In the face of the ongoing trade war with China, the Australian government has decided to look elsewhere for opportunities to drive the growth of our economy and sell our commodities and services. Moreover, the RBA has only recently given us their latest insight into the impacts of the lockdowns and the dire need for greater rates of vaccination, while giving a lukewarm outlook on future inflationary figures.
1. Protectionism-fuelled Trade Diversion
Led by former Prime Minister Tony Abbott, Australia has begun to lay the groundwork to create a brand new trade deal with India, another large quickly-developing economy. If we look back at our syllabus, we often wonder why states would agree to deals which don’t necessarily fulfill their own interests. The general answer to this question is that states are often bound by the economic desire to not allow major trading competitors to capture significant market share, access cheaper materials and grow faster than them.
In the case of China, many countries in the developed world have been upset by its reversal from open acceptance of free trade agreements to belligerent protectionism, prompting many of its trading partners to seek to divert trade to friendlier countries instead.
Mr Abbott notes “With the world’s other emerging superpower (China) becoming more belligerent almost by the day, it’s in everyone’s interests that India take its rightful place among the nations as quickly as possible.” If Australia enters into an agreement with India, we will be able to better access their large markets to support the demand for our commodities, driving an increase in the value of our Balance of Goods and Services and possibly an improvement in our terms of trade, while improving the resilience of the demand for our exports by diversifying the number of economies we rely on for export demand.
However, despite being a large opportunity for Australian producers, the Indian economy is currently unable to match the sheer size and wealth of the Chinese economy, as shown by the gulf between their respective per capita income figures.
Thus while our new trade deal might lessen the blow of China’s declining demand for our exports, it can hardly replace it.
2. RBA Chief: “We’ll suffer less economic damage if everyone gets vaccinated faster”
The RBA governor, Phillip Lowe has come out to explain how faster vaccination rates will help to boost the Australian economy in a world that will continue to struggle with COVID-19 in the next few years.
Let’s review why that is: COVID-19 impacts our levels of consumption in periods of both lockdown and outside of lockdown. Often, individuals who are worried about contracting the illness participate in the community less, spending less money at physical stores and spending less in the economy as a whole due to economic uncertainty, for example about whether or not they will have a job and stable income in the near future.
This reduces the amount of overall consumption and drives down aggregate demand, which directly encourages suppliers to reduce the price of goods and services, placing a downwards pressure on inflation.
While we have had numerous concerns in recent months about the impact of inflation on the economy, Lowe now thinks that this is an unlikely concern, saying “It’s very difficult for me to see us having an inflation problem.” Therefore, while the economy is not recovering to the same degree we would have liked, we have nothing to worry about regarding high inflation.
Instead of high inflation, we should keep an eye on potential negative inflation that may occur in the near future as even state borders are likely to remain closed as well as future lockdowns being inevitable as countries fail to control the spread of COVID-19 between local and international borders.
This series of weekly articles aims to compile the important economic news of the week into bite-sized summaries with HSC-specific takeaways.
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