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Trade Openness: An Australian Perspective

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  • Simon Guttmann

    (Reserve Bank of Australia)

  • Anthony Richards

    (Reserve Bank of Australia)

Abstract

Australia’s external trade is relatively low compared with the size of its economy. Indeed, Australia’s openness ratio (exports plus imports as a proportion of GDP) in 2002 was the third-lowest among the 30 OECD countries. This paper seeks to understand Australia’s low openness by analysing the empirical determinants of aggregate country trade. We begin by estimating a standard gravity model of bilateral trade. Although the model appears to fit the bilateral data very well, it does a relatively poor job at fitting countries’ aggregate trade levels, with different methodologies sometimes providing highly conflicting results. The focus of the paper is an equation for country openness. Our equation explains a substantial amount of the variation in how much countries trade using a small number of explanatory variables. We find that the most important determinants of openness are population and a measure of distance to potential trade partners. Countries with larger populations trade less, as do countries that are relatively more remote. Furthermore, after controlling for trade policy there is little evidence of a positive correlation between openness and economic development. While gravity models suggest Australia trades much more than expected, the openness equation suggests that its level of trade is relatively close to what would be expected. The most important factors in explaining Australia’s low openness ratio are its distance to the rest of the world, and to a lesser extent its large geographic size.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2004-11.

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Date of creation: Dec 2004
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Handle: RePEc:rba:rbardp:rdp2004-11

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Keywords: trade; outward orientation; economic geography; trade liberalisation;

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  6. James E. Anderson & Douglas Marcouiller, S.J., 1999. "Insecurity and the Pattern of Trade: An Empirical Investigation," Boston College Working Papers in Economics 418, Boston College Department of Economics, revised 03 Aug 2000.
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  12. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Boston College Working Papers in Economics 593, Boston College Department of Economics.
  13. Clark, Ximena & Dollar, David & Micco, Alejandro, 2004. "Port efficiency, maritime transport costs, and bilateral trade," Journal of Development Economics, Elsevier, vol. 75(2), pages 417-450, December.
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  16. Jon Haveman & David Hummels, 2004. "Alternative hypotheses and the volume of trade: the gravity equation and the extent of specialization," Canadian Journal of Economics, Canadian Economics Association, vol. 37(1), pages 199-218, February.
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Cited by:
  1. Ilya Bolotov & Kateřina Gajdušková, 2013. "Srovnání otevřenosti trhů Brazílie, Ruska, Indie a Číny a zemí střední a východní Evropy," Současná Evropa, University of Economics, Prague, vol. 2013(3), pages 9-34.
  2. Michael Bleaney & Håvard Halland, . "The Resource Curse and Fiscal Policy Volatility," Discussion Papers 09/09, University of Nottingham, CREDIT.
  3. Michael Bleaney & Abelardo Salazar Neaves, . "Declining Distance Effects in International Trade: Some Country-Level Evidence," Discussion Papers 11/02, University of Nottingham, CREDIT.
  4. Cortes, Maria, 2007. "Composition of Trade between Australia and Latin America: Gravity Model," Economics Working Papers wp07-19, School of Economics, University of Wollongong, NSW, Australia.

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