occurred in Argentina in 2002 because of its external imbalances. Investor confidence can change suddenly and countries with higher CADs are more vulnerable to shifts in investor sentiment.

Appreciation and depreciation of AUD

NOTE: Depreciation is opposite, so decrease in demand and increase in supply Appreciation: demand increase, supply decrease. - They play a central role in the relationships between individual eco and global eco, all of trade and financial relationships between countries are mediated through the exchange of currencies - Because of this, ex rate movements play a significant impact on inter competitiveness, trade flows, investment decisions, inflation and many other factors - It is the price of Aus currency in terms of another country's currency. Price at which traders and investors swap Aus currency for another. - They are necessary because exporters want to be paid in their own currency, which means that the importers need to be able to convert their currency into foreign ones - Conversion occurs in foreign exchange market, FOREX, where the forces of demand and supply, or in case of fixed exchange rate the gov or its representatives, determine the price of one country's currency in terms of another. - Aus dollar world's fifth most traded currency, after the US dollar, Euro, Yen, Pound - Aus dollar used in 6.9% of all currency trades in foreign exchange markets - 88% of all Aus dollars sold in the Aus for exchange market are used to buy US dollars - Countries can use diff systems for determining the ex rate of their currency, these include fixed, floating (clean or dirty float) and a flexible peg. - Aus floating exchange rate system - Dec 1983 Aus switched from a managed flexible peg to a floating ex rate system. One of the most important structural changes in eco history as it opened up Aus eco to global financial flows. - Under a floating system, the ex rate is determined by free play of market forces and not gov intervention. - Supply and demand est an equilibrium price for the Aus dollar ($A) in terms of another country currency. - Eq can change hour by hour or even minute by minute as supply and demand change - Demand for $A is represented by all those people who wish to buy $A.

1991 policy protection

Reductions in general tariff rates were continued with the 1991 'Building a Competitive Australia' initiative which reduced general tariff rates from 15 and 10% to a single rate of 5% over the four years from 1992 to 1996. As part of the initiative, tariffs on passenger motor vehicles were reduced to 15% by 2000. For textiles, clothing and footwear activities import quotas were abolished by 1993 and tariffs passed down to a max of 25% by 2000. Affects All industries, including motor vehicle and TCF

Link between Balance of Payments categories

Relationships between the current account and the capital and financial account: - Firstly the two accounts add up to 0, together they represent a balance of payments. • The deficit on the current account is equal to the surplus on the capital and financial account. • An increase in the current account deficit will result in a rise in the capital and financial account surplus. - In theory, floating Australian dollar plays a key role of ensuring that there is a balance in the balance of payments. Under a freely floating exchange rate equilibrium occurs where: • Supply of Aus $ (supply of A$ rep by payments for m of g&s, primary and secondary Y transfers overseas (Y debits), capital and financial outflow (k outflow) = Demand for Aus $ (the D for A$ is rep by receipts for X of G&S, prim and sec Y transfers from overseas (Y credits), capital and fin inflow (K inflow) - The strongest link between the current account and the capital and financial account can be seen in the primary income component of the current account. • Financial inflow (foreign equity direct and portfolio investment) ○ Increase in cap and fin acc surplus ○ Profits and dividends paid on these I appear in the primary Y component of the current acc as debits ○ Increase in the curr acc deficit • Financial inflow (foreign debt) ○ Increase in capital and fin account surplus ○ Interest padi on these loans appear in the primary Y compnent of the the currecnt accout as debits ○ Increase in the current account def

Implications for Aus protection policies for aus gov

Short Run: • Cutting tariffs will reduce government revenue, as tariffs provide indirect tax revenue to the gov. The approx $2 billion in tariff revenue collected by the gov in 2017-18 accounts for less than 1% of its total revenue. • Reducing protection may have adverse political consequences. Cutting protection is generally unpopular with the wider community, as the costs of it are highly visible (structural unemployment, closure of factories) and benefits are less visible. Means gov can lose votes by pursuing policies to reduce protection. • Government spending on structural adjustment programs may increase. Govs may be required to assist the structural adjustment process through increased expenditure on unemployment benefits and retraining programs to aid individuals who lose their job. Also, in some cases, gov may provide financial assistance to industries to assist with the adjustment process. Long Run: Sustainable economic growth should raise revenue.

Implications of Aus protection for aus firm

Short Run: • Import competing industries go out of business unless they are able to improve their competitiveness. • Lower tariffs provide lower input costs for firms that import capital goods for their production processes. The Productivity Commission in 2017 estimated that abolishing tariffs on intermediate production inputs would reduce input costs by around $6 billion per year. Reducing these input costs will also make exporting firms more internationally competitive. Long Run: • Efficient firms restructure operations to compete on global stage. This is because the aim of removing protection is to force firms to develop the innovation and efficiency that is necessary to compete. This should also result in higher levels of investment for those firms that survive, as Aus businesses invest in improving their tech or expanding their business.

