Chapter 4: Australia's trade and financial flows Flashcards
1
Q
what are the general trends in AUS’ trade patterns
A
- despite AUS’ geographic isolation, trade has always represented a high proportion of eco acitvity
- there has always been overseas makrets for AUS primary commodities
- from exporting minerals and agricultural products to exporter of services such as tourism and edu cos of AUS’ development
- AUS’ need to trade to obtain new tech cos of AUS’ small population there is not a lot of production
2
Q
how is AUS considered a small eco (refernce statistics)
A
It is small by global standards, producing less than 2% of GWP
3
Q
how much influence does AUS have in the global eco and what does that result in
A
AUS does not have much influence in the global eco, world eco developments can have a very significant impact on AUS
4
Q
which trading partners have become more significant and which less
A
- china, south korea, india and ASEAN ecos have become more important
- prev key market such as japan, the uk and europe have become less important in recent decades
5
Q
what happened as a reuslt of the UKs deicison to join the European Economic Community (EEC) trading bloc (precurcor to the EU)
A
- cause historic shift in the direction of AUS trade
- prior UK had been AUS’ major trading partner, reflecting historic colonial ties
- by joining EEC, the UK was req’d to impose trade barriers on AUS
- while UK has left and the A-UKFTA came into effect in 2023, the UK remains a much less signif market than ecos in close prox to AUS
6
Q
what is AUS’ trade relation with Jpana
A
- Due to Japan’s rapid growth, and demand for minerals and energy, AUS was able to take adv of this opp, with Jpana becomign our largest export market (1970s)
- however, Jpana’s share of AU trade began declining aorund 1990 and has continued to shrink relfecting both Japan’s weak growth and AUS’ increasing focus on other regions
7
Q
what is AUS’ trade relation with China
A
- China became our largest export market in 2009-10 due to exports to china increaisng dramatically in ealry 2000s
- in 2023, China accounted for 1/3 of total exports, despite punitive trade sanctions China had in place on certain AUS exports
- annual exports to China exceed $200bn in 2023
8
Q
what is AUS’ comparative adv and how does that affect the composition of trade
A
- AUS has a comparative adv in commodities due to its vast natural resources
- AUS’ composition of exports includes primary industries such as agricultural products such as wheat, wool and beef and minerals such as coal, iron ore and gold
- agriculture and minerals account for 2/3 of AUS’ export earnings
9
Q
why doesnt AUS export manufactured goods
A
- AUS is less compeititve in manifacturing - while other ecos dveloped substantial manu industries, AUS has continued to rely on its primary exports while importing large quantities of capital goods and manufactured consumer goods
10
Q
what significany changes in the composition of its export base has AUS experienced
A
- 2023-24: AUS’ total export were $659bn, down from $686bn in 2022-23 due to a decrease in commodities exports and weaker global demand –> lower export prices
- agriculture and manufacturing have declined in relative importance compared to minerals (reflecting the impact of global commodities booms from 2003
11
Q
what has contributed to the relative decline of agricultural exports in recent decades
A
- lagre fluctuations in world prices
- ongoing protectionism in other makrets have suppressed export revenues
- value adding of agri goods is very little compared to manufactured
- natural disasters such as floods and fires have become more frequent , reduicng output and productivity of the argi sector
12
Q
why is the composition of AUS’ exports of manufactured goods so small
A
- manu goods make up small share of exports, lower than most adv ecos and falling during commodities booms
- AUS does not compete well with in the manu of high-volume, low-cost products
- its sales of sophisticated niche markets manufactures picked up from 1990 to 2006
- With AUD appreciating during the first global reosurces boom, AUS manufactureing exporters face more comp from China and other asian ecos
13
Q
What does the global resources boom mean for AUS’ commodity exports
A
- the boom triggered debate over whether AUS can continue to rely so heavily on commodities exports
- some argue the prospects for high commodity prices are positive cos China growing
- others point to the risk of being too reliant on resource exprts and on major export market
14
Q
What are the risks for AUS’ exports as ecos shift away from fossil fuels
A
- risks in AUS’ reliance on global demand for coal and gas exports
