Reasons for Signing a Free Trade Agreement - Case Study Example

FREE TRADE AGREEMENTS Name College Professor Date Introduction A Free Trade Agreement (FTA) is an agreement signed by two or more countries within a trade bloc or a free trade area. This type of agreement enhances trade between the countries by increasing the trade of goods and services between them and reducing the trade barriers (Department of Foreign Affairs and Trade 2012), such as trade quotas and tariffs. Some FTAs have additionally created a free border, meaning that the citizens of the countries are also able to move freely between the two or more countries. Free Trade Agreements also help to protect the local markets and industries (Grimson, 2014). The implementation of Free Trade Agreement (FTA) allows unrestricted commodity exchange and trade among two countries (Sheppard, 2005). The global business environment is extremely dynamic in the 21st Century. For this reason, it is very important for countries to cooperate with each other in order to stay afloat and successful. Cross country trade is beneficial both to the businesses and the consumers. For the businesses, it increases their customer base, and by default, their profits. It also enables the interaction of businesses and the subsequent trade of business methods and secrets. For the consumers, cross country trade provides a variety of goods and services to choose from (Mendoza & Bahadur, 2002). It also exposes them to new products and experiences. It further ensures that there is healthy competition between businesses, and this ensures reasonable prices for the customers/clients. Reasons for signing an FTA Countries sign FTAs for a whole range of reasons. First, FTAs cover intellectual property rights. These are laws that protect the monopoly of an individual’s intellect. This includes patents industrial design rights and copyright. Intellectual property rights cover all forms of artistic work, like literature and music. They ensure that the individual who initially came up with an idea (inventions or discoveries) owns it exclusively, so that no other person, company or organisation can “steal” the idea or get false credit for it. It is important to protect intellectual property rights in international business to avoid conflict between businesses, or countries in general. Free Trade Agreements also take care of government procurement, also called public procurement. Government procurement is when an authority procures, or annexes, goods or services on behalf of a public authority. This, sometimes, may be done by the procuring authority issuing public tenders. Free Trade Agreements ensure that government procurement is monitored relatively closely. International business can be rather delicate, and lack of regulation undermines the whole point of FTAs by increasing the trade barriers between countries. Monitoring public procurement prevents corruption and fraud in the course of international business. A country would also sign an FTA to have a good competition policy with the country with which it partners. Having a secure competition policy ensures that the competition between the two or more trading countries does not get hostile or undermine the trade. This controls the prices of goods and services as they are traded between the partner companies. This prevents the businesses in the countries from lowering or raising their prices such that it undermines the market for the businesses in the other countries. This way, a country can participate in international trade while simultaneously retaining a good market for its local businesses. Benefits of Free Trade Agreements Free Trade Agreements enhance countries’ competitive advantage. This is particularly important because it caters for each of the parties that are a part of the agreement, so that not one of them is favoured over the other. FTAs eliminate tariffs, thus increasing the opportunities for the business owners of either country in many sectors. The agreements improve the market access. This particularly applies to businesses in the service sector, such as banks, and security and insurance companies. The FTA also improves the position of the country as a site for business investments by the entrepreneurs of the partnering country. It makes the country more appealing to these investors, thus creating more opportunities for the citizens of the former country, like the creation of job opportunities. When a less developed country signs an FTA with a more developed country, the competitive advantage of the former increases effectively. The more developed country would certainly have a better economy. The less developed country, on entering a business partnership with the more developed country, gets an edge over other less developed countries on the international front. This improves the country’s position internationally, thus giving the country a better competitive advantage. Free Trade Agreements, by improving and enhancing business between countries, gives the citizens of a country greater access to a wider variety of goods and services. The free trade and reduction of barriers allows for easier and more efficient cross country trading. Consumers have a larger pool of goods and services to select from; and the business owners have a broader customer base. This trade also allows for the exchange of ideas and concepts, and this serves to improve the services and goods in the overall market. It