How Australian Dairy Firms Will Benefit from the Free Trade Agreement - Case Study Example

How Australian Dairy Firms will benefit from the Free Trade Agreement Name Professor Institution Course Date How Australian Dairy Firms will benefit from the Free Trade Agreement Executive Summary According to report, even though Asia particular the Asia-Pacific nations are considered a latecomer as economic potential, the region has emerged as a significant forefront in free trade agreement activities especially for Australian Dairy sector which has experienced some decline performance. According to this report, the growth of developing of economic trade agreement in Asia-Pacific has been a major topic amongst the policymakers regarding the developed countries this region especially Japan, South Korea and China. Most international trade experts believe that these countries can provide an important for Australian dairy products which has faced volatile external forces in the last five years. The signing of free trade agreements between Australia and Japan, South Korea and China in 2014, have provided hope for Australian Dairy sector. Therefore, this report explains how Australian firms in the Dairy sector will be benefitted from free trade agreements. The topic will be discussed in relation to International Business theories. Introduction Today, the world of business has been marred with trade relationship and collaboration between countries in what can best be described as 'free trade excitement’. There has been an increase in trade collaboration in the recent years, and between a period one year , 2004 and 2005, World Trade Organization was notified by 44 regional trade agreements with an intention to create free trade (Crawford & Fiorentino, 2005, p.14). WTO (2005a) stated that this increase of such relationships adds the number to nearly 300 in terms of regional trade agreements which are existing. The situation signifies the most productive period of trade agreements in an account of World Trade Organization and General Agreement on Tariffs and Trade (WTO, 2005b). The impacts of such trade agreements based on economic factors are overwhelming. A research conducted by the World Bank in 2005 held that almost 40% of global trade currently happen under the arrangement of the preferential trade. Currently, the common among the regional trade agreements is a free trade agreement which has been embraced by more than 150 countries of the world. Usually, Free trade agreements had been negotiated by countries considering themselves as 'natural' trading partners like New Zealand and Australia (Crawford & Fiorentino, 2005, p.5). However, economic challenges, competition and saturation of the market has forced members to look elsewhere. For instance, member partners can find themselves facing same social, economical and political challenges hence cannot enjoy the same benefits. This is the same with the Australian Dairy sector which have faced volatile economical challenges in the recent past and even targeting New Zealand market has provided the solution (Tonkin 2015). The country has since signed free trade agreements between Australia and Japan, South Korea and China in 2014. Therefore, this report will analyze how Australian firms in Dairy sector will be benefitted from free trade agreements. Overview of Australian Dairy sector Unpredictable external forces have affected Australian Dairy sector in the last five years. Fluctuations of the demand, shift in international markets, increasing prices of farmgate and shifting nature of rainfall have all influenced the revenue of the industry (Tonkin 2015). However, the industry is poised to grow in the next five years at the rate of annualized 2.4% from 2015 through to 2018. Tonkin (2015) went ahead to state that by the end of 2015, the Australian Dairy sector is projected to grow to $4.2 billion. A projected improvement of rainfall conditions in 2015 is expected to boost the production of national milk production. Nevertheless, the price of farmgate milk is anticipated to decrease in reaction to the growing number of supplies. Price of global dairy milk and products that greatly impacts the prices of domestic farmgate is predicted to drop by the last quarter of 2015 even as the production of milk is rising in major exporting nations like New Zealand (MarketLine Industry Profile 2014). In the process, the profits are poised to drop by 13.2 percent by the end of 2015. However, the new trade agreement signed between Australia and Asia–Pacific countries such as Japan, South Korea and China has been predicted to improve performance of the Australian dairy industry since more products will be exported to these lucrative markets. These Asia-pacific markets have become more profitable as a result of increasing disposable income compared to Australia. In 2015, Tonkin (2008) claimed that the dairy market in Australia had total profits of $7,149.8 million signifying 3.9% of compound annual growth rate from 2009 to 2013. When compared to Japanese and Chinese markets, the report established that the two had a growth 1.7% and 8.1% CAGRs respectively within the same duration. The two countries also registered a profit of $19,507.2 and $29,057 million over the similar duration. Whilst Australia has a market share of 9.2 percent, Japan holds a market share of 37.7 percent of Asia-Pacific dairy industry (MarketLine Industry Profile 2014). The research has also pointed out strong demand for dairy products in Asia-Pacific a situation which market players such as Bega Cheese Company, Dairy Connect, Peloris Global Sourcing and Norco Co-Operative are likely to benefit from significantly. Opportunities these FTAs will offer to Australia According to Plummer (2008, p. 17693), globalization has increased business