- demand expected to decrease as ecos shift to energy sources with lower carbon emissions
-over-reliance on fossil fuel exports could mean AUS is harder hit if ecos adopt carbon tariffs as part of the global response to climate change
15
Q
What is AUS’ ideal long term position
A
AUS ideal long term position is to diversify exports away from traditional fossil fuels towards new cleaner mineral and energy exports demanded by the growing population of middle-class consumers across Asia
16
Q
What are exmaples of AUS’ natural resources that could be used in clean energy technologies
A
lithium, cobalt and rare earths and hydrogen
17
Q
which egs of services industries have grown substantial export markets
A
- education
- financial services
- insurance
- tourism
- transport, health and communications sevrices
18
Q
what is likely to be crucial to AUS’ future economic prosperity
A
reducing dependence on resources exports and focusing on service exports or manufactured exports
19
Q
why has AUS’ imports of intermediate goods fallen notably with significant grwoth in imports of consumer goods
A
- AUS shifting away from large scale manufacturing, increasing demand for manu consumer goodsand decreasing demand for inputs to use in domestic manu
20
Q
what is exporting tourism (inbound tourism) vs importing tourism
A
- touism exports involves “selling” experiences and sevrices (eg accomodation, food) to international tourists
- tourism imports refers to aussies spending money when traveling abroad
21
Q
What is the composition of AUS’ imports
A
- Of AUS’ $605bn in total imports in 2023-24, intermediate goods accounted for the largest share
- sevrices (such as outbound tourism) finally recovering to (and exceeding) pre-pandemic lvls
- consumer goods recording slightly lower share due to mroe subdued growth in consumer spending as housheolds face increased cost of living pressures
22
Q
identify the general trand in AUS’ financial flow compared to trade flows and why
A
- rate of grwoth in finanial flows have been even greater than growth in trade flows in recent decades, with international investors and firms purchasing AUS assets and investing in AUS buses, and AUS individuals and firms also increasing their overseas investments
23
Q
What was a pivotal change in the AUS eco to rapidly increase financial flows
A
- when Bretton woods system of fixed ER came to an end in early 1970s, financial flows began growing rapidly as ER were floated
- restrictions on movements of capital across borders were removed
- ER determined by market forces of supply and demand
- technological changes made it easier to shift finance b/w countries
24
Q
what is direct investment
A
direct investment refers to the establishment of a new bus (a controlling interest is 10% or more or shares) by foreigners in AUS or by aussies overseas
- longer term inbestment and the investor tends to play role in management of bus
25
what is portfolio investment
include the purchase of bonds (or other types of loans made) or smaller shareholdings in companies, with firms and individuls making these investments generally not intending to play a role in the running of a bus
26
describe direct and portfolio investment prior to the deregulation of the financial sector
- most financial flows came in the form of direct investment
- gov preferred direct investment cos it brought benefits of job creation and tech transfer
- portfolio investment was not as important as the lvl of overseas shares purchases was relatively small and overseas bond purchases or other foreign loans were not common due to the regulation of financial makrets (ie due to regulation, foreigners didnt invest in AUS)
27
What was the trend in financial flows after the deregulation of the financial sector and the floating of the AUD in 1983
- foreign investment inflows began to grow rapidly, a trend that has been sustained for the past four decades
- AUS investment overseas is over 7 times what is was in 2000 and the level of portfolio is now significantly higher than the lvl of direct
- injection of funds into AUS firms through the purchase of bonds and shares
28
what has been the recent rate of growth of portfolio investment compared to direct
the rate of growth of portfolio investment into AUS (the shorter-term and more speculative inflow) has been significantly faster than the growth in longer-term FDI
29
What has been a significant feature of financial flows between Australia and the global economy?
The imbalance between investment in Australia and Australian investment overseas.
30
Has Australia typically been a net capital importer or exporter?
net capital importer
31
How has Australia compensated for its low domestic savings?
By relying on financial flows from overseas to make up the shortfall.
