International Trade in Australia 2020

International Trade in Australia 2020

Australia is the sixth-largest country in the world by area and comprises of a population of 25.6 million, as of March 31, 2020 (ABS, 2020). It is the 14th biggest economy in the world, with a nominal GDP of USD 1.42 trillion (Silver, 2020). Moreover, in FY 2017-18, it achieved a record surplus of AUD48.8 billion (Tang, 2020). Australian exports have diversified from supplying almost 50% of the world’s zinc ore in the early 20th century to sheep wool accounting major Australian export in the mid-20th century (DFAT, 2020). It is the largest iron ore exporter in the world, having exported 828 million tonnes of iron ore worth $45 billion in 2017 (MCA, 2018). On the other hand, cars and refined petroleum consisted of 8.25% and 8.44% respectively of total Australian imports in 2018 with China making up 24.1% of total imports of the country (OEC, 2020). This article will provide a background of Australian international trade activity along with major policy shifts. Moreover, abundance and scarcity of resources available to the Australian economy will be analyzed and how the country benefits from international trade with China will also be discussed. Besides, iron ore exports to China will be evaluated. Furthermore, trade regulatory requirements, taxation rules regarding trade, and Australian government’s trade treaties will be accessed. Heckscher-Ohlin model will be used to access Australia’s international trade activity.

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Trading History of Australia

The trading history of Australia can be described as having three different eras (Varghese, 2014). The first era started after the formation of the federation where it exported wheat, gold, and wool etc. The second period ranges from the 1920s-1960s where it sheltered its industries and prevented competition from international companies, for instance, in 1960, the foreign investment in Australia was lowest at 23% of GDP. However, it shifted towards globalization from the 1970s onwards as 25% tariffs applied uniformly on all trading activities in 1973 were revised within 15 years in 1988. Externally, the United States and the United Kingdom used to be significant markets for Australian products in the 1960s (DFAT, 2020). At that time, the range of Australian exports was far lower than it is today and consisted primarily of agriculture and livestock products such as wheat, beef, sugar and sheep wool (DFAT, 2020). Over time, the range of Australian products diversified and so did the exporting destinations. Asia has emerged to be the biggest destination for Australian products with four out of five top trading partners being Asian countries which include China, Japan, Republic of Korea etc.

Australia’s Free-Trade Agreements

In its effort to enhance cross border trade activity, Australian government entered into a free trade agreement with New Zealand, the core trading policy of Australian government, which reduced the barriers in trade between both countries and exports and imports on both sides boomed. 20 years later, in 2003, Australia negotiated its second free trade agreement with Singapore and now has FTAs with 14 countries, including major markets like China and the US (DFAT, 2020). Moreover, it is negotiating FTAs with India, the European Union and UK (Australian Border Force, 2020). FTAs covered 70% of two way Australian trade in 2019 which was only 26% in 2014 (ICE Cargo, 2020). Impact of Australia China FTA is evident by the fact that exports to China 2016-17 increased 25%, with two years of FTA implementation (Xinhua, 2017). Moreover, in 2019-20 Australia exported goods and services worth USD150 million to China, which made up 39% of total exports and 27% of total imports came from China (ABS, 2020).

Australia-China Trade Relationship

Australian international trade position can also be assessed with the help of the Heckscher-Ohlin theory. This theory was proposed by Swedish economist Ohlin based on the work of his teacher Heckscher and states that a country rich with capital, but low labour resources tends to export capital intensive products due to high wage rates and vice versa (Kopp, 2020). This theory fits perfectly in Australia-China trade relationship. Australia has a total workforce of 1.2 million and a population participation rate of 66%. Due to a shortage of labour, as of 2019, Australia paid USD12.6 an hour which is the highest minimum wage rate in the world (Ma, 2020). Therefore, it imports labour-intensive products, i.e. manufactured goods from China such as automobiles, telecommunication equipment etc. (ABS, 2020). On the other hand, the country is rich in capital as it is the largest producer of bauxite, alumina, rutile, and tantalum etc., but it does not have adequate labour (Roarty, 2010). This makes Australia a natural trading partner of China which has an abundance of labour and capacity to utilize Australian resources. China has a massive workforce of 774 million, world`s largest, and a community participation rate of 68% (Textor, 2020). Therefore, it has one of the lowest wage rates in the world, paying 1,071 USD per month (CEIC, 2020). Hence, China buys capital intensive goods from Australia such as iron ore, educations etc. Currently, China buys 80% of Australian iron ore, and due to the Belt and Road initiative of the Chinese government, it will continue to be a major buyer of resources and energy products (Tan, 2020). This analysis of Heckscher-Ohlin theory proves that how Australia and China are interdependent due to their limitations.

