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In Australia, baby formula is one of the most produced and imported products. Due to the high level of demand both internally and externally, many companies such as Abbott Australasia Pty Ltd, Bayer Australia Ltd, and Nestle Australia Ltd, among others, are manufacturing and importing various types of baby formulas in the region. China is one of Australia's largest foreign buyers of baby formula. The Chinese "daigous" also acted as a go-between for China's infant formula customers and Australian manufacturing firms (Kent, 2015). There are several effects on any economy as a result of the high demand for a commodity. For instance, the rising demand for baby formula from the China has had several impacts on the economy of Australia, both for the Australian producers and consumers. The implications are either comprised of positives and adverse effects (Caton, 2006). This paper will critically analyse the potential impacts on the economic welfare of the Australian producers and consumers, and the possible government effects as a result of rising demand for baby formula from Chinese "diagous."
The Rising Demand of Baby Formula from China
In recent years, the manufacturers and importers of infant formula in Australia have experienced high demands of this product, especially from the Chinese consumers. According to Siegel (2013), the market is increasingly growing such that the commodity is becoming scarce even to the locals. Supermarkets are out of stock for infant formula and parents are unable to purchase the product for their children.
Kent (2014) asserts that parents are concerned about the health implications of China-made baby formula following a series of incidents. The worst was experienced in 2008 where six children died and over 300,000 falling ill after consuming formula tainted with chemical melamine. As a result, many Chinese consumers prefer imported infant formula. Thus, many companies and “diagous” in China are headed to Australia to purchase the product and meet the demand from their consumers.
Figure 1: Uses of Baby Formula and Volume of Exports to China.
Sources: Siegel, 2013.
Effects of Rising Demand on Australian Consumers
One of the consequences of increasing demand of baby formula from the Chinese people on Australian consumers is the increase in prices. From the law of demand, there is a negative relationship between the price of a commodity and the quantity purchased (Ball & Seidman, 2012). A rise in the price of baby formula due to increase in demand will make it more expensive for consumers in Australia to purchase it, and therefore, very few will be bought at higher prices. However, McEachern (2009) states that the law of demand is affected by the availability of substitutes. When consumers can't afford to purchase the formula due to high prices, they will opt for alternatives.
Source: McEachern, 2009.
When demand for infant formula increases from China, it will affect the supply of the commodity to the Australian consumers as all the formula imported and manufactured will be exported to meet the rising demand in China. According to Samuelson and Nordhaus (2010), there will be less of the commodity left for consumption for the consumers available at higher prices. As a result, the users will lose preference and opt for substitutes.
Figure 2: The effect of increase on demand on prices.
Source: McEachern, 2009.
Effects of Rising Demand on Australian Producers
The rising demand does affect not only the consumers but also the producers. For manufacturers, the increase of the request for infant formula from the Chinese “diagous” means more business to them. Since the prices will rise due to high demand, the supply of the product will tend to increase. Therefore, the manufacturers will have to provide more products than before to counter the demand. The increase in supply will have a significant effect as the companies will have to outsource more workers to produce more goods (Chauhan & Chauhan, 2009).
Figure 3: Effect of increase in prices on supply.
Sources: Chauhan & Chauhan, 2009.
An increase in demand of a commodity leads to increases in the price of that product and an increase in output (Ball & Seidman, 2012). Due to the increase in demand, there will be excess demand developed at the initial price. The excess demand makes the prices to shoot upwards, and producers become willing to sell more, thereby increasing the output. Another effect of the growth in demand on manufacturers is more profits (Caton, 2006). The companies produce more formula and sell at higher prices, thus making more profits.
Guilliatt (2013) affirms that the rising demand of baby infant from the Chinese market has some negative impact on the producers, in that they pay more taxes than before. However, in the long run, the high taxes will reduce both supply and demand, and results to a market equilibrium price that is greater than without the tax and quantity that is lower than without the tax (Denny, 2006).
The Financial Impact
Dollery, Crase and Johnson (2006) argues that researchers have explored on the financial effects of these cross-border trade, a type of export where products are purchased in one country and sold in a different country as a practice that is challenging for not only in Australia but also in other nations like Japan and Canada. While there are both losers and winners in the trading process, it is possible for the Australian government to that producers and consumers benefit (Schilling, 2011).
Cross-border trade by the Chinese “diagous” will reduce the financial welfare of the Australians as compared to typical exporting because the losses incurred by the consumers will tend to exceed the profits made by the producers (Siegel, 2013). However, if properly controlled, the trade will enhance the financial welfare of the Australian producers and consumers. Therefore, there is the need for government interventions to effect some regulations (Dollery, Crase & Johnson, 2006).
Government Regulations on Impact of Rising Demand
The baby formula market scenario in Australia is a clear indication that the government needs to intervene to create balance to the financial welfare of producers, consumers, and the government revenues. The government of Australia can achieve these by adopting and implementing regulations to balance the impacts caused by rising demand for baby formula in Australia. Some of the most significant laws that the government needs to implement are tax policy, import and export regulations, and immigration restrictions (Stonecash, 2011).
