Economics Update

VOL. 21 NO.2

MARCH 2015

What happened to the dream?

In this issue:

FEATURE: What ever happened to the dream of global free trade?*

ISSN: 2204-5554 © Opinion Education 2015

OPINION: Malcolm Fraser’s Economic Legacy

EXAM STRATEGY: An approach to Australia’s Balance of Payments

The future of international trade and why a multilateral free trade agreement continues to prove elusive.

ECONOMIC SNAPSHOT:

The first quarter of the year has been a melting pot of macroeconomic developments. In early March, the Reserve Bank of Australia resolved to maintain benchmark interest rates at their historical low of 2.25%, opting to observe the impact of prior adjustments before loosening the monetary lever further. Interest rate analysts expect the benchmark cash rate to finish the year at just 1.5%, down from the post-financial crisis high of 4.75%. Meanwhile, RBA executives acknowledged the central bank was fast approaching the limitations of monetary policy as all eyes begin to shift towards the Abbott Government’s second budget. Economists will be looking for specific policies that assist in the transition away from mining related investment towards new sources of growth. In managing expectations, the Prime Minister was quick to suggest that the Federal Budget, due the second Tuesday of May, would be “pretty dull, pretty routine”. These comments come on the back off falling iron

ore prices that continue to drift towards the $50 per tonne mark. Analysts estimate that each $1 drop reduces government revenue by $200 million, placing more pressure on the already revised timeline for the budget’s return to surplus. Growth figures released in March showed that GDP growth slowed to just 0.5% in the last quarter of 2014 while labour market data for the month of February revealed the unemployment rate eased slightly to 6.3%.

Abroad, the US dollar continues to climb against all major currencies as talk of higher interest rates in the world’s largest economy sees stronger demand for US dollar denominated assets. Meanwhile, the Euro continues to plunge as the European Central Bank launches its long awaited quantitative easing program, a form of unconventional monetary policy that lowers borrowing costs and weakens the currency, as the Eurozone edges closer and closer to deflation.

Economics Update March 2015

2

What ever happened to the dream

FEATURE:

The grand vision of open trade is increasingly under threat from the proliferation of preferential trade agreements and non-tariff measures.

of global free trade?

Off Course: The New Global Trade System

In November 2008, as financial markets around the world

were thrown into turmoil, leaders and policymakers from

the top twenty industrialised economies met in

Washington DC. With the global economy descending

further and further into recession, leaders promised not to

repeat the mistakes of the 1930s which saw nations raise

trade barriers and revert to economic isolation as fears of

economic contagion gripped global export markets. Such

actions only hastened the economic deterioration that

precipitated the Great Depression and this time,

representatives of the world’s major industrialised

economies were careful not to repeat the policy missteps

of the past. At the summit, leaders reaffirmed their

commitment to free trade and were unequivocal in voicing

their outright rejection of protectionism.

In the six years since, it is apparent the world economy

has become less transparent and less open. After almost

three decades in which goods, capital and labour were

moving ever seamlessly across regional borders, barriers

particularly in the exchange of goods and services have

emerged, albeit in more subtle and less conventional

forms. This is not to say that global trade volumes are

declining, in fact, year-on-year, global trade flows continue

to grow modestly. Conventional wisdom among economic

policymakers in both advanced and developing worlds still

overwhelmingly advocates the principles of cross-border

free trade and investment.

Rather, individual economies are becoming more selective

in which aspects of globalisation and international trade

they want to be involved with. Nations want to enjoy the

very best that global trade has to offer, but as much as

possible, they want little to do with the adverse

consequences of international commerce, such as the

threat of foreign competition. The result, is a fragmented

and distorted global trade system where economies ‘cherry

-pick’ trading partners and secure preferable trading

agreements that serve their national interests at the

expense of the broader globalisation process.

Meanwhile, the World Trade Organisation, the successor to

Economics Update March 2015

3

the General Agreement on Tariffs and Trade, has struggled

with building a strong consensus for a comprehensive

multilateral free trade agreement. Instead, it continues to

see its influence weaken as regional and bilateral trade

agreements gain popularity, stoking fears that globalisation

is stalling against what appears to be a shift towards

regionalisation.

Despite falling average tariff levels across export markets,

modern day trade protection continues to flourish in both

developing and advanced nations, albeit in new and hidden

forms, masquerading under the guise of ‘industry

assistance’ or ‘health and ethical restrictions’. For advanced

liberal economies that have long preached the ideals of

market liberalisation, such policies send a conflicting

message to newly emerging economies seeking guidance

on how to become more active in global trade activities.