China has emerged as a major trading partner of Australia. The rapid growth of the Chinese economy in the 21st century has resulted in vast demands of iron ore. Australia, in contrast, has 30% of the world’s iron ore reserves which amount to 52 billion tonnes. It earns AUD 63billion from iron ore sales, and since 2010 the exports have risen 200% (MCA, 2020). Chinese high demand and Australian high production of iron ore have benefited both countries. Australia sells its 80% iron ore to China, whereas China buys its 60% of iron ore needs from Australia (Tan, 2020). However, there has been a hot and cold political relationship between the leaders of both countries, which pose a significant threat to Australian iron exports (Matsumo, 2020).

Tax Collection in Australia

Tax is collected by governments worldwide for several purposes such as financing the government or preventing the use of particular product etc. (Neumark, 2020). Similarly, the Australian government also imposes tax both on individuals and corporations. Australia’s tax to GDP ratio in 2018 was 28.7, which is one of the lowest among OECD countries (OECD, 2020) and collected A$559.8million in 2018-19 (ABS, 2020). Individuals and corporations are required to file their tax return 31 October every year for a period of 1 July to 30 June. According to Australian Tax law, a company is required to pay tax at 30% of profit after tax. However, there is a concession for base rate entity which pays a lower company tax rate at 27.5%. Meanwhile, imports in Australia are overlooked by the Australian Border Force, and duties are collected by the Australian tax office. There are different kinds of levies, and import duties are imposed in Australia, but a general rule states that most goods are subject to 10% import and service tax on the customs value of the product (WWCF, 2020). Moreover, goods worth more than A$ 1,000 are cleared by border forces after submitting the import declaration form. On the other hand, the export of goods from Australia is duty-free subject to full or part receipt of payment within 60 days of receipt (ATO, 2020).

Regulation of Trade in Australia

In Australia, just like other countries, trade is regulated by the Australian government. It controls the product list for things which can be imported, and the Australian border force administers these regulations. There is no requirement to hold an importer license to import goods and services in Australia. However, subject to the nature of goods imported, there may arise a need to obtain import permit in order to clear goods from customs control. Moreover, for importing chemical products into Australia, the importer is required to register with Australian industrial chemicals introduction scheme AICIS. Different types of fee are collected by the treasury department on imports. These fees include clearance fees, customs duty, goods and services tax and other taxes (Australia Government, 2020). On the other hand, Exports are also regulated by Australian border force. Similar to imports, exporter also needs to fill a goods declaration form with ABF for goods worth more than AUD 2,000 (ABF, 2020).

This article examined various factors of Australian trade, such as policy shifts, trade treaties with other countries. Moreover, major Australian client, i.e. China, was discussed in detail based on Heckscher Ohlin theory. At last, the governmental regulations such as taxation, import and exports policy were discussed. By analyzing Australian government trading policies, it can be concluded that Australia’s reason for success and becoming the major economy of the world are free-trade agreements. As a result, the Australian government is working to reach a free trade agreement with other major markets like the Gulf Corporation Council, EU and India. However, it should be noted that Australia depends considerably on mineral exports which make up around 55% of total exports of the country. These are depleting natural resources, and therefore, the soon Australian government must invent a new line of trade for its exports. Moreover, it is learned that Australia relies greatly on China for its exports and imports. This dependency needs to be lessened to counter the ill effects of any change in the geopolitical environment.

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