Critical Review Of Global Issues: Impact Of Chinese Economic Situation And Australia-Indonesia Relationship On Australian Businesses And Trade Essay.

Chinese Economic Situation

Discuss about the Critical Review of Global Issues.

Two events on a global scale have taken place which will have implications on the businesses in Australia. The first event is the slowdown which has taken place in China along with the crisis that has occurred in the confidence of the Chinese investors. As per a new report of the IMF, it is expected that a crackdown that has taken place on cheap credit in China will cause a reduction in the China’s real GDP growth rate to 6.8% in the current year from the 7.4% which was there last year. This is expected to weaken the demand for the commodities of Australia, thus impacting its business (IMF, 2016). The second event is the relationship that Australia has with Indonesia which very recently had an impact on the import quota of live cattle. Indonesia has cut its import quota in relation to the live cattle from Australia. This quota was reduced to only 50,000 head of cattle and instead of the expected figure of 500,000-600,000 cattle it is expected that the figure will be 200,000 less in the coming year (Owens, 2015). This paper will be assessing the impact of the two events on Australian businesses to figure out the one which has the greatest importance.

The economy of China with low economic growth is undergoing a tough phase of transition. In 2015, the Chinese economy at 7% registered its lowest growth in 24 years.

The slowing down of the potential economic growth of China is in line with the economic law. The economic growth of the country has turned from a high rate of approximately 10% to approximately 7% which can be considered a moderate rate. If the structure pertaining to the essential factors is analysed, it indicates that changes have taken place in the demographic population with the decrease the total population in the working age, contributing negatively to the economic growth. This results in lower saving rates and the contribution of capital accumulation to the country’s economic growth starts to decline. This weakens the comparative advantage with respect to labour that is enjoyed by the country for producing goods, causing substantial slowdown of export trade (Li, 2015). As per the comparative advantage theory, it is sensible for a nation to produce the goods which it has the ability of producing most efficiently and buy from the other nations, the goods which it produces less efficiently (Hill et al., 2015).

The Impact of Chinese Situation on Australian Businesses and Trade

The progress technologically and labour capital have remained stable in the short-term causing the total factor productivity to become slow. The contribution of the Chinese service industry to the GDP has increased, making it a leader in case of economic growth. As the labour productivity is less in it in comparison to the secondary industry, the rate of economic growth decreases. The stock markets of China have fallen as the overall economic growth has slowed down and both the economy as well as the stock market cannot remain disparate for long (Jericho, 2015).

The economic downturn of China and the prospect of weak growth worldwide related to it are posing a threat to stall the global progress (Harlan, 2016). China is the biggest trading partner of Australia and thus the economic fortunes of Australia are linked to China very intrinsically particularly after the free trade agreement which was signed between the two nations in the latter part of the previous year (Ma, 2015) . China happens to be Australia’s top export destination with exports worth $82.9 billion in 2014 (OEC, 2015). Although the plunge in the stocks of China is expected to have smaller direct impacts but the slump in the economy and the demand for the Australian goods and services will have greater effects on Australia’s economy (Jericho, 2015). It will also have an adverse affect on the prices of commodities especially the ones significant for Australia (McKenna, 2016).

Among the primary reasons for the economic slowdown in China is the restructuring occurring within the economy. The economy of China is changing from being export-oriented wherein it was producing for being consumed by other nations to an economy of domestic consumption. The Government is trying to end inequality of wealth by shifting it to the middle class resulting in high disposal incomes of the middle class. The Australian businesses can take advantages of such a scenario. Even though the traditional focus of the trade relationships of Australia have been on commodities like iron ore, the new situation brings in more opportunities for the companies of Australia. Growth opportunities are large in a number of other industries like retail, real estate, services and tourism that match restructuring and growth of the Chinese economy (Ma, 2015).

In 2014-2015, the cattle exports from Australia to Indonesia amounted to A$1.35 billion (ALEC, 2016). However, the export industry was surprised when Indonesia slashed the quota for the Australian cattle. As per the Australian Livestock Exporters Council, the quota was done by 250,000 in comparison to the previous quarter. One of the reasons for this is thought to be the frosty relationship between the two nations which had suffered recently due to execution of two drug smugglers from Australia by Jakarta and allegations paid by Canberra in turning the asylum-seekers to Indonesia again mostly a result of the close geographical proximity of the two nations. Another reason is the attempt of Indonesia to develop self sufficiency. However, currently, this is likely lead to cattle shortage in Indonesia, reduction in number of slaughters and rise in beef prices (Owens, 2015).