Implication of Aus removing protection policies for individual aus

Short Run: • Structural unemployment increases as inefficient firms close, as they can not compete without the protection. They are considered 'structurally unemployed' because the people often find their skills do not match the job vacancies in the eco. • Consumers gain access to a wider variety of goods at lower prices as there is more competition in the market without protection. This leads to increased standards of living as the quality of G&S is higher because the best global businesses enter Aus domestic markets, forcing domestic firms to lift their game in response to the more competitive business environment. Long Run: Job opportunities increase in internationally competitive sectors of the economy.

2010 policy protection

Tariffs on passenger motor vehicles were further reduced from the 15% set in Jan 2000, to 10% in Jan 2005, and 5% in Jan 2010. After the termination of tariff quotas in 1993 and the phasing of tariffs to a maximum of 25 per cent by the year 2000, maximum TCF tariffs were reduced to 17.5 per cent in January 2005, 10 per cent in January 2010, and 5 per cent in January 2015. Affects Passenger motor vehicle industry and TCF industry

1973 policy protection

The first significant initiative to reduce protection was made by the Whitlam Government, which in 1973 announced a 25% across the board tariff cut. Aus was experiencing sharply rising inflation due to 1973 oil crisis, so adopted tariff cut.

1988 policy protection

The removal of all quantitative import restrictions (except for textiles, clothing and footwear) by 1988 Under the May 1988 'Economic Statement' the Gov introduced an across the board program to phase down all tariffs (except for passenger motor vehicles and textiles, clothing and footwear activities which has their own reduction programs) to either 10% or 15% by 1992. Affects All industries, except motor vehicles and textile, clothing and footwear industries.

Summary of protection in Aus

• Australia's transition from a highly protected economy to an economy with relatively low trade barriers has occurred over a period of decades. • This is demonstrated by the gradual decline in the average tariff level in Australia since the late 1960's. • Over this same time, Australia has also seen the gradual phasing out of other "non-tariff barriers" to trade, such as quotas and subsidies.

Why Aus gov pursued bilateral FTA

• Bilateral FTA are the easiest trade agreements to negotiate because they only need to factor in the interest of the two participants. Because of this, they can go into effect faster, reaping trade benefits more quickly • Signing bilateral free trade agreement is not only creating the condition for closer relations among the nations but also providing a common platform to act in a united fashion in other multilateral platforms like, multilateral trade negotiation in the World Trade Organisation (WTO) and even in the global political arena under the UN. On the other hand, executing bilateral free trade agreement is comparatively easier than the regional or multilateral ones. • They provide a more flexible forum for addressing eco problems. A bilateral forum allows the parties to address broader issues that are very difficult to address in multilateral situations, eg: Multilateral agreement with developed and developing eco have very different interests, so many of developing eco unwilling to discuss further protection of intellectual property as it is not their biggest concern.

