The past week in the economy has been filled with international cooperation, the resurgence of global institutions and a forward looking approach to the post-COVID economy. Within this, it gives us a rare chance to look at the role of international organisations like the G7 in forming trade agreements and in promoting free trade. It also presented us with the growth of new trade agreements as Australia negotiates free trade agreements and tariffs with Europe in a post-Brexit world.
1. The G7 Meeting
The Group of Seven, is an organisation of some of the largest advanced, western democracies. Through forums such as the G7, G20 and OECD annual forum, these economies work together to promote their form of globalisation, encouraging the spread of capitalist systems and institutions. A direct manifestation of this particular purpose is the new ‘Build Back Better’ scheme created at the most recent G7 meeting.
As the ABC notes, “The Group of Seven richest democracies has sought to counter China’s growing influence by offering developing nations an infrastructure plan that could rival President Xi Jinping’s multi-trillion-dollar Belt and Road Initiative.” What we see in this scheme is a great example of international convergence and investment.
Here, the governments of the G7 advanced economies are planning to invest in infrastructure across the developing world, helping them to build ports, roads, bridges and other essential trade infrastructure.
In the long term, this will help to improve production efficiency in those emerging countries by making transportation of raw materials and processed goods cheaper, leading to increased aggregate supply, increased trade volume and increased economic activity, growth and eventually development.
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Finally, the size of such a scheme and its role in improving global aggregate demand is immense, as Biden notes the “Build Back Better World (B3W) initiative, will provide a transparent government-lead infrastructure partnership to help narrow the $US40 trillion ($51.9 trillion) needed by developing nations by 2035”. While the B3W scheme is unlikely to meet the entirety of that USD40 trillion, it will certainly coordinate debt and investment needed to increase gross world product through the development of important trade infrastructure.
All in all, we need to recognise that global organisations like the G7 forum act as a conduit for international cooperation regarding economic growth, investment and globalisation. In doing so, the international agreements, partnerships and organisations such as the World Bank and OECD help to improve long term Gross World Product (GWP) growth.
- As of 2017, the G7 accounts for 60% of global wealth and 40% of GWP, demonstrating the ability of individual governments to foster global economic progress through international cooperation.
- Advanced economies’ growing political desire to respond to China is heavily influencing governments’ decisions on where to expand economic investment.
2. The UK – Australia Free Trade Scheme
Following Brexit, the UK, Australia’s largest source of immigrants, and continuing source of investment is once again able to freely negotiate its own trade agreements.
During their time in the EU, the UK was unable to trade freely with Australia in the agricultural industry.
This was due in large part to the EU Common Agricultural Policy and related tariffs. The protectionist subsidies offered by the EU to its farmers reached up to ⅓ of the EU agricultural industry’s total income. Such a massive subsidy erased Australia’s major comparative advantage in agricultural production, preventing Australian agricultural producers from benefiting from profiting off exports to the UK and EU at a lower price than they could normally produce themselves.
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Therefore, in crafting a new trade deal that removes these protectionist barriers to free trade, Australia will continue to increase the volume of our agricultural exports, mobility of labour and investment to the UK. For example, Australia’s Minister for Trade, Dan Tehan has signalled that he is prepared to walk away from a free trade agreement with the UK if Australian agricultural exporters are not granted sufficient access to the British market.
If agreed upon, Australia hopes to maintain our competitive advantage and sustain long term economic growth. Moreover, an advantageous trade deal will keep our Balance of Goods and Services (BOGS) in surplus into the future and hopefully also keep our Current Account Surplus (CAS) going well into the future.
The Australian government has made it clear that it intends to leverage our local producers’ comparative advantage and trade deals to benefit the economy as much as possible.
HSC application: Investment and exports to the UK
- The UK is the second largest source of foreign investment in Australia, with the stock of investment valued at $574.8 billion in 2018 (FDI of $98.7 billion).
- Australian services exports to the UK amount to $5.5 billion and imports of $9.2 billion in 2018.
This series of weekly articles aims to compile the important economic news of the week into bite-sized summaries with HSC-specific takeaways. You can expect a new article every Monday!