Australia-Indonesia Relationship

The comparative advantage theory can explain this trade relationship between Australia and Indonesia also. Australia produces cattle more efficiently and in surplus amounts which it can export to Indonesia while Indonesia is not self sufficient and efficient in the production of cattle which it can therefore import form its neighbour Australia. Importing it from other nations like Brazil which have surplus production would involve high costs of transportation. This is in accordance to the Heckscher and Ohlin theory as per which it is argued that comparative advantage is a result of differences that exist in the endowment of national factors. Countries will thus be exporting those goods which can make intensive utilisation of the factors that are present in abundance locally and import the goods which make intensive utilisation of the locally scarce factors (Hill et al., 2015). 

Till recently, Indonesia was the biggest market for live cattle export from Australia and this industry provided employment to thousands of Australians. Of all the imports from Australia, a mere 6% was amounted by live cattle as well as meat which are about one-fourth of imports of Indonesia from Australia. 40-65% of the live cattle are exported to Indonesia which is approximately 20-30% of the beef consumption of Indonesia. These exports are equal to 0.2% of the total exports of Australia related to goods and services. Even though the exports are very small in respect to the entire Australian economy, it has regional significance particularly in Western Australia and the Northern territory which account for 35% and 40% respectively of the live cattle market share and Indonesia has a heavy reliance on Australia in this category (The Conversation, 2013). Additionally, the cattle export industry provides support to almost 11,000 jobs which will be affected by the ban (Alford & Franklin, 2011).

This scenario can be viewed as a positive one also for Australia. The reduction in the exports of live cattle will mean that more of it will be available for domestic consumption and at lower prices. Besides this, Australia can think in terms of exporting live cattle to other nations in the region such as Vietnam. Australia can also adopt certain more “labour intensive aspects” for processing the beef and then exporting it which would free the resources for food production of other types in which other Asian nations might be having a competitive advantage. The beef producing market could make additional contributions of $204m to the economy of the regional. This would also create additional jobs (ACIl Talsman, 2012).

Conclusion

An analysis of the implications of both the global events on the Australian businesses and trade show that the slowdown in China is likely to have greatest importance for the businesses and trade of Australia as in terms of volume China is the leading trading partner of Australia. Australia has also signed a free trade agreement with China recently. Australia will have to look to make investments in the sectors of China that are undergoing restructuring and have potential of growth rather than the energy sector which is currently the main one. As far as the quota cut for cattle export to Indonesia is concerned, Australia can always make efforts to find new nations for its products or increase the domestic supply or even start processing the beef and exporting it. This way the people of this industry will be able to retain their jobs.

References

ACIl Talsman, 2012. An economic analysis of the live exportation of cattle from Northern Australia. [Online] Available at: https://www.rspca.org.au/sites/default/files/website/Campaigns/Live-export/Live-exports-vs-the-meat-trade/ACIL%20Tasman%202012%20-%20Economic%20analysis%20of%20live%20cattle%20exports.pdf [Accessed 5 September 2016].

ALEC, 2016. Livestock Export Statistics. [Online] Available at: https://auslivestockexport.com/trade-statistics/ [Accessed 6 September 2016].

Alford, P. & Franklin, M., 2011. Jakarta fights live Cattle export ban. The Australian, 9 June. Available at:. [Accessed 5 September 2016].

Harlan, C., 2016. China’s economic downturn is threatening one of the world’s greatest success stories. The Washington Post, 1 February.

Hill, C.W.L., Cronk. & Wickramasekera, 2015. Global Business Today. McGraw Hill Education.

IMF, 2016. Proactive Reforms Critical to China’s Medium-Term Growth Prospects. USA: IMF.

Jericho, G., 2015. China’s slumping economy a bigger threat to Australia than its plunging stock market. The Guardian, 27 August.

Li, N., 2015. How to view China's Cureewnt Economic Situation. [Online] Available at: https://www.chinausfocus.com/finance-economy/how-to-view-chinas-current-economic-situation/ [Accessed 5 September 2016].

Ma, W., 2015. What the Chinese economic slowdown means for Australia. [Online] Available at: https://www.news.com.au/finance/executive-lounge/what-the-chinese-economic-slowdown-means-for-australia/news-story/655a8cf4f052e34032ca34d7564c8aa0 [Accessed 5 September 2016].

McKenna, G., 2016. Here's a great summary of where China's economy is at, and why it matters for Australia. Business Insider, 13 Feb.

OEC, 2015. Australia. OEC.

Owens, J., 2015. Indonesia dramatically cuts live cattle imports to only 50,000. The Australian, 14 July.

The Conversation, 2013. Australian trade with Indonesia: what’s really at stake? The Conversation, 28 November.