The Status of the Terms of Trade between Australia and other Economies

This paper analyzes the terms of trade between Australia and other economies such as China, Japan, UK, US, Germany, India, Indonesia, and Korea. The factors affecting the trade are also discussed. The data used in the analysis is obtained from the Australian Department of Foreign Affairs and Trade.

Running Head: Australian Terms of Trade
The Status of the Terms of Trade between Australia and other Economies
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Table of Contents
Introduction....................................................................................................................................3
Terms of Trade between Australia and China.................................................................................3
Terms of Trade between Australia and Japan.................................................................................5
Terms of Trade between Australia and UK.....................................................................................5
Terms of Trade between Australia and US.....................................................................................6
Terms of Trade between Australia and Germany...........................................................................6
Terms of Trade between Australia and India..................................................................................7
Terms of Trade between Australia and Indonesia..........................................................................7
Terms of Trade between Australia and Korea................................................................................7
Conclusion......................................................................................................................................8
Bibliography....................................................................................................................................9

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The Status of the Terms of Trade between Australia and other Economies
Introduction
There exists the problem of scarcity of resources for all nations in the world. There is no
single country that can be said to have all the necessary resources necessary for it to produce all
goods that are needed in its economy (McDonald, 2017). This thus creates a need for trading
among countries. What the economies does is to produce a surplus of what they can produce
more efficiently and trade it with other countries for other goods and services that they may
need. Trading among countries is dated many 1000 years ago. The globalization of world
economies have led to improvements in the industrialization of nations and has played an
important part in promoting international trade. International trade involves importation of
foreign goods and the exportation of domestic goods. There are many reason as to why nations
make a decision to import certain goods or services. One is that some imports are cheaper than
local goods, this helps in lowering the prices for domestic goods thus improving consumers’
standards of living. Other imports may be of better quality. Others may be easily available in
comparison to local goods. In some instances, a good may be completely unavailable. An
example is oil in Japan, Japan imports all the oil it consumes, and it’s one of the largest oil
consumer nations.
Australia is one of the nation that greatly embraces international trading. This economy is
both a great exporter and importer. Terms of trade is a ratio of the changes in exports index
prices to changes in imports index prices. The terms of trade for an economy is said to be
increasing if the increase in exports is greater than the change in imports. Terms of trade =
(Index of export prices / Index of import prices *100). The result is thus as a percentage such that
if above 100%, the terms are improving, and if below, the terms are worsening
(Economicsonline.co.uk, 2018). The terms are improving if for every unit of export sold, more
units of imports can be bought. This paper will analyze how Australia has performed in terms of
trade with countries like; China, US, UK, Japan, Indonesia, Korea, India and Germany. Factors
affecting this trade will also be discussed. The data used in the analysis is obtained from the
Australian Department of Foreign Affairs and Trade (Dfat.gov.au, 2018).
Terms of Trade between Australia and China
The terms of trade between Australia and China are increasing given that the growth on
export from the year 2016 to 2017 had been greater than the growth on imports during the same

