Australia-China FTA Negotiations - Case Study Example

Australia-China FTA Negotiations Introduction Home to 1.3 billion people, China is considered to be a very big market that consumes anything from luxury commodities to food items. One of the few largest economies, China, as on date, is stated to be shaping economy on the world front. Third of the world's gross domestic product is accounted for by China with a growth rate of 7 percent per annum. It has changed certain scenes at the world economy ever since it got integrated into it. The result is today it is considered as a nation that has key drivers to propel economic growth (The Economist 2004a). Recently the country has taken steps to transform itself into a market oriented system from its earlier system of central planning. Historically, it was on December 11, 2001 that China became a member of WTO or World Trade Organisation. To be on record it was 143rd country to join WTO. Alliance with WTO created a mandatory need for it to liberalise trading programmes, the first and foremost of which was reduction of around 50 percent in average tariff rate on import of products related to agriculture. The earlier rate was 31.5 percent and the new rate 17.4 percent. Background Looking back, in 2003, China was to Australia 7th largest export market and 3rd largest merchandise trading partner. In other words, at that point of time and even now, it can be deduced that a more liberalised China would mean greater income for Australia through exports and greater access to Chinese market. This is notwithstanding the fact that despite concerted efforts at both ends, some barrier, especially in services and commodities sectors, do persist. There is also widespread criticism that has been showered on the proposed free trade agreement between the two countries. Proposed FTA The free trade agreement between the two countries is a proposed one and both Chinese and Australian governments have been holding negotiation in this regard since 26 May, 2005. The last negotiation round was 18th in the series and still no breakthrough has been achieved to end the deadlock. The problem as of now is that China wants to give only partial access to Australia for goods to be traded but Australia is adamant that it must receive full FTA in almost all sectors. The negotiations are continuing because a consensus has not been yet reached on China's proposal that it would offer 'market access' for Australian goods which, of course, includes agricultural products. But statistics of 2002-03, when the trading association between the two countries were just as new, reveal an encouraging trend. The bilateral merchandise between the two countries jumped to A$22.6 billion in the said period from an earlier A$1.1 billion during 1998-99. Similarly Australia's total exports grew to A$8.8 billion from an earlier figure of A$3.9 billion. For China's exports to Australia the figure went up to A$13.8 billion from A$6.1 billion. Australia's main exporting merchandise mainly includes energy, mineral and agricultural products, while China's exports to Australia mainly include footwear, clothing and textile products. It is interesting to note that 70 percent of what goes out of China to Australia include these. Anderson (1995) has remarked for both Australia and China the competitive advantage lies in its merchandise mainly because one country’s merchandise is not similar to the other's. Australia's revealed comparative advantage indices includes wheat, cereal grains, animal products, wool, silk worm cocoons, petroleum oil, minerals, bovine meat products, dairy products, iron and steel products, metal products and machinery. China's indices are in textiles, wearing apparels, leather products, wood products, electronics and machinery. Expectations It is held that free trade between Australia and China will provide both countries with mutual benefits. Yansheng, Zhongxin and Shuguang (1998) estimated long term benefits of trade liberalisation for China at US$35 billion. However, a negative side of Chinese free trade was explained by Duncan, Rees and Tyers (2003), who stated that in order to achieve agricultural products' self-sufficiency, China would actually be retarding its own growth in numerous other modern sectors. This is because it will mean imposing undue burden on average households in China. But after China accessed the WTO, it has become more and more liberal by the day vis-à-vis its trade with Australia. Modeling issues There are several modeling issues that are seen to result from the free trade between China and Australia. The first is that in the partner country lower cost imports will replace domestic production. And second is the possibility that higher cost import suppliers will replace low cost import suppliers on account of the preferential tariffs applied to what goods are supplied. This calls for two-component analysis of a bilateral agreement on trade. This would include assessment of price changes and estimates of trade in accordance with the equilibrium model (Kowalcyzk, 2000). Consequently a reference case can be constructed with regard to the global model of China-Australia free trade agreement by using GETM or global trade and environment model. This model is a multisector, multiregion and dynamic computational general equilibrium model pertaining to the world economy. GTEM takes into account several features