Savings investment gap

• CAD = S < I, structural reasons, constantly this occurs ○ Investment greater than savings ○ Low domestic savings in Aus means there is a need to attract funds from o/s (debt/equity) to fund I in Aus. ○ The CAD can also be thought of as the situation where domestic investment exceeds saving by Australian residents. The main factor contributing to the persistent deficit on the current account is the size of the net primary income component. The deficit is financed by an inflow of finances that appear as a surplus (capital inflow > capital outflow) on the capital and financial account. When overseas investors are paid a return on these investments and loans, these are recorded as debit in the primary income component of the current account and as such further add to the overall size of the deficit on current account. The size of the deficit on current account reflects the fact that imports and income paid to overseas exceed exports and income received from abroad. CAD = Australia's saving investment Gap: For the last fifty years Australia has had a savings-investment gap. This is because the level of national savings each year is less than national investment spending. To finance this gap/shortfall, Australians need to borrow or sell assets to overseas investors. This shortfall is equivalent to the size of the current account deficit. National savings is the difference between a nation's income and what it spends on consumption. It is determined by: • Household savings levels — the household savings ratio • Corporate savings levels — retained profits and • Government savings levels — budget surpluses The amount of national savings determines how much domestic investment can be financed without the need for overseas funding. This type of investment is important for the economy as it helps to improve labour productivity, expands the nation's supply capacity, GDP and ultimately increases living standards. The level of National investment is determined by: • Households investing in the construction of new homes • Companies investing in new equipment, buildings and other structures • Governments investing in infrastructure (roads, ports, transport facilities etc.). The period up to the mid-1970s saw Australia generally recording a savings-investment surplus. At the same time the current account deficit was not a cause for concern and was generally equal to around 1 - 2 per cent of GDP. Significantly household savings levels were equivalent to around 10 per cent of GDP during this time. Also, governments and corporates were stable with their savings levels. The period from the mid-1970s until the mid-2000s saw a change take place. The overall investment shares relative to GDP fell slightly but there occurred a significant fall in savings levels. Household savings share of GDP went from around 10 per cent in 1974 to close to zero in the mid- 2000s. The general government share also fell and was negative for significant lengths of time. These factors were responsible for the savings-investment gap widening during this time and consequently the current account deficit reaching levels equal to 5 - 6 per cent of GDP for many years. Why did Savings Levels fall? As mentioned household savings levels fell steadily from the mid 1970's. Factors responsible for this fall included: • Deregulation of the finance sector in the 1980s which made access to finance easier for households and resulted in higher levels of borrowing, especially for housing and discretionary consumption. • The 'wealth effect' resulting from rising house prices during this time. This made households more willing to take on higher levels of debt and more willing to consume. • Falling levels of unemployment during the 1990s and up until 2008 made households more willing to take on debt and gave them a greater sense of job security. • As housing prices rose, mortgages increased in size and interest repayments took up a greater proportion of family income. This meant that for many their ability to save fell. For much of the period the government was dissaving, although from 1996 to 2007 this was reversed as budget surpluses were achieved. RECENT TRENDS The GFC Effect The global financial crisis of 2008-09 brought about a narrowing of the savings-investment gap. Significantly, households, corporates and governments increased their savings levels. For many households, the GFC brought about a dramatic decline in their Household Net Worth due to falling asset values for shares and in some cases house prices. This resulted in a 'negative wealth' effect leading many consumers to become more cautious as they reduced their discretionary spending and increased their levels of savings. Combined with the 'negative wealth' effect, households were paying out more of their income in interest repayments on mortgages. Furthermore taxes paid by households increased as the government attempted to move its budget back to surplus. This resulted in lower levels of consumption spending and a desire by many to reduce the size of their debt. Corporates also increased their savings levels due to moves to retain more of their profits for re-investment. This was the case with the mining sector which managed to achieve record profit levels. The impact of the GFC for the government sector was to see a significant increase in spending take place and therefore a decline in government savings. Recently, trends with savings and investment have altered. Record low interest rates have brought about a large increase in demand for loans to finance residential investment for the building and purchase of new and existing dwellings. The surge in property prices and values which has taken place has had a 'wealth effect' on consumer spending and savings levels. However, for some households the effect has been opposite as high levels of indebtedness is reducing their ability to save. Combined with continued large budget deficits, this has seen the savings-investment gap once again widen.

Aus FTA under negotiation

• Indonesia ○ Free trade agreement with Indonesia, Indonesia-Australia Comprehensive Economic Partnership Agreement ○ Will create the framework for a new era of closer eco engagement between Aus and Indonesia and open new markets and opps for businesses, primary producers, service providers and investors. • India ○ Free trade agreement with India, Aus-India Comprehensive Economic Cooperation Agreement Negotiations to conclude a Comprehensive Economic Cooperation Agreement between Aus and India were launched in May 2011. There have been nine rounds of negotiations, the most recent of which was held in Sept 2015 • PACER plus ○ Pacific Agreement on Closer Economic Relations (PACER) Plus ○ Comprehensive FTA covering goods, services and investment ○ Negotiations on PACER Plus commenced in 2009 and concluded in Brisbane on 20 April 2017. The Agreement was signed in Nuku'alofa in Tonga on 14 June 2017 by Australia, New Zealand and eight Pacific island countries - Cook Islands, Kiribati, Nauru, Niue, Samoa, Solomon Islands, Tonga and Tuvalu. Vanuatu signed in Apia in Samoa on 7 September 2017. • Gulf Cooperation Council ○ Free Trade Agreement negotiations with the Gulf Cooperation Council (GCC), comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, commenced in July 2007. ○ To date, there have been four rounds of GCC-Australia FTA negotiations, with the last one held in June 2009.

Managed exchange rate

○ A managed ex rate occurs when there is official intervention by a gov or an agency, such as the RBA to determine the value of a country's ex rate. Through such official interventions, it is possible to manage both fixed and floating ex rates ○ The Aud was pegged to TWI from Sept 1974 to Nov 1976, the gov adopted a "managed flexible peg" or a "crawling peg system". Under this new method of determining ex rates, the value of the Aud was changed relative to the TWI, not just relative to a single individual currency ○ The ex rate was announced each morning by the RBA and remained at that rate until the next morning. This system continued until the AUD was floating in Dec 1983 ○ Under the floating ex rate system the value of the AUD is not specifically targeted by the RBA. To intervene in the market and alter the ex rate significantly in the long run is beyond the financial ability of the RBA. This is because Aus level of foreign reserves (gold and foreign currencies) are relatively small ($A34 billion) compared to the volumes of currency trade in the market each day.

Trade in Services Agreement

○ A services only trade agreement being negotiated in Geneva among a subset of WTO members, jointly led by AUS, EU and US. ○ There are currently 23 TiSA parties (50 ecos) which account for around 70% of global services trade. ○ It will address barriers to international services trade and promote the expansion of Aus services exports ○ Designed to set a new inter standard in services liberalisation, feeding into future multilateral negotiations. Aims at liberalising the worldwide trade of services, eg: banking, healthcare, transport.

