Assignment 1

BUSINESS SCHOOL
Assignment 1: Trimester 1, 2009

Section Instructors: Student Id No: Group Members: Due Date: - 3rd April 2009.

Assignment 1

Abstract
Australia and China have a longstanding relationship with a high level of interaction on Trade and Investment. China is of great importance to Australia as a bilateral partner and is the second largest trading partner to Australia. China was the 17th largest investor in Australia primarily in the resource sector and mineral exploration, in 2006. Bilateral Trade links between India and Australia have gained significantly over the years, and India is now Australias 6th largest export market. This paper shows the bilateral economic trade relationship between Australia &, China and also with India and the benefits on Australian resource sector.

Background and Introduction

Australia being a resource rich country, the report focuses on the Australias natural resource sector, which is one the primary sources of income to the economy. It recorded a total trade of US$127 B in the year 2006. Australia is one of the top exporter of coal and copper to the world. The top export markets of Australia include China, Japan, India, USA and Korea. Over the last few years China has significantly become as one of the leading trading partner of Australia. The key exports to China include metal ores, non-ferrous metals, coal and petroleum products. Apart from being the leading trading partner to Australia, China is increasingly becoming a major investor in Australia. The single largest Chinese investment in Australia is in the mining sector amounting to about US$240 M. The bilateral trade relations between Australia and China is said to reach greater heights with China's fast growing economy and a huge market potential. This bilateral trade is not only going to have lasting impact on Australian trade and economy but also on China's economy (Articles base, 2005-08). .

Literature Review
Impact on Australian Economy
The Australian economy, once measured as a comparatively safe haven, is headed for a sudden recession in 2009, in measurement because of slower-than-expected development in china. In a spartanly worded weekly outlook statement, the Australian investigate firm Access Economics warned that the mining-led economy will unwind scarily fast in 2009, transfer the interest rates booming and Australian currency. To encourage expansion, the description predicted that the central bank would be forced to cut significant tariffs to 2.5 %, from 4.25 %, china retard is Australias recessions(The New York Times, 2009).

Assignment 1 Mining boom in Australia, accelerated by Chinese demand for iron ore and Coal, helped increase companies net profit over period of 7 years and contracted the countries present report deficit as of a proof. The government said today, Business income higher 14.3 % in the next sector, additional 6 times the 2.3% middle estimation of 22 economists survey by Bloomberg reports, a different statement showed the present report insufficiency pointed for the first time in two years. Rolling demand from China will enlarge Australias export profits by 20% this year, the central bank estimates, offsetting local development and boosting income at miners together with Rio Tinto Group. A different statement today showed inflation held over the central banks object assortment among 2 % and 3%, Reserve Bank Governor Glenn Stevens potential to cut borrowing expenses in coming months. Jobs Boom Still, todays information propose mining companies and builders are serving offset slower domestic development, driving insist for skilful employees that pressed the joblessness rate secure to the lowest in additional than three decades. The unemployed rate was 4.3% in July. Income for mining companys rise 41 % from the first income for builders gained 20 % and manufacturers income improved 15 %. The worlds largest mining group, BHP Billiton Ltd. The 30 % increase of financial year, boost manufacture of crude oil to profit from growing price obsessed by demand from China. The underperformance on products, services and deal shrank to A$12.77 billion from a revise A$19.84 billion in the finical year, The recent report is the broadest calculate of buy and sell because it includes asset flows of service and goods shipments. A shortfall represents currency, Australia has to make use of in a foreign country to recompense for the service and products it imports, and to economics investment not covered by local investment (Mining Exploration News,2008).

Trade Policies
(Bilateral Trade between Australia and China)
The basis for bilateral and economic relationship between Australia and China was The 1973 Trade Agreement. On the 24th October, 2003, Australia-China Trade and Economic Framework was signed between the two countries. This framework lays

Assignment 1 down the agenda for bilateral and trade economic relationship that is expected to strengthen commercial and policy linkages in specific industry sectors and areas such as (energy & mining, agriculture, quarantine inspection, textile, clothing, information and communication technology and e-commerce etc). The outcome of the financial modelling suggest that an Free Trade Agreement would have a important net optimistic impact on productivity and employment in china and Australia and it also indicates that, the larger the exposure, the deeper the liberalisation, and the more rapid the achievement, the better the net profit to china and Australia. Free Trade Agreement covering goods and services, investment between both countries could increase their real GDP growth by 0.4% over a period of 2005-2015 and could boost up total bilateral trade by US$5.4 billion by 2015(DFAT). China has become Australias 2nd largest trading partner while Australia is Chinas 13th largest trading partner (BNET). Australia and China have employed other policies other than tariffs such as rules of origin rate regimes, tariff rate quotas, import licensing regimes, customs evaluation and shipment inspection and technical barriers to trade etc to back their foreign trade administration. Thus FTA between two countries would have a minor impact on rest of the worlds GDP (DFAT).

