Trade and Protection vs Free Trade

Theory of Trade All countries have different combination of economic resources: land, labour and capital resources. As a result each country must make decisions about what to trade on the basis of two key economic principles: absolute advantage and comparative advantage. Absolute advantage occurs when a country can produce more of a particular product than others using a similar amount of productive resources. Comparative advantage is the cost advantage gained from being able to produce more efficiently than other countries, enabling specialisation in that product where the opportunity cost is the lowest.

Theory of Trade In theory we have just seen that a country should specialise in producing the good or service that it has a comparative advantage in. This means Australia needs to export the goods/services it has a comparative advantage in and import the ones it doesn’t. There used to be policies in place that prevented this from happening.

Barriers To Trade Tariffs: an indirect tax levied on selected imports to make them more expensive. Subsidies: government cash payments made to local producers to help them cover some of the costs of production. Enables firms to lower their export prices.

Barriers To Trade Import Quotas: are designed to restrict the quantity of specific types of imports allowed into the country. Importers must obtain a licence which gives them a maximum number of imports for a particular good.

Trade Liberalisation Trade liberalisation is about removing the barriers that are designed to restrict international trade and shift towards the idea of free trade where there is an increase in the number of free trade agreements. Two parts to trade liberalisation 1.Removal of barriers 2.Free Trade Agreements

Trade liberalisation: Part 1 Removal of Tariffs The major part of trade reform in Australia has been the tariff reduction process which is designed to reduce the government’s contribution to the cost of imports, many of which are used as inputs into the production process. The tariff reduction program for phasing out and reducing tariffs began in 1988 and was accelerated further in 1991.

Trade liberalisation: Part 2 Reduction of Subsidies As part of its trade liberalisation measures, the Australian Government has increasingly reduced subsidies or used them as financial incentives to help restructure the industry more efficiently. Gross subsidies made by the federal government have decreased from around $25 billion in 1971–72, down to an estimate of around $2 billion by 2007–08. In addition, most subsidies granted now are conditional upon companies undertaking investment to upgrade plant, equipment and technology in order to improve efficiency.

Trade liberalisation: Part 3 Abolition of Import Quotas Quotas were commonplace in the 1970s and early 1980s, especially on cars, textiles, footwear and clothing. However, these have been progressively abolished. The last quotas, applying to cheese, were terminated in 2000–01.

Trade liberalisation: Part 4 Free Trade Agreements Australia has increasingly tried to negotiate bilateral free trade agreements (FTAs) with two or more individual countries. For example, by 2014 we had FTAs in place: Australia–New Zealand FTA (also known as ‘Closer economic relations’) in 1983 Australia–Singapore FTA in 2005 Australia–Thailand FTA in 2005 Australia–United States FTA in 2005 Australia–Chile FTA in Australia – South Korea FTA 2014 Australia – Japan FTA 2014

Trade liberalisation: Part 4 Free Trade Agreements The aim of this type of trade reform lifting the competitiveness of our exporters, establishing a business presence abroad, expanding Australia's market share in overseas countries,