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Economics and International Trade

News article- Almost all Australians want to reduce dependence on China as the trust in Beijing falls to 23% after a cyber-attack and COVID pandemic allegations (Australianassociatedpress, 2020). –

 Event Description

This article elaborated on the reaction of Australians on the dependence on China that was anxious about the economic dependence on China and Lowy Institute’s annual poll showed a reaction that 9 out of 10 Australians want to reduce this dependence on China and consider COVID-19 and draught as the biggest issues of threat for country’s interests. 80% of people also said that Chinese officials be sanctioned who are associated with human rights abuse though Australians rank China higher above the US in handling the pandemic. It is to be noted that Australians consider the allegation as true which says China has hidden the information on the spread of the virus.

Holmes (2020) asserts that Australia is more dependent on China than other nations as China is Australia’s largest trading partner and accounts for 32% of its total exports. Australia iron ore, coal, and gas have been delivered to China for their growth needs. In addition to this, education, tourism, agricultural products, wine are also provided by Australia. So China is the consumer here and Australia is the seller in a broad sense. The development came after Australia’s 80% barley export has been banned by China after the Australian PM's brave call for an inquiry into the origin of the Coronavirus despite heavy dependence on china (Dfat, n.d.). The Economists of Australia are insisting on developing trading with East Asian nations and to reduce dependence on China.India is cited as the most promising replacement of china looking at its vast potential but it's a long way to go as Australia’sexport to china were 160 B dollars in 2019 were Australia's goal of increasing exports to India to 45 b dollars by 2035 (Holmes, 2020).

Part 1- Microeconomic Analysis

Australia established firm diplomatic relations with the People's Republic of China in 1972 (Dfat, n.d.). Since then, Australia's heavy dependence on a few products for its economy has been fulfilled by China in the form of Australian exports.

  1. Determinants of market demand-
  • China’s population is a powerful determinant of exports of China,
  • The developing phase of China- which needs energy and infrastructure both of which are fulfilled by Australia through its raw materials of coal, natural gas, iron ore which makes the bulk of Australian exports to China,
  • The proximity of the locations makes it cheaper for China to import infrastructure material from Australia, the development phase of China is also a determinant of demand of Australian raw material as consistently buying has been made possible through it,
  • The heavy income of China to buy continuously from Australia as Chinese manufacturing is a big source of its income(Dfat, n.d.).
  1. Determinants of market supply-

Australia's heavy reserves of coal, iron ore, and gas- trade between China and Australia continues to grow with total exports of Australia at 153 b dollars in 2019 (RBA, 2020).

China-Australia free trade agreement- it was signed in 2015 and made a hassle-free way of importing and exporting of materials to and from China. It has increased the competitive position of Australia in the Chinese market.

Increased capacity of production- Australia has increased its capacity for production of iron ore and coal through enormous investment by china in these primary industries. These factors have induced growth in the supply by Australia to china and export grew by 24 % in 2018-19 (Holmes, 2020).

Appreciation of the exchange rate- This increased the competitiveness of Australian the international market including China, which has lowered export revenue relative to domestic production cost.

  1. Power in the market-

China has the market power to buy a lot of raw material for its infrastructural needs and that it can manipulate to some extent the price reduction from the Australian side of the materials imported from Australia, as it has trade relations with developed and emerging economies, and also a political advantage (Chinese GDP of 12 T dollars, 2018 compared to 1.43 t dollars of Australia in the same year) which is more than Australia (Dfat, n.d.). In addition to these Chinese direct investments in Australia, core industries have been also a matter of advantage for china which was 40 b Dollars in 2018. China is a populated market for Australian exports of other goods and services available on competitive prices, no other country except India has such a potential of consumption.

Australia has large reserves of core infrastructure and energy materials, no other economy can offer such amount of material at a competitive price than Australia, and Australia can manipulate prices and supply to a particular degree.In addition to this, education and medical tourism in Australia are cheaper than in china and easy access of Chinese people into Australia is facilitated by several agreements and strong bilateral relationships which was increased to Comprehensive Strategic Partnershipin 2014 (Dfat, n.d.).The close distance and large reserves together make Australia a near to monopoly of core materials for china.