paves the way for more inventions and discoveries. Free Trade Agreements improve countries’ investment opportunities. No country, no matter how developed it is, can be self sufficient. No country can produce all the goods or offer all the services its citizens require; neither can it consume all the goods and services the citizens produce and offer. Free Trade Agreements make sure that the country can trade freely with the partner country. When an FTA allows the citizens to move freely between the countries, and have minimal barriers, they are able to invest and establish their businesses in partnering countries more comfortably, improving the trade between the countries. The Australia- China Free Trade Agreement Australia recently finalized the signing on a Free Trade Agreement with China. The two countries are both developed and have economies that are very competitive on the global scene. Their mutually exclusive presence on the global front makes the two countries complementary to one another’s economies. The FTA sets the stage for an even greater economic relationship between Australia and China. This Free Trade Agreement will make use of China’s economic reform to capture the diversity of the Australian economy (Gillard, 2011). Opportunities created by the ChAFTA The China- Australia Free Trade Agreement, known in short as the ChAFTA, is expected to create a better trading environment between the two countries. Tony Abbott, the Australian Prime Minister, has expressed that the agreement will give both China and Australia “unprecedented access to each other’s markets” (Hurst, 2015). The agreement also reduces trade tariffs imposed between the two countries. The reduction of the tariffs allows the exports of a whole range of products. These include horticultural produce, beef and dairy products, seafood and wine. The free trade agreement means that exportation will be duty free for most of the resources of the two countries. The ChAFTA gives each country access to the other’s market and industries. It is clear that each country has something to offer. Each of them has its strong suit in terms of industries. For instance, in the service sector, Australian service providers will be able to see into the Chinese service sector. China’s service sector is already one of the country’s key revenue earning enterprises, and it earns a large percentage of China’s Gross Domestic Product (GDP). This way, Australian service providers (health services, financial services, education, and etcetera) can get to experience service the Chinese way. This places the Australian businesses in a better position, not just to serve Chinese clients, but also to improve their overall service provision on the global scene. This agreement will also be beneficial to the consumers in both countries. The reduction of tariffs across the borders of the two countries makes it cheaper to import and export goods and services. Therefore, with reduced taxes and costs, the business owners are able to lower the prices of their goods and services in the foreign country; which is an advantage for the consumers. The ChAFTA will enable prices to be lowered on a number of products such as clothes, electronics and automobiles that are traded cross border. The ChAFTA is expected to create an open border between China and Australia. This means that the citizens will be able to move freely between the two countries. It has been proposed that the agreement see the introduction of four new classes of visas. These are expected to reflect the exact nature of the movements between the two countries. This way, more skilled workers will be able to move between the two countries for economic purposes. This will improve the work force in both countries, and allow them to specialise even further in their chosen fields (Sheppard, 2005). The ChAFTA for China The FTA is designed to be mutually beneficial to both countries. For China, the ChAFTA will ensure food and agricultural security (Holman Fenwick Willan, 2014). The Australian economy is well known for the world class minerals and resources. Australia is China’s second largest source of copper and alloys (Holman Fenwick Willan, 2014). The agreement allows China to import these at better rates. China will also be privy to Australian aged and heath care services sector, which makes a good percentage of the Australian economy. This way, Chinese businesses will be able to gain expertise in these services as well, thus improving their global impact. The agreement will also allow Chinese investors to invest more in Australia. The ChAFTA will relax the thresholds of the Foreign Investment Review Board for approval, making it easier for investors to qualify. This means that more Chinese private investors will be able to acquire a great deal of commercial property in Australia before they need to be approved by the Foreign Investment Review Board (FIRB). This, however, applies only to commercial property. Acquisition of residential property will still follow the initial rules and those interested will still have to fulfil the set conditions. At the moment, there are already reports of private Chinese firms looking to buy into the Australian dairy sector; and this shows a lot of promise for China in terms of this ChAFTA. As seen earlier, the agreement is expected to create an open border between China and Australia. An open border means that skilled Australian workers will be able to move to China, and