Boriraj, Jumpoth (2008) Analysing and modelling international trade patterns of the Australian wine industry in the world wine market. Other Degree thesis, Victoria University.

Abstract

Since the mid-1980s, trade liberalisation has encouraged the growth of Australia’s international trade. The Australian wine industry has been successful in the world wine market, achieving a significant growth in production and export sales since the 1990s. In this context, this thesis attempts to provide a comprehensive analysis of the patterns and determinants of Australia’s international trade in wines for the period 1980-2004. The general aim of this thesis is to analyse the Australian wine industry based on the economic theories of inter-industry trade and intra-industry trade and to model wine export and import relationships. Indicators of Australia’s trade performance in wines in terms of trade specialisation index, export propensity, import penetration, and the ratio of exports to imports indicate that Australia has become a net-exporter and has experienced a specialisation in wine trade since 1987. This signifies a high degree of international trade competitiveness in Australia’s wines. The results of Balassa’s revealed comparative advantage index and Vollrath’s revealed competitive advantage indexes suggest that, among the wine producing countries, Australia has a comparative advantage and competitive advantage in wines. The significant year was 1987 when Australia first experienced comparative and competitive advantage. The important explanation for this turning point is Australia’s trade liberalisation policy in the mid-1980s. Based on econometric concepts of unit root and cointegration, the unrestricted error correction model is applied to analyse the determinants of Australia’s wine exports and imports separately in the models of export supply, export demand, and import demand. The results suggest that the relative price of wine exports and the long-run production capacity have had a positive influence on the supply of wine exports. However, Australia’s wine exports are not very responsive to changes in export price. Although the trade liberalisation shows a positive impact on the supply of wine exports, it is not statistically significant. Foreign demand for Australia’s wine exports has had a significant negative response to changes in the relative price of exports and a significant positive response to the depreciation of the Australian dollar in both the short run and long run. A low value of the price elasticity of foreign demand may reveal that Australia has some market power in relation to its exports of differentiated or unique wines to the world market. The demand for wine imports by Australia is inelastic with respect to the relative price of wine imports but more elastic to Australia’s income. The standard Grubel-Lloyd index is used to examine the extent of intra-industry trade of Australia and major world-wine trading countries. The index is also applied to Australia’s bilateral intra-industry trade in wines with its major trading countries. To measure the growth of intra-industry trade for Australia’s wines, the concept of marginal intra-industry trade is applied, together with Menon-Dixon’s approach. The results indicate that the world wine industry is more likely to be characterised by inter-industry trade which is based on the significance of comparative advantage and factor endowments rather than intra-industry trade. Australia has a relatively small intra-industry trade in wines. This is due to the fact that the values of Australia’s wine exports are very much higher than those of its imports. The extent of bilateral intra-industry trade in wines between Australia and its major trading partners is also small. However, the levels of bilateral intra-industry trade between Australia and New Zealand are relatively high. The growth of intra-industry trade in wines between Australia and most of the major wine-producing countries is due to the contributions of export growth to the growth in intra-industry trade, which imply that Australia is a net importer of wines from these countries. On the other hand, the percentage growth of intra-industry trade in wines between Australia and Germany, the U.S., the U.K., New Zealand, Canada, and Japan is due to the contributions of import growth to the growth in intra-industry trade, which imply that Australia is a net exporter of wines to these countries. The extent of Australia’s intra-industry trade with the rest of the world will be higher when the industry gains more scale economies. Contrary to the theoretical suggestions, product differentiations, degree of trade openness, and exchange rate have had negative relationships with Australia’s intra-industry trade in wines. With regard to Australia’s bilateral intra-industry trade with its nine major wine trading partners (France, Italy, Spain, Germany, the U.S., South Africa, New Zealand, the U.K. and Japan), the intensity of intra-industry trade in wines is statistically and positively related to the ratio of capital to labour, trade openness, common culture, and the regional trade arrangements. The policy implications of the analysis of the determinants of Australia’s intra-industry trade in wines are that the government policy should be oriented towards increases in the production capacity of the Australian wine industry in order to achieve higher economies of scale. In addition, the Australian government should promote regional economic integration and trade liberalisation involving wine trade between close and economically similar economies.

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