Against these metrics, the global trade system today has

deviated far from the market liberal paragons that defined

and dominated the globalisation era of the 1980s. In the

post financial crisis era, the grand vision for a global free

trade regime is quickly becoming neglected as the day to

day realities around national interests and political patience

drown out any concerted attempt to create a framework that

supports a fairer, stronger and more participative global

trade system.

Enforcing Cross-border Trade Rules

One of the more challenging aspects of managing the

explosion in global trade over the last three decades lies in

how the global economy resolves trade disputes. The World

Trade Organisation, formed in 1995 to replace the outdated

General Agreement on Tariffs and Trade, marked an

important step towards creating a consistent global trade

framework. To this day, the WTO’s objectives remain

relatively unchanged. First, the organisation seeks to

promote global free trade by establishing common

agreements in relation to the exchange of goods and

services that are negotiated and signed by member nations.

These agreements are effectively contracts that guarantee

member countries certain trade rights. Once signed,

member nations ratify these agreements and ensure that

their respective trade policies at home are consistent with

those of the WTO.

The second mandate of the WTO rests with its role in

dispute resolution. This is where the WTO has seen the

most success in recent times. Disputes occur when trade

friction exists between different member nations. When

nations engage in trade practices that are in breach of WTO

agreements, a case may be lodged with the organisation’s

dispute settlement process (DSP). The method employed by

the WTO underscores ‘rule of law’ principles, where the

resolution process hinges on clearly defined rules with

adequate appeal provisions and strict resolution timetables

that ensure open cases are dealt with in a timely manner.

The dispute settlement method aims to work constructively

with the affected parties to resolve disputes informally and

arrange for remediation that it mutually agreeable.

Nonetheless, there remain flaws with the WTO’s dispute

resolution process, namely in relation to the challenges

associated with enforcement. Enforcing trade rules, like all

international laws, is inherently difficult given the lack of a

credible enforcement mechanism. When member nations

are deemed to be non-compliant with WTO agreements and

fail to take corrective action, the WTO may grant permission

for other nations to impose higher trade barriers on the

offending nation. The efficacy of such an approach is

questionable, as some commentators put it ‘using trade

protection to fight trade protection’ may not produce

desirable outcomes

Adding to the weakness with the DSP is its lack of

consistency in dealing with trade disputes. Despite attempts

to channel all trade matters through the structured dispute

settlement process, it remains common practice for nations

to engage directly in retaliatory trade measures to what one

nation may unilaterally perceive to be a breach in WTO

standards. In 2012, the US Department of Commerce

unilaterally raised import tariffs on Chinese solar panels by

up to 35.2 per cent without involving the WTO’s formal DSP

and at the time sparked concerns of a potential trade war.

Last year, the officials at the World Trade Organisation

denounced the actions taken by the US, claiming that such

moves were ‘inconsistent and in violation’ of WTO

mandates.

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Economics Update March 2015

4

The Rise of Mega-regional Trade Agreements

After more than a decade of multilateral trade talks, an

enforceable set of standardised trade rules has yet to materialise.

At the same time, regional ‘preferential trade agreements’ (PTAs),

have proliferated, running counter to the principles of universal

trade liberalisation, raising concerns that the global economy is

being segmented into regional clusters with inconsistent rules

governing international commerce.

While the rapid growth of regional and bilateral PTAs does

indicate that the world hasn’t given up on trade liberalisation, it

does suggest that global trade is becoming more splintered. PTAs

have been sharply criticized by some economists to have

distracted important policy debates away from multilateral trade

discussions. The genuine concern is that the discrimination such

PTAs entail may undermine the thin layer of trust and confidence

in the globalisation process itself.

The discussion about whether regional trade agreements help or

harm multilateral trade has gone on for many decades.

Supporters argue that once nations engage in RTAs, there is an

incentive for others to join or to arrange their own RTA.

Eventually, the global trading system becomes saturated with

RTAs that trading barriers fall, forming the impetus for

policymakers to enter into multilateral deals. Those critical of

RTAs claim that once part of a trade agreement, members secure

favorable trading conditions for themselves, often by

discriminating against outsiders and eventually become

complacent enough to lose interest in pursuing multilateral trade

discussions.