to simulate a policy's impact on the trading country. This includes gross domestic product, trade, consumption, investment, and production and greenhouse gas emissions. GTEM is an accepted model that has the capability such liberalisation schemes as preferential bilateral trade agreements. In China-Australia context two key factors which determine the expectations on either side are Australia's agricultural surplus and China's labour surplus. In other words each country has different relative endowments from the other. Australia has one type of resource advantage and China another. This expectant growth in free trade will further be aided by the geography of the two nations - they are in close proximity to each other, which reduces the transportation overheads and expenses. The advantage is more for Australia since its exports would be bulky mineral and agricultural consignments. Irrefutably these are the sectors in which Australia stands chances of reaping increased benefits and China, on the other hand, would do so in its textile exports. Criticism The criticism hurled at the Australian government has been mainly from Australian manufacturing industry which has raised a concern over eliminating tariffs as proposed in the agreement. Australian manufactures fear they would be out of business if any such proposal is implemented. The China-Australia FTA negotiations make for a typical case for introspection and analysis. This is because even in the absence of it, today, for Australia China is the topmost trading partner. Australia harbours a free trade agreement ambitions, but China is reluctant to provide it. The recent thaw in the negotiaions came when things seemed to be getting on track. The negotiations derailed again this year (Tanquintic-Misa, 2013) when China insisted that foreign investment restrictions should be lifted by Australia. China's demand is that Australia should life its asset acquisitions threshold in case of foreign states. Currently it is zero, China wants it should be $1 billion. Recently in Melbourne Australia's trade minister said that this is not possible since Australian public would not accept any such move. The stand by each country has turned negotiations to almost a non-negotiation state. Some analysts, however, are in favour of the agreement reaching its conclusions since it is believed that if it takes off Australia will have to gain around A$146 billion (equivalent to $145.5 billion) within next two decades. There have also been talks on providing mini, if not full, FTA access to both countries, but even that hasn't gone beyond the proposal stage. Cho and Diaz (2011) are of the opinion that this matter is of great significance since at least one of the two nations have to understand that there cannot be such an optimal balance achieved in the FTA that suits both the countries. One has to have a greater proportion than the other and there should be some level of grass root understanding between the two. The economic impact of the FTA particularly on Australia has been a subject of several studies done in the recent past. Some of these have been done by Syquia (2007), Mai et al. (2005) and Siriwardana and Yang (2008). Most of them agree that several changes will take place in different sectors in trade, production across industries, volume and distribution which will greatly impact heterogeneous population across Australian households. Likely impact Nicita (2004) has remarked that FTA has a propensity to affect households through factor prices and goods consumption. Some previous studies which have analysed impacts of some previous FTAs done between other countries includes one Bennett et al. (2008), who conducted a study on Bolivia-U.S. free trade agreement. His study was a focus on Bolivian households which were categorised according to geographical location and income patterns. Similarly Vietnamese households were studied by Seshan (2005) by undertaking an assessment of similar classification as used by Bennett et al. Analysts, however, believe that such studies cannot be applied to this Australian context as the demographic distribution of households and their income patterns are not same as that in Bolivia and Vietnam. Mai et al. (2005) has studied the impact of Australia-China FTA, particularly on the impact it is likely to have on Australia. In what is considered as a first, he conducted an analysis based on multi-sector dynamic applied general equilibrium (AGE). Australian Department of Foreign Affairs commissioned this study in order to ascertain the feasibility of Joint FTA. The study revealed that FTA, when signed and implemented, would lead to an increase in the country's real GDP (by 0.37 percent), volume of aggregate welfare and bilateral trade and aggregate industry output. Mai also concluded that the FTA will provide an enormous scope in the increase of Australian niche agricultural and mining products. In contrast to the widespread criticism of the FTA, Mai has stated that it will have a profoundly positive impact on different Territories and States of Australia. He has further added that Western Australia is expected to gain more from the FTA than Eastern Australia. This is because this region is resource-rich in both agriculture and mining. If barriers to trade are removed, these regions will gain greatly as the volume of business will be expected more than what is prevalent at present. It