Your Gateway

Gateway CU

International trade

International trade is the backbone of our modern commercial world. Every day, the buying and selling of goods and services occurs across national borders. No country can exist in isolation in a globalised world where goods, money and ideas move around the world faster and cheaper than ever before. The rise in international trade has fuelled the growth of globalisation.

The evidence of globalisation can be seen everywhere. In Australia, thanks to imports, we have access to a wide range of affordable yet quality products. We can go into a local store and buy a suit from Italy, a TV from Korea, an iPhone from China and flat pack furniture from Sweden. We benefit from the lower price of these items as they are made more cost-effectively overseas. 

Due to our exports, people in other countries are eating our beef, drinking our wine, using our software, enjoying our tourism and riding in our fast ferries. Australia also exports its raw materials to the world. We have an abundance of natural resources that we cannot use and are able to sell the surplus to other countries, giving us a world market of seven billion people.

The difference in value between what a country imports and exports in goods and services is referred to as its balance of trade. A country has a trade deficit if it imports more than it exports and this is generally considered to be an unfavourable trade balance. A country has a trade surplus if it exports more than it imports which is generally considered to be a favourable trade balance.

However, as is typically the case in economics, there are differing views among economists about the pros and cons of trade imbalances. Asking whether trade deficits or surpluses are good or bad for an economy is like asking whether a government budget deficit or surplus is good or bad for an economy – opinions are divided.

As I outlined in a recent post, Government debt, citizens around the world have been (erroneously) taught to believe that public debt is always bad. Conventional wisdom holds that borrowing money is foolhardy and that a prudent country, like a prudent person, should always rely on its own resources. 

When it comes to trade, what is often misunderstood is that flows of trade involve flows of financial payments. Flows of international trade, therefore, are actually the same as flows of international financial capital. So the question becomes: Should we participate in global financial capital markets? The answer is unequivocally in the affirmative. 

It makes economic sense for a national economy to borrow abroad, as long as the money is wisely invested in ways that raise a nation’s economic growth over time. In Australia’s case, our low levels of national savings forces businesses and governments to seek funds from overseas. Our long-standing dependence on foreign investment makes Australia a capital importer. 

This vital and necessary capital has helped Australia become the world’s 12th largest economy, boasting 23 years of uninterrupted growth. International capital has also enabled Australians to enjoy higher rates of economic growth, employment and standards of living than could have been achieved with domestic capital alone.

The equity in Australian companies is increasingly foreign owned. Not only that, but foreigners increasingly own our government debt. So yes, we are in hock to foreigners but we have been for most of our history. This should not be a cause for concern as foreign investment enables us to build infrastructure, develop industries and provide jobs. 

A good example of this is our recent resources boom. The funding for this was sourced extensively from overseas. Foreigners saw it as a good investment opportunity. As a small country, Australia has and will continue to rely on foreign investment to build large-scale, capital-intensive industries. The capital we import, therefore, is being put to good use in fuelling productive activity. 

Many economists (but certainly not all) believe that a trade deficit is not a problem in and of itself. However, as with most economic issues, there are no completely right or wrong answers. I’m in the camp that believes Australians benefit from the efficiencies, opportunities and consumer choices created in an economy which is open to world trade. 

Australia was built on foreign investment, first from Britain, then America and more recently Japan and China. It is vital that Australia remains an attractive destination for foreign capital. Our way of life depends upon it. 

Regards

Paul J. Thomas

 Subscribe to blog - RSS

Posted Monday, March 30, 2015    View Comments 0 Comments    Make a Comment Make a comment  

RSS Feed