The clothes you wear are probably made in China or Bangladesh. The car you (or your parents) drive is likely to be from Japan or Germany. The rice you eat might have been grown in Thailand.
Our ability to trade with other countries is a result of globalisation – the links between different countries and the increased impact of international influences on all aspects of our lives.
The idea of free trade is based upon the idea of comparative advantage. In a nutshell, it’s basically where countries will specialise in the areas of production that they are really efficient in, and then trade with other nations to maximise standards of living for both countries.
For example, say Australia was really good at making bread. And New Zealand was really good at making jam. What's the point of having loads of great bread without eating it with great jam? It makes sense for Australia and New Zealand to share their jam and bread. And that's the concept of comparative advantage.
The structure of Australian industry is heavily influenced by trade patterns. These can be divided into four industries:
Let's look at them individually.
Since our country has access to a vast amount of natural resources, particularly iron ore and coal, mining has always been a major Australian industry.
Why? It’s mainly due to the mining boom that occurred from around 2005-2012, where there was huge global demand for these commodities, especially since this was a time of rapid economic growth for Asian economies like China and India. These growing countries needed metals and energy to build new cities and buildings in order to shift away from rural, peasant-based farming to industrialised, urban places.
Even though we’ve come to the end of the mining boom, the trend in mining export revenue is still expected to go up due to predicted growth in LNG (liquefied natural gas) exports. In fact, Australia is predicted to be the world’s largest LNG exporter by 2020.
The manufacturing industry is involved in producing things like textiles, machines and processed foods. In general, Australia isn’t very good at manufacturing, since we have a very high minimum wage rate (compared with other countries that don’t pay their workers as much) and a small population. So with fast economic development occurring across Asia in the past few decades, Australia’s manufacturing industry has declined. Now, manufactured goods only account for 13% of our total exports, meaning that the manufacturing industry’s importance to our economy is decreasing.
A good example of this change was the closure of the last Holden factory in Australia in 2017. (Seems like Holden struggled to Hold-on!) (Editor's note: we sincerely apologise to our readers for this pun). This was following the exits of Ford and Toyota not too long beforehand.
Dramatic reenactment: Holden, Ford and Toyota leaving our manufacturing industry.
However, our manufacturing industry isn’t completely doomed, as Australia is quite good at producing ETMs (elaborately transformed manufactures): sophisticated, specialised manufactured goods, like medicine and non-electrical machinery.
Australia exports high volumes of wheat, wool and beef, especially selling heaps to the growing middle class in Asia. But all the same, agricultural exports are now less important to Australia, now only 13% of our exports.
Agriculture is an interesting industry, because it can’t be sold at whatever price the seller would like. Similarly to minerals, agricultural goods have a “world price” – hypothetically, $1 for a kilogram of wheat. Exporters of agriculture can’t sell their goods at a price higher than the world price, because there would always be someone in another country selling the same thing at a lower price – who would buy the more expensive thing? The problem is, world prices have fluctuated a lot, and the US and the EU have high levels of protection. Australia’s frequent droughts don’t help either. So agriculture is now not a big part of Australia’s economy.
Additionally, you can’t make much more money out of processing agricultural produce (unlike commodities such as metals that can be used to produce machinery), so there isn’t as much potential for growth in this industry.
The services sector has experienced a lot of growth in the past decades and is predicted to continue expanding. There’s growing demand for Australian services, particularly in education, finance, insurance and tourism. Plus, we have a highly-skilled labour force (meaning that Australians are generally more educated and skilled than elsewhere), giving us a comparative advantage in this sector.
The expansion of our services industry is also a great long-term alternative as a more sustainable source of economic growth, especially because of the decline in manufacturing. Also, heaps of people worry that we rely too much on selling metals and coal, because their prices are unstable, and more and more countries are turning to renewable energy sources.
Ultimately, because mining is an insecure source of export money, we’re expecting to see future growth in our services sector, whilst manufacturing and agriculture will likely decline. What we can take from this is that what happens in the world definitely has an impact on the Australian economy. And this economy is going to see a lot of changes in the near future.
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