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period. The growth on exports was 21.8% and the growth on imports was 8.4%. When these two
percentage increments are divided and the result multiplied by 100 the result is 12.4%
improvement in terms of trade. The article “China trade with Australia soars, along with war of
words” by (Needham, 2018) confirms that there has actually been a significant growth in the
terms of trade between these two economies relying on the records made in 2017. In fact he
noted that there was a 23% increase with Chinese importation from Australia growing by 37%.
The major factor contributing to this trade growth in the increment in the demand of
Australian resources by China (Holmes, 2017). Needham also noted that the existence of free
trade agreement between these two economies resulted in the increased benefits to Australia; this
information was provided by Huang Songping the spokesman of General Administration of
Customs. Myers (2016) and Hurst (2015) noted that the trade agreements was put in place in
December 2015 with 86% of Australian exports entering China duty free. In overall, trade
between the two economies is 14% of China’s foreign trade in general. Amadeo (2018) pointed
out that terms of trade determines the efficiency of a country in trading with the other. Before
this 14% growth in China-Australia foreign trade, there had been a decline for two consecutive
years.
The major factors driving this growth in trade are; Australia’s supply of natural gas and
Iron ore is huge, so the growth in demand for these products by china by 27% and 5%
respectively raise the overall imports. Huang said that owing to the environment impacts of the
usage of coal, China is trying to shift from consuming coal to gas; this has resulted in increased
demand for liquefied natural gas. Again the Australian suppliers of iron ore has benefited much
from the rise in average import price by 28.6%. The enforcement of United Nations Security
Council sanctions by China may have contributed to increased trade with Australia since it
resulted in a fall in the imports that China made from North Korea; the fall was 81.6%
(Needham, 2018).
According to Gruen (2017), from Australia there has been a big improvement in the
prices of mineral commodities exported; the rising development and urbanization of China has
resulted in an increased demand which has resulted in rising prices. Thirlwell (2016) noted that
China is undergoing an economic transition to become more market-based and this has had direct
and indirect impacts on terms of trade. The direct impacts are by its increased demand for
imports and the indirect impacts is on the rising price of imports. The economic ties between the

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two countries has promoted their trading terms; China considers Australia to be a popular
position for its direct investment (Myers, 2016).
Terms of Trade between Australia and Japan
The terms of trade between Australia and Japan is increasing given that the growth on
export from the year 2016 to 2017 had been greater than the growth on imports during the same
period. The growth on exports was 24.0% and the growth on imports was 7.4%. When these two
percentage increments are divided and the result multiplied by 100 the result is 15.5%
improvement in terms of trade. Trade between Australia and Japan was enhance by the
establishment of free trade agreement that led to elimination of bilateral tariffs between the two
(Siriwardana, 2015). The article “Australia-Japan trade relations: From mines to the lab and
back” by Ciobo (2018) explains that Australia and Japan economic ties is dated back to 1957
when they had their commerce agreement.
Currently, Japan is the second largest Australian export destination market, with China
being the leading destination. The major drivers of the trade between the two is that there has
been a mutual trust in their trade relationship which has resulted in Japan increasing its capital
investment in Australia thereby promoting its accelerated growth. In 2014, the two economies
signed the Japan-Australia Economic Partnership Agreement (Japan.embassy.gov.au, 2018). In
2018 the new report “Japanese Investment in Australia - a trusted partnership’ helped in opening
Australian regional vast areas such as Pilbara iron ore, the Bowen Basin coal and the North-West
Shelf gas (Ciobo, 2018). Japanese banks and large financial institutions plays an important role
in the Australian financial service sector.
Terms of Trade between Australia and UK
The terms of trade between Australia and UK is decreasing given that the growth on
export from the year 2016 to 2017 had been lower than the growth on imports during the same
period. The growth on exports was -39.8% and the growth on imports was -3.5%. When these
two percentage increments are divided and the result multiplied by 100 the result is -37.6%
worsening in terms of trade. The economic, investment and trade relationship between the two is
extensive; the two has a bilateral relationship (DFAT, 2018). The UK has a greater potential for
expanding its trading relationship with Australia. However, the two lacks a trading agreement.
This explains why both the exports from Australia to UK has fallen significantly and also the
imports from UK to Australia.