WTO Environmental Goods Agreement

○ A trade agreement being negotiated by Members of the WTO ○ It focuses on reducing tariffs on products benefiting the environment to reduce costs and benefit trade ○ Participating WTO Members include Canada, China, Costa Rica, the European Union and its 28 member states, Hong Kong, Iceland, Israel, Japan, Korea, New Zealand, Norway, Singapore, Switzerland, Chinese Taipei, Turkey and the United States. ○ The global market for environmental goods is expected to be worth around US$3 trillion by 2020. These products include solar panels, wind turbines and other energy-efficient products, as well as air pollution, waste and water management technologies. ○ Eighteen participants representing 46 WTO members are engaged in negotiations seeking to eliminate tariffs on a number of important environment-related products. These include products that can help achieve environmental and climate protection goals, such as generating clean and renewable energy, improving energy and resource efficiency, controlling air pollution, managing waste, treating wastewater, monitoring the quality of the environment, and combating noise pollution.

APEC forum

○ Asia-Pacific Economic Cooperation ○ A forum of 21 Asia-Pacific economies, with member economies being home to more than 2.7 billion people and make up over half of global GDP. ○ APEC partners make up more than 70% of Aus total trade in G&S ○ Founded in 1989 ○ It was formed to encourage a growing and prosperous regional eco through: § Trade and investment liberalisation and facilitation — at the border, across the border and behind the border § Reduced costs of cross-border trade to assist businesses § Economic and technical cooperation § Exchanges of best practice information on trade and investment § Simplified regulatory and administrative processes § Improved institutional capacity to implement and take advantage of the benefits of trade and investment reform. ○ APEC works to combat protectionist pressures by: § Supporting services integration § Working towards a Free Trade Area of the Asia-Pacific § Delivering strong advocacy for global value chains and open markets. ○ In 1994, the APEC forum set a target of free trade by 2020 (by 2010 for developed countries). This goal was never formalised in a trade agreement. ○ For most of its history, the meeting of APEC forum leaders has focused on other priorities, eg: terrorism and climate change. Meet annually

ASEAN-Australia-New Zealand FTA

○ Association of Southeast Asian Nations - Aus-NZ FTA ○ Aus main multilateral trade agreement ○ Came into effect Jan 2010 ○ This agreement covers around 20% of Aus trade in G&S and effectively creates a free trade area of over 650 million people with a combined GDP over US$4 trillion ○ This agreement is forecast to boost the Aus eco by US$19 bill during the decade following its implementation in 2010 ○ Aims for sustainable eco growth in the region by providing a more liberal, facilitative and transparent market and investment regimes among the twelve signatories to the Agreement. ○ Through the AANZFTA: § Tariffs will be progressively reduced from entry into force of the Agreement, and eliminated for at least 90% of all tariff lines within specified timelines; § Movement of goods will be facilitated via a more modern and flexible rules of origin, simplified customs procedures, and more transparent mechanisms; § Barriers to trade in services will be progressively liberalised allowing for greater market access to service suppliers in the region; § Movement of business persons, those engaged in trade and investment activities, will be facilitated; and § Covered investments will be accorded a range of protection, including the possibility of dealing with disputes via an investor-state dispute settlement mechanism.

Info on BoP

○ Aus Balance of Payments (BoP) ○ ABS defines the Balance of Payments as: A statistical statement that systematically summarises the economic transactions of an economy with the rest of the world for a specific time period. It shows transactions between residents and non-residents of that economy ○ Shows all transactions in and out an economy over a given period of time ○ Two components: Current and capital and financial account

AUSFTA

○ Australia United State Free Trade Agreement ○ Came into effect 1 Jan 2005 ○ Ensures greater access to the US market for Aus products ○ Also enhances prospects for Aus services, trade and investment, improves the regulatory and investment environment between the two countries, and promotes increased business mobility ○ Underpins the bilateral eco relationship between Aus and US ○ Two way investment has almost tripled since the Agreement came into force ○ All tariffs have been eliminated for imported products from the United State into Aus ○ Most tariffs have been eliminated for exported products from Aus to US Provides significant tariff reductions on a number of goods, especially agriculture and manufacturing. In particular, automotive tariffs were eliminated immediately and tariffs on all goods were eliminated from 2015

ACI-FTA

○ Australia-Chile Free Trade Agreement ○ Came into force 6th March 2009 ○ Covers goods, services and investment ○ From 1 Jan 2015, all tariffs were eliminated except sugar, which retains a tariff of 6% for Aus exports due to Chile's price band system. ○ Since its entry into force, there has been a significant increase in Aus companies operating in Chile to over 120. ○ Elimination of almost 92% of tariff lines covering 97% of merchandise trade upon entry into force. Elimination of tariffs on all existing merchandise trade from 1 Jan 2015

JAEPA

○ Japan Australia Economic Partnership Agreement ○ Came into force 15th Jan 2015 ○ The agreement provides valuable preferential access for Australia's exporters and will support further growth in two-way investment. JAEPA is by far the most liberalising trade agreement Japan has ever negotiated and implemented. ○ Once JAEPA is fully implemented, around 98 per cent of Australia's merchandise exports to Japan will be able to receive preferential access or enter duty-free. ○ On full implementation on 1 April 2034, all of Australia's resources, energy and manufactured goods exports will benefit from duty-free entry into Japan.

