Globalisation is the increasing level of economic integration between countries leading to the surfacing of a new market place. Globalisation has resulted in a reduction in trade protection. This is because of the increased interaction between countries has led to the possibility to purchase goods with similar quality to those developed locally, but for a cheaper price. Financial flows throughout the global economy have immensely increased due to more interaction.
– In the early 1970’s industrial development took place in developing countries, so companies moved production oversees, allowing for lower production costs mainly due to cheap labour.
– In 1983 the financial system was de-regulated and the exchange rate was floated. This means that the value of the Australian dollar is determined by the supply and demand of the currency. This led to greater accessibility of Australian firms to world capital markets and reduced exporting costs. But this increased the instability of the exchange rate.
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– In the late 1980’s Australian manufacturers were persuaded to export to the international market through tariffs, subsidies, local content schemes and quotas. This was in order for them to survive in the large international market.
– There have been major changes in trade patterns that reflect changes in the global economy. An example is the growth of China being directly related to the demand of raw materials.
The increased volume of trade between countries can also be attributed to advances in technologies and new trade agreements such as the Australia – United States Free Trade Agreement (AUSFTA). Trade growth is also due to the increase in demand of the resources that Australia has high amounts of. The constantly growing Asian economies demand raw materials that Australian companies extract from the land support growth in certain industries. An example of this is the trade between Australia and China. China is in demand of resource commodities in order to expand their infrastructure and support the 8% growth rate.
Explain why globalisation has resulted in a reduction of trade protection
Trade protection is a form of regulation that is imposed by a government in order to protect certain industries from cheaper oversees alternatives. Globalisation has resulted in a reduction of trade protection. This is because of increased production possibilities in developing countries that have lower wage rates than developing countries, leading to lower costs and greater profits. The removal of trade barriers can occur because a certain country can:
– Produce a good not available in another country
– Produce a good for a cheaper price than goods produced locally
– Produce a good more efficiently, allowing another country to focus on goods that they can produce efficiently
– Produce a good that is of better quality because of development of technical skills.
However, there are trade protection rules in place in order to protect certain industries and to reduce effects of off shoring on domestic markets. Reasons for protection include:
– Infant Industries: These are industries that are at the beginning of the product lifecycle and have yet to establish themselves in the market. Therefore they have not yet experienced economies of scale (have not produced enough so that the cost of producing is lower in bulk). Because of this it is very difficult for them to compete with large foreign competitors, who take advantage of economies of scale and offer their products at lower prices, domestically. Although this is a reason for protection, if it is not removed at the correct time the industry may become reliant on government protection and never mature. Therefore a balance must be found between protection and allowing domestic industries to mature.
– Dumping: This refers to the selling of goods in export markets for a cheaper price than the cost of production. This creates revenue for the exporters that are dumping, but destroys the market for the importing company as they cannot compete with the cheap prices. Dumping is prohibited because of its potential to destroy industries quickly. Dumping may occur because a company wishes to: Gain market share, to reduce excess stock or to deliberately destroy competitive, domestic producers. Dumping also affects employment levels, because consumers will purchase the cheaper good, as the law of demand states “the lower the price, the more demand there will be”.
– Domestic Employment: Cheap imports reduce the market share of producers because of consumer’s purchasing cheaper products. As a result of this unemployment may occur in a certain industry because they may not compete. There may be structural change in the domestic economy because of this inability to compete. An example of this is in the United States in the 1980’s where consumer’s preferred cheaper Japanese alternatives, therefore employment in the car industry decreased rapidly and the structure of the domestic economy changed to specialisation in the computer industry.
Explain how trading blocs have impacted on protection levels
Trading blocs are intergovernmental, multilateral agreements between countries within an area that decrease regulation on each other’s exports. Trading blocs have impacted on levels of protection. Since trading blocs are intergovernmental agreements, there must be deregulation in order to achieve maximum trade efficiency. An increase in the amounts of trading blocs internationally has led to a decrease in protection levels between countries in the trading blocs. An example of a trading bloc that has eliminated all trade barriers between the members is the European Union. This was established in 1993 and, although there is minimum regulation, there remains a common tariff between the members. The reasons that countries would want to join a trading bloc are: Improved growth, increased efficiency through importing cheaper goods and services, increased competition, economies of scale (larger markets due to free trade, investment in production due to increased trade and increased technology.
Explain the consequences of deregulation on financial markets
Deregulation of financial markets is where the banks have regulations removed from them. Between the years of 1983 and 1985 the financial system was deregulated by:
– The cessation of interest rate constraints on banks. This allowed banks to, more efficiently, fight for business (in the form of deposits and loans).
– Floating the Australian dollar: This is where the value of the currency is determined by the supply and demand of that certain currency. This changes the cost to import from or export to Australia, because the value of the dollar fluctuates. There is an inverse relation between the value of the dollar and the cost to import/export from/to Australia.
– Granting 40 foreign exchange licenses: This allowed foreign banks to enter the Australian financial system, and was done in order to boost competitiveness in the financial sector. In order to make the Australian banks more competitive, the procedure to set up domestic institutions was made more simple.
The consequences of de-regulation are to do with the effects of speculation on appreciation and depreciation of the currency. When there is speculation that the value of the Australian dollar will rise, more people will purchase when it is still low. This increased demand will then cause the dollar to rise because of the floating exchange rate (as shown above). This in turn will have a negative effect on exports from Australia because the currency is worth more in comparison to others. An example is if the USA are importing goods from Australia with the Australian dollar buying 40 US cents. There will be more exports from Australia at this exchange rate in comparison to when 1 Australian dollar will by 1 US Dollar.
