International Trade Is an Important

International Trade is an important economic tool for countries around the world. This is one tool that catalyses the achievement of various macroeconomic objectives of a government. These objectives include increasing output and Gross Domestic Product, achieving positive economic growth, earning greater foreign exchange and a positive Balance of Payment along with increasing standards of living and allowing wider choices of goods and services to their consumers. The international trade may include trade of both visible goods as well as invisible goods.

Since International Trade takes place between countries across geographical boundaries foreign relations between countries and transnational treaties have a direct role to play in increasing and/or decreasing the International Trade of the countries. This of course means that the responsibility of developing favorable international trade and foreign policy lies on the shoulders of the political leadership of the country.

During the past couple of years, China has emerged as an important and highly competitive economy in the international market. China is currently the fastest growing economy in the world. China enjoys a high competitive edge over other economies due to the fact that the abundance of natural resources and cheap labor and energy resources enables China to keep its costs of production low and in turn, it is able to charge lower prices from the importers as compared to other competing economies. Over a period of time China had seen a rapid transition from primary sector of economy to the secondary sector with rapid industrial growth and phenomenal structural changes in the economy.

China is a major trading partner of Australia. A major proportion of Australian exports which include mainly primary resources along with some mineral resources and tertiary exports are consumed by the Chinese economy. In return, Australia imports value added industrial commodities from Australia. What poses a great concern for the Australian economy is the fact that the country exports primary resources, which are of lower monetary value as compared to the Chinese imports of industrial and value added goods and technology which is of higher monetary value. The ultimate effect of this kind of a trade on Australian balance of payment is that Australian economy ends up experiencing negative pressures on its balance of payment, particularly the current account. For this reason, it has now become important for Australia to devise a trade and foreign policy for Australian trade relations with China, such that it helps curtailing the current negative pressures on the Australian balance of payment.

The reason why Australia has to be more intelligent in devising a trade and foreign policy for China to suit its benefits is that China is an important trade partner of Australia. Any policy that would put Chinese interests at stake would directly mean that Australia will lose an important trading partner which would leave Australia in much more severe conditions. For this reason, Australia must rule out any pro-protectionism trade policies such as imposing tariffs, quotas or duties. This would not only provoke China to take similar actions in retaliation, but will also make Chinese goods expensive in Australia, thus impacting production costs of Australian industries that use Chinese raw materials.

In order to counter the problem Australia can follow the economic model of the likes of India and can import technology from China and should consider producing industrial goods on its own. Australia should also consider exploring newer markets for risk diversification. Given the edge that Australia enjoys in tertiary sector over China, it can increase tertiary sector ecports to China.

Outline

China's industry is rapidly growing and its cost efficiency is posing competitive threats to other international economies.

China is Australia's major trading partner consuming most of Australia's exports.

Australia exports mainly natural resources and primary products to China and imported high value added goods in return. This means a negative balance of payment for Australia.

Australia cannot afford to use protectionism-based trade policies for China as China will do the same in retaliation. Australia must therefore consider diversification in other market sectors.

Introduction

Ever since the concept of specialization was evolved in the field of economics, the concept of International Trade emerged as an important economic objective for any economy. In order to achieve its targets, any economy needs finances. Although, major sources of finance are the direct and indirect taxes, however, a very important economic tool for any country is its foreign exchange. The foreign exchange does not only earn income for the economy, but it also helps in appreciating the economy's foreign exchange of the economy in the international market.

A very important objective for any economy is to maintain a positive Balance of Payments. This means that the economy would want its exports to exceed its import bill. Exports exceeding the imports would mean that the country is selling more in international market and buying less from outside. This will result in more net inflows in the economy.

In order to maintain a positive balance of payments many countries introduced barriers on international trade. These barriers included import duties, tariffs and quotas, which were physical and monetary restriction on the imports. The main idea to impose trade barriers was to make foreign goods less affordable in the domestic market so that domestic markets could be protected. However, as globalization increased, the concept of Free Trade emerged and overshadowed the aims and objectives of trade barriers.

