Australia’s terms of trade
The liberalization of trade and major economic reforms have been the center of Australian Government policies for many decades. Up to the 1960s, the US and Britain were the main trading partners of Australia. However, Australia shifted its focus on the US and Britain, and its main trading partners have been China, Japan, and the US. The paper focuses on the general trade patterns between Australia and China, which is the current main trading partner of Australia. Research shows that the trade between China and Australia has been valued to be about $183 billion, which is about 24% of the total trade (Zhou, Wu & Si, 2017). China has remained the largest two-way trading partner with Australia, in the export and import market.
The general pattern of trade experienced between China and Australia
China is the number one export market for Australia, a valuable tourism market, the main source of foreign direct investment, and the largest market for agricultural goods. The economic relationship between China and Australia has grown rapidly in recent times, especially the trade relationship (Fischer, Keys & Au-Yeung, 2016). China has become the largest trading partner of Australia in terms of exports and imports, while Australia is the sixth-largest trading partner of China. Although the investment of China in Australia has remained low, it has grown fast in recent years, and it is expected to continue increasing to benefit the two trading partners (Zhou, Wu & Si, 2017). Many companies from Australia have invested in the Chinese market due to the increased economic liberalization and easier capital flows, which creates opportunities for Australian businesses to invest in China.
The Australian trade with China is dated a long way. In the 19th century, in the early days of trade federation, trade between China and Australian was relatively small, where China accounted for about 0.3% of Australia’s total inflows (Culas & Timsina, 2019). Tea and rice formed the main imports by Australia from China, which accounted for almost half of the imports. In the 20th century, textile imports overtook tea and rice. The share of textile imports from China was about 43% of imports in the 19th century (Sheng, Drysdale & Chen, 2019). However, the normalization of diplomatic relations in 1972 paved a way for improved economic and trade relationship between China and Australia, which put Australia in a good position to benefit from trade opportunities in China.
China’s trade with Australia grew at an annual rate of 9% from 1978 to 2011 from a modest base. The growth followed many trade reforms and the accession of China to the WTO, which accelerated the rate of economic growth (Sheng, Drysdale & Chen, 2019). The integration of China into the global economy meant it could capitalize on the availability of labor force to exploit its comparative advantage in expanding the labor-intensive sector. The rapid growth of merchandise exports and imports in China has seen its share in the world trade increase substantially (Culas & Timsina, 2019). According to World Trade Organization, China is ranked first in the global exports, which accounts for about 10.4 % of the world exports, and is ranked second in imports with about 9.5% of the world imports.
The complementarity between China and Australia has led to extraordinary growth in their bilateral trade in the last 20 years. The merchandise trade of the two countries has grown to more than $150 billion, while services trade has grown to more than $10 billion. The share of China in Australia’s total merchandise trade has grown to about 27% between 2010 and 2019 (Sheng, Drysdale & Chen, 2019). Through the strong and growing trade relationships, China and Australia entered into an agreement in 2005 to start negotiation on the free trade agreement. There was more than a round of negotiations covering important issues such as agricultural tariffs, quotas, foreign investment, and manufactured goods. The entry into the China Australia Free Trade Agreement injected new incentives into an already existing strong trade and investment partnership between China and Australia, which opened more doors for Australian companies to get into the China export market (Culas & Timsina, 2019).
The integration of China with Australia in terms of trade
The economy of China has become more integrated with the Australian terms of trade. Currently, China is the largest trading partner with Australia contributing more than $195 billion of exports and imports. Between 2005 and 2011, the Australian terms of trade were favorable driven by an increase in the prices of export commodities to China (Sheng, Drysdale & Chen, 2019). Australia has had plenty of supply of natural resources such as iron ore, coal, and gas, which have made sizeable exports to China, thus, improving its terms of trade. The increased export of natural resources was driven by rapid urbanization and industrialization in China, which requires more resources for investment in the housing sector, factories, and transport. In 2015, the Australian terms of trade were around 75 percent, which was as a result of increased exports to China after the country entered into the China Australia Free Trade Agreement (ChAFTA) (Culas & Timsina, 2019).