Outline the role of the WTO, IMF and the World Bank in the global Economy
The World Trade Organisation is a global establishment that supervises and implements rules controlling global trade. It is at the middle of decreasing
trade protection and barriers. The trade policies that are determined by the WTO and multilateral agreements have expanded world trade; therefore it is seen as a symbol of globalisation. The accomplishment of the WTO in decreasing obstructions to trade and encouraging globalisation can be attributed to a reduction in mainly tariffs and quotas. This is done by:
– Enforcing international agreements and trade rules:
– Controlling trade disputes
– Observing trade policies
– Supervise trade negotiations
While many countries have based their development on export and support globalisation entirely, there are many opponents to globalisation that have hindered the WTO’s protection reduction scheme through protesting. This is known as “the anti-globalisation process” and is undertaken by numerous individuals/organisations because they are opposed to transnational corporations having un-regulated power and specifically because of profit maximisation leading to reducing costs which may lead to a more dangerous work place. The success of the WTO is measured by world trade figures. The amount of merchandise trade exports in 1990 was 14 times bigger than in 1950.
The International Monetary fund is an establishment that has been set up with the intention to help countries finance trade and assist with balance of payments. Its prime intention is to guarantee steadiness of the worldwide financial structure, the system of exchange rates and worldwide payments that allows countries and its people to purchase goods and services from each other. In short it promotes globalisation. This is completed by loaning funds to nations in crisis to aid them in paying debts, imports and stabilising currencies. Examples of nations needing financial aid are Russia in 1998, many countries in Asia in 1998 and Argentina in 2003. The countries that obtain help from the IMF usually have conditions imposed on them. The types of conditions that the IMF imposes include:
– An increase in taxes
– Decreasing financial assistance on food and fuel
– Requiring members to disclose monetary and fiscal policies
Since these reduce the living conditions of the impoverished, the IMF is frequently perceived as supporting global capital at the expense of the poor. It is, in addition, criticised for pushing nations at the beginning of the economic life cycle to open their economies, float their currencies, and reduce manufacturing and trade barriers. Since there are lags, it takes a while for the income levels to rise and demonstrate the benefits of these actions undertaken by the IMF.
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The World Bank is built as an organisation for financially supporting long standing expansion scheme for developing nations. The loans that are made towards these developing nations have a very low interest rate and are commonly referred to as soft loans. It not only lends money cheaply to developing nations, but also enforces procedures in order to endorse trade, boost exports and deregulation. An example of this is where some farmers in certain impoverished nations are persuaded to harvest produce for global demand, rather than for neighbouring areas. This may be done in order to boost profits from exports for the entire country. Although this may have a negative impact on local areas because rather than having those supplies used for the locals, they are used, instead for use in exports.
Analyse how the global credit crisis has changed global trade and financial flows
The global credit crisis has affected global trade and financial flows within the economy greatly. The following trade statistics show the trade numbers between the years 2005-08.
The trend of the data can be analysed in the following graph.
Results taken from World Trade Organisation website: http://www.wto.org/english/res_e/statis_e/its2010_e/its10_toc_e.htm
From the results above it can be seen that between the years 2004 and 2008 there was a drastic decrease in the export and import numbers internationally from 10.5% to -12%. This was due to the effects of the Global Credit Crisis. This will be shown below
The global credit crisis began having major impacts in 2007, and still has major impacts on most economies in 2010. The global credit crisis began in the 1980s, where gigantic companies produced mechanical goods. At the end of the decade these firms identified that much more money could be made by investing into the financial industry. An example of a company that took part in this exercise was GE, who by the 90’s, was making 10 times more money in investment, than in the production of goods. Due to the amount of cheap loans available, they borrowed much and became in debt. This money was then used to “invest in financial bubbles”. At first hefty profits were made, and many companies followed suit and by 2005 there was 14 so much money invested in speculation, that in value it equalled 14 times the value of the American economy. Debt began being offered to low income earners to in order to make more money and they could not pay it off. This had an incredible impact on the rest of the world, showing the theory that “when America sneezes, everybody catches a cold”. Australia was one of the less affected countries due to its link with China.
The global credit crisis had a large effect on global trade and financial flows. They include:
– Less demand for goods and services: Since there was far less demand, the price of elastic goods and service will go down, translating into less production, leading to greater unemployment. From this unemployment, there will be less household income therefore less goods and services will be bought. It was like a never ending circle.
– Less availability of credit: After the banks had gone bankrupt, there was no body to lend money to consumers, meaning spending was minimal.
– Rapidly decreasing Gross Domestic Product
-Australia has developed a foreign debt of almost $A500 billion from borrowing money in order to fix the extended account deficit.
– There have been major changes in trade patterns that reflect the changes in the global economy. The rapid growth of China and the export of their manufactured goods, have led to a massive increase of raw materials demanded of certain countries like Australia. Results show that in 2003 the exports from Australia to China were triple what they were in 1990. This ever growing link between Asia and Australia has such a large importance that one of the objectives of ASEAN (Association of South East Asian Nations) is to have Australia join so that free trade can occur between them. In conclusion it can be said that the structure and target of Australian trade is greatly affected by the trends of the global economy.