32
Since when had Australia recorded consecutive quarterly surpluses on the KAFA (when foreign investment in a country exceeds a country's investment abroad and when was it broken
- since June 1975
- streak broken in June 2019
33
what was AUS' KAFA position from 2020-2023
the CA was in surplus, and this the KAFA was in deficit - with AUS becoming a net exporter over this period
(exports more than it imports and less payments to foreign entities & more financial inflow)
34
what is a reason for AUS' invetsments overseas increasing in recent decades
AUS' large superaanuation funds have incrceasingly pursued investment opps overseas as they have outgrown AUS' share makret in size (ie the svaings held by super funds now exceeds the total value of shares listed on ASX)
35
what is debt financing
refers to borrowing arrangements such as loans, bonds, trade credits and leases
36
what is an inflow of the KAFA in terms of debt
overseas investors providing debt finance to AUS
37
what are outflows on the KAFA in term of debt
AUS investors providing debt finance to overseas borrowers
38
what are inflows and outflows on the CA in terms of repaying debt
- outflows on the CA when paid to foreign investors
- inflows on the CA when received by aussies from overseas
39
what is equity financing
Equity financing refers to funds acquired through the sale of assets such as shares and real estate
40
what are inflows and outflows on the KAFA in relation to equity
- inflow: foreign investors providing equity funds by purchasing assets in AUS
- outflow: AUS investors providing equity funds by purchasing assets overseas
41
what are inflows and outflows on the CA in terms of equity
- outlfows: when dividends paid to foreign investors
- inflows: when dividends received by aussies
42
what is AUS' international investment position determined by
how much AUS owes foreigners and how much is owed to aussies by foreigners
43
what are the two components of AUS' foreign liabilities
- net foreign debt (or net external debt) - the total stock of all forms of borrowing owed by aussies to foreigners minus the total stock of all loans owed by foreigners to aussies (in short what aussies owe to the rest of the world)
- net foreign equity - the total value of assets in AUS (eg real estate, shares, companies - wholly owned) owned by foreigners minus the total value of overseas assets owned by aussies (showing whetherits a creditor or debtor nation)
44
what is the formula for net foreign liabilities (NFL)
net foreign debt + net foreign equity
45
what is the trend in AUS' net foreign liabilities
- growth in AUS' net foreign debt has slowed in recent yrs
- now have a net positive foreign equity position
(ie aussies now own more foreign assets than aus assets owned by foreigners)
46
what is one disadvntage of foreign equity investments in AUS
the loss of ownership and control of reosurces, particularly valuable land (agri land) or important infrastructure
47
what is the Foreign investmetn review board (FIRB)
the FIRB advises the Treasurer on whether proposed foreign investmentsprojects are liekly to be in the national interest
48
what must foreign investors do in case of purchasing or investing in aus beyond a monetayr threshold
must apply for approval on any purchase of AUS real estate or investment in firms exceeding a monetary
threshold
49
In 2024, what did the fed gov do to change the FIRB process
- made the process streamlined to reduce wait times and compliance costs for repeat investors
- increased scrutiny applied to proposals involving critical infrastructure, minerals or technology; sensitive data or located close to defence sites
50
what is the BOP
the record of all trasactions b/w AUS and the rest of the world over given period
- shows the trade and financial flows in and out of the AUS eco
51
differ b/w credit and debit
- credit - money that flows in (credit entries are positive transactions)
- debit - money that flows out (debit entries are negative transactions)
52
what is the CA
part of the BOP that shows the receipts (credits) and payments (debits) for trade in G&S, income flows (earned from foreign investments) and trasnfer payments
- ie covers external transactions that are non-reversible
53
what are the major items on the CA
- net goods
- net sevrices
- net primary income
- net secondary income
54
what are net goods
refers to the diff b/w what AUS receives for exports and pays out for imports of goods only
55
what are net sevirces
refers to the diff b/w what AUS receives for sevrices exports and pays out for imports of services
56
what is BOGS
net goods + net sevirces
57
what is net rpimary income (factor income)
refers to the diff b/w flows in and out of earnings on overseas investments, or income earned as a return on overseas factors of production
58
what is net secondary income (current transfers)
refers to the diff b/w flows in and out of non-makret transfers, or income that is not earned thru a fcator of production (workers remittances)
59
what is the KAFA
the money flows that result form international borrowing, lending and
sales/purchases of assets such as shares and real estate
- transactions reversible eg borrowing paid back
60
what are the two main components of capital account
- capital transfer - mainly in the form of conditional foreign aid grants and debt forgiveness
- purchase and sale of non-produced, non-financial assets - mainly IP rights such as patents, copyrights, trademarks and franchises
61
what does the financial account show
the financial acc shows AUS' transactions in foreign financial assets and liabilities
62
what are credit entries and debt entries on the financial acc
- credit entries represent net inflows (increase in foreign investment in AUS or reduction in AUS investment overseas
- debit entries represent net outflows (decrease in foreign investment in AUS or increase in AUS investment overseas)
