Explain globalisation, the terms of trade and international competitiveness, and analyse Australia's trade relationships and the role of productivity

What this dot point is asking

SCSA wants you to define globalisation and its dimensions, explain the terms of trade and what drives international competitiveness, and analyse Australia's trade relationships and the role of productivity. Expect a terms of trade graph as stimulus and an extended response.

What globalisation is

The main dimensions are:

• Trade in goods and services, supported by lower transport costs and trade liberalisation.
• Financial flows, including foreign direct investment and portfolio capital.
• Technology transfer and the spread of global supply chains.
• Labour movement, including skilled migration.

Globalisation has been driven by trade liberalisation (through the WTO and free trade agreements), deregulation of capital markets, falling communication and transport costs, and the rise of multinational corporations.

The terms of trade

The terms of trade (TOT) measures the ratio of export prices to import prices:

$\text{TOT index} = \frac{\text{export price index}}{\text{import price index}} \times 100$

A rise in the terms of trade means export prices are rising relative to import prices, so a given volume of exports buys more imports. This raises national income.

A higher terms of trade boosts real national income, the exchange rate, company profits and government tax revenue, but it can also crowd out trade-exposed manufacturing (the resource reallocation sometimes called Dutch disease).

International competitiveness

International competitiveness is the ability of Australian producers to sell goods and services in world markets at a profit. It depends on:

• Relative costs and prices, including wages and input costs.
• Productivity, the output produced per unit of input. Higher productivity lowers unit costs and is the most sustainable source of competitiveness.
• The exchange rate. A lower AUD improves price competitiveness; a higher AUD erodes it.
• Quality, innovation and reliability, especially for services and differentiated goods.

Australia's trade relationships

Australia's trade is heavily concentrated in Asia. According to ABS and DFAT data:

• China is Australia's largest two-way trading partner by a wide margin, taking a large share of iron ore, coal, LNG, education and tourism exports.
• Japan, South Korea, India and the United States are other major partners.
• Exports are dominated by resources and energy, with services (education and tourism) and agriculture also significant.

This concentration creates both opportunity and risk. The 2020 to 2021 trade tensions with China, which saw restrictions on barley, wine, coal and other goods, highlighted the danger of over-reliance on a single market and prompted some diversification.

Free trade agreements

Australia is party to numerous agreements that deepen integration:

• ChAFTA (China), JAEPA (Japan), KAFTA (Korea).
• CPTPP (a multilateral Pacific agreement).
• RCEP (a large regional Asia-Pacific agreement).
• Membership of the World Trade Organization (WTO), which sets multilateral trade rules.

Costs and benefits of globalisation

Benefits: access to larger markets and cheaper imports, technology transfer, foreign investment, greater competition and efficiency, and higher living standards.

Costs: structural adjustment and job losses in uncompetitive industries, greater exposure to global shocks (financial crises, pandemics, supply chain disruption), and concerns about inequality and environmental pressure.