The paper 'Australian Free Trade Agreements" is a great example of a macro and microeconomics case study. Australia has negotiated several trade agreements that eliminated many of the trade restrictions on trade between Australia and the relevant foreign trading partners. These free trade agreements include The ASEAN- Australian- New Zealand Free Trade Agreement (AANZFTA), Australian- Chile (ACI-FTA), Australia- United States (AUSFTA), Thailand-Australia (TAFTA), Singapore Australia (SAFTA) and Australia New Zealand Closer Economic Agreement (ANZCERTA). These free trade agreements came into effect in different time periods. For example, ANZCERTA was the first to come into effect in 1983, while ACIFTA is the latest which came into effect in 2009 (ATC, 2011). These trade agreements cover goods, services, investment, intellectual property, e-commerce, movement of people and economic cooperation.
Major factors that characterize free trade are an unrestricted movement of people and goods and reduction of tariff for both exports and imports or a total ban on tariff costs. Free trade agreements impact negatively and positively on trading countries. However, the positive effects or advantages of free trade agreements are more profound than the limitations. In addition, certain industries and categories of people may benefit more or loose more from free trade agreements than others.
Hence, economics theories have been developed to critically address free trade, its benefits and limitations. One of these theories is the Ricardian Trade Theory developed by David Ricardo. This theory is also termed as the ‘ Comparative Advantage Theory’ . David argued that, if one country has a production advantage over another, and the other country has an absolute advantage over the first country in another production, then the two countries are bound to benefit from trade.
The Ricardian theory assumes that there are only two countries that are being involved in trade, each country has production superiority in one commodity, consumers have the same taste in all trading countries and there are no transportation costs. With the Ricardian Theory, a country exports the product it has a comparative advantage while it imports the product that it has a comparative disadvantage. Comparative advantage or disadvantage implies a country’ s capability to produce a certain product at the lowest costs or highest cost respectively. In addition, a certain product may be favorable in a certain country (comparative advantage), while it is not favorable in another country (comparative disadvantage) in terms of growth.
For example, coffee is grown in areas of high temperatures or semi-arid areas, while tea is grown in areas with low temperature (highland areas). Consequently, the same Ricardian argument applies in Australia. The microeconomics tools of demand and supply also apply when addressing the issue of free trade agreements. With free trade agreements, there will be an increase in demand and supply for commodities traded by Australia and another country such as Thailand.
This is because barriers to trade such as restricted movement and high costs associated with tariffs and export and import duties are eliminated. The Ricardian theory applies where the two trading countries such as Australia and Chile are involved in trade for single or multiple products. If Chile is the one selling the commodity to Australia, Australia will increase its demand for that product since it has a comparative disadvantage, while Chile will increase its supply for that product over which it has a comparative advantage (Yang, 2005).
Australian Trade Commission (ATC), (2011). International Agreements on Trade & Investment,
Available at http://www.austrade.gov.au/Free-Trade-Agreements/default.aspx
Edge, Ken. (1999) Free Trade and Protection: Advantage and Disadvantages of Free Trade,
Available at http://hsc.csu.edu.au/economics/global_economy/tut7/Tutorial7.html
Kerr, William A & Perdikis, N. (1998). Trade Theories and Empirical Evidence,
Manchester University Press.
Yang, Xiaokai. (2005). An Inframarginal Approach to Trade Theory, World Scientific.
Zhang, Wei-Bin. (2002) A Theory of International Trade: Capital, Knowledge and Economic