  1. The price elasticity of demandof the iron ore, gas, and coal is tilted towards Australia as china is dependent on Australia for its infrastructure needs because of its growing economy and several factors like close distance, competitive prices, and lesser options of import from other economies like European Union exist. Due to the corona pandemic, countries are unfamiliar with china and as Australia’s economy are dependent on export to China, it will continue to export the essential materials.Currently, there are very few options for china against Australia.

Description of The Industry and Market Analysis

  1. Size of the industry and the competition level

The two-way trade between China and Australia reached $ 235 billion in 2018-19, up by 20% of the previous year, and exports to China by Australia reached 153 billion dollars in the same period, up by 24 % (Dfat, n.d.). China is the world's largest iron ore consumer and given the mass import from Australia and the needs of China, it cannot stop or sanction the import of iron ore or coal from Australia. Thus, Australia has a monopoly over the trade of iron ore and coal and it has a bigger say in this trade. Apart from that, Australia provides various services such as education, medical tourism. Apart from that, there is an increasing number of Australian businesses being established in china which have been very successful recently. In the corona virus pandemic duration, it is very difficult for China to replace Australia’s imports (Tan, 2020).

  1. Structure of the market and structure influence the prices in the industry.

The market structure of Australia China bilateral trade in core infrastructural goods is, if not perfect, but similar to monopoly. As China is the biggest importer of iron ore and coal in the world and depends heavily on the supply of Australia, given the fact that the corona pandemic has damaged the image of china in the world market, it has increased the monopoly status of Australia towards china trade (Hewett, 2020). It gives Australia the power to manipulate prices of iron ore and coal to a certain level until china starts to variate its dependency on coal and iron by its investments into Africa.

  1. Regulators of the industry and their power to ensure compliance into the industry

World Trade Organization is the regulator of the international trade between economies which has put certain restrictions on the measures which countries put to discourage trade within them. WTO has three boxes which are three categories that allow countries to put several restrictions on the trade of certain goods and services include in the respective box. These are green box, amber box, and red box. The other regulator is the CHAFTA (China Australia free trade agreement) signed in 2015 between China and Australia which allowed free trade in goods and services bilaterally (Kelly &Barrett, 2020).

  1. The industry groups that help regulations apart from regulators.

The other regulator though not directly related but is an influence is the declaration of the Comprehensive Strategic Partnership in 2014 between both countries. These regulations do have a particular say in the supply of the goods but cannot dominate the prices which is the sole regulation of the exporting country (Hewett, 2020). Thus Australia has a monopoly over prices but is restricted by demand by the regulators. The G20 group, EastAsia summit, and APEC are the groups that pledge for free trade within them though not binding but still are powerful enough as the country has to maintain its reputation. Apart from that, political informal groupings are also a considerable factor in which countries have to maintain their relationship with the trading country.

Externalities

  1. Aside from the trade partners, are there any other parties that are affected by this event?

Japan, India, and Australia are working on a new supply chain infrastructure after the corona pandemic to reduce dependence on China. These three countries will now work with regional partners including members of the ASEAN to build new and stronger manufacturing and supply chains and to include more suppliers into the chain. In addition to that, tourism and cultural ties between the two nations have been affected (Bloomberg, 2020).

  1. The impact on the third parties as India, Japan, and ASEAN nations will be positive as manufacturing and supply chains in these countries will be increased and these countries have a bigger say now in the coal and iron ore industry of Australia. A separate manufacturing and supply chain will also positively affect other nationsapart from these nations and competitiveness will result in the lowering of prices of goods and services. In the case of parties related to the tourism and cultural business of China and Australia, these parties of both countries will suffer as increased tensions after the coronavirus pandemic (Hewett, 2020).
  2. What actions or behavior is triggered by 3rd party and solutions?

Third parties viz India, Japan, and ASEAN countries have positively affected by the decision to create a new supply and manufacturing chain and thus solutions regard. Concerning the education, medical, tourism sector, and cultural trade - both countries need to separate these trades from current tensions to avoid the unemployment created in these industries as the Coronavirus pandemic has already set the unemployment rate at a higher number (Adekunle, 2020).

