International Economics: Australia-Japan Trade Dynamics

This essay provides a comprehensive analysis of the international economic and trade relationship between Australia and Japan over the past two decades. It begins with an overview of Australia's economic standing and its trade with Japan, highlighting the bilateral trade value. The essay then delves into the trends of exports and imports between the two countries, illustrating the data with figures and discussing the major traded goods and services. It examines the terms of trade and their impact on the Australian economy, exploring the reasons behind the trade patterns through the lens of absolute and comparative advantage, as well as the Heckscher-Ohlin model. Furthermore, the essay discusses the Japan-Australia Economic Partnership Agreement (JAEPA) and its impact on trade, FDI, and economic growth. The conclusion summarizes the strengthening trade relationship, emphasizing the favorable terms of trade for Australia and the benefits of JAEPA in fostering a stronger economic partnership between the two nations.

Running head: INTERNATIONAL ECONOMICS AND TRADE
International Economics and trade between Australia and Japan
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Introduction
Australia is a highly developed market economy. In 2019, its GDP was estimated to be
AUD 1.89 trillion. Australia is the 21st largest export economy out of 119 country and also 21st
largest importer economy. The trade balance rank of Australia is 19th. In 2018, the country
exported US $252.77 billion worth of goods and services and imported US $235.51 billion worth
of products and services, with a trade balance of US $17.25 billion (Global Edge, 2020). The top
trading partners of Australia are China, Japan, USA, South Korea, Thailand, India and Hong
Kong (Oec.world, 2020). Among these trading partners, one of the major countries is Japan. In
2017, the bilateral trade value was US $71.8 billion, with Japan being the second largest export
destination of Australia. This essay will provide an overview of the terms of trade of Australia
with Japan, its impact on the trade pattern between the two countries, and on the economy of
Australia and the level of integration of Japan with Australia over the past two decades in terms
of international trade. The bilateral trade agreement between Australia and Japan will also be
discussed to understand its impact on the trade level and their economic growth.
Discussion
Japan is Australia’s second biggest export market. The value of Australia’s total export to
Japan in 2018 was US $41.35 billion, while the total import from Japan was US $17.35 billion
(GlobalEdge, 2020). Following images show the level of export and import between Australia
and Japan over two decades, that is, from 2000 to 2020.

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Figure 1: Total export value: from Australia to Japan
(Source: Ceicdata.com, 2020)
Figure 2: Total import value: from Japan to Australia
(Source: Ceicdata.com, 2020)
It can be seen from the above images that the level of export from Australia to Japan has
increased significantly 2000 onwards. It showed a very sharp increase during 2008-09, reaching
an all-time high of AUD 6.059 million in 2008, and 2010 onwards, the growth in exports to

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Japan has been quite stable and substantial, almost doubling from the previous decade. There
was a fall in export in 2016, which is due to the fall in the commodity prices all over the world.
However, 2017 onwards, the export volume recovered.
On the other hand, the import volume from Japan to Australia has been steady over the
two decades and it also has shown an upward rising trend 2008 onwards. The import level from
Japan showed a sharp decline in 2011 which also recovered in 2012. There have been some
fluctuations in the import trend from Japan to Australia over the two decades, and although, the
growth has been steady, the overall level of import was less than the overall level of export from
Australia to Japan (Department of Foreign Affairs and Trade, 2020).
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
Total Export and Import of Australia from Japan (A$000),
2006-2019
Total Export (A$000) Total Import (A$000)
Figure 3: Comparison of total export and import value, 2000-2019
(Source: Department of Foreign Affairs and Trade, 2020)
In 2019, the total export value to Japan was US $24.4 billion, which was 9% of the total
exports of Australia (Workman, 2020). The major exports of Australia to Japan included LNG in

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2017, followed by coal of US $16.5 billion, iron ore of US $5.6 billion, beef of US $2 billion,
and copper ores and concentrates, worth of US $1.3 billion. According to Department of Foreign
Affairs and Trade (2020), Japan is Australia's largest market for export merchandise of LNG,
coal, beef, cheese and curd, aluminium, animal feed and liquefied propane and butane. In terms
of import, in 2017, Japan was the fourth largest import originating market for Australia, and the
imports included passenger vehicles worth of US $7.6 billion, refined petroleum products worth
of US $2.8 billion, gold of US $2.3 billion and the goods vehicle of US $1.6 billion. The service
sector also contributed significantly in the bilateral trade between Australia and Japan. In 2017,
the bilateral trade was worth of US $5.8 billion, generated mostly from the recreational travel
and tourism, transport and the education sector. While the service export values US $2.3 billion,
the import values $3.5 billion (Dfat.gov.au, 2020).
Terms of trade represents the ratio of the export prices to the import prices. When the
index of terms of trade rises, that implies that Australia is receiving more foreign exchange for
its exports, and opposite happens when the terms of trade index decreases. Hence, a rise in the
export prices than the import prices indicates greater inflow of foreign exchange to the economy
and therefore, increase in terms of trade is always favorable for an economy (Zeev, Pappa &
Vicondoa, 2017). When the terms of trade decreases, it implies that Australia must export more
products and services for maintaining the same level of imports (Parliament of Australia, 2020).