Trans Pacific Partnership Agreement

○ Brief Overview § The coverage of the TPPA extends to the Australia, Brunei, Chile, Malaysia, New Zealand, Singapore, Peru, US, Vietnam, Canada, Mexico, § TPPA economies account for around 40% of global GDP, 35% of Australia's exports and 45% of Australia's total outward investment § Signed on 4 February 2016, which was not ratified as required and did not take effect. After the United States withdrew its signature, the agreement could not enter into force. § The remaining nations negotiated a new trade agreement called Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which incorporates most of the provisions of the TPP. ○ Benefits to Australia include: § New reductions in Japanese tariffs on fresh, chilled and frozen beef. § New access for dairy products into Japan, Canada and Mexico including the elimination of cheese tariffs into Japan. § New sugar access into the Japanese, Canadian and Mexican markets. § Tariff reductions and new access for cereals and grains exporters into Japan, including, for the first time in 20 years, access for rice products. § Elimination of all tariffs on sheepmeat, cotton and wool. § Elimination of tariffs on seafood, horticulture and wine. § Improved regulatory regimes for investment, particularly in mining, resources, telecommunications and financial services. § Universities and vocational education providers will have legally guaranteed access to Brunei Darussalam, Japan, Malaysia and Mexico and will be able to supply online education services across the region. § New opportunities for Australian businesses in government procurement services including accounting, management consulting, architectural engineering, environmental protection and health. ○ Timeline: § Brunei, Chile, Singapore and New Zealand are parties to the Trans Pacific Economic Partnership Agreement, which was signed in 2005, and entered into force in 2006. § In January 2008, the U.S. agreed to enter into talks with the Pacific 4 (P4) members regarding trade liberalisation in financial services § New Zealand ratified the TPP on May 11, 2017 § President Trump signed a Presidential memorandum[Note 2] to withdraw the U.S. from the TPP on 23 January 2017 § In January 2018 the remaining eleven countries agreed on a revised TPP, now renamed as the "Comprehensive and Progressive Agreement for Trans-Pacific Partnership" (CPTPP). The agreement remains substantially the same, but contains a list of 20 "suspended provisions" that were added to the TPP at the U.S.'s insistence and that are now no longer binding. These provisions primarily relate to investment, government procurement and intellectual property. § The United Kingdom held informal talks to join the renewed negotiations after Brexit and has expressed an interest in joining the TPP

CHAFTA

○ China Australia Free Trade Agreement ○ Entered into force on 20 dec 2015 ○ Paves the way for the next phase of Aus eco relationship with China ○ Thanks to ChAFTA, more than 98 per cent of Australia's goods exports to China are eligible to enter duty-free or at preferential rates. ○ On full implementation of ChAFTA (1 January 2029), virtually all of Australia's resources, energy and manufacturing exports will enjoy duty-free entry into China. ○ Expected to further promote trade with Aus largest trading partner. ○ Currently, around 86% of Aus exports to China are tariff free, and this rate will increase to around 98% upon full implementation of the agreement, directly improving the competitiveness of key agricultural industries such as beef, diary, wine, fruit and seafood. ○ China has also granted Aus greater market access for certain services than most other nations with Chinese agreements, particularly for Aus financial, professional and educational service providers. ○ Also includes controversial items, most notably, investor-state dispute settlement (ISDS) provisions allow foreign investors to directly bring arbitration claims against gov for alleged breaches of FTA's. Also, the agreement includes other investment facilitation agreements that critics argue would allow Chinese companies to bring in Chinese migrant workers to work on major projects at the cost of Aus workers.