63
what was the trend in AUS financial acc
AUS consistently recorded a positive financial acc balance, showing that each yr the rise in AUS' liabilities to the rest of the world was greater than the increased in the liabilities of the rest of the world to AUS
64
what are the five main financial acc components
- direct investment
- portfolio investment (often largest item on financial acc)
- financial derivatives
- other investment
- reserve assets
65
what are net errors and omissions
this accounts for statistical discrepancies or adjustments in calculations made by the ABS
66
what is the formula for BOP
CA + KAFA + net errors and omissions = 0
67
what is the equation for equilibrium in BOP
M – X + Y debits – Y credits = K inflow – K outflow
68
why does a KAFA surplus reuslt in a larger net primary income deificit
bcos any foreign financial flow coming into AUS will earn some kind of return for its foreign owner, and these will be will become debits recorded on the primary income acc
69
what are two ways financial inflows can create primary income debits
- international borrowing (foreign debt) - will req regular interest payments, recorded on the CA as net primary income debits; only repayments of the principal is recorded in the financial acc
- foreign investment (foreign equity) - will req returns on investment for foriegn purchasers of AUS assets, such as rent, dividends and profits
70
why can high level of KAFA surpluses result in a widening CAD over time
- bcos of the servicing costs associated with increased foreign liabilities (ie borrowing from overseas or receiving foreign investment (KAFA surplus) leads to pay back of interest or dividends (CAD))
71
what is a debt trap scenario
- where an eco borrows from overseas to pay the interest servicing costs on its existing foreign debt
- in short, borrow to pay debts
72
why does aus have a lng history of CADs and what are the changing perspectives
- economists used to believe AUS' CAD problem was due to low international competitiveness (more imports than exports)
- now they focus on the gap b/w svaings and investments cos AUS has low svaings menaing AUS relies on foreign capital inflows (KAFA surplus)
- AUS' CADs are not just a trade issue but a KAFA issue
73
what was the trend of the CA in 2019
- CA moved into surplus as savings surpassed investment, with AUS becoming a net exporter of capital and the KAFA moving into deificit
74
what are cyclical factors
cyclical factors are those which vary with the level of economic activity - such as changes in the global demand for commodities, AUS' terms of trade and the value of AUD
75
what are structural factors
structural factors are those which are underlying or persistent influences on the BOP - such as the structure of AUS' export base, the internaitonal compeititveness of AUS' exports and the level of national savings
76
what were the reasons for the surpluses in CAD in FY21 and FY22
- driven by strong commodity prices
- low global interest rates (reducing the sevricing costs of AUS' foreign liabiltiites)
- larger contractions in imports than exports during the pandemic
77
what was the recent trend in BOGS
- an improving trend over the past decade, recording strong surpluses in recent yrs
- the BOGS surplus in 2033-24 was less than the teo highest in 22 and 23, which mainly reflected elevated commodity rpices as well as a strong recovery in tourism exports and return on international students
78
what are cyclical factors affecting the BOGS
- the ER
-the TOT
- the rate of eco growh in AUS and the global eco
79
how does the ER influence the purchasing of imports and exports
- a depreciation in AUD results in AUS hvaing cheaper exports and imports being moer expensive --> improving BOGS
80
what has the greatest influence on AUS' BOP
changes in AUS' terms of trade (TOT)
81
what does TOT measure
TOT measures the relative moments in the prices of an eco's imports and exports over a period of time (ie TOT will imporve if export prices are rising relative to import prices)
82
what does an imporvement in the TOT mean
means that the same volume of exports can buy more imports
83
what was the trend in TOT and how was it beneficial
- TOT has sustained boom since 2003
- AUS exporters received higher prices for their exports, increasing export revenue anf the total value of AUS exports
- imporved BOGS
- after 2003, AUS experienced a doubling of its TOT
- TOT reached peak in 2022 as the strong global recovery from pandmeic increased demand for AUS commoditiies
- Russia's invasion of Uraine and its threat to cut off gas supplies soared prices for energy exports
84
what does a higher TOT mean
- means that exports receive higher prices for the same output, which increases revnue and improves the BOGS
- higher TOT usually rlfects an increase in demand for AUS' commodity exports, the demand for AUD rises, causing an appreication of ER --> higher AUD weakens international competititveness of AUS' non-commodity exports ie a lower lvl of non-commodity exports will partially offset the benefits of the rising TOT on the BOGS
- in recent yrs, this has not been the case as the upward pressure on AUD has been more than offset by downward pressures
85
how does high domestic growth increase imports
high domestic grwoth results in increased business investment and consumption, thereby increasing imports (which constitute a significant proportion of both capital and consumer spending)
86
how can eco growth increase exports to reverse the impacts of imports on BOGS
- eco growth is driven by investment in productive capacity that will expand future exports and reverse imports
87
how can the international bus cycle impact the BOGS
- a slowdown in global eco growth can reduce growth in demand for AUS' exports, which may worsen BOGS
88