Macroeconomic Analysis

  1. How much is the GDP contribution of the goods discussed in the article? Explain the expected effect on the economy?

China has its growth years since 1970 with the rapid needs of urbanization, manufacturing, and infrastructure investment. The demand for infrastructure and energy lead to the market cr4eated for Australia as Australia was very well versed in meeting these needs. China is the largest market for both imports andexports. Australia china trade stood at 195 b dollars in 2017-18 which is 25 % of the total international trade (RBA, 2020). Australia's major items are coal, iron ore, and agricultural products of which china is a major consumer, with 13 % exports of thermal coal. In addition to that, Australia is the biggest education service provider to china and has command over some essential services like medical instruments, banking, and finances, administration (Dfat, 2020). Thus 25 % of the trade of Australia is at stake due to increased tensions with China. Though it is very difficult for China to avoid the import of essential infrastructural goods other trades are going to affect both China and Australia. Australia is china’s sixth-largest trading partner and 25 % of its manufactured goods are consumed by Australia. It will have an impact on the investment and consumption sectors of the GDP and it will be lowered because these sectors will not perform well for both the countries. Thus the import and export part of both the nations are going to be affected which will result in decreased GDP (Holmes, 2020).

Government spending- will be decreased in the case of decreased trade between the two.

Public investments- or savings rate has already been down in Australia due to the pandemic and this trade if decreased between the two will negatively affect the public investment.

Consumption- The public consumption depends on the central bank and fiscal policy of Australia, if the government decides to pump money into the economy by several measures, spending could be maintained.

b.Will the event affect employment and what will be the impact on the economy?

 This event will bring down the employment rate in both the china and Australia as increased strains in the relations between trade will affect a wide variety of factors of trade, for example, China has put a ban on the imports of barley, agricultural goods, honey, processes meat on the insistence of the PM of Australia into an inquiry of the handling of the COVID-19 pandemic by China (Kelly &Barrett, 2020). It is also possible that Australia may put restrictions on the Chinese imports and other services it provides to china like tourism in education, medical, financial services, though major trade is expected to be continued between the two. This divide between the two leaderships will dominate the strategic and economic environment for Australia (Liu et al, 2020). If Australia retaliates with the banning or imposing tariffs on Chinese imports, it will suffer and will have to change the government spending policies according to the sectors affected by banning imports (IMF, 2020). Australia’s iron ore and coal reserves are going down with the rest of the world for which Australia needs to vary its economic dependence on other activities, till that time, Australia needs to carefully maintain the trade relations with China.

Fiscal Policy

  1. Action taken

Australia estimates a decline in the economy of 4.9 % for 2019-20 which is 95 b dollars of deficit (RBA, 2020). Australia has in the first place made fiscal decisions on corona impact worth 56 billion dollars. These policy reforms are made keeping In view the trade strains between Australia and China, which has negatively impacted Australia. The government has also announced as a fiscal measure a job keeper wage subsidy scheme which allowed employers 1500 AUD per fortnight per employee to support and sustain their jobs (RBA, 2020). Fiscal policy in terms of stimulus is the only need of the hour which Australia is doing. Stimulus package allows for society to immediately access funds which in turn increases the demand which results in the supply and employment and the economy starts to run. The Australian government has one by one introduced financial packages targeting those sectors which are affected most. Australia's central bank chief said that a fiscal stimulus is necessary to revive the economy of Australia (Kelly &Barrett, 2020).

  1. Contractionary policy or expansionary?

The policy is expansionary as one by one major fiscal stimulus packages have been announced for different sectors of the economy which are worst affected by the corona pandemic and the ban of imports by China. Australia has brought in wide measures to contain the coronavirus but has been lesser strict on lockdowns as in other Asian or European countries. Scott Morrison has said, "We will focus on those in the frontline, who are feeling the first blows of the economic downturn" (Tan, 2020). Australia's central bank has put an aggressive statement to put all shoulders to the wheel to fund the spending which is very much important to generate and sustain jobs (IMF, 2020)

Monitory Policy

Australian central is well aware of the fact that the primary response to the pandemic is to manage the health of the people, but this pandemic will also affect the economy in many factors and sectors. With the other institutions of the government, the monitory policy and the central bank of Australia are an important tool to maintain and sustain the economy to reduce the financial and economic disruptions (RBA, 2020). It is a fact that at a point in time, the virus will be contained and the economy will start to recover only when the measures will be taken to sustain the economy in these opposite times and downturn.