In the early stages of the globalisation era, the former was

certainly true, multilateral and regional trade agreements co-

existed without so much as a hint of mutual exclusivity. In the

decade leading up to the new century, the Clinton

administration signed the North American Free Trade

Agreement (NAFTA) just as the Uruguay round of

multilateral trade talks were being completed. In the early

2000s, China was accepted into the WTO just as the

European Union expanded its reach into the former Soviet

Bloc.

This started to change over last ten years. Regional trade

agreements are now seen more as ‘alternatives’, rather than

a supplement to multilateral trade agreements. The launch of

the Doha Development Round in 2001, intended to enhance

market access and economic opportunity for the developing

world, encountered fierce resistance as soon as negotiations

began. Emerging market economies balked at the grand

bargain: across-the-board cuts in industrial tariffs for greater

access to the markets of advanced economies.

Doha was always seen as an ambitious multilateral trade

framework that was predicated on two core principles: non-

discrimination and national treatment. The former is known

among economists as ‘the favoured nation principle’ which

seeks to ensure that trade benefits extended to one country

are extended to all. The latter requires all imported and

locally produced goods to be treated equally. After 13 years

and more than nine rounds of talks, few inroads have been

made.

One of the most significant factors weighing on progress in

multilateral trade talks is the changing balance of global

economic power. The BRIC economies (Brazil, Russia,

India, China) consider themselves as economies still poor

enough to justify the need of protection for their industries.

But advanced economies increasingly view the BRICS as

capable players in the global economy that have an

obligation to shoulder more responsibility in opening up to

the rest of the world. Since 2008, when multilateral

negotiations collapsed in Geneva, there have been several

attempts to revive the dialogue, but a lack of leadership from

the US and China continues to drag on progress.

Meanwhile, the appeal of regional trade agreements

flourished on the back of floundering multilateral talks. Since

2001, the number of active RTAs have doubled, increasing

from just over 200 to 398 in the first quarter of 2015

according to data compiled by the World Trade Organisation.

In recent times, the constructs of RTAs themselves have

been changing. New generation RTAs such as the highly

controversial Trans-Pacific Partnership (TPP) and the

Transatlantic Trade and Investment Partnership (TTIP) in

addition to blanket trade liberalisation, seek to go ‘beyond

the border’ and address topical issues such as harmonizing

tax laws, strengthening intellectual property rules and raising

environmental protection standards.

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Economics Update March 2015

5

An unintended consequence of the popular rise of bilateral and

regional trade agreements is that the World Trade Organisation

has become increasingly marginalised. The failure of multilateral

trade talks has had a significant effect on diminishing the

organisation's credibility within the international trade system.

This is a particularly concerning prospect for the global economy.

As the de facto mediator in trade disputes and the chief advocate

for trade liberalisation, the WTO serves an important role in

building trust and confidence in the global trade framework - a

role that will only become more important as new emerging

economies look to become more active in global export markets.

Murky Lines: Non-tariff Measures

World leaders are often quick to draw attention to falling average

tariff levels as positive confirmation that global export markets are

becoming more open. According to data prepared by the World

Bank, average global tariffs are now at just 3 per cent, down from

35 per cent in the mid 1990s. In Australia alone, average tariff

levels are well below 2 per cent, down from over 36 per cent in

the pre-globalisation era. While it is true that conventional tariffs

are now far lower than they were prior to the 1980s, trends in

average tariff levels alone are not representative of the true

conditions within the global trade system.

One of the more pressing threats to the progress of creating a

fairer global trade system is the rise of non-tariff measures

(NTMs). NTMs are any protectionist policies other than

conventional trade tariffs. They share similar outcomes to

conventional tariffs in the effect they have on disrupting global

trade flows and limiting market access. The rise of NTMs or

’covert protection’ has coincided with efforts by the World

Trade Organisation to liberalise export markets and

harmonise trading rules. According to reports by Global

Trade Alert, a monitoring service of the Centre for Economic

Policy Research, more than 5,784 such measures, including

new tariffs, have been introduced since 2008.

For individual economies, NTMs provide an avenue to

circumvent the WTO’s multilateral trade standards, allowing

them to remain compliant with the shared principles of free

trade while hiding their protectionist agenda.

