International Trade Is an Important Case Study

  • Length: 15 pages
  • Sources: 13
  • Subject: Economics
  • Type: Case Study
  • Paper: #34868399

Excerpt from Case Study :

Only a few decades ago, China was a struggling economy. It is much newer in the free market economy system as compared to the already established economical giants, given the country's communist history. China, a country with an extremely high population, put its resources to its best possible advantage and that was something which contributed towards the country's rapid growth. China has one of the cheapest labor and energy and power resources available for its production. As a result, the industries can achieve economies of scale and thus can cut down on their cost of production. As a result, China enjoys a greater absolute advantage over its competitors. Importers around the world have realized the fact that importing goods from China is relatively much cheaper as compared to imports from other developed economies. These cheaper imports allow them a greater profit margin. Moreover, given the fragile economic conditions and declining purchasing power and consumption expenditures around the world, consumers prefer cheaper Chinese products over expensive Japanese, American and German ones.

The extremely low costs of Chinese goods have made the economy grow to a significant degree because using Chinese commodities was an easy answer to the economic problems of a lot of countries. Countries had to consider their rapidly declining Balance of Payments due to imports from older established economies such as Germany and Japan, and therefore were forced to resort to Chinese products. The economic crisis and the urgent need of cost efficiency for economies around the world overshadowed one major weakness of Chinese commodities -- quality management. Chinese economic policies revolved around volume-based production. The country initiated the process of its economic growth by large scale labor intensive production that allowed an extremely low average cost per unit and in turn higher profits. However, what they compromised on was quality, something which is given particular importance by established economies of Japan, United States of America, Germany and other European economies. The recessionary timing however went in China's favor and many importers were force to choose cost efficiency over quality management in order to sustain their survival and profitability and that enabled the Chinese economy to thrive. As economic conditions settled down, and things got back to track, this weakness of Chinese commodities was gradually exposed and in turn China was forced to take quality management into consideration. While China has now started to work towards producing commodities that meet the international quality standards, it still have not been able to achieve the required mark. This weakness is something that Australia can play on to boost its own economy.

Australian trade with China

The importance of China for a country like Australia is immense due to the fact that China is the largest trading partner of Australia. Nearly 23% of total Australian exports are to China which amounted to around 46,448 Australian million dollars in the fiscal year 2009-2010. On the other hand, Australia's 18% of total imports are from China which amounted to around 36368 Australian million dollars in the fiscal year 2009-2010. The major Australian exports to China include Iron ore and concentrates, Coal, copper ore and concentrates and wool and other animal hair. While Australia imports from China are dominated by products such as clothing, computers, telecom equipment and parts and pram, toys, games and sporting goods. Apart from goods that are traded between Australia and China, Australia's 11% of total services export is to China and only 3% of total service import is from China.

Australia and China also share good investment relations. Australian investment in the Chinese markets amounts to 6327 million dollars while Chinese investment in Australian markets is three times greater than that which amounts to 16637 million dollars as in the year 2009-2010. In order to strengthen its ties with China, Australia also signed a Free trade agreement with China on '18 April, 2005. The agreement is said to have significant economic benefits to the Australian and Chinese markets (McDougall, 2009).

Australian trade is found to be in great advantage due to the rise of China since statistics show that the Australian exports to China have grown by an outstanding 50 times in the last 3 decades and the growth in the year 2007-2008 was around 28.3% which is again an impressive figure from Australian point-of-view. China has been a resource hungry country and is in constant need of resources such as wood and fuel and the fact that Australia is a resource rich country, it has benefitted by its immense exports to china in the past few years along with the benefit of rising prices of fuel and petroleum products. Due to Chinese interests in the resources of Australia, Chinese have invested heavily in the Australian markets. At the end of 2008 Chinese investment in Australia amounted to AUS $35 billion compared to AUS $6.2 billion the previous year. This massive rise owed to the investment by the Chinese resource extraction company Chinalco purchasing shares in the Anglo-Australian mining conglomerate Rio Tinto.

The rise of china has also been the source of Australian service exports to china as Australia is the only country to have the most number of Chinese students which is due to rising incomes and rapid growth of the Chinese economy (Hale & Hale, 2003). More and more students are applying to Australian university which is also benefiting Australia in the form of tourism promotion.

Having said that, the statistical information implies that Australia's major imports to China comprise of primary resources and raw materials. Although, given the rapid industrial expansion in China over the past few years, the demand for Australian raw materials has drastically increased, thus resulting in 18% trade growth in Australia, however, it must be noted that the net balance of payment effects are based on the monetary value of both exports and imports. While it might be true that the Australian export to China might be in excess to that of the Chinese exports to Australia, in monetary terms, China enjoys clear and sharp edge over Australia. The primary reason behind this is that Australia exports raw material and primary resources to China, while on the other hand it imports high end technology and finished industrial goods from its trade counterpart. It is clear that the technological and finished industrial goods are more value added and therefore are more highly priced as compared to the raw materials and primary resources as there is little addition of value to the natural resources. This means that while Australia might be exporting a higher amount of goods to China in terms of physical quantity, it is actually exporting a much lower valued goods and services in terms of monetary value. The only significant export by Australia in terms of monetary value is the export of energy. Australia exports Liquefied Natural Gas to China, which is one major high end export of Australia. Due to the rapidly increasing industrial growth, China is in dire need of energy supplies (Zweig & Jianhai, 2005). Given the rapidly fluctuating oil prices around the world, and considering the comparative cost efficiency that Liquefied Natural Gas has over oil, and its close alternativeness to oil, China imports a substantial amount of energy from Australia.

Australia's Trade and Foreign Policy

China, beyond any doubts, is a major trade partner of Australia at the moment. This calls for Australia to ensure strong and progressive foreign relations with China. On the other hand, as stated earlier, increasing monetary value of imports from China is having adverse effects on Australia's balance of payment as Australia is exporting low value resources to China in return of high end, value added finished goods. This means that the Australian trade policy with China should be designed in a manner that it aims at decreasing the negative pressures on Australia's current account.

On theoretical grounds, a simple method to do so is to cut down on Chinese imports by adopting protectionism strategies. Australian government can impose import duties, tariffs and quotas on Chinese imports to reduce the pressures on the Balance of Payment. However, in practice, this policy has a lot of potential to backfire (Thomas, 2004). If Australia imposes a tariff or quota on Chinese imports, there might be two possible negative effects in contrast to one positive effect of improved balance of payments. Firstly, imposition of protectionism on Chinese imports would mean that Chinese goods would become expensive in Australia. This would mean that any industry that would be dependent on Chinese raw materials for its production will end up with increased cost of production. This in turn means a decline in competitive advantage for the Australian industries. The second disadvantage would be that of Australia imposes tariffs or quotas on China, there are high chances that China would retaliate and do the same to Australia. In that case, it will be a big blow to Australia as China remains its major trade partner in terms of exports as well…

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