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The Brexit issue is the major factor behind the sluggish trade between UK and Australia.
It is responsible for slowing down the negotiation of trading agreement between the two. The
article “Australia’s Trade Strategy in Europe: UK or the Rest?” by (Lieto and Treisman, 2017)
explain that Brexit is expected to bring negative political implications to the Australian economy
and thus the efforts of trade negotiations have been limited. This has been intensified by the fear
that trade negotiations with the UK might allow the inflow of workers to Australia of which the
agreement will lower the ability of Australia to have control (Crowe, 2018).
Terms of Trade between Australia and US
The terms of trade between Australia and US is decreasing given that the growth on
export from the year 2016 to 2017 had been lower than the growth on imports during the same
period. The growth on exports was -1.3% and the growth on imports was 5.2%. When these two
percentage increments are divided and the result multiplied by 100 the result is -6.2% worsening
in terms of trade. According to Makin (2018), the US president levied a tariff on imported steel
and aluminium, 25% and 10% respectively. The article “Australia could be a winner in China-
US trade battle” by (Reynolds, 2018) explained that Australia’s gain on the trade wars between
US and China is great.
Reynolds noted after the US tariff imposition on steel and aluminium, China reacted by
imposing a 25% tariff on US’s 128 agricultural products. This resulted in Australia benefiting
from its ability to export more affordable agricultural products to China. There exist a free trade
agreement that protects the major products the US trades with Australia, this explains why the
US- Australian trade is not impacted by the imposed tariff. Everything imported from US to
Australia is tariff free and this explains the increment in imports.
Terms of Trade between Australia and Germany
The terms of trade between Australia and UK is decreasing given that the growth on
export from the year 2016 to 2017 had been lower than the growth on imports during the same
period. The growth on exports was -0.5% and the growth on imports was 1.5%. When these two
percentage increments are divided and the result multiplied by 100 the result is -2% worsening in
terms of trade. There has been a reduction on invested capital in Germany for the exporters
which has resulted on great shifts for several major companies. German businesses cut producer
prices in order to boost exports as per the European commission (Mauldin, 2016). In January
2016, there was a 3% decline in producer prices, followed by a 4.2% decrease in February. Even

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though Germany is boosting exports, the revenue on businesses in not improving significantly
which exposes it to production risks.
Terms of Trade between Australia and India
The terms of trade between Australia and Japan is increasing given that the growth on
export from the year 2016 to 2017 had been greater than the growth on imports during the same
period. The growth on exports was 38.0% and the growth on imports was 17%. When these two
percentage increments are divided and the result multiplied by 100 the result is 17.9%
improvement in terms of trade. The trade between these two economies has been doing well and
they have been negotiating on free trade agreement. The Indian and Australian negotiation for
FTA started in 2011 (Bennett and Coleman, 2018). Since then, the two nations has reached some
level of trade agreements which has boosted their trade. Finally in June 2018, a balanced FTA
between the two was achieved and a great boost to their trading level.
Terms of Trade between Australia and Indonesia
The terms of trade between Australia and Japan is increasing given that the growth on
export from the year 2016 to 2017 had been greater than the growth on imports during the same
period. The growth on exports was 16.7% and the growth on imports was -14.2%. When these
two percentage increments are divided and the result multiplied by 100 the result is 36.0%
improvement in terms of trade. Even though Australia has Indonesian as an important market
destination for its wheat, there has been a decline on the imports it receives from Indonesia.
According to Haan (2017), the reduction in commodity export by Indonesia to Australia has
resulted in a fall in bilateral trade. He also noted that the poor general business in Indonesia has
contributed to low Australian investment.
Terms of Trade between Australia and Korea
The terms of trade between Australia and Korea is decreasing given that the growth on
export from the year 2016 to 2017 had been lower than the growth on imports during the same
period. The growth on exports was 16.3% and the growth on imports was 181.3%. When these
two percentage increments are divided and the result multiplied by 100 the result is -58.7%
worsening in terms of trade. In the current period, Korea has grown to be a major exporter; it
grew by 20% in 2017 (Hktdc.com, 2018). Having a good trade relationship with Australia

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resulted in its export to Australia almost doubling during the same period. The FTA between the
two was signed in December 2014 (Clark, 2014).
Conclusion
The research has shown that Australian trade relationship with most of these countries is
well developed. The only two countries where trade relationship is not much developed is UK
and Indonesia. While there exist some political uncertainty between UK and Australia, there is
no clear issue indicating why the relationship with Indonesia still remain under developed.
However, there are expectations that the two economies are looking forward for an FTA. FTAs
have been noted to be the greatest boost on international trading between all these economies.
Whereas there has been a reduction of demand for some Australian exports such as coal in
China, the impact is neutralized by an increase in demand for other export commodities such as
liquefied natural gas by China. The other contributing factor to improvement in terms of trade for
Australia has been contributed by the rising prices of its export commodities.

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