The Australian government should impose some restrictions on its Immigration Department. There are over 1.2 million Chinese “diagous” crossing the Australian border in a year to buy infant formula and go back to sell in China (Kent, 2015). As a result, a parallel trade emerges on top of the typical exports. According to McEachern, 2009), parallel trade reduces the financial welfare of the country at large because the losses incurred by consumers exceed the gains made by the manufacturers. Also, the parallel trade will be an advantage to the producers as they will sell more baby formula at higher prices. The output will also increase to meet high demand. The producers also will have their brands advertised in China as the Chinese traders carry their brand back to their native country (Samuelson & Nordhaus, 2010). Again, the local consumers will have to pay higher prices for the scarce baby formula. With the government regulating the movement of the Chinese “diagous” across the border, it will ensure that the rights of the consumer are protected and that he too benefits from the baby formula (Kent, 2015).
According to Granville (2013), taxes are mandatory levies imposed upon businesses or individuals by the government to enable the government fund its expenditures. One primary form of government interventions on increasing demand is the introduction of and regulation of taxes. Though taxes are introduced to raise government revenue, they also have an impact on increasing the cost of goods to the consumer (Schilling, 2011). Subsequently, this will lead to a reduction in the quantity of the commodities consumed and produces after taxes are the introduction of taxes. For example, sales tax is a type of tax paid by the consumer since the producer adds it to the price of the consumer. Value Added Tax (VAT) is paid by the producer in their chain of production (Stonecash, 2011).
According to Guilliatt (2013), the tax imposed to the Australian consumers' results to a decrease in demand for the baby formula because of higher prices. The magnitude change in demand is always equal to the amount of tax the government imposes on consumers because the change in demand will be equal to the change in prices that the change in tax causes. On the other hand, the tax imposed the Australian producers of baby formula will cause to a reduction in the supply of the formula. More costs will be incurred by the producers making the prices to be high but at lower quantities (Chauhan & Chauhan, 2009).
Denny (2006) affirms that by regulating taxes, the government ensures that the companies are passing over the taxes to the consumers in the same and magnitude they would pass on in case of higher inputs costs. This results in mutual benefit for both the producers and consumers of infant formula and the government.
The government also must impose some regulations on the imports and exports of the baby formula by the manufacturers in Australia to achieve a balance of trade. Imports are goods purchased from a foreign economy by a domestic economy. According to Allen and Ballingall (2011), imports are the defining financial transactions of trade internationally and cater for a significant amount of the GDP. Therefore, due to import's economic importance, the government need to enact laws, policies and barriers to control international trade. One of the perfect ways to adopt laws is through protectionism (Allen & Ballingall, 2011). Here, the government introduces the economic policy of regulating trade with other countries by imposing tariffs on imported goods, government regulations and restrictive quotas. When government regulations are eliminated, consumer surplus shoots up. As a result, the prices will increase while quantity consumed will increase (Chauhan & Chauhan, 2009).
Schilling (2011) affirms that exports are goods sold by a domestic economy to a foreign economy. Government regulations on the export of goods affect both the consumer and the producer. If the government decides to put restrictions regarding the quantity of goods exported to other countries, the prices of these commodities decrease hence becoming affordable to the local consumer. The reduction in prices, in the long run, affects the production output hence reducing the producer's profitability (Ball & Seidman, 2012). On the other hand, if more goods are exported, the prices increase due to increase in demand leading to the scarcity of the commodity for the local consumers. The little that is left is sold at higher prices which not all the consumers can afford. For the producers, this is a boom to them, and hence they increase production output to meet the high demands of the external markets and maximize profits (Stonecash, 2011).
Therefore, it is necessary for the government to intervene and impose some form of restrictions to ensure both the producer and the consumer benefits equally. The baby formula scenario in Australia is clear indication that the Australian government needs to step in and regulate the level of exports and imports to ensure the local consumers as well as the manufacturer benefits, and at the same time, they are maintaining the good trading relationship with China.
Factors Influencing the Value of Imports and Exports
However, as the government regulates imports and exports, it needs to be cautious of several factors that affect the value of a country's import and exports. They include; the inflation rate, the exchange rate, productivity, domestic GDP, foreign GDP and trade restrictions (Granville, 2013). For example, a decrease in a country's inflation would increase its international competitiveness, and as a result, exports tend to increase and imports to reduce and the reverse is true. A fall in the exchange rate of a country will raise prices of imports and lower the prices of exports thus lessen the value of imports and increasing the value of exports (Denny, 2006). For a country with high production level, exports are more than imports. If domestic GDP rises, producers will be tempted to buy more raw materials from abroad thus increasing imports. Subsequently, an increase in domestic demand encourages firms to shift from foreign to local market making exports to fall. On the other hand, if incomes from abroad rise, foreigners will buy more products thus causing the domestic country to export more (Stonecash, 2011).
The increasing demand from China for high-quality infant formula has significant effects as to both the Australian consumers and producers as well as on the Australian economy. The impacts are diverse to the extent that some have adverse effects and others benefits. For instance, producers benefit the most from the sales due to rising demand. This affects the output as well as the prices. The consumer welfare is at risk due to the high prices and scarcity resulted from the high rates of exports.
The government interventions through regulations of policies, on the other hand, affect the prices, output and the welfare of both consumers and producers. However, there is the need for the government to intervene to ensure a balance of benefits for both parties.
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