Trade Liberalisation

Question 1

Trade Liberalisation “Free Trade”

Answer 1

Free trade, and the movement of trade liberalisation, involves the global movement over recent decades towards the removal of barriers to free trade such as tariffs, quotas, and protections to local industries so as to encourage flows of goods and services, income, and people between countries.

This involves the signing of free trade agreements (FTA’s)

Question 2

Tariff

Answer 2

A tax imposed on imported goods to protect domestic industries and raise revenue.

Example: Imagine Australia imposes a 20% tax on imported French wine. This makes French wine more expensive in Australia, encouraging people to buy Australian-made wine instead.

Question 3

Quota

Answer 3

A limit set on the quantity of a specific product that can be imported or exported.

Example: Let’s say Japan allows the import of only 1000 tons of Australian beef per year. Once this limit is reached, no more Australian beef can be imported for that year.

Question 4

Subsidy

Answer 4

Financial assistance provided by the government to support businesses, industries or consumers

Example: The government of India provides financial support to local panel manufacturers, reducing their production costs and allowing them to sell at competitive prices in competition with Australian manufacturers.

Question 5

Australia-UK Free Trade Agreement

Answer 5

The recent Australia-UK Free Trade Agreement, effective from May 31, 2023, eliminates long-standing tariffs and opens up new trade opportunities, such as a $19 million sugar shipment to the UK. The agreement aims to gradually remove all tariffs by January 1, 2031.

Question 6

Impacts of the Australia-UK FTA

Answer 6

Over 99% of Aussie G+S have tariffs removed!

UK people can work in Australia more easily (increased labour for Aussie companies, but loss of farm labourers not everyone wins!)

Great for both economies (more trade = more sales = more production = more income = more GDP = more jobs)

Sheep, Cow, and Rice Farmers: In a huge win for Aussie cow and sheep farmers, the trade deal will liberalise Australian imports of beef, lamb, cheese and sugar into the UK,

Tariffs on British cars, machinery, tractors and pharmaceuticals will also be removed. This will make some British goods cheaper and thus Aussie ones will be more expensive by comparison

Question 7

Effect of Trade Liberalisation in the Short-Term

Answer 7

It has some negative impact in the short term.

Local industries are exposed to overseas competition (via removal of tariffs)

Loss of subsidies when FTA’s are signed. Therefore businesses have higher costs as government money has gone.

Businesses are forced to downsize or even shut down due to international competition beating them on price and/or quality.

Question 8

Impact of Trade Liberalisation on our Goals (Short-Term)

Answer 8

Strong and sustainable growth: GDP will slow due to increased spending on imported G+S and decreased spending on local (domestic) G+S

Cheaper goods from overseas + decreased prices of local goods/services (in order to compete) as well as decrease in AD = downward pressure on prices = better able to achieve price stability

Question 9

Effect of Trade Liberalisation in the Long-term

Answer 9

Broadly positive in the long term

As firms adjust to the new level of competition, they must innovate and increase productivity in order to survive.

This improves productive efficiency as resources get reallocated and productivity improves.

There is an increase in international competitiveness as businesses decrease their prices or improve the quality of their offerings.
-> Increases AS

Helps achieve all 3 macroeconomic goals.