Policy Option to Reverse Persistent Trade Deficits in Australia

Introduction 

Australia’s balance of trade has been negative over the past five years, though positive values have been realized in 2017, and parts of 2013 and 2014. Balance of trade indicates the level of country’s dependence on other countries and has economic and political implications. The political benefits of a balanced trade and policy options for Australia to realization of a balanced trade are discussed. 

Balanced Trade as a Political Objective

A negative balance of trade exhausts an economy’s financial reserves (Khullar, 2016) and is likely to induce political implications. Reduced ability to finance needs of the economy and possible political dissidence, due to the limited ability, identify the need for balanced trade. Extensive reliance on imports that also undermines domestic productivity and the associated effects on unemployment rate have domestic political influence. Similarly, exhaustion of financial reserved due to a negative balance of trade makes an economy vulnerable to other economies on which it may depend, for financial aids or grants. Such dependence reduces political significance of an economy and explains the need for a balanced trade. In addition, exhausted economic reserves mean inability or reduced ability of an economy to establish its political autonomy in the global politics. An economically unstable nation is likely to yield to political pressure from economic giants and a balanced trade, into favorable balance of payment and safeguarded financial reserves cushions a nation from political intimidation from financially stable countries. Higher levels of exports that define the positive balance of payment also imply greater level of political interdependence that defines international trade agreements. Countries, therefore, should seek a balanced trade because for domestic political stability and autonomy in international politics.    

Policy Options for a Balanced Trade

Devaluation

Devaluation is one of the policy options for correcting a negative balance of trade and involves lowering the value of an economy’s currency (Dwivedi, 2013). The direct effect of a devaluation policy is the change in relative prices of commodities within an economy and across the economy’s boarders. An economy’s currency, following devaluation, loses its value about other currencies and this makes commodities cheaper in the subject economy than in other economies. Preference for domestically produced products, based on economic rationale of citizens in the subject economy, is likely and the effect is reduced level of imports into the economy. Similarly, devaluation, due to the reduced commodity prices in the subject economy, about other economies, is likely to promote export from the economy (Dwivedi, 2013). Consequently, devaluation is likely to increase exports and reduce imports and the extent of devaluation can be moderated to ensure a balanced trade. Devaluation policies, however, are likely to cause inflation in an economy, though contractionary monetary and fiscal policies can be used to manage the possible adverse effects.   

Protectionism 

Protectionism is an alternative policy approach to ensuring balanced trade through reduced imports. It involves the protection of domestic industries from international competition through restricted import trade. Protectionism uses such tools as tariffs, quotas, and other trade barriers to limit the flow of commercial goods into an economy (Thompson, 2011). Tariffs are taxes that a government introduces on imported commodities and increase commodities’ prices. The relatively higher prices then reduce the demand for imported products into reduced quantity of imports. Quotas, however, establish restrictions on the quantity of a commodity that can be imported into an economy and helps in realizing acceptable levels of imports. The mechanism allows an economy to determine the suitable level of importation that can yield a desired balance of trade. An economy, based on its domestic productivity on a commodity, such as automobiles, can restrict the levels of automobile imports to meet deficit in the economy’s production (Thompson, 2011). 

Other trade barriers, such as voluntary export expansion and legal measures like licensing are other protectionist tools for realizing balanced trade. Voluntary export expansion involves initiatives by exporters in an economy to increase outflow of goods, and the effect is neutralization of the imports into the economy. Factors such as diplomatic relations and management of lack of trade barriers in international markets facilitate the voluntary expansionary measures. Legal requirements, such as licensing that may further put restrictions on the flow of raw materials and finished products into an economy, is another protectionist tool (Thompson, 2011). Counter-measures from other countries, such as protectionist approaches against the restrictive economy are possible adverse consequences of the policy approach. A protectionist economy may succeed in reducing the quantity of its imports, but effects of reduced quantity of exports may undermine realization of a balanced trade.     

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Deflationary Policies 

Deflationary policies are another set of alternatives for correcting a negative balance of trade. Reduction in government expenditures, strict monetary policies, reduced wage rates, and currency devaluation are some of the mechanisms of deflationary policies (Patnaik, 2010). The policies aim at reducing the level of demand for commodities in an economy, and the effect is reduced quantity of imports (Jacque, 2014). The reduced demand in an economy is further likely to increase surplus in the economy to facilitate exports. Deflationary policies, however, are only effective when the elasticity of demand of import commodities is high. Deflationary policies are also effective when implemented with other policies, a factor that undermines their effectiveness when implemented independently (Jacque, 2014).  

Conclusion

Australia has been experiencing a negative balance of trade and policy options for realizing a balanced trade, as well as the political significance of a balanced trade. A balanced trade is important to nations’ internal and external political power and stability because of the relationship between politics and international trade. Exhaustion of financial resources for financing trade deficit is likely to undermine a government’s ability to meet its citizen’s needs towards political instability and extreme reliance on exports, together with a need financial help from other economies, undermines a country’s political significance in international politics. Devaluation, protectionism, and deflationary policies are some of the available policy options for ensuring balanced trade. Devaluation involves lowering the value of a country’s currency for making domestic commodities cheaper than export for reduced levels of importation; protectionism involves restriction of importation through tariff and non-tariff barriers, while deflationary policies involve a reduction in the level of demand in an economy. Devaluation is likely to cause inflation, protectionism is likely to trigger counter-measures from other economies, while deflationary policies are less effective when implemented independently. Australia can consider a combination of tools under the three policies and moderate usage to minimize adverse effects.