Reserve banks reduced the cash rate two times in March which is now at 0.25% to boost the cash inflow into the economy and the household sector; it will also help Australia’s trade sector industries by appreciation in the exchange rates. RBA also announced that it has no plans of increasing the rate till attaining the full employment rate. The RBA has also made a target of a 3-year Australian government bond yield of .25 % (RBA, 2020). In addition to this, the central bank has provided a term funding facility to banks to fund businesses. RBA is providing liquidity to the financial market, the bond market of government; it has also established a swap line for foreign exchange to the funding of US dollars.

Conclusion on Micro and Macro Economics Analysis

The potential rivalry of trade between China and Australia which has started because of the corona pandemic can be made worse if both the countries do not cooperate in the already tough times of the corona pandemic which is seen as the worst factor of recession since 100 years. It is very important for both the countries to respect the treaties and regulations which they have signed and which are for smooth trade between the two and for optimum utilization and efficient resource allocation. Australia has adopted the exapansio9nary policy which has been globally marked as the most successful strategy for the downturn and recession times given the example of US adoption of the expansionary policy after the great depression of 1930 which made the US a superpower afterward as other countries have resorted to fiscal austerity measures and their economies dumped, another example is the 2010 European debt crisis when again fiscal austerity policy was adopted and it failed.

References for Micro and Macro Economics Analysis

Adekunle, A., Meehan, M., Alvarez, D., Trauer, J. & Macbryde, E. (2020) delaying the covid‐19 epidemic in Australia: Evaluating the effectiveness of international travel bans. DOI: https://doi.org/10.1111/1753-6405.13016

Australianassociatedpress (2020) almost all Australians want to reduce dependence on China as trust in Beijing falls to 23% after cyber attack and tension over covid-19. Retrieved from https://www.dailymail.co.uk/news/article-8451635/Australians-want-reduce-dependence-China-amid-cyber-attacks-tension-COVID-19.html

Bloomberg.com (2020) India china japan to launch a new supply chain. Retrieved from: https://www.bloomberg.com/news/articles/2020-09-01/japan-australia-and-india-to-discuss-supply-chains-alliance

Dfat.gov.au (n.d.) Bilateral relations. China: Country brief. Retrieved from https://www.dfat.gov.au/geo/china/Pages/china-country-brief

Hewett, J. (2020) China-us rivalry means the rules of business are changing fast. Retrieved from https://www.afr.com/policy/economy/china-us-rivalry-means-the-rules-of-business-are-changing-fast-20200819-p55n7j

Holden, R., Mackibbin, W. & Quiggin, J. (2020) The RBA needs a new post-virus monetary policy game. Retrieved from https://www.afr.com/policy/economy/the-rba-needs-a-new-post-virus-monetary-policy-game-20200505-p54ptw

Holmes, A. (2020) Australia’s economic relationships with china. Retrieved from https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook44p/China#:~:text=Australia%20is%20China's%20sixth%20largest,are%20thermal%20coal%20to%20China.

IMF.org (2020) Policy response to covid 19. Retrieved from https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19

Liu, S., Saif, L., Weiss, S. & Su, L. (2020) No credible evidence supporting claims of the laboratory engineering of sars-cov-2. Emerging Microbes and Infections 9(1) pp.507-509.

Nature.com (2020). Coronavirus: the first three months as it happened. Retrieved from https://www.nature.com/articles/d41586-020-00154-wFan, Y., Zhao, K., Shi, Z. & Zhou, P. (2020) Bat Coronaviruses in China. Viruses 11(3). Pp.210.

RBA.gov.au (2020) Supporting the economy and financial system in response to covid-19. Retrieved from https://www.rba.gov.au/covid-19/

Singhal, T. (2020) A review of coronavirus disease-2019 (covid-19). Indian J Padiatr 87(4) pp 281-286.

Tan, H. (2020). China may punish Australia with trade curbs — but it can’t stop buying iron ore from down under. Retrieved from https://www.cnbc.com/2020/06/12/china-may-impose-trade-curbs-on-australia-but-cant-stop-buying-iron-ore.html

Uren, D. (2020) How covid-19 infected global trade. Retrieved from https://www.aspistrategist.org.au/how-covid-19-infected-global-trade/

Wang, H. (2019). How will the us-china trade war affect australia? Retrieved from https://newsroom.unsw.edu.au/news/business-law/how-will-us-china-trade-war-affect-australia

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