competition in the world markets making companies to seek new markets. Every country has its laws that govern its markets; though what differs is the strictness of the laws. However, all markets have challenges which make entry by a foreign company very difficult. To reduce such complexity for the benefit of trade, countries have over the years entered in trade agreements. One of such trade agreement is the free trade area. As stated earlier, the Australia dairy industry has faced low returns and seeks to expand into new markets to maximize their returns (Tonkin 2008). The government has given them the opportunity by signing Free Trade Area agreement with China, South Korea and Japan. A Free Trade Agreement like the one between Australia and Asia-Pacific nations such as China, Japan, South Korea is defined as contractual accord between more nations to abolish tariffs on considerably some or all trade relations between them, hence giving members special access to their market. This form of agreement has to be negotiated and operated under World Trade Organization rules and applies to nearly trade of goods or services (Capling, 2008, p.28). Modern Free Trade Area agreements typically go further than abolishing tariffs to comprise of dedication on services, international relations, foreign investment and customs cooperation. Fundamentally, Kawaia & Wignaraja (2011, p.9) contended that Free Trade Agreements are between these four countries are created to decrease the barriers of trade operation between two or many countries. For instance, in the past South Korean dairy has been regulated by the government by imposing heavy tariffs on exports. However, creating a free trade agreement means tariffs will be lowered and companies such as Bega Cheese Company, Fonterra Co-operative Group, Dairy Connect, Murray Goulburn Co-operative, Peloris Global Sourcing and Norco Co-Operative will get free access (Productivity Commission 2004). In the process, these companies are likely to increase their profits. Many Australian firms will also benefit from brand recognition. Entering a new market gives a company an opportunity to showcase what offers and in the end it increases its brand awareness. The reality with brand awareness is that company may increase its customer base, hence more profits. Countries like China have been known to have cheap labor and free trade allows more Chinese workers to cross boarders and work in Free Trade Agreement member country. Plummer (2008, p. 17765) posited that the dream of every company is to have cheap labor because its enable the managers to cut operation costs. In this situation, Australian dairy companies are likely to get cheap labor both in Australia and China. This is because Australian can either chose to process dairy products at home or transfer the process to China with the help of Chinese employees. FTA’s can be used as an opportunity to get into strategic alliances with foreign companies. Today, Japanese dairy sector companies commands Asia-Pacific making Japan to have a market share of 37.7 percent within the region (MarketLine Industry Profile 2014). Strategic Alliance with Chinese industries mean will therefore enable Australian companies to improve their position in the market. Companies in strategic alliance often allow their partners for exchange of technology. Pempel & Urata (2006, p.78) argued that Japan as one of the most established countries in terms of technology means dairy companies from Australia would benefits while operating in Asia-Pacific area. Technology is not only used for research and development but also for production and sales of dairy products. Strategic alliance also enables a company to compete and understand the strength of its products in the market (Hamanaka 2012, p.385). Obviously, companies from these regions are likely to be stronger, therefore teaming up with them is likely to raise Australian dairy sector market share in the region. When free trade has resulted into strategic alliance, companies work together in terms of pooling resources such as raw material which leads to economies of scale (Yoichiro 2006). In the process, Australian companies which are considered foreign companies in Asia Pacific are likely to benefit from cost reduction. Endogenous growth model has supported and stated that it results to growth of companies within the markets. It held that Free trade agreement increases establishment of foreign business and trade activities. As a result, the situation increases spillovers of knowledge in new markets. In this perspective, FTA will result to start up business from Japan, China and South Korea (Desker 2004, p.12). In the end, Australian companies will benefit from new knowledge, research and development techniques. China and Japan are more established than Australia hence companies from Australia are likely to benefit greatly and increase their productivity. Corish (2006) opined that reducing trade barriers enables companies to access the new markets thus boasting their reach and number of people who acquire their products. Market analysis of Australian primary industry products for Asia Pacific Region Australian dairy market has several categories of dairy products which it offers both home and globally. The major product category is the milk meant for manufacturing. Bergsten (2007) clamed that more than two-thirds of milk in raw format produced is sold and transported to dairy process. Even though, locally the dairy company famers and producers can decide to sell the raw. However, milk destined for export must be pasteurized to make remain imperishable up to its destination. The fraction of the proceeds generated from sale of raw milk to processing companies has improved in the last five considerably. Others product segments that