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Terms Of Trade Between Australia And China

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Question:

Write about the Terms of Trade Between Australia and China.

 

Answer:

Introduction

China is one of Australia’s most important trading partners. In 2015, the country accounted for 28.8% of Australia’s trade, which also marked an 8% increase in trade over five years. The importance of china as Australia’s main trade partner is highlighted by the fact that the next biggest partner, Japan, only accounted for less than half of what China traded with Australia (DFAT, 2017).

This has not always been the case. The rapid growth of china’s economy has been reflected in the country’s rapid industrialization, and gradual change of the country form a rural to more urbanized population. We all understand how China has been upcoming in terms of technology and with the kind of manpower they have, they surely should be leading. As this happened, china’s demand for materials used in infrastructure development, transport and electricity has grown. Australia is one of china’s most important importers in iron ore. This has been used to power the construction boom in the country, while of the exports that Australia sends to China, 13% accounts for coal, used to produce energy for the various factories (DFAT, 2017).

China is not only importing things from Australia. Currently, 25% of all manufactured imports come from china. The relationship is also changing, so that the two countries do not only exchange raw materials in exchange for finished gods. Instead, they have been able to trade in services such as tourism and outsourcing opportunities. China has over the years grown to become the biggest recipient of Australia’s education services (Holmes, 2017). 

 

Facts Affecting Trade Between Australia and China

Size and Orientation of Economy

One of the most important factors that affect a country’s level of trade with another is the size of the economy of the trading partner. China is one of the super power countries with an outstanding number in population and even economic growth. The Chinese economy has been growing at a rate not matched by regional countries, or even elsewhere in the world. Since the economic reforms started in the 1970s and 1980s, China has overtaken most western economies and Japan as the second biggest economy, and in some cases, as the biggest economy on the globe. This economic power has meant that the country’s population is able to purchase imports, while also being able to produce high quality goods that the country can export (Roy & Chatterjee, 2007). This is true, especially to third world countries where they majorly rely on basic needs from China.

The Growth in the Chinese economy will therefore have direct effects on the Australian economy since, as described above; Australia is heavily reliant on china as a destination of its products. The decrease in the level of economic growth has affected the traditional exports to china negatively.The interest rates and the cash rate have seriously affected the exports as well. These include coal, iron ore and other raw materials. As China now tries to develop a high quality financial sector, the ideal educational setup and generally enhance other services to match world services, it has turned to Australia. Australia has a highly developed financial sector, a stable economic growth, slow but for sure stable which is in some cases considered among the best in the world (Roy & Chatterjee, 2007). 

Population

The issue of population is closely tied to the economic size of a country. While a country like Singapore or even Japan has a higher GNP/Capita that is much higher than china’s, their market is not as large as the one offered by China. This means that China is likely to produce more people with the ability to purchase Australian products or inversely, produce Australia – bound goods than in more developed countries with smaller populations (Roy & Chatterjee, 2007). The higher the population the higher the trade as the demand/ market needs to be supplied for their needs. This would definitely reflect directly to Australia in terms of increases in taxation to government and GNP in general.

 

Geographical Location

Another factor that has led to the increased volumes of trade between China and Australia is the physical distance between both countries. Whereas the European Union and the United States may offer competitive or even better rates than what China offers, the two countries are located near each other. This mean that china is likely to get better deals for coal by importing it from Australia, as opposed to getting it from other countries such as Pakistan. The same goes for other bulky imports and exports. The importance of geographical proximity is further highlighted by the fact that a significant percentage of the price of coal exported to China from Australia accounts for the cost of transportation it is therefore likely that few other countries are likely to succeed in usurping Australia’s position, since the transport costs will make their prices uncompetitive (Roy & Chatterjee, 2007).With this in mind, we should consider even the time it takes for the coal to be transported from Australia to China, the shorter the distance the lower the cost and also the higher the volumes of coal transported. This factor is a beneficial to both countries participating in trade.

Natural Resources

As mentioned elsewhere in the paper, Australia’s exports to china have been dominated by raw materials. Indeed, Australia exports raw materials to several other countries, while using its natural resources to produce other products such as dairy products and meat, also highly popular in china. China is a manufacturing country and economy in general and currently has a huge appetite for things such as coal to power its industries, steel for construction etc. This is because labor is quite cheap and affordable in China than anywhere else in the world. Additionally, it has faced an increasing need to provide quality food for its burgeoning middle class, thereby necessitating the importation from Australia of beef and dairy products.

It is highly likely that without the natural resources that Australia is endowed with, it may not be as strong a trading partner as it currently is. The shift in china’s economy to cover other areas such as financial services and education is only starting, and it will take years before it can be considered to have completely shifted (Reilly & Yuan, 2012).

 

Trade Agreements

Trade agreements are also commonly referred to as the trade pacts. These agreements often in investments between two countries include various tariffs, tax and free trade treaties. In recent years, both china and Australia have identified the importance of trade agreements to enhance the volume of trade. As a result, the level of trade has significantly improved since both countries signed trade deals that have removed or minimized most of the barrier of trade. Under the agreement, most imports from either country are not subject to tariffs that would normally apply to other WTO members (Reilly & Yuan, 2012).