Over the last ten years, the face of trade protection has

shifted away from industrial tariffs towards the likes of

‘industry assistance’, ‘customs duties’ and ‘anti-dumping

measures’. This has complicated the role of the WTO and

added a new layer of disorganisation to the global trade

system. Nations have been known to exploit these NTMs as

cover for new protectionist measures. Nations often resort

to imposing outright import bans on the grounds of ‘poor

safety standards’ or introduce vague ‘administrative fees’ on

incoming trade. In early 2013, in an attempt to sway

Ukraine away from European integration, Russia banned

imports of Ukrainian confectionary, claiming they contained

harmful substances. Intrusive customs checks followed

soon after, slowing Ukrainian exports at border crossings to

a crawl. Late this month, the EU slapped Chinese steel

products with tariffs of up to 25.2 per cent on allegations of

‘dumping’. European authorities claimed that prices on steel

imports were ‘cheap as cabbages’, inducing significant

disruption to European steel markets.

> Decelerating: Since the global financial crisis, growth in global trade has slowed against growth in GWP Source: International Trade Statistics 2014, World Trade Organisation

Economics Update March 2015

6

In recent times, ‘industry assistance’, an obscure form of

protectionism, has garnered intense scrutiny from members

of the World Trade Organisation. The term ‘industry

assistance’ is used to describe any policy measure that

advantages a country’s commercial interests at the expense

of another. The definition has been broadened to include

direct subsidy schemes, tax rebates for research and

development, government bailouts, wage rebates, export

grants and preferable access to capital resources. Some

policymakers argue that government sponsored assistance

in the form of research and development for instance, is

crucial in encouraging innovation and productivity growth in

local industries, while critics argue such programs result in a

skewed playing field. Some analysts also go on to point out

that even varying levels of corporate taxes between

economies have a sizeable effect on international

competitiveness across an economy’s import competing

sectors.

It is clear that when it comes to matters involving industry

assistance, it is inherently difficult to ‘draw the line in the

sand’. In order to neutralise any bias one country may have

over another, corporate taxes and industry policies would

need to be standardised across different economies, an

almost impossible task. Therefore, the debate around

industry assistance has evolved in recent times and now

centres around what is deemed to be ‘fair’. What is

considered to be ‘fair’, however, is inherently subjective,

complicating matters for the WTO when it presides over

disputes. This often results in lengthy case hearings

including an iconic dispute filed by the US in 2005 against

the EU relating to subsidies extended to aircraft

manufacturer, Airbus, which after a decade of hearings, has

yet to be settled.

The rise of NTMs over the last decade along with the new

prominence of RTAs have been partly responsible for the

slowdown in global trade growth in recent times. Since the

start of the globalisation era, growth in global trade is on

average, in any given year, twice that of growth in gross

world product. In the two decades leading up to the financial

crisis, global trade grew at a rate that averaged 7 per cent,

more than double that of growth in GWP. In 2012 and 2013,

growth in global trade expanded by just 2.8 per cent and 3.2

per cent respectively, even as GWP grew by 3.1 per cent

and 3.2 per cent over the same period.

In September last year, the WTO revised down its 2015

forecasts for global trade growth from 5.3 per cent to just

4.0 per cent, well below the 20 year moving average of 5.2

per cent. Economists at the WTO cited a weakened global

outlook, geopolitical tensions, regional conflicts and the

Ebola epidemic in West Africa as reasons for the revised

estimate.

Currency Wars: The New Protectionism?

One of the most controversial topics among economists in

the post-financial crisis period is that of ‘currency

manipulation’ and its implications for the global economy. In

2010, Brazil’s finance minister coined the term ‘currency

war’ to describe how unconventional monetary policies

employed by advanced economies were pushing up the

value of other countries’ currencies, weakening their trade

competitiveness in export markets.

Since 2008, advanced economies have experimented with a

previously little-known form of monetary policy called

‘quantitative easing’ (QE). It involves the central bank

intervening directly in financial markets by purchasing

various financial securities. This process adds more

‘liquidity’ or ‘loanable funds’ into capital markets which

results in lower borrowing costs for ordinary households and

businesses. The theory is that with these lower borrowing

costs, it would allow for more favourable investment and

consumption conditions which would help strengthen a

rebound in domestic growth.

A side effect of such policies, however, is that by adding

more liquidity into financial markets, the central bank

expands the money supply. A larger money supply, means

that each dollar’s purchasing power is reduced and hence

its value (represented by the exchange rate) is weakened.