While all economies aim at maximizing exports and minimizing imports, many countries fail to do so despite of the fact that they have huge exports in terms of physical quantity. However, it is the monetary value that counts in the economic system and physical quantity is of little value. For example exporting large quantities of low priced goods in return of imports of small quantities of high priced commodities may result in the import bill exceeding the exports, which means a negative balance of payments. This problem is greatly faced by those countries whose major import commodities include oil. Free trade is more supported over protectionism policies because contemporary economists argue that free trade leads to increased specialization and competition. It is an established fact that competition would lead to more efficiency and better utilization of resources, therefore any inefficient businesses will automatically get out of the market (Lipsey & Chrystal, 1997).

There is no doubt in the fact that China is the current market leader in everything from a small thumb pin to an air conditioner or a motor vehicle. Chinese have been able to exploit the market very cleverly due to the fact that they are the cheapest. China has hit the major world producers like Finland and other mobile producers in the field of mobile technology due to the very cheap mobile phones being offered by Chinese companies such as Benq and China Mobile. The fact that China has been offering cheap products to its international customers is the fact that it has a large amount of cheap labor available which is not easily available in countries like Australia and other European countries.

The rising of the Chinese industry has simply lead to the decline of the other industries world-wide. In every market, the product says itself that china leads the world by the tag on it saying "Made in China." Even the Middle-east markets are flooded with Chinese products swapping out the quality consciousness and bringing in the cheap factor that leads consumers to make their choices on the basis of prices due to the fact that the difference is not slight but the price difference is too much. It is not only the Australian exports that have suffered due to Chinese products flooding the market but this is the story of nearly every country who have not been able to offer something very different from that which Chinese offer the world.

China has especially hit the western markets so badly that the Government of United States had to pressurize the Chinese Government to revalue their currency in line with their increased exports. The revaluation would have the effect of making the Chinese exports less cheaper in the international markets which would mean that goods from other countries would have a better chance to compete with the Chinese products.

Analysis of the International competition from China

The competition given by China to its competitors in the international markets has been great as China is now the world's third largest trader, the second largest exporter and on the other hand it has remained to be the major importer of fossils such as fuel and coal and of other raw materials. The rising of the Chinese industry and the rapid economic growth that China has experienced in the past few decades has made the governments of other countries a tough challenge towards the drafting of their foreign policy as they strive to survive the international competition from China, they make sure that their foreign policy terms with China are such that allows them to trade with them on the basis of mutual advantage rather than the Chinese giant exploiting their markets.

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 as imports and Australia cannot afford to lose a major export market to protectionism wars. This will only hurt Australia more than it will hurt China (Adam & Fan, 2005).

Besides economical problems, Australia's foreign policy should take into consideration, the political sensitivities involved as well. The government of United States of America has had some serious reservations against China's development in the security sector. If in future there is any political coldness that arises between China and United States of America, Australia would obviously ally itself with the United States of America. Since foreign relations on a political front have a direct impact on a country's international trade, such circumstances would mean a direct threat to the seemingly progressive trade partnership between China and Australia. Considering the possible and short-term and long-term political and economical sensitivities involved in the Australia China trade partnership, Australia needs to start thinking about an intelligent economical policy with a sense of urgency.

In the context of the current scenario, it is of course not advisable to think of extreme options such as protectionism. Australia, however can consider some more progressive options that may also help in securing the country's position in the long-term. Australia should and must consider diversifying its export markets. While current trade partnership between China and Australia should remain intact, new export prospects must be explored. This will not only help in increasing exports, but will also help securing Australia's position in the long-term if any political tensions arise between China and the western powers. It is high time Australia must consider a transition from exporting primary sector goods to more value added goods and make itself self sufficient. Australia should strive to develop itself technologically and should focus on exporting more high value goods rather than maintaining dependence low value primary resources. It would be a much more intelligent approach if Australia uses its own natural resources to its own benefit rather than exporting them to other economies and then importing them back again with a value addition. It would be a much better idea if Australia itself plays that part of value addition. This strategy has already been tried and tested by India and the result is that India is also one of the thriving economies in the world. As mentioned earlier, China is on the verge of facing criticisms for quality flaws in its goods despite of the low costs. This is where Australia can get into the picture. It can only import the basic technology from China and develop higher quality goods as compared to those produced by China. Australia, beyond any doubt has a higher skilled and qualified workforce and the quality of education is also much better in Australia.