(Bilateral Trade between Australia and India)

Bilateral Trade links between India and Australia has gained in importance in recent years. Australia and India are currently undertaking a Joint Feasibility Study on the merits of Free Trade Agreement. India is Australias sixth largest export market, in Gold, ores and metals. There has been a strong growth in Australian exports to India in the past five years. An FTA would benefit both the countries, Australia a reliable supplier, would be able to provide valuable inputs to India in its growing manufacture sector. As a result of a comprehensive FTA, there will be an increase in the investment flows, not just from each other but from other sources as well (Gibbons P , DFAT).

Trade Barriers/Tariffs:
Chinas inclusion in the World Trade Organization (WTO) is one of the most important developments in trade. It not only will help China to improve its economy 4

Assignment 1 and to get a hold of the world market but will also help boost the Australian economy. (China in the World Trade Organization: what it means for Australia) The WTO has set certain guidelines like, the countries should not differentiate between imports and domestic products and any issues that arise are to be dealt through bilateral and multilateral trade negotiations. The exchange rate between two trading partners plays a major role. It is simply the price at which one currency trades for another (Sumner. D. A, Smith. V. H, C. Parr Rosson). The WTO entry will make Chinese mineral industry more efficient which in turn will create a demand for Australias high quality of service and technology. Concerns about depletion of environment, changing climatic conditions, contamination with toxic chemicals and nuclear materials have been used to justify trade restrictions. In the year 2008 the Australian government banned export of nuclear fuel (Uranium) to India since India refused to sign Nuclear Non-Proliferation Treaty. Australia has about 40 percent of worlds uranium resources and it imports to about 30 countries under strict conditions. (BBC NEWS Asia-Pacific) Tariffs are taxes on import commodities into a country. Tariffs provide revenue for the government and they improve economic returns to firms and suppliers of resources. China has two types of tariff rates and they are Most Favoured Nation (MFN) rates and the General rates. The MFN rates apply to the member countries of WTO and General rates apply to those countries that dont have trade agreement with China. If the tariffs are set too high, they can impact on trade and act as import bans. (China-Tariffs and non-tariff barriers- for Australian exporters) China is the largest importer of copper from Australia. China is set to increase its tariff rates on copper by about 3-6 percent (Hooke. M. H, An Australia- China Free Trade Agreement A Minerals Industry Perspective). China is also planning to drop its tariff rates on agricultural and non-agricultural products by about 20-30 percent. (ABC radio Australia) The trade relationship between China and Australia is said to improve with reduced barriers and tariffs. The increasing imports from China will have lasting positive impact on global economy and on Australian economy as well.

Impact on Emerging Markets (China & India)

Assignment 1 There has been a upward drift in the global growth rate because the share from the leading economies like India and China, with its high growth rates, is gradually rising. Rising incomes, a high Investment rate has led to a rapid growth in chinas economy which has increased the demand for resources, fuelling the Australian mining industry. In recent years, China and India have been major contributors to the global world growth. (Gruen D, Kennedy S, 2006)

(Source : Gruen D, Kennedy Steven, 2006) Australia is abundant in natural resources and is the worlds largest exporter of black coal and over the past two decades the output has been increasing. In 2008, exports of minerals and fuels increased from 65.8% to $121.2 billion. Thus minerals and fuels account for 44% of the total Australian exports.

(Source: DFAT, 2009)

Assignment 1 Percentage increase in exports of iron ore & concentrates to China has increased to 103.6% and other ores and concentrates to 16.8% and copper ores and concentrates to 49.8% from last year. An export of coal to India has increased from A$5456(million) to 127.7% in 2008. The amount of exports to China and India has been increasing steadily, and are likely to have an impact on Australian mining industry, which will boost the Australian economy (DFAT,2009).

FDI (Foreign Direct Investment)

Australia has one of the most efficient mining sectors in the world. The increasing demand for resources from emerging markets like China and India has lead to a steady increase of investment in the Australian resource sector. The scale alone of the sudden increase in FDI gives a clear idea about the role of FDI. Both China and India coming from different political backgrounds, give the state a large role in their economies and a big share of their outward investment is channelled through stateowned enterprises, state-owned banks or sovereign wealth funds. Over four fifths of the investment in offshore petroleum and gas exploration and more than one half of the investment in exploration and assessment of other minerals that support the production in these industries are taken over by foreign investors. Foreign and domestic firms are highly established and are among the major suppliers of resources to the global market but since last 10 years China by far has emerged as one of the leading market, especially for iron ore and natural gas. China is one of the major trading partner of Australia and is one of the largest importer of Australian raw materials like iron ore, copper and there is a increasing demand for natural gas as well. In the year 2007 commodity imports of China from Australia has increased by 17 percent and has averaged an annual growth of about 19 percent since last 10 years. The increasing trade relationship between China and Australia has every prospect of becoming one of the most important economic relationships. (Drysdale P, Findlay C, 2008)