By weakening a country’s currency, policymakers are able

to gain a competitive advantage as their economy’s exports

appear cheaper on international markets, helping to prop up

domestic growth.

Just over the last six months, central banks around the

world including Singapore, Canada, India and Australia

have progressively lowered benchmark interest rates while

Japan and the Eurozone continue with their respective QE

programmes.

Do you have an Opinion? Have your say in our Letters columnHave our stories got you thinking? Do you share our passion for economic issues? We’d love to hear your thoughts. Send us your comments on a particular issue we’ve covered and we’ll feature it in next month’s edition of Economics Update

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Economics Update March 2015

7

This loosening of monetary policy has had a profound

impact on foreign exchange markets. The Australian dollar

is now at its lowest level since 2009, as interest rates sit at

historic lows of 2.25 per cent. For the most of March, the

currency traded within 75-80c to the US dollar, down from

US 110c in mid-2011.

The problem with manipulating currencies in pursuit of a

short-term boost to trade competitiveness is that currency

wars are a ‘zero-sum game’: if one currency is weaker,

another must be stronger; and if one country’s trade

balance improves, another’s must worsen. Therefore, there

is little impact on lifting global growth, rather such policies

achieve little more than reallocating growth from one

country to another.

A more troubling outcome of such short-sided currency

policies is that it risks undermining the autonomy of central

banks. A key cornerstone of the modern global economy is

the unequivocal independence of central banks. This allows

for key decisions such as interest rate adjustments to be

predicated on economic fundamentals and not politics.

Currency manipulation potentially opens up central banks to

the threat of politicisation, as national governments place

more pressure on central banks to adopt aggressive

currency devaluations in retaliation to methods employed by

other economies. Most importantly, currency manipulation, if

it achieves its goal, has benefits confined only to the short

term. It distracts policymakers from pursuing more difficult

reforms that target structural weaknesses such as low

innovation and poor competitiveness, which if successful,

could have longer lasting benefits for that nation’s economic

outlook.

A New Roadmap for Global Trade

International trade has been the most important contributor to

global prosperity over the last century and for participating

countries, it has been a powerful force for peace and stability.

Between 1960 and 1990, only one person in ten lived in an

economically open society, today nine in ten do. Across both

advanced and developing economies, median incomes are

higher, new industries have formed and living standards have

improved significantly. Against all indicators, global trade has

come along way. But there is so much more potential for trade in

today’s global economy. Developing markets across Africa, Latin

America, the Middle East and Asia have yet to realise the full

benefits of trade. Instead, they continue to face a fragmented

and uneven playing field, one that is skewed unfairly toward

advanced economies and members of mega-regional trade

agreements. It is estimated that a multilateral FTA could boost

gross world product by up to $ US 750 billion.

Now is not a time to retreat from the norms and principles of free

trade that have underpinned the export-led growth model which

has worked so well over the last three decades - the same

model that has enabled countries to lift billions of people out of

poverty. Instead, policymakers must rethink their approach to

multilateral trade agreements. Emerging and developing

economies must conform to the same trade rules governing

advanced economies, but at the same time, developing

economies deserve longer transition periods and more patience

in aligning their trade rules with that of their advanced

counterparts. Reaching such an understanding would allow for

constructive progress in multilateral talks. Importantly, these

discussions must be led by both the US and China, alongside

each other. It would be a powerful show of solidarity and a

strong catalyst for reviving multilateralism.

Economics Update March 2015

8

Malcolm Fraser’s Economic Legacy

OPINION:

On the 20th of March this year, Malcolm Fraser, Australia’s 22nd Prime Minister,

passed away. Fraser’s time in office was a significant period in the recent economic

history of Australia and with his passing this month, it is an apt time to consider the

role his policies played in shaping our current economic climate and the lessons that

can be learned.

Many HSC Economics students are familiar with the reforms of Hawke, Keating and

Howard. These three prime ministers led governments with significant reform

agendas. Under Hawke and Keating we saw the floating of the dollar, banking

deregulation, trade liberalisation and labour market reform. Labour market reform

continued under Howard, along with the introduction of the GST and a host of other

microeconomic reforms. These three prime ministers are often credited with

contributing and shaping the period of sustained growth experienced over the last

three decades. What then, we may ask, preceded this period?