The boost in demand that Australia has received though the favorable terms of trade from the higher prices of export to China display hallmarks of structural events in the trade relationships. That is, the emergence of China in the world resources markets means that Australia’s terms of trade have increased and are likely to remain higher in the future as a result of the free trade agreement with China (Holmes, 2017). Besides, Australia has been receiving high levels of Chinese investment through large, state-owned companies due to the Chinese government policy of relaxing controls on foreigners investing in China. The observed trend in the improvement of terms of trade in Australia is a result of increased integration with the Chinese economy. The Australian exports to China have increased due to free movement of goods and services, and the Chinese government policy that allows foreign firms such a financial investor to establish their businesses in China (Culas & Timsina, 2019). Higher prices of Australian exports have been an important element in lifting the terms of trade, and it is attributed to the strong demand for energy and metals from China.
Evaluation of Australia’s terms of trade
In the first quarter of 2020, the Australian terms of trade increased to 98.8 points from 95.20 in the last quarter of 2019. The projected terms of trade in the second quarter of 2020 is expected to be 93.10 points (Trading Economics, 2020). In the long term, the terms of trade in Australia is projected to be about 100.91 in 2021 and 98.1 in 2022. The improving terms of trade in Australia have been largely associated with a favorable trading relationship with China. The latest trading reports show that China is the main destination of Australian export for a record of about 40%. In the last quarter of 2019, the share of China in Australian monthly export was 30%, which was a 10% rise in the last 10 years, which is an indication of improved terms of trade(Uren, 2019).
Although the trade balance between the two countries is in favor of Australia, the import of Chinese goods has also been growing in Australia. In the last 5 years, Australian imports from China increased by 15%, while imports from other regions went down by 2% (Tang, 2018). Australian exports to China products such as coal, and iron ore. China depends heavily on raw materials and supplies of energy from Australia. The LNG from Australia has become an important source of energy for the Chinese economy, and a quick route to Australia, which is the Chinese preferred supplier.
Based on the trade relationship between China and Australia, there is a significant change in terms of trade with China. The terms of trade in China has declined from 105.2 to 100.1 in 2019 (Trading Economics, 2020). The terms of trade are expected to be 98.10 by the end of the second quarter in 2020. In the long-term, the terms of trade in China has been projected to be about 100 in 2021. The significant changes in terms of trade are as a result of improved exports to Australia and other regions around the world. The main exports of China from Australia include manufactured goods such as furniture, homeware, IT products, and other technological equipment (Uren, 2019). The value of Chinese exports to Australia is about $50 billion.
Australia has had favorable terms of trade from the trading relationship with China. This is evidenced by the high prices of exports from Australia to China. China is the largest export destination of the Australian exports, which are valued at more than $150 billion that is 36% of all country’s exports (Fischer, Keys & Au-Yeung, 2016). The Australian terms of trade have increased unprecedentedly, which reflects changes in both the composition and prices of goods and services exported to China. The rise in export prices was driven by the increases in the demand for coal, iron ore, and LNG products in China.
Conclusion
China has remained Australia’s biggest trading partner in the last 20 years accounting for more than 26% of the total trade (Tang, 2018). Australia has been enjoying a strong and wide economic complementary with China, which has strengthened the economy and the trade ties between the two counties. The main driver of the trade relationship between China and Australia is the Chinese demand for natural resources such as coal, iron ore, and LHG products that are needed in China for rapid industrial expansion. The increased prices of Australian exports to China have been beneficial to Australian terms of trade. Besides, the Australian Competitiveness in manufactured products has provided the low cost of imports from China, which further contributes to the improvement of Australian terms of trade. The trade relationship between China and Australian is expected to grow in the years to come. However, the structural transformations that are happening in China are likely to change the export opportunities for Australia. China is focusing on investing in the environmental sustainable growth model, which will reduce its demand for coal and LNG products from Australia. This will affect Australia’s terms of trade significantly. However, Australia will remain a significant supplier of iron ore in China due to its position of low cost.