Reference no: EM131736963

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Australia's economy is dominated by its services sector, yet it is the agricultural and mining sectors that account for the bulk of Australia's exports. Australia's comparative advantage in the export of primary products is a reflection of the natural wealth of the Australian continent and its small domestic market; 22 million people occupy a continent the size of the contiguous United States. The relative size of the manufacturing sector has been declining for several decades, but has now steadied at around 8.5% of GDP. The global recovery is putting upward pressure on prices for Australia's commodity exports, which is expected to cause a substantial rise in the terms of trade in 2010. The terms of trade are expected to rebound by around 25% by mid 2010, injecting $30 billion into the economy and helping to reinvigorate the mining sector and economic activity more generally.

Since the 1980s, Australia has undertaken significant structural reform of its economy and has transformed itself from an inward-looking, highly protected, and regulated marketplace to an open, internationally competitive, export-oriented economy. Key economic reforms included unilaterally reducing high tariffs and other protective barriers to free trade, floating the Australian dollar, deregulating the financial services sector, including liberalizing access for foreign banks, increasing flexibility in the labor market, reducing duplication and increasing efficiency between the federal and state branches of government, privatizing many government-owned monopolies, and reforming the taxation system, including introducing a broad-based Goods and Services Tax (GST) and large reductions in income tax rates.

Australia enjoys one of the highest standards of living in the G7. Australia's economic standing in the world is a result of a commitment to best-practice macroeconomic policy settings, including the delegation of the conduct of monetary policy to the independent Reserve Bank of Australia, and a broad acceptance of prudent fiscal policy where the government aims for fiscal balance over the economic cycle. Economic recovery is strengthening, with GDP forecast to grow by 3.25% in 2010 2011 and 4% in 2011 2012, leading to further reductions in the unemployment rate. The success of monetary and fiscal stimulus will help the budget return to surplus in 2012 2013, 3 years ahead of schedule. Net debt is expected to peak at 6.1% of GDP in 2011 2012, considerably below the previous forecast of 9.6% of GDP.

The unemployment rate is expected to fall from its current level of 5.3%, down to 5% in late 2010 2011, and 4.75% in late 2011 2012, around levels consistent with full employment. Labor market participation has remained at around 65%. Both the federal and state governments have recognized the need to invest heavily in water, transport, ports, telecommunications, and education infrastructure to expand Australia's supply capacity. The largest river system in Australia, the Murray-Darling, and related coastal lakes and wetlands in South Australia are critically threatened, and the government has developed a plan to improve irrigation infrastructure and efficiency and buy back unused water allocations along the river.

A second significant issue is climate change. A report commissioned by then-Prime Minister John Howard recommended a domestic carbon emissions trading scheme and that Australia take an active role in developing a future global carbon emissions trading system. Prime Minister Kevin Rudd planned to introduce a domestic carbon trading system by 2011 to reduce emissions by 5% from 2000 levels by 2020. However, the Rudd government has now deferred legislation establishing an emissions trading scheme until 2013, at the earliest.

The Australia-U.S. Free Trade Agreement (AUSFTA) entered into force on January 1, 2005. The AUSFTA was the first FTA the United States concluded with a developed economy since the U.S.-Canada FTA in 1988. Australia also has FTAs with New Zealand-ASEAN, Singapore, Thailand, and Chile, and is pursuing other FTAs, including with China, Japan, Malaysia, and South Korea. A burgeoning trade relationship marked by ongoing, multi-billion dollar resource export contracts and rising manufactured imports has driven FTA negotiations with China.