Trans Pacific Partnership

○ Comprehensive and Progressive Agreement for Trans-Pacific Partnership (incorporates most of the Trans-Pacific Partnership provisions by reference, but suspended 22 provisions the US favoured that other countries opposed, and lowered the threshold for enactment so the participation of the US is not required. TPP was signed on 4th Feb 2016, but never entered into force as a result the withdrawal of the US. ○ Free trade agreement between Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, Peru, New Zealand, Singapore and Vietnam. ○ The deal was signed by the 11 countries on 8 March 2018 in Santiago, Chile. ○ The TPP is a regional free trade agreement of unprecedented scope and ambition with great potential to drive job-creating growth across the Australian economy. ○ TPP outcomes include new market access opportunities for Australian exporters of goods and services, as well as investors, that are additional to Australia's existing free trade agreements. For investment, the TPP will create new opportunities and provide a more predictable and transparent regulatory environment. ○ The TPP will also establish a more seamless trade and investment environment across 12 countries by setting commonly-agreed rules and promoting transparency of laws and regulations. The TPP will provide greater certainty for businesses, reduce costs and red tape and facilitate participation in regional supply chains. ○ The TPP addresses contemporary trade challenges in ways that have not previously been addressed in Australian FTAs, such as commitments on state-owned enterprises, which will promote competition, trade and investment and enable Australian exporters to compete on a more level playing field. ○ The TPP allows for other members to join in the future, which will amplify its benefits. Australia is committed to expanding the TPP membership over time.

Credit

○ Credit: Money that flows into Aus, ABS shows with positive sign

Debit

○ Debit: Money that flo1ws out of Aus, ABS shown as negative sign

International competitiveness

○ Define: Refers to the ability of an eco's exports to compete on global markets. An eco may be competitive by selling products of a higher quality or a lower price than its competition. ○ Influences of Aus inter competitiveness: Movements in the exchange rate affect the inter competitiveness, depreciation decreases the foreign currency price of Aus exports therefore increased competitiveness but also depreciation increases the Aus dollar price of M = discourages consumers from buying M. Also higher rates of productivity, and those things that give us a comparative advantage. Impact of changes in Aus inter competitiveness on the BoP: When depreciation occurs, and increases the price of M and discourages consumers from purchasing M, but also depreciation increases inter competitiveness as decreases Aus foreign currency policy, our Goods are cheaper. This helps the balance on G and S as deficit increses, more cheaper so sell more G and S and this is recorded in G and S and Bop.

WTO information Technology Agreement

○ Est in 1997. In 2015, members agreed to expand coverage to 201 more products in an agreement known as ITA-2 ○ Now has 82 participants, covering 97% of global IT products trade. ○ Australia imports around A$19 billion worth of goods covered under the expanded ITA and exports around A$3.6 billion. ○ Participants are committed to completely eliminating tariffs on IT products covered by the Agreement ○ Entered into force 1 July 1996 ○ The treaty amendment to bind the expanded ITA tariff commitments in Australia's WTO Schedule of Concessions was tabled in parliament on 31 August 2016. The Joint Standing Committee on Treaties (JSCOT) conducted an inquiry into the expanded ITA and a National Interest Analysis before the tariff commitments were bound in the WTO. ○ Australia will phase out tariffs on the expanded list of products by 2021.

KAFTA

○ Korea-Australia Free Trade Agreement ○ Came into force 12 Dec 2014 ○ Under KAFTA, Australian exporters to Korea gain a competitive edge for their goods exports, with nearly all Korean import taxes (tariffs) on Australian goods eliminated over time. Australian services exporters have better access to the market. Investment commitments in the agreement protect and enhance investment in both directions. ○ Thanks to KAFTA, more than 99 per cent of Australia's goods exports to Korea are eligible to enter duty-free or with preferential access. ○ 88 per cent of Australia's manufactures, resources and energy exports entered Korea duty free from entry into force, with all remaining tariffs being phased out by 1 January 2023. ○ Improves access for Aus exporters to the US$1.4 trillion Korean eco, with tariff free exports rising from 84% to 99% of exports over the next 20 years. ○ It also facilitates more services trade in legal, accounting, financial, engineerings, telecommunications, and education services. ○ Seeks to improve opps for Aus investors and investments in Korea, and will help attract direct i from Korea into Aus.

MAFTA

○ Malaysia Australia Free Trade Agreement ○ Entered into force on 1 Jan 2013 ○ Agreement opens avenues for Aus G&S into the dynamic Malaysian market ○ Eliminates tariffs on 97.6% of goods imported from Aus, extending to 99% by 2017 ○ Malaysian exports will benefit from duty-free entry into Aus from day one. ○ The Agreement also addresses other barriers to trade, will simplify administration for traders and allow more Australian business executives and senior managers to work in Malaysia.

Regional Comprehensive Economic Agreement

○ Negotiations were launched by leaders from ASEAN and ASEAN free trade agreement partners in the margins of the East Asia Summit in Cambodia in 2012 ○ RCEP is an Asean centred proposal for a regional free trade area, which would initially include the ten ASEAN member states and those countries which have existing FTAs with ASEAN (Aus, China, India, Japan, Sth Korea, NZ) ○ RCEP will build on and expand Australia's existing FTA with ASEAN and New Zealand, AANZFTA. It also complements Australia's participation in bilateral FTAs with individual countries. ○ RCEP has the potential to deliver significant opportunities for Australian businesses. The 16 RCEP participating countries account for almost half of the world's population, almost 30 per cent of global GDP and over a quarter of world exports. ○ The objective of launching RCEP negotiations is to achieve a modern, comprehensive, high-quality and mutually beneficial economic partnership agreement that will cover trade in goods, trade in services, investment, economic and technical cooperation, intellectual property, competition, electronic commerce, dispute settlement and other issues.