what are two key structural factors that persist that sustained a BOGS deificit before 2016
- a narrow export base
- a lack of internationla competitiveness in key sectors
89
what has been the recent trend in commodity demand
- increased global demand for commodities
- led to significant imporvement in the BOGS due to extraordinary grwoth in export revenues
90
why has BOGS historically tended to be in deificit
import payments often exceed export revenues
- AUS lacks internaitonal compeititveness in manufacturing and relies on imports of hgh value-added products, while exporting bulk commodities that are usually exported without value-adding
91
what must AUS do to its export base to maintain eco growht
AUS must in the long run diversify its export base towards high-growth,
high value-added sectors of global trade, such as elaborately transformed manufactures (ETMs), as opposed to simply transformed manufactrued goods (STMs)
92
what are the three main factors driving AUS' net servicing costs owed to overseas (AUS' net primary income deficit)
- domestic eco growth
- the ER
- interest rates
93
how does domestic eco grwoth increase net primary income deficit
due to 40% of shares on the ASX being foreign owned, domestic eco growth means a large proportion of dividends flow out of AUS
(higher domestic profits tend to increase equity sevricing costs in the form of dividend outflows)
94
how do movements in ER alter the amt aussies pay to foreigners (the valuation effect)
- an appreciation will decrease the AUD value of this debt, decreasing the value of AUS' debt servicing in AUD terms
- a depreciation will increase the AUD value of this debt, worsening the net primary income deificit
95
how can changes in domestic and gloabl interest rates affect the size of AUS' interest repayments
- AUS borrowers either borrowing under an oversea interest rate or under an AUS interest rate (eg selling bonds to a foreign investor)
- when interest rates change, the cost of servicing foreign debt also changes
96
what has been the trend in interest rates and its effect on net primary income
due to AUS' sensitivity to changes in domestic and global interest rates relfected in the cost of debt servicing more than doubling in FY22-FY23 - from $18 to $38bn, interest rates rose sharply (combined with high profits in mining sector, this has driven the sig increase in the net primary income deificit)
97
what si the main reason for AUS' ongoing net primary income deficit
the svaings-investment gap
98
what is the major reason why the CA remained in deificit
AUS tends to fund larges parts of its investment thru international borrowing (which increases foreign debt) or selling ownership in AUS assets (which increases foreign equity) increasing AUS' foreign liabilities and creates future servicing obligations in for of interest repayments and dividends
99
what has been the trend in household svaings
- AUS historically had low levels of household and public svaings
- AUS households highly leveraged (indebted) compared ot other countries with debt as a proportion of household income doubling over the last two decades
- However, AUS saved higher proportion following the GFC, reducing AUS' net borrowing needs and easing pressure on the net primary income account (and thus the CAD)
- in short, increased after GFC
100
what did the spike in household income during the pandemic result in
led to a significant reduction in the net primary income deificit and contributed to the CA shifting from deificit to surplus in FY20
101
why did household incoem fall again by 2024
- increase in spending as lockdowns ended and eco rebounded
- the impact of rising inflation and successive interest rate increases on the cost of living shifting CAS in FY22 and FY23 to CAD in FY24
102
how can gov increase the level of nationla svaings
by implementing policies to increase the lvl of household svaings (eg increasing rate of compulsory super, removing tax incentives that encourage increased debt and encouraging increased savings thru other tax incentives)
and measure to achieve budget syrpluses more consistently
103
why must gov need to strike a balce b/w the competing obj of domestic eco perofrmance and the BOP position
increased household svaings and lower gov expenditure (for BOP) can result in lower eco growth
104
how does grwoth in foreign liabilities lead to high CAD
- rising foreign liabilities (foreign equity + foreign debt ie assets owned by foreigners and what aussies owe foriengers) results from financial inflows on the KAFA --> CAD
105
what are several risks associated with a sustained high CAD
- the growth of foreign libailities
- increased servicing costs
- increased ER volatility
- constraint on future eco growth
- more contractionary eco policy
- sudden loss of international investor confidence
106
how does increased sevricing costs lead to high CAD
high levels of foreign liabilities lead to larger outflows on the primary income acc, worsening CAD
107
how does increased ER volatility lead to CAD
high CADS undermine the confidence of overseas investors in the AUS eco --> reduction in demand for AUD
108
how can CADs constrain future eco growth
- higher levels of grwoth generally involve an increase in imports and a detrioration in the CAD
- ecos with CAD problem therefore forced to limit growth to the level which CAD is sustainable (aka BOP constraint)
109
how can a high CAD result in more contractionary eco policy
govs may use tighter macroeconomic policies and accelerate the implementation of microeconomic reform to reduce high CAD
110
how can high CADs cause a sudden loss of international investor confidence
- eco crises can be triggered by a sudden shift in the attitude of global markets towards a country whose external imbalance appears unsustainable. ie if eco have unsustainable debt levels, confidence will decrease