The scenario above was seen when china removed all import tariffs on Australian beef. China has banned beef from the Unites States and Brazil, over mad cow fears. Australian beef is highly valued, hence the demand from china. By removing the trade barriers, the average output of Australian farmers has drastically increased, further enhancing the trade ties between the two countries.

Politics

Politics is an important determinant of trade volumes between countries. The current economic development in china has been fuelled mainly by political and cultural changes that happened after the original years of Maoist rule. The country has now adopted an economic model that is more compatible with western models, and with the Australian business outlook. This has led to enhanced economic growth as private enterprise grew.

The political relationship between china and Australia has gradually improved over the years, as the world moved out of the cold war. At the same time, china has opened up more, and became more accessible not just economically, culturally too. For instance, Australia receives a huge number of tourists every year, many of who many originate from china. The ability to travel is a product of the political changes and more so stability in the country, as well as the strong ties between the two countries.

China and Australia trade is still beset by serious issues that arise from their political and cultural differences. Australia is traditionally an ally of the US in regional politics. For instance, china demands that all countries with which it has diplomatic ties to recognize Taiwan as a part of china. Any dealings with Taiwan are frowned upon. Australia has on some occasions been at loggerheads with Taiwan on this. At the same time, the relationship between china and Australia has been problematic due to human rights and democracy issues. While not significantly affecting trade, they are still important considerations in future.

China has also adopted a more militaristic posture towards its neighbors, in relation to territorial claims and military exercises. These issues have alarmed American allies in the region, including Australia. Ultimately, the differences between china and the west will have a huge impact on the future of trade between china and Australia.

At the same time, the country faces competition from other countries, which have also identified china as a valuable trading partner. These countries are taking advantage of the economic shift reported in this paper, to enhance trade between themselves and china. Cheaper sources of raw materials from other countries in Asia, Africa and South America are also available, potentially threatening the hold that Australia has on the Chinese import market (Wang, 2012).

 

Other factors

After several years of trade, Australian businesses have come to understand how the Chinese market works. Crucially, Australian and Chinese businesses understand each other’s culture and its importance to business. Besides language, the Chinese culture has a knack for natural products. From preferring natural and herbal cures to contemporary medicine, China has shown a preference for natural food that Australia exports to the country. At the same time, The Chinese language is renowned for its sometimes confusing words and characters. Australians have taken to better understanding these intricacies so as to use them to their advantage. In the end, they are better placed than other foreign players in doing business in China, as opposed to businesses from other countries around the world (Chappell, 2016, 5).

Conclusion

Trade between Australia and other countries is mainly reliant on the other country’s characteristics, and how well they fit with Australian capabilities. Australia and china have forged strong economies with each other through a pragmatic approach to each other’ needs. Australia has the raw materials that china has needed to develop itself, such as iron ore, coals, agricultural produce, and highly skilled labor. In return, Australia has received manufactured items, which are produced at a cost which makes them competitive in china.

Trade between the two countries has greatly affected their economies in tremendous ways. There is growth for both countries and even increases in tourism for people seeking seeking opportunities While the general orientation of the Chinese economy is slowly changing form manufacturing and raw material importation to service, and consequently, skilled labor demand, the relationship will shift, but the value of the relationship will not significantly change. While other factors such as political events in the wider region have an effect on the volume of trade between the two countries, these may not have as huge an impact as this. Competition against Australia in the region is growing, as it is for Chinese exporters to Australia, who have to contend with products manufactured close by in Thailand, Indonesia among others. Al these factors have had, and will continue to have, huge impact on Chinese - Australian trade relationship.

The most important aspects of the trade between the two countries have been the manufacturing scale and ability of china, and the ability of Australia to come up with high quality raw materials, and unique products that china may have a hard time securing form elsewhere in the world.

 

References

Department of Foreign Affairs and Trade. 2017. Trade and Investment tatistics.dfat.gov.au. 

Available at: https://dfat.gov.au/trade/resources/trade-statistics/Pages/australias-trade-balance.aspx [Accessed 10 May 2017.

Holmes, A. 2017. Australia’s economic relationships with China – Parliament of Australia.

[online] Aph.gov.au. Available at:

https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pu

bs/BriefingBook44p/China [Accessed 10 May 2017].

Roy, K., Chartajee, S. 2007. Growth, Development and Poverty Alleviation in the Asia-Pacific,

New York: Nova Publishers.

Reilly, J. Yuan, J. 2012. Australia and China at 40. Sydney: UNSW Press.

Wang, Y., Australia-China Relations Post 1949: Sixty Years of Trade and Politics. London:

Routledge.

Chappell, T. (2016). Understand China, says Blackmores CEO. Retrieved 05 16, 2017, from www.news.com.au: https://www.news.com.au/finance/business/breaking-news/understand-china-says-blackmores-ceo/news-story/3332225062431af592adf9f624a32d36

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