Australian Dollar Decline

Australian Dollar Decline



Australian Dollar Decline

Case Scenario

Australian dollar to decline from A$ 1=US$ 0.9304 cents to on April 30, 2010 to A$1=US$0.83.15 cents on 21 May 2010. Analysts blame two factors: Greek financial crisis and investors' fee from the Australian Stock market. An Australian company, called Mohammad & Co has exported beef to Japan on 30 April 2010 and expects to receive payment in $A in 30 June 2010 on the basis of it entered into a contract on 15 May 2010 with an US company to being machinery against payment in US$ in July. A distinguishing feature of the Textiles, Clothing and Footwear Industry has been the high levels of quota and tariff protection applied by many countries. The Australian TCF industry is no exception to this rule, enjoying high levels of protection with tariffs running as high as 30%. Tariffs are taxes imposed by the government to provide protection against foreign imports that can offer the same products for a cheaper price. To evaluate the impact of reduced tariffs it is important to understand that tariffs affect the economy in a number of ways. Firstly as tariffs increase the prices of foreign-produced protected goods they therefore encourage the goods production domestically, leading to the inefficient utilisation of capital, labour and other resources to produce a lower quantity of outputs. Tariffs also reduce the real income of consumers. Because tariffs increase prices paid for goods by consumers, the same good is purchased at a higher price. This means that Australia's total income is lower that it would be if there were no tariffs even though the companies directly involved in the TCF manufacturing industry may be better off(Bambrick, 1994, 64).

Impact of Greek crisis

The Australian TCF market was estimated to grow less rapidly in the future than the rest of the economy. This can be explained by the hypothesis that consumer taste changes against TCF products. This assumption is based on the continuance of the historical trend observed from 1986-87 to 1993-94. The data showed that consumers appeared to prefer to spend their income on other products such as leisure and household services. The slow growth in the size of the domestic market meant that the TCF industries capacity for expansion was fundamentally dependent on the companies' ability to attract consumers over imports and their ability to increase their exports.

The Australian TCF industry had experienced major pressure on exports caused by the strength of the Australian dollar, local distribution structures and freight. If this continued without any tariff reductions, it would have forced Australian businesses to manufacture offshore to stay in existence. The Productivity Commission's interim report stated that our TCF industry could be eliminated by low-cost offshore competition within a decade, whether the tariff levels remain the same or not. The absence of duty when exporting Australian-made goods to New Zealand meant that more funds could be used to promote the growth of the business.

The TCF industries had been diminishing in Australia for the past 30 ...