vice versa. The Australian economy has a lot to offer in terms of skilled labour. There are specialists and experienced workers in some fields such as the care provision and mineral production. Their movement into China means that they will be able to exploit the Chinese economy to a maximum, thereby exposing less experienced and skilled Chinese workers to the “tricks of the trade”. This will eventually breed a skilled workforce in China, and these workers will be able to come up with newer employment opportunities in and outside of China. The free movement of the citizens of the two countries will also be beneficial to China in the way that Chinese citizens will be able to move to Australia. China also has its strong suits. However, a large pool of the same skills is definitely a recipe for disaster and unhealthy competition between the locals. The ability to move to Australia will decentralise Chinese resources and labour. This way, the Chinese workers can explore more opportunities abroad, and in so doing, learn more to better their chosen skill set. This reduces the local competition, and allows the businesses to make better profits independently of each other. China has a fast growing population. The middle class is expected to grow largely in the coming years. China relies on Australia for a large percentage of food and other agricultural produce (McCalla, 2004). The ChAFTA is set to be reviewed after three years. Throughout this duration, China will have Australia as a reliable source for quality and low cost food for its citizens. Should the outcomes of the agreement be viewed as positive at the end of the three years, the cooperation will be continued. This ensures that China has a growing food source for its fast growing population. Industry- specific opportunities Agriculture and Processed Food The food service is bound to be one of the industries that are affected greatly by the ChAFTA, seeing as China relies on Australia greatly for agricultural produce, while Australia relies on China for importation and exportation (Lawrence, 2015). China has an increasing demand for food and agricultural produce, and the FTA is supposed to facilitate the acquisition of these products from Australia. The ChAFTA will enable Chinese entrepreneurs to invest in food production in Australia. It has already been reported that many Chinese investors are looking to invest in Northern Australia, an area with many underdeveloped regions, so that greater opportunities for food production are created. For instance, the China Shanghai Zhongfu Kimberley Agricultural Investment Group is ready to invest a large amount into the Ord River Irrigation Scheme (Lawrence, 2015). The reduction of tariffs creates a competitive advantage (Burrows & Kirk, 2006) over the countries that do not have a Free Trade Agreement with either China or Australia. Australia also gets an advantage over some larger players such as Canada and the United States. The agreement has cemented cooperation for three years, and also given provisions for a review after three years. This way, the two countries can continue to trade with each other profitably for quite a while. Resources, Energy and Manufacturing Australia relies on China as its leading export market (Department of Foreign Affairs and Trade, 2012) for resources, energy and manufactured goods. The agreement will ensure that about 93 percent of Australian exports enter China duty free, by reducing tariffs and ultimately eliminating them in the next four years (Department of Foreign Affairs and Trade [DFAT], 2015). This will cover copper and aluminium waste and scrap, unwrought nickel, alumina, thermal coal, coking coal and unwrought refined copper and alloys. This way, energy consumption will be more efficient for both countries. It will also provide a whole range of alternative sources of energy for the two countries. Case Study: The China Shanghai Zhongfu Kimberley Agricultural Investment Group The China Shanghai Zhongfu Kimberley Agricultural Investment Group is a key player in food production and other agricultural produce in China. The firm has recently announced that it is ready to invest in agriculture in Australia. The agriculture industry is extremely important in Australia and accounts for a large percentage of the country’s GDP. This is what the firm hopes to have a piece of by investing in agriculture in Australia. Northern Australia is a region with many areas that are not well developed. This makes it the perfect region for the firm to exploit agriculturally. The region has great agricultural potential, as is demonstrated by the Ord River Irrigation Scheme, which is currently responsible for much of the produce from the region. China’s investment into Northern Australia gets it a better position on the global arena. First, Australia has greater agricultural potential than China does. Therefore, by investing in Australia, the firm gets a relevant portion of the produce from the region. Australia also has a reputation of having fertile regions. This increases the overall produce that the firm can lay claim to. Agricultural produce in Australia is also well known to be world class. If the firm is able to attest that their produce is grown in Australia, it inspires more confidence. This gives the firm a competitive advantage over local Chinese firms and over other countries as well. Conclusion The 21st century business environment is ever changing. For this reