FTA between Australia and South-East Asian Countries - Case Study Example

Individual Essay Name: Institution: Table of Contents Introduction 3 Reasons to Sign FTA 4 FTA between Australia and South East Asian Countries 6 Impact of FTA 8 Conclusion 11 References 11 Introduction With recent advancements in technology, the world has literally been transformed into a ‘global village’. For that reason, businesses and trade has generally been immensely impacted as there has been a greater need for countries to trade with each other more efficiently than before. In order to actualize this need, countries have resorted to cross-border trade and international investment agreements. According to Baier, & Bergstrand (2007), international investment agreements may be defined as a kind of treaty cementing the cross-border investments between the concerned countries with the main aim of protecting, enhancing, and liberalizing the cross-border investments. From the definition above, it can be derived that international investment agreements are fundamentally critical in helping to protect the foreign investments from their partner country in that country. The same applies to the investment of that country in the country for which it has partnered with through the investment agreement. Cross-country trade agreements are also important in enhancing and liberalizing investments across partner countries by loosening excessive restrictions on foreign investments from partner countries (Baier, & Bergstrand, 2007). Examples of international investment agreements include the ones signed by Australia with Japan, South Korea, and China in 2014. These agreements generated a discussion on the influence of free trade agreements in Australia’s business opportunities in the Asia Pacific Region. This paper, therefore, reports on the Australian agricultural sector and the likely benefits of the investment agreements to the business firms in this sector. Specifically, the paper begins by discussing the reasons that may lead a country into signing free-trade agreements with other countries. It then discusses the 2014 FTAs between Australia and South East Asian countries and the opportunities that abound as a result of those FTAs. The report concludes by analysing the impacts of the FTAs especially to Australian businesses in the agricultural sector. Reasons to Sign FTA There are various reasons that make a country enter into free-trade agreements with another country. In most cases, such reasons apply for either party in the FTA. To begin with, a country may sign a FTA in order for it to boost its production in one of its sectors such as the agricultural sector. According to Sen (2004), this goal is enhanced primarily through the competition that arises when FTA is signed. When a country signs a FTA with another country, it gives a conducive platform for foreign companies to operate within its boundaries. This, therefore, means that local companies will face intense competition from these foreign companies. Naturally, these companies will react by innovating more, producing high quality products, and/or offering competitive prices for their products. Overall, such moves will increase the production in the impacted sectors (Scollay & Gilbert, 2001). Secondly, a country may enter into FTAs with the view of enhancing its cooperation with the countries with which it signs the FTAs. Strictly speaking, it is essential that the partner countries entering into a FTA have a smooth interaction with each other. Only then will trade between them flow as efficiently as is expected. Hilty (2004) posits that trade agreements are a fundamental pillar in cementing relationships between any two countries. It is for that reason that a FTA is highly recommended for countries that have a history of friction between them besides just targeting economic expansion. Thirdly, a country may sign a FTA in order to significantly explore new markets for the products and services generated by her companies and enterprises. As a country enters into a FTA, it allows the products produced by the foreign companies to be sold within its borders. On the other hand, signing a FTA gives a country an opportunity for products and services from her industries to be marketed in the partner countries. By so doing, domestic companies find an opportunity to sell to a wider market in the diaspora (Scollay & Gilbert, 2001). Finally, signing a FTA also encourage invention and innovation in the countries involved. As was mentioned before, FTA increases the level of competition in a country due to free entry and exit of foreign companies. In a highly competitive business environment, enterprises will strive to thrive in innovation so as to always stay ahead of their competition. Furthermore, when foreign industries are allowed to freely operate in the local arena, they will come with new ways of doing things hence stimulating innovation in the local arena as well. The sharing of knowledge and skills will play a significant role in spurring innovation locally (Manchin, & Annette, 2008). FTAs have, for the longest time, been known to spur competitive advantage especially among local businesses in relation to the foreign industries. This may be explained by the fact that for countries tied by a FTA, foreign companies are allowed to freely enter the local market, and in order to do so effectively, it is prudent that they come up with such strategies as the lowering of prices, production of extremely high quality products, and increased participation in corporate social responsibility (CSR) activities (Magee, 2008). The local companies, therefore, find themselves equally doing the same in order to counter the pressure from these foreign companies, hence spurring cut-throat competition which not only enhances competitive advantage, but also promotes business environment of a given country (Hilty, 2012). FTA between Australia and South East Asian Countries The FTAs signed between Australia and the three South East Asian