Australia in the late 1970s experienced poor growth, high inflation, low productivity and periods of stubbornly high

unemployment. Much of this ‘stagflation’ was the result of successive rises in the price of oil by OPEC and the adverse effect

this had on spending and confidence in the US economy. With the domestic economy entering recession in his final years of

office, average growth under Fraser (Prime Minister,1975-1983) was a meagre 2.3 per cent; and average unemployment an

abysmal 6.5 per cent (in contrast to the 2 per cent maintained during the post-war boom).

While Fraser is not especially commended for his economic policy, it is worth observing his responses to this situation.

One of Fraser’s enduring legacies is the Expenditure Review Committee (ERC). Fraser sought to bring what he saw as

excessive spending during the Whitlam years under tight control in order to suppress inflationary pressure and spiralling

levels of debt. The ERC was established to facilitate the policy of fiscal consolidation which Fraser’s government pursued by

introducing a body independent of Cabinet that would review new spending measures more cautiously. This assisted a

decline in the budget deficit from 4.8 per cent of GDP to just 1 per cent of GDP in 1980. Despite this, however, for most of his

time in office, Fraser produced budget deficits, which reflects his Keynesian credentials rather than poor economic

management. Concern over public debt remains an issue today, of course, and accordingly, the ERC remains both an

important and influential wing of fiscal administration.

We should also note that many of the reforms of the 1980s had begun to be assembled as policies during the 1970s. Fraser

and his treasurer John Howard are known to have pursued the floating of the dollar (achieved by Keating in 1983) but were

met by substantial opposition within the Treasury. Movement towards tariff reform and deregulation were stalled in cabinet by

opposition from the Nationals as well as personal reluctance on the part of Fraser himself. A Treasury-commissioned report

by Keith Campbell into the financial system was largely ignored by the Fraser administration, yet most of its recommendations

were later adopted by the Hawke government.

Fraser also sought to strengthen Australia’s links with its neighbours in the Asian region. Following in the wake of Whitlam,

Fraser continued to establish relations with China, as well as with other nations in South East Asia. At the present time, now

that Asian economies have become some of Australia’s largest trading partners, such policies should be recognised as

pioneering.

Australia has lost a great statesman in Malcolm Fraser. His contribution to both the economy and Australian society-at-large

will never be forgotten.

Economics Update March 2015

9

Extended responses: Australia’s balance of payments

EXAM STRATEGY:

A simple, definition-based understanding of the Balance of Payments

is not too difficult a concept to grasp in the context of HSC Economics.

From reading textbooks, students should be able to ascertain what is

contained in the Current Account and in the Capital and Financial

Account, as well as to provide definitions of the Balance of Goods and

Services, Net Primary Income and components in the Capital and

Financial Account. Answering multiple choice and short answer

questions on the Balance of Payments requires a simple

understanding of how economic changes will influence the Balance of

Payments.

Writing essays, on the other hand, demands a particular level of

analysis, a level at first difficult to discern. The range of essay

questions you may be asked will concern the causes and effects of

changes in the Balance of Payments, the long term implications of

these changes, the sustainability of aspects of Australia’s external

accounts and policy responses to the Balance of Payments.

As with all areas of HSC Economics, it is important to stay on top of current issues related to the Balance of Payments. Know

how recent currency changes have influenced factors such as the competitiveness of domestic industry or the level of foreign

investment into Australia. Know how patterns in trade, especially in commodity prices, are influencing the Balance of Goods

and Services, and how trade policy may also be relevant. Knowing these statistics will assist your analysis, providing a logical

cause-and-effect based frame for explaining changes and fluctuations in the Balance of Payments. Such knowledge,

however, is not present in the textbook. External research is essential. Keeping abreast of current affairs and taking note of

insightful and perhaps less used figures will provide you with an arsenal of examples to use in assessments and in an exam.

Committing statistics to memory, however, is not enough. Construction of an essay with a coherent, persuasive argument will

make for a more competitive response.

This is especially true of a Balance of Payments question, where many students will simply write a paragraph on each of the

components and deal with basic theory with few statistics or current trends. Having said this, there is no definite way to

structure any essay. A useful framework is to use an introduction to outline your argument, one or two paragraphs to explain

the structure of the Balance of Payments, several paragraphs each covering a particular trend or economic issue influencing

Australia’s Balance of Payments and ending with one or two paragraphs which discuss and evaluate policy responses as well

as a conclusion. In terms of policies, you may want to discuss recent talk of changes to superannuation and their wide-

ranging implications for Australia’s Current Account Deficit.