Australian dairy industry is intending to export to China, Japan and South Korea include cheese, butter, yoghurt and Spreadable fats. Since customers are becoming health conscious, companies tend to make products with low fat content such as yoghurt and cheese (Aggarwal & Koo 2006, p.281). The demand in Asia-Pacific market is expected to offer more opportunity for the Australian companies to maximize their revenues, especially by focusing on health-conscious consumers. Australia has also been involved in exportation of dairy cattle and the growth in the region offers farmers increase number of sales since they have been trading them on small capacity. Australia dairy market also produces milk powder which only 20 percent is consumed locally while 80 percent is exported to Asian markets (MarketLine Industry Profile 2014). Australian has been involved in export of milk powder in small scale due to tariffs imposed on those products by various countries. Reduction of tariffs in China, Japan, South Korea and Indonesia is a blessing to industry players to improve on their level of exports. Locals have continued to utilize milk powder as an ingredient for food. On the other hand, Australian dairy market players have continued to produce butter over the years. Its production has improved over the years as its manufactures bank on it to fetch good revenue in foreign markets. Anhydrous milk fat and dehydrated butter have been highly produced by Fonterra Co-operative Group, Dairy Connect and Murray Goulburn Co-operative in the recent. However, health-conscious has made these companies to produce one with low calories. Today, Japan dominates Asian markets with its dairy product exports (Athukorala 2012, p.152). Japan is closely flowed by China while South Korea and Indonesia comes at a distant in comparison with the top countries. In fact, South Korea is at position ten as an exporter of dairy products. It must be noted that south is also a very vital market for Australian butter, skim milk powder and cheese. Comparison of the Australian products with those from the USA and New Zealand in Asia Pacific Region Although Australian has improved its dairy production, it has never been enough to compete with its major competitors New Zealand and US in terms of production and product development (Baldwin, 2006). From the outlook, competition is likely to increase in Asia-Pacific as more countries target the region. The key challenge therefore is how Australian dairy market will sustain competition in this market because these two countries have increased their product portfolio and sales volumes in the recent years. Amongst the three courtiers, New Zealand is the largest producer and exporter of dairy products to Asia-Pacific. The US comes second while Australia is third in the log. The research actually places New Zealand as the largest exporter of dairy products in the Asian market as the country sells up to 95 percent of its products to foreign market as opposed to Australian with an average export of 65% of dairy products (MarketLine Industry Profile 2014). New Zealand large companies manufacture high volume of whole milk powder, butter and skim powdered milk. The industry report claimed that whole milk dominates New Zealand exports to Asia-pacific and represent 45 percent of the total volumes sold to China. New Zealand sold more than 450,000 tonnes of whole milk powder to Chinese dairy market compared to 6, 500 and 214, 000 tonnes of whole milk powder export by Australia and the US respectively in 2012 (MarketLine Industry Profile 2014). The number accounts that New Zealand export 48% of dairy products to China. Just like the US dairy products are dominated by Cheese, butter and milk powder. The difference between the countries is that most of the US products are consumed locally. However, small volume of the US dairy products is exported to China, South Korea and Japan. Conclusion With competition in world markets, countries have found it viable to enforce strict quotas and tariffs to protect their market from dumping of substandard products. Protect of the market has also proved to be an important practice for protection of small young companies from been overtaken by more established foreign companies and allow them to grow. However, protection has also led to stagnation of countries from growth and discouraged international competition. Australian dairy products have suffered the fate of protection and other external factors. Political leaders from Australia, Japan, South Korea and China has realized the importance free trade have signed agreement to enable exploit the opportunities within their countries. Even though there are also disadvantages, there many opportunities too. Hence, this report concludes that countries especially developing one must create free trade agreement policies if they are to compete with more established economies. References Athukorala, P 2012, Asian trade flows: Trends, patterns and prospects, Japan and the World Economy, Vol.24, pp.150–162. Aggarwal, V. 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Productivity Commission 2004, Australian and New Zealand Competition and Consumer Protection Regimes; Productivity Commission Research Report, Retrieved on 5th May 2015 from www.pc.gov.au/study/transtasman/finalreport/transtasman.pdf Tonkin, B 2008, IBISWorld Industry Report A0160: Dairy Cattle Farming in Australia, IBISWorld . Yoichiro, S 2006, Japan–Australia relations: friends in search of binding bonds’, in Yoichiro Sato and Sato Limaye (eds) Japan in a Dynamic Asia: Copying with the New Security Challenges, Lanham,VA, Lexington Books, 199–224. World Trade Organization 2005, Regional Trade Agreements, Retrieved on 5th May 2015 from www.wto.org/ englishltratop_e/region_e/region_e.htm Read More