countries i.e. China, Japan, and South Korea were expected to offer a number of opportunities especially in the Australian market. One such benefit in the FTA between Australia and Japan is the fact that the motor industry would most likely thrive better in Australia than it was before. This may be supported by Japan’s excellence in the motor industry. By the time the FTA between Japan and Australia was to be put into force on 15th January 2015, it had been projected that Australia’s motor industry would have grown by approximately 34%. There was expectation that Japan’s major players in the motor industry would not only find a newer market in Australia for their motor vehicles, but they would as well share their technology and innovations with their colleague players in the Australian motor vehicle industry. This presented newer opportunities for stakeholders such as motor vehicle importers to thrive in their import businesses, motor vehicle manufacturers to gain new technologies for their production, and the Australian government to collect even more tax from the many industry players in the industry in Australia (Kirchner, 2012). The FTA between Australia and South Korea is another treaty that presents a number of opportunities for Australia. Infamously known as Korea-Australia Free Trade Agreement (KAFTA), this treaty was implemented on 12th December 2014 with both South Korea and Australia having a myriad of expectations on the FTA and the opportunities it was intended to present. Upon signing of the KAFTA, Australia in particular had foreseen opportunity in promoting her products and services in the South Korean market. This FTA will present this opportunity by taking advantage of the tariff elimination on virtually all exports from Australia to South Korea. This in turn presents a major opportunity for Australia to strategically position itself as one of the major exporter to South Korea. According to this treaty, KAFTA offers Australian service industries the best by taking advantage of the preferential treatment of Australia’s service industries in South Korea. Important to note, however, is the fact that the benefits that abound affect both sides of the divide hence promoting mutual benefit (Sen, 2004). Infamously known as Chine-Australia Free Trade Agreement (ChaFTA), the treaty between China and Australia was implemented on 20th December 2015. With China being the largest importer of Australian products and services, ChaFTA has managed to promote more export out of Australia into the Chinese market. Through the above-discussed FTAs, Australian business firms in the agricultural sector can leverage the opportunities created by those FTAs. Australian companies dealing in the processing of hides and skins may leverage on the 5 to 14% tariff elimination on hides and skins by increasing their production for the Chinese market. That way, their profitability will increase as a result. The 3% and 2% tariff elimination on barley and sorghum respectively may be leveraged by industries dealing in these agricultural crops through increase in export volumes in these two crops to China. Similarly, horticultural companies may also leverage on the over 30% tariff elimination on fruits, vegetables, and nuts courtesy of ChaFTA by raising their export volume of these horticultural products to the Chinese market. Overall, such leveraging will make the affected products and services gain a competitive advantage not just in China but also in the global market (Kirchner, 2012). For KAFTA and JAEPA (Japan-Australia Economic Partnership Agreement), Australian companies in the agricultural sector may leverage on exporting processed foods to both Japan and South Korea. Specifically, these business firms may leverage by increasing their exportation of processed food such as beef, pork, and seafood to the two partner countries. They may as well leverage by setting up subsidiaries in those countries for strategic reasons in readiness for business (Kirchner, 2012). Impact of FTA Australia’s engagement in FTAs with the South East Asian countries comes with various opportunities and challenges alike. The first impact of FTAs is that they promote free flow of trading activities among the partner countries which enhances smoother trading relationships with the key partners. For the Australian agricultural sector, the FTAs with Japan, China, and South Korea cements trading relationship between Australia and these three countries. Secondly, the FTAs play a critical role in matters intellectual property protection, e-commerce, and government procurement processes. By signing FTAs with countries in the Asia Pacific region, Australian firms intending to venture in the foreign markets will be cushioned against lengthy government procurement processes and manipulation of intellectual property rights (Hilty, 2012). The FTAs are also very important in increasing the overall productivity of Australia through her companies. Since FTAs target the improvement of trade between the concerned countries, these countries gain immensely by boosting their GDP growth. Australia gains this through innovations and advanced technologies in businesses, easier access to cheaper factors of production, and by reacting to intense competition from the multinationals from partner countries in the FTAs (Weatherbee, 2009). Fourth, FTAs promote regional economic integration among the partner countries. They achieve this by taking uniform approaches in the way they trade and invest hence fostering economic cooperation between them. Finally, and perhaps most importantly, is that the FTAs promote exports from the Australian market by making them more competitive both in the partner countries’ foreign markets as well as in the entire global business space. Additionally, FTAs are key in marketing Australia as a critical investment hub for other countries to take advantage of (Bohara, Gawande, & Sanguinetti, 2004). Challenges, however, exist as a result of the FTAs between Australia and the South East