Trade Liberalisation

Micro Reform – Trade Liberalisation Trade liberalisation is about removing the barriers that are designed to restrict international trade and shift towards the idea of free trade where there is an increase in the number of free trade agreements. Two parts to trade liberalisation 1. Removal of barriers 2. Free Trade Agreements

Barriers To Trade Tariffs: an indirect tax levied on selected imports to make them more expensive. Subsidies: government cash payments made to local producers to help them cover some of the costs of production. Enables firms to lower their export prices. Import Quotas: are designed to restrict the quantity of specific types of imports allowed into the country. Importers must obtain a licence which gives them a maximum number of imports for a particular good.

Trade liberalisation: Part 1 Removal of Tariffs The major part of trade reform in Australia has been the tariff reduction process which is designed to reduce the government’s contribution to the cost of imports, many of which are used as inputs into the production process. The tariff reduction program for phasing out and reducing tariffs began in 1988 and was accelerated further in 1991.

Trade liberalisation: Part 2 Reduction of Subsidies As part of its trade liberalisation measures, the Australian Government has increasingly reduced subsidies or used them as financial incentives to help restructure the industry more efficiently. Gross subsidies made by the federal government have decreased from around $25 billion in 1971– 72, down to an estimate of less $2 billion by 2014 In addition, most subsidies granted now are conditional upon companies undertaking investment to upgrade plant, equipment and technology in order to improve efficiency.

Trade liberalisation: Part 3 Abolition of Import Quotas Quotas were commonplace in the 1970s and early 1980s, especially on cars, textiles, footwear and clothing. However, these have been progressively abolished. The last quotas, applying to cheese, were terminated in 2000–01.

Trade liberalisation: Part 4 Free Trade Agreements Australia has increasingly tried to negotiate bilateral free trade agreements (FTAs) with two or more individual countries. Australia–New Zealand FTA (also known as ‘Closer economic relations’) in 1983 Australia–Singapore FTA in 2005 Australia–Thailand FTA in 2005 Australia–United States FTA in 2005 Australia–Chile FTA in 2007 Australia Japan FTA in 2014 Australia Korea FTA in 2014

Trade liberalisation: Part 4 Free Trade Agreements The aim of this type of trade reform include lifting the competitiveness of our exporters, establishing a business presence abroad, expanding Australia's market share in overseas countries,

Trade liberalisation This concept of free trade is based on the belief that there are benefits to be gained from competition between nations and is aimed at improving international competitiveness. What do we mean by competition? Competition: involves the nature and extent of rivalry in particular markets. The more competitive the market the more likely it is that firms will:  Operate more efficiently to keep prices down  Be more innovative  Respond to changing consumer preferences  Develop better products

Trade liberalisation – Impact on Efficiency Perhaps the major goal of all microeconomic reform policies is the desire to improve the efficiency with which resources are allocated in the Australian economy. If the Australian economy is able to create a higher level of output with a smaller quantity of inputs, then our growth will be sustainable and prices should remain stable.

Trade liberalisation – Impact on Low Inflation Trade liberalisation helps to ease inflationary pressures on prices and achieve the goal of low inflation as imports become cheaper due to removal of trade barriers. Many imports are also inputs into final goods produced in Australia.

Trade liberalisation – Full Employment In the SHORT TERM, some Australian businesses may not be able to compete against cheaper imports leading to business closures and structural unemployment. In an effort to improve efficiency businesses may also restructure their production process leading to some workers being made redundant, structural unemployment In the LONG TERM, as we start to become more competitive there will be higher demand for Australian made goods and services locally and internationally, leading to more demand for workers and lower unemployment

Trade liberalisation – External Stability By improving the efficiency of resource allocation, microeconomic reforms are likely to facilitate external stability by:  lower prices will make us more internationally competitive which should boost export sales and assist domestic firms competing against imports  Rising exports and a decrease in demand for imports should improve the current account deficit.  HOWEVER – some restructuring may require international; investment which may increase foreign debt and put pressure on the CAD.

Trade liberalisation – Equity in Income In the SHORT TERM, equity in income may worsen due to structural unemployment However, in the LONG TERM, due to the expansion in productive capacity and the higher levels of growth at lower prices we become more internationally competitive, leading to higher growth, more employment. More employment means more people are earning a factor income which results in a more equitable distribution of income.