Cyclical and structural factors affecting primary income account

○ Ongoing structural cause of Aus CAD ○ Comprised mainly of payments of interest and dividends on Aus net foreign debt and equity ○ Tend to record a deficit ○ Structural, large and deficit ○ Deficit changes due to cyclical factors, eg: ex rate, global interest, domestic business cycle ○ Cyclical factors: - Exchanges rates movements - Appreciation of Aus dollar (AUD 1 = USD 1, then AUD 1.10 = US 1, pay less on debt) - Leads to decreases in foreign debt (reduces servicing costs) - Leads to deficit/decrease in primary Y account, pay less - Leads to CAD improvement (less in negatives) - Global interest rates - Increase in global interest rates - Leads to increases the repayments on foreign debt - Leads to increase in primary Y account debits - Leads to deterioration of CAD (debt getting bigger) - Domestic business cycle - Strong eco growth - Leads to rise in company profits - Leads to increased dividends to overseas shareholders - Leads to increase in primary Y account debits - Leads to deterioration of CAD ○ Structural factors: (always ensuring it is in deficit in primary account because it is not volatile like cyclical factors) - The saving and investment gap - Aus low levels of savings - Leads to inflow of foreign assets (debts and equity) into Aus - Leads to recorded in cap and fin account, increase surplus - Leads to returns on investment recorded in prim Y component - Leads to increase in primary Y acc debits - Leads to deterioration of CAD

WTO Government procurement agreement

○ Procurement: the action or occupation of acquiring military equipment and supplies ○ It opens gov procurement markets between members ○ Australia wants to join the GPA to protect and promote Australian businesses bidding for government procurement contracts in the markets of its 47 current members. Aus launched negotiations to accede to the GPA in 2015 ○ To ensure open, fair and transparent conditions of competition in the government procurement markets ○ At present, the Agreement has 19 parties comprising 47 WTO members. Another 31 WTO members participate in the GPA Committee as observers. Out of these, 10 members are in the process of acceding to the Agreement. ○ The fundamental aim of the GPA is to mutually open government procurement markets among its parties. As a result of several rounds of negotiations, the GPA parties have opened procurement activities worth an estimated US$ 1.7 trillion annually to international competition (i.e. to suppliers from GPA parties offering goods, services or construction services). The text of the Agreement establishes rules requiring that open, fair and transparent conditions of competition be ensured in government procurement. However, these rules do not automatically apply to all procurement activities of each party.

SAFTA

○ Singapore-Australia Free trade Agreement ○ In addition to tariff elimination, the Agreement improves increased market access for Australian exporters of services, particularly education, environmental, telecommunications, and professional services. It also provides a more open and predictable business environment across a range of areas, including competition policy, government procurement, intellectual property, e-commerce, customs procedures and business travel. ○ Entered into force on 28th July 2003 SAFTA offers greater opportunities in goods and services to a wide range of Australian exporters, further strengthens trade and investment links, eliminates Singapore's tariffs and provides cheaper inputs for Australian businesses on a range of products.

TAFTA

○ Thailand-Australia Free Trade Agreement ○ It has eliminated the majority of Thai tariffs on goods imported from Australia. he reduction of Thailand's previously high tariff barriers (for some goods, up to 200%) is a significant win for Australian businesses, opening up a range of export opportunities in Southeast Asia's second-largest economy. Elimination of 94% of Thailand's tariff and quota barriers in imports from aus as of 2010, with the remaining tariffs phasing to 0 in 2015-2020 (with the exception of skim milk powder and liquid milk and cream, for which the tariff rate quotas will be eliminated in 2025). ○ Improves the environment for bilateral services trade and investment ○ Entered into force on 1 Jan 2005 Total two way trade between Aus and Thailand has more than doubled since TAFTA entered into force.

ANZCERTA

○ The Australia-New Zealand CLoser Economic Relations Trade Agreement ○ One of the most comprehensive bilateral free trade agreements in existence ○ Covers substantially all trans-Tasman trade in goods, including agricultural products, and was the first to include free trade in services. ○ Objectives are to strengthen relationship between the two countries, develop closer eco relations, eliminate trade barriers , develop trade between the two countries ○ Came into effect on Jan 1st 1983 ○ It created one of the world's most open and successful free trade agreements ○ Two ways trans Tasman merchandise trade has increased at an average annual rate of around 8% in 30 years since its adoption. ○ A good that can be legally sold in one country can also be legally sold in the other. Anyone registered to practise an occupation in one country may practise in the other (with some exemptions including medical practitioners) Service providers may provide services in either country (except in certain areas such as airway services)

G20

○ The Group of 20 ○ Premier international forum for international eco cooperation and decision making, bringing together 20 of the world's largest eco ○ Work together to ensure a resilient global financial system and promote strong, sustainable, balanced and inclusive growth across both developed and developing ecos. ○ Include: Argentina, Aus, Brazil, Canada, China, France, Ger, India, Indonesia, Italy, Japan, Sth Korea, Mexico, Russia, Saudi Arabia, Sth Africa, Turkey, UK, US, EU ○ G20 members account for 86% of world eco, 78% of global trade, two thirds of world's pop, including more than half of the world's poor. ○ Decisions reached by consensus and commitments are on a voluntary basis. ○ Founded in 1999 Aims to discuss policy pertaining the promotion of international financial stability.