Asian countries. One major challenge is Australia’s strong ties with Western countries such as the US and Great Britain. While this relationship has a historical origin, most Asian countries are not quite comfortable doing business with Western countries except when unavoidably necessary. This controversy sometimes makes Australia feel a bit awkward in its trading relations with the Asian Pacific countries (Institute of Southeast Asian Studies, 2004). The other challenge is under the FTAs, the partner countries are obliged to sue Australia just in the event that the Australian government implements policy changes with the aim of thoroughly interfering with the interests of the concerned countries. FTAs have led to creation of several business opportunities especially in the agricultural sector. To begin with, it has spurred further expansion of businesses that deal with the processing of foods such as barley, sorghum, horticultural products, and beef. Currently, there are several companies in Australia that are fully engaged in the production and processing of agricultural products with the intention of exporting to the countries with which Australia has signed FTAs. Secondly, the FTAs have created business opportunities in the exportation of agricultural tools and machineries to the three South East Asian countries. According to Weatherbee (2009), FTAs have not only enhanced technological improvements and innovation but it has also created more market for the consumption of agricultural tools, equipment, and machinery made by Australian companies in the agricultural sector. As at 2011, businesses that export agricultural tools, equipment, and machinery had increased by almost 35 per cent, and the total foreign income from such businesses had increased by 23 per cent. This is proof enough that the FTAs have created a lot of business opportunities in equipment for mechanized agriculture (Kirchner, 2012). Taking the Chinese market into perspective, Australian firms especially those dealing in processed foods have had immense business opportunities. ChaFTA offers Australian companies with improved market access for their agricultural and processed foods. As a matter of fact, this FTA provides Australian companies with access to the Chinese market better than any other country that China trades with. In view of that, Australian companies dealing in processed foods such as honey and fruit juices have immensely expanded. This is founded on the platform that under the FTA, tariffs would be eliminated on such products from Australia. It has also been observed that there has been tariff elimination on barley, sorghum, and other horticultural products such as fruits, vegetables, and nuts. The percentage of the weighted tariffs on the three products is 3 per cent, 2 per cent, and 30 per cent for barley, sorghum, and horticultural products respectively (Kirchner, 2012). Compared to their counterparts from New Zealand and US, Australian businesses have generally excelled more in view of Australia’s signing of FTAs with countries in the South East Asia particularly in the agricultural sector. Comparatively, Australian companies have excelled more in exporting their agricultural produce to Japan, South Korea, and China. This is due to the tariff eliminations under the FTAs in which such companies have generally been confirmed to be more profitable than their competitors from New Zealand and the US. Similarly, Australian business firms have more opportunity to export their processed foods into the South East Asian countries compared to their counterparts from New Zealand and the United States. Ideally, Australian business firms are given preferential treatment in business than any other trading partners of the three countries (Bohara, Gawande, & Sanguinetti, 2004). Conclusion In conclusion, therefore, while FTAs have been entered into with the assumption that there would be mutual benefits for all the parties involved, Australia has generally been proven to have gained a lot from these FTAs especially with the countries in the South Pacific region. The agricultural sector, in particular, has been one of the major beneficiaries. Through these FTAs, Australian business firms have been able to expand their presence beyond the Australian borders, increase their profitability by trading in tariff-free business environments, and innovate more based on their acquired skills and technologies from business firms of the partner countries. Overall, FTAs have increased the competitiveness of Australian firms not only in the partner countries but also in the entire global market. References Baier, S. L. & Bergstrand, J. H. (2007). Do trade agreement actually increase members’ international trade? Journal of International Economics, 71(2007), 72- 95. Bohara, A., Gawande, K. & Sanguinetti, P. (2004). Trade diversion and declining tariffs: evidence from Mercosur. Journal of International Economics 64(2004), 65-88. Hilty, R. M. (2012). Intellectual Property and Free Trade Agreements in the Asia-Pacific Region. Berlin: Springer Berlin. Institute of Southeast Asian Studies. (2004). Australia-New Zealand & Southeast Asia relations: An agenda for closer cooperation. Singapore: ISEAS. Kirchner, S. (2012). Foreign Direct Investment in Australia Following the Australia– US Free Trade Agreement. The Australian Economic Review, 45(4) 410–21. Magee, C. (2008). New measures of trade creation and trade diversion. Journal of International Economics, 75(2008), 349-362. Manchin, M. & Annette, P. (2008). Clothes without an Emperor: Analysis of the preferential tariffs in ASEAN. Journal of Asian Economics, 19(2008), 213-223. Scollay, R., & Gilbert, J. P. (2001). New regional trading arrangements in the Asia Pacific? Washington, DC: Inst. for Internat. Economics. Sen, R. (2004). Free trade agreements in Southeast Asia. Singapore: ISEAS. Weatherbee, D. E. (2009). International relations in Southeast Asia: The struggle for autonomy. Lanham, Md: Rowman & Littlefield Publishers. Read More