Importantly, students who write sophisticated essays will be sure to make mention of other sections of the syllabus. They wil l

also incorporate discussion of other areas of economics into their analysis of the Balance of Payments. We noted earlier that

it is important to know trends in trade and currency patterns and their effect on the Balance of Payments. Further, students

should consider how, for example, the tide of globalisation over the last three or four decades has influenced Australia’s

Current Account Deficit, how the late 2000s commodities boom or recently high Terms of Trade have influenced the Balance

on Goods and Services or how microeconomic reform, notably in banking deregulation, has had implications for the Financial

Account. Not only will this display the depth of your economic knowledge, it will demonstrate your ability to synthesise.

In the time between now and the HSC exam, it is important that you revise your understanding of Australia’s Balance of

Payments. This should involve adjusting and reworking your understanding of the topic as trends change. Your essay writing

skills are improved by practice above all things, so apply the knowledge presented here on a regular and thorough basis.

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Statistics KEY AUSTRALIAN INDICATORS Latest Date 12 Months

ago

Economic Growth 0.5% Dec 14 0.8%

Unemployment 6.3% Feb 15 6.0%

Participation Rate 64.7% Feb 15 64.7%

Inflation (CPI) 1.7% Dec 14 2.7%

Underlying Inflation 2.3% Dec 14 2.6%

Wage Price Index +2.5% Dec 14 +2.6%

Household savings ratio 9.1% Dec 14 9.8%

RBA Cash Rate 2.25% Mar 15 2.5%

EXTERNAL ACCOUNTS

Current Account -$11.2bn Dec 14 -$11.6bn

CAD (% of GDP) -2.8% Dec 14 -2.9%

Balance on goods and services -$4.6bn Dec 14 -$0.5bn

BOGS (% of GDP) -1.1% Dec 14 -0.1%

Primary Income (% of GDP) -1.6% Dec 14 -2.7%

Net Foreign Liabilities (% of GDP) 54.1% Dec 14 54.1%

Net Foreign Debt (% of GDP) 57.8% Dec 14 54.7%

Net Foreign Equity (% of GDP) -3.7% Dec 14 -0.6%

Terms of trade (2010-11 = 100) 87.2 Dec 14 98.3

Trade Weighted Index 64.5 Mar 15 71.1

*Figures as at 26 March 2015

Quotes & Questions

Source: ABS, Reserve Bank of Australia

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Quotes

Free Trade

“The Doha Round was torpedoed by the United States’ refusal to

eliminate agricultural subsidies – a sine qua non for any true

development round, given that 70% of those in the developing

world depend on agriculture directly or indirectly. The US position

was truly breathtaking, given that the WTO had already judged that

America’s cotton subsidies – paid to fewer than 25,000 rich farmers

– were illegal. America’s response was to bribe Brazil, which had

brought the complaint, not to pursue the matter further, leaving in

the lurch millions of poor cotton farmers in Sub-Saharan Africa and

India, who suffer from depressed prices because of America’s

largesse to its wealthy farmers.

Given this recent history, it now seems clear that the negotiations

to create a free-trade area between the US and Europe, and

another between the US and much of the Pacific (except for

China), are not about establishing a true free-trade system.

Instead, the goal is a managed trade regime – managed, that is, to

serve the special interests that have long dominated trade policy in

the West.”

Nobel Laureate, Joseph Stiglitz

July 2013

“People trade with each other because it’s in their interest to do so.

Every time one person freely trades with another, wealth increases.

Just as trade within countries increases wealth, trade between

countries increases wealth – that’s why we should all be

missionaries for freer trade. At the very least, the G20 should

renew its commitment against protectionism and in favour of freer

markets. Each country should renew its resolve to undo any

protectionist measures put in place since the Crisis. Better still,

each country should commit to open up trade through unilateral, bi-

lateral, plurilateral and multi-lateral actions and through domestic

reforms to help businesses engage more fully in global commerce.

As a trading nation, Australia will make the most of its G20

presidency to promote free trade. Over time, everyone benefits

because, in a global economy, countries end up focussing on what

they do best.”

Australian Prime Minister, Tony Abbott

World Economic Forum

January 2014

Questions

1. Discuss the responsibilities of the World TradeOrganisation

2. Analyse the role of regional trade agreements insupporting global free trade

3. Evaluate the effects of protectionist policies on theglobalisation process