Fixed exchange rate

○ The World Bank and IMF were both est in 1944 at a conference of world leaders in Bretton Woods, New Hampshire (USA). ○ The aim of the two "Bretton Woods" institutions as they are sometimes called was to place the global eco on a sound footing after WW2. ○ To help reduce the eco instability that existed the conference favoured the use of the fixed exchange rate system ○ Under a fixed ex rate system, the value of a country's currency is fixed by the gov or one of its agencies, for example the RBA, to another currency for a specific time period ○ This method of determine ex rates was to dominate until the 1970's ○ In Aus, the dollar was fixed (pegged) from 1946 to Dec 1971 to the British Pound (due to historical ties) and then to the US dollar (had become dominate currency) until September 1974 ○ From Sept 1974 to Nov 1976, the Fed gov, in an attempt to reduce the impact of ex rate fluctuations on the eco pegged the Aus dollar to the trade weighted index (TWI) ○ Using this system the value of the Au dollar was allowed to adjust each currency in the TWI. However, in reality the value of the Aud remained foxed for long periods of time DIAGRAMS

- The capital and financial accounts are the other 2 accounts which together with the current account make up overall B of P.

○ The capital and financial account records flows of I funds and capital transfers between Aus and the rest of the world ○ The capital account: records the sum (net) of credit and debit entries for acquisition/disposal of non-produced, non-financial assets and capital transfers, such as foreign aid and capital bought in by migrants. ○ The finacial account records credits and debits for transactions associated with direct and portfolio I, financial derivatives, other I (loans) and changes in the value of reserve assets held by RBA.

Advantages of foreign i in Aus

○ The transfer of tech and management skills ○ Access to foreign exchange ○ The creation of employment/training opps ○ Increased access to export markets

Flows of foreign investment in Aus

○ The value of Aus' total two way investment reached $5.1 trillion, up 8.0% from $4.7 trillion in 2014 ○ US, UK, Japan, Belgium and Singapore were Aus top five two-way investment partners in 2015 ○ In 2015, stock of total foreign I into Aus reached $3 trillion ○ Aus major source were US at $860.3 billion, the UK at $499.9 billl, Belgium at $238.4 bill, Japan at $199.6 bill and Singapore at $98.6 billion ○ Chinese I reached nearly $75 bill at end of 2015, making it 7th largest investor ○ International financial flows were less important in post war eco boom of the 1950's-70's while exchange rates remained fixed and international capital markets remained largely closed § However, early 70's the international system of fixed exchange rates (knows as Bretton Woods system) ended. Ex rates around world floated and restrictions on the movement of capital across national borders were removed. ○ Financial flows began growing rapidly as inter capital markets opened up, exchange rates floated and tech changes made it easier to shift finance between countries ○ The level of foreign I in Aus and I overseas by Aus had more than doubled in the past decade and has been rising rapibly since 1980's ○ Biggest growth in for portfolio i: 1980-81 = 46786 ($m), 2016-17 = 3237 904 ($m) ○ Aus has more I here than Aus I overseas. We are more receipents than investors. ○ Prior to dereg of financial sector, most financial flows come into Aus in direct i. ○ Gov preferred direct I = brought jobs, tech ○ Portfolio I not as important as level of overseas purchase of shares was relatively small and where fin markets werereg, overseas loans not common § Removal of restrictions on fin flows changed situation as Aus saw the benefit of attracting the growing companies through loans and share purchases. ○ After dereg of fin sector and floating of Aus dollar in 1980's, for I inflows began to grow rapibly, a sustained trend over past 3 decades. ○ Rate of growth of port I into Aus, the shorter term and more speculative inflow has been sig faster than growth in longer term for dir i. § Simarily, Aus I overseas is arounf 20 times what it was in 1990, and level of port I is now higher than level of dir I ○ Aus always been a 'net capital importer' with level of for I in Aus consistently being well above the level of aus I abroad. ○ Historically low level of domestic savings with Aus. § Bad savers § For many years, Aus relied on financial flows from overseas to make up for the shortfall between savings and I in Aus ○ For I in Aus, total over $3.2 trillion invested in aus eco in 2016-17, aus invested over half as much overseas ($2.2 trillion)