Assignment 1

Empirical Analysis
The following empirical analysis is based on the natural resources (GDP mining and GDP nuclear fuel, petroleum products Australia).This analysis is to determine the impact of FDI (inflows Australia), GDP (Australia), China GDP (which is the largest importer of natural resources from Australia) on the natural resources of Australia. The GDP of mining and petroleum products are the dependent variable whereas the FDI and GDP (Australia and China) are the Independent Variable.

Hypotheses
(1) The increase in foreign direct investment effects the Sales growth of natural resources Australia.

(2) The increase in GDP Australia effects the Sales growth of natural resources Australia.

(3) The increase in the GDP of China effects the Sales growth of Australia natural resources; this is because China is the largest importer of natural resources from Australia.

Regression Analysis
Regression equation is formulated as y = a+b1x1+x2+b2x2+c2x2+..+e. In this equation of regression analysis a is denoted as the intercept, whereas b1, b2 have

Assignment 1 the fractional effects, x1, x 2stands for the independent variable in addition to this, e is the error term. On the whole by explaining the equation in simple terms b is the independent variable, which is constant and the increase in the every unit of x which is also independent will raise the dependent variable by that price.

Years 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Total GDP Mining 14,036.80 15,233.40 14,311.30 13,886.50 14,585.30 15,594.20 18,588.90 17,516.20 15,741.60 15,978.60 15,868.20 17,889.90 19,253.40 23,099.30 24,727.30 34,583.50 48,892.70 68,125.70

Total GDP petrol pro 2,573.80 2,473.30 2,313.50 2,235.10 2,539.30 2,685.10 2,952.60 2,796.10 2,461.90 2,485.50 2,263.50 2,003.20 2,070.80 2,683.50 3,016.70 3,116.30 2,951.40 3,196.60

Total GDP AUS 317,663.10 320,005.30 313,003.30 304,784.60 347,127.80 371,005.10 417,064.50 416,953.60 372,390.30 401,801.30 388,310.20 367,776.60 412,538.60 525,105.20 639,566.80 713,000.70 755,033.60 907,050.60

Total GDP CHINA 390,278.10 409,166.00 488,222.70 613,227.40 559,221.60 727,944.80 856,087.70 952,650.80 1,019,479.30 1,083,285.10 1,198,460.50 1,324,806.60 1,453,827.10 1,640,958.10 1,931,644.40 2,235,908.50 2,657,867.90 3,280,038.30

Total FDI (Inflows) 8,120.60 4,303.00 5,722.50 4,288.80 5,029.40 11,967.90 6,106.30 7,637.00 6,004.40 3,267.80 13,963.10 8,305.40 17,003.00 7,972.60 36,093.40 -35,295.20 25,735.50 22,265.60

Total GDP B+C 16,610.60 17,706.70 16,624.80 16,121.60 17,124.60 18,279.30 21,541.50 20,312.30 18,203.50 18,464.10 18,131.70 19,893.10 21,324.20 25,782.80 27,744.00 37,699.80 51,844.10 71,322.30

The B+C=dependent variable (mining +petrol products)

SUMMARY OUTPUT Regression Statistics Multiple R 0.945908 R Square 0.894741 Adjusted R Square 0.872186 Standard Error 5219.787 Observations 18 ANOVA df Regression Residual Total 3 14 17 Coefficients SS 3.24E+09 3.81E+08 3.62E+09 Standard MS 1.08E+09 27246177 F 39.66849 Significance F 4.29E-07

t Stat

P-value

Lower 95%

Upper

Lower

Upper

Assignment 1
Error Intercept Total GDP AUS Total GDP CHINA Total FDI (Inflows) -10042.7 0.07219 0.001266 0.05135 5995.879 0.027741 0.006047 0.093149 -1.67493 2.60226 0.209313 0.551268 0.116131 0.020885 0.837219 0.59014 -22902.6 0.012691 -0.0117 -0.14843 95% 2817.198 0.13169 0.014236 0.251135 95.0% -22902.6 0.012691 -0.0117 -0.14843 95.0% 2817.198 0.13169 0.014236 0.251135