was a breather when Siriwardana and Yang (2008) and Syquia (2007), who conducted a similar study on Australia-China FTA in association with the e Centre for International Economics (2009) argued in support of Mai et al (2005). A static, five-sector AGE model was used by Sequia (2007) to study the impact, with specific focus on the production sectors like agriculture, which he argued would gain the most from this agreement. But he cautioned that once FTA was underway, the sectors hit worst would be footwear, clothing and textiles. Sequia's model was based on a scientific calibration using Social Accounting Matrix (SAM) and feeding into the same Input-Output (IO) tables from 2001-2002. These tables pertained to Australia. Siriwardana and Yang (2008) on the other hand evaluated Australia-China FTA's economic impact by taking into account 20 sectors and using static AGE model. These researchers stated that the benefits of the FTA would go to both the countries, but Australia was expected to gain on the higher side in comparison to China which had stiff trade barriers. Two more researchers, Hoa (2008) and Cheng (2008) held the same opinion. Mai et al's work was updated by Centre for International Economics study (2009). The center incorporated fresh data into what had previously been researched by using 57-sectoral disaggregation dynamic AGE model. Changes that were incorporated included statistical and growth changes that occurred in both countries until 2008 from 2005. The encouraging aspect was that economies in both countries grew rapidly in these three years. In China it grew by 56 percent and in Australia it grew by 25 percent. It was seen that until the end of 2005 Australia's trade, in absence of FTA, grew to 12.8 percent from an earlier 9.7 percent and it was presumed that once the FTA agreement got stamped the trade would go further high. Conclusion Previous accounts have revealed that whatever trade Australia does at the moment with China, the households in Australia have tended to make substantial gains from the same. For example, since exports to China have increased, that has also meant increase in GDP, wages and employment; thus transforming the lives and standards of Australians involved with the same. The imports from China have helped them purchase newer goods of Chinese origin to increase the standards of living. In other words the prospect that would come on account of this FTA can be expected to be good for the Australians. References Anderson, K. (1995), ‘Australia’s changing trade pattern and growth performance’, in R. Pomfret (ed), Australia’s Trade Policies, Oxford University Press Melbourne. Bennett, R., Shankar, B., Ludena, C. and Telleria, R. (2008), ‘Would a Free Trade Agreement Between Bolivia and the United States Prove Beneficial to Bolivian Households?’ Cho, S. and Diaz, J. (2011), ‘The Welfare Impact of Trade Liberalisation’, Economic Inquiry, 49(2), 379-397. Cheng, D. (2008), ‘A Chinese Perspective on the China-Australia Free Trade Agreement and Policy Suggestions’, Economic Papers, 27(1), 30-40. Duncan, R., Rees, L. and Tyers, R. (2003), Revisiting the Economic Costs of Self-sufficiency in China, ANU Working Paper no. 436, Canberra. Hoa, T. (2008), ‘Australia-China Free Trade Agreement: Causal Empirics and Political Economy’, Economic Papers, 26(1), 19-29. Kowalcyzk, C. (2000), ‘Welfare and integration’, International Economic Review, vol. 41, no. 2, pp. 483–92. Mai, Y., P. Adams, M. Fan, R. Li, and Zheng, Z. (2005), ‘Modelling the Potential Benefits of an Australia-China Free Trade Agreement’, An independent report prepared for the Australia-China FTA Feasibility Study, Centre of Policy Studies, Melbourne. Mai, Y. (2005), ‘Modelling the Potential Benefits of an Australia-China Free Trade Agreement: Impact on Australian States and Territories’, An independent report prepared for the Department of Foreign Affairs and Trade, Centre of Policy Studies, Melbourne. Nicita, A. (2004), ‘Who Benefited from Trade Liberalization in Mexico? Measuring the Effects on Household Welfare.’ World Bank Policy Research Working Paper Series, no. 3265. Syquia, S. (2007). The Australia-China Free Trade Agreement: An Analysis of the Potential Impacts on the Australian Economy. Unpublished honours thesis, University of New South Wales, Sydney, Australia. Siriwardana, M. and Yang, J. (2008), ‘GTAP Model Analysis of the Economic Effects of an Australia-China FTA: Welfare and Sectoral Aspects’, Global Economic Review, 37(3), 341-362. Seshan, G. (2005), ‘The Impact of Trade Liberalization on Household Welfare in Vietnam.’ World Bank Policy Research Working Paper 3541. The Centre for International Economics (2009), ‘Estimating the Impact of an Australia-China Trade and Investment Agreement: 2008 Economic Modelling Update’, Reportfor the Australia China Business Council, Sydney. The Economist. (2004a), ‘The dragon and the eagle’, United Nations 2004, UN Commodity Trade Statistics Database (UN COMTRADE), New York. Tanquintic-Misa, E. (2013). FTA Between Australia and China Derailed Yet Again Over State-Owned Assets Restrictions. Available http://au.ibtimes.com/articles/458465/20130418/fta-between-australia-china-derailed-again-over.htm#.UZb__qJyBYd. Accessed May 16, 2013. Yansheng, Z., Zhongxin, W. and Shuguang, Z. (1998), Measuring the Costs of Protection in China, Institute for International Economics, Washington DC. Read More