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Figure 4: Terms of Trade: Australia (2000-2020)
(Source: Tradingeconomics.com, 2020)
The above chart shows that since 2000, Australia has experienced a significant increase
in the terms of trade. It experienced a drop in 2009 as an effect of the global financial crisis, and
again in 2016 due to a worldwide fall in the commodity prices. However, the trend in the growth
of terms of trade has been upward rising, indicating a very good and steady export scenario of
the country. From the export and import statistics of Australia with Japan it can be inferred that
the trade level between the two countries has been favorable for Australia. Over the past two
decades, Australia has exported more to Japan than it imported from Japan. Hence, the net export
has been positive for Australia, which is also aligned with the rising terms of trade. In terms of
the receipt of foreign exchange, Australia has been in a favorable position due to its higher level
of export than import to Japan.
The potential reasons for the higher export from Australia to Japan can be explained in
the light of the absolute and comparative advantage theories of international trade. According
to Morales Meoqui (2019), an economy gains absolute advantage in a specific product when it

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uses less resources for producing the good than other economies and it is majorly generated from
natural endowments. On the contrary, comparative advantage is achieved when a country can
produce a particular good at less cost in terms or other goods, that is, can produce the product at
lower opportunity cost (Levchenko & Zhang, 2016). By analyzing the top export and import
products between Australia and Japan, it can be observed that the LNG, coal, iron ore, copper
ores and concentrates and aluminium are the major exports from Australia. Mining industry in
Australia is biggest due to large preserve of natural resources (Australian Trade and Investment
Commission, 2020). Hence, it has absolute advantage in these natural gas and mineral products.
On the other hand, Japan has comparative advantage in motor vehicles and parts production due
to highly advanced technology and thus, these are the major imports of Australia from Japan.
The Heckscher-Ohlin (HO) model of international trade can also be applied to explain
the pattern of trade between Japan and Australia. According to this theory, international trade is
highly dependent on the relative factor endowments of the countries and the relative factor
intensities of the products (Zhang, 2017). Thus, mining and agriculture are two largest industries
of Australia, based on natural resources and both these are labour intensive industries. On the
other hand, Japan being a small island country, has lower population and natural resources than
Australia and hence, its major industries are capital intensive. The traded products also reflect
these features of factor intensities.
The trade relationship between Australia and Japan goes back a long way, with the 1957
Commerce Agreement between these countries. The two economies entered into a bilateral trade
agreement, Japan-Australia Economic Partnership Agreement (JAEPA) in 2014, and it came into
force since 2015. This agreement secured many concessions for the Australian agricultural
sector, and also lowered tariffs of Australia on Japanese industrial products like cars, motor

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parts, electronics etc. (Department of Foreign Affairs and Trade, 2019). This agreement has been
beneficial for service trade and FDI along with merchandised trade. This agreement reduces the
trade barriers between Japan and Australia benefiting all types of exports and imports. On full
implementation of the agreement, Japan will provide preferential tariff or customs duty free
access to 97% of the Australian exports in the Japanese market. It includes decreasing
prohibitive tariff on the agricultural exports and tariff elimination on 99.7% of the Australian
resources, manufacturing and energy exports (Australian Trade and Investment Commission,
2020). After the implementation of this agreement, the level of export of Australia to Japan has
increased steadily and quite substantially. The agreement has also increased benefits and
opportunities for FDI inflow and outflow between these two countries.
As pointed out Australian Trade and Investment Commission (2020), the level of
reinvestment by the Japanese companies is the largest among all other trading partners of
Australia, including the USA and the UK. The flow has increased significantly in sectors like
advanced manufacturing, and technology. The JAEPA has contributed significantly in increasing
the scope of trade from the basic goods to advanced products, technology, services and
investments.
Conclusion
From the above discussion it can be inferred that in the past two decades, the trade
relationship between Australia and Japan has strengthened quite substantially. Japan has acquired
the position of second largest export market of Australia, while it is the third largest import
generating country for Australia. The trade pattern shows that the terms of trade has been
favorable for Australia and it has been taking the advantage by exporting more products than

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importing. The top trading products reflect that the countries follow their scopes of absolute and
comparative advantages while choosing products for export and import, and at the same time,
also follows the theory of factor intensities. Lastly, the JAEPA has been beneficial for both the
economies for increasing the trade through reduce tariffs and custom duties, and is making the
trade partnership between Australia and Japan stronger.

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References
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