The coefficient of the intercept -10042.7 is to be estimated as the average sales deficit as it is negative, of the natural resources if all the variables of b were 0.Therefore the equation says that the increase in the sales by an additional unit will help in the increase the sales of natural resources. However, independent variable should be constant. The sales growth of natural resources has been increased by GDP (Australia) is 0.0729, GDP (China) is 0.001266 and by FDI is 0.5135.As all the three independent variable are positive, they have positive relation with the dependent variable. Coming to the p-value for GDP (Australia) 0.020885 which is less than 5% and reveals that there is less than 5% chance of the relationship not significant. The pvalue of GDP (China) is 0.837219 which is less than 10% so there is chance of relation which is insignificant. Talking about the FDI the p-value is 0.5914, which are less than 5% and the chance of relation is insignificant. The difference between R square and Adjusted R square is low, which shows the positive relation between slope and intercept.

Conclusion

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References
ABC Radio Australia, retrieved 28th March 2009, http://www.radioaustralia.net.au/news/stories/200811/s2428550.htm Sumner. D. A, Smith. V. H, C. Parr Rosson, retrieved 27th March, 2009 http://www.cepea.esalq.usp.br/pdfs/130.pdf Articles base 2005-08, Australia-China Bilateral Trade Phenomenon, retrieved 31st March 2009,http://www.articlesbase.com/business-articles/australia-china-bilateraltrade-phenomenon-229791.html BBC NEWS Asia-Pacific, retrieved 20th March 2009, http://news.bbc.co.uk/2/hi/asia-pacific/7188835.stm China in the World Trade Organization: what it means for Australia, retrieved 28th March 2009, http://www.trademinister.gov.au/speeches/2002/021126_mvt_chinawto.html China-Tariffs and non-tariff barriers- for Australian exporters, retrieved 28th March 2009, http://www.austrade.gov.au/Tariff-and-non-tariff-barriers/default.aspx DFAT 2005, Australia-China Free Trade Agreement Joint Feasibility Study 2005, , retrieved 14th March 2009, http://www.dfat.gov.au/geo/china/cb_index.html

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Assignment 1 DFAT, 2009, TRADE TOPICS Quarterly statistics, Incorporating December quarter 2008 data, retrieved 25th March 2009, http://www.dfat.gov.au/publications/stats-pubs/trade_topics.html

Drysdale P, Findlay C, 2008, Chinese Foreign Direct Investment in Australia: Policy Issues for the Resource Sector, retrieved 23rd March 2009, http://72.14.235.132/search?q=cache:AeuC-ZBBfuUJ:eastasiaforum.org/wpcontent/uploads/2008/09/drysdale_and_findlay_chinese_fdi3.pdf+Hartley,+1984%3B +ABARE,+2007).&cd=1&hl=en&ct=clnk&gl=au&client=firefox-a

Euromonitor International, GMID, Market sizes(Australia), retrieved 24th March 2009, http://0-www.portal.euromonitor.com.alpha2.latrobe.edu.au/passport/Statistics.aspx

Gibbons P, India: A trading partner of growing importance, Department of Foreign Affairs and Trade, retrieved 18th March 2009, http://www.dfat.gov.au/publications/statspubs/india_trading_partner_of_growing_importance.pdf

Hooke. M. H, An Australia- China Free Trade Agreement A Minerals Industry Perspective, 2005, retrieved 28th March, 2009 http://www.minerals.org.au/__data/assets/pdf_file/0009/9981/MCA_China_Economic _and_TradeCoopForum_MHH230505.pdf Kennedy S, Gruen D, 2006, Reflections on the global economy and the Australian mining boom, Keynote address to the Australian Business Economists Forecasting Conference, retrieved 18th March 2009, http://www.treasury.gov.au/documents/1190/PDF/05_boom.pdf Mining Exploration News 2008, Chinese Demand Iron ore and Coal Effect Australian Mining Boom, retrieved 21st March 2009, http://paguntaka.org/2008/09/03/chinese-demand-coal-and-iron-ore-effect-australianmining-boom/

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Assignment 1 Sheng, Y, Song, L, 2008, Comparative advantage and Australia-China bilateral trade, Economic papers (Economic Society of Australia), BNET Australia, retrieved 9th March 2009 http://findarticles.com/p/articles/mi_m0PAO/is_1_27/ai_n24923425/?tag=rbxcra.2.a. 44

Sumner. D. A, Smith. V. H, C. Parr Rosson, retrieved 27th March, 2009 http://www.cepea.esalq.usp.br/pdfs/130.pdf

The New York Times 2009, World Business, A Gloomy Forecast for Australian Economy in 2009, retrieved 24th March 2009, http://www.nytimes.com/2009/01/20/business/worldbusiness/20australia.html?_r=1& scp=1&sq=impact%20of%20mining%20in%20australia%20economy&st=cse

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