Macroeconomic overview

Australia is an island nation between the Indian Ocean and the Pacific Ocean, situated in the Southern hemisphere. It is the world’s largest island and smallest continent and the sixth largest country in the world after Russia, Canada, USA and Brazil.

Australia has two different types of climates. Northern parts of the country are tropical, with summers extending from November to April and winters from May to October. In contrast, southern parts of Australia experience a distinct summer from December to February and winter from June to August. Owing to its size, Australia has diverse landscapes, namely, deserts in the central part of the country, tropical rainforests in the north-east and mountain ranges in the south-east.

Australia is an important trading nation and an active member of the United Nations and the Commonwealth of Nations. Australia is also a member of the Organization for Economic Co-operation and Development (OECD), the World Trade Organization (WTO), the Asia Pacific Economic Cooperation (APEC) and the G20.

Australia has eleven FTAs in force, with New Zealand, Singapore, the US, Thailand, Chile, the Association of South East Asian Nations (ASEAN), Malaysia, Korea, Japan, China and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Australia has agreed to join the Regional Comprehensive Economic Partnership (RCEP). Currently, Australia is engaged in the Australia-European Union Free Trade Agreement, Australia-Gulf Cooperation Council (GCC) Free Trade Agreement, Australia-India Comprehensive Economic Cooperation Agreement, Environmental Goods Agreement, Pacific Alliance Free Trade Agreement, Regional Comprehensive Economic Partnership and Trade in Services Agreement (TISA).¹³

Australia’s geographical location and relatively small population means that the country relies largely on shipping for its ocean trade and security activities. This has resulted in the development of close alliances with the UK and in recent times with the US for defense and economic activities.

At the start of the twentieth century, Australia identified more closely, both culturally as well as for trade with the UK and Europe. The UK was Australia’s primary trading partner. As recently as the first half of the twentieth century, Australia viewed Asia with significant apprehension. Considering that Australia was attacked by Japanese forces during the Second World War and given the experiences of Asia during the Cold War years, these worries were further accentuated. It was not until the latter part of the twentieth century that Australia’s misgivings about Asia began to fade and Australia realized the immense potential of Asia in the changing world. In 1950, the former Foreign Minister of Australia, Sir Percy Spender, said:

“Geographically Australia is next door to Asia and our destiny as a nation is irrevocably conditioned by what takes place in Asia. This means that our future depends, to an increasing degree, on the political stability of our Asian neighbors, on the economic wellbeing of Asian people and upon the development of understanding and friendly relations between Australia and Asia...It is therefore in Asia and the Pacific that Australia should make its primary effort in the field of foreign relations.”

Australia has been quick to understand that the center of economic gravity is gradually changing base from the Euro-Atlantic region to Asia. For the past several decades, Australia has focused its core strategic interests in Asia. In 1957, Australian Trade Minister, John McEwen signed a commercial agreement with Japan, which marked a significant milestone in Asian-Australian relationship. By the 1960s, Japan had replaced the UK as Australia’s primary trading partner.

In the 1970s, Gough Whitlam, the then-Prime Minister of Australia, established diplomatic relations with China. Australia also provided significant support for China’s entry into the World Trade Organization (WTO). In the 1980s and 1990s, Australia further enhanced relations with China under the Fraser and the Hawke-Keating Governments. This period also witnessed the establishment of Asia-Pacific centered institutions in which Australia played a prominent role. China has since emerged as Australia’s largest export destination. Over the past decade, Australia’s services exports, which include education and tourism, to China have grown at an average of 14%.¹⁴ Apart from economic activity, the number of Chinese visitors to Australia have also increased to ~1.4 million from merely ~0.4 million visitors, a decade ago.¹⁵

Australia has traditionally bought most of its weapons from the US, making it Australia’s major defense and security partner. In recent years, Australia’s geopolitical situation has been characterized by a strong economic relationship with China and a continuing close, strategic relationship with USA.

¹³ Free trade agreements in force, DFAT website
¹⁴ Trade Map
¹⁵ More tourists in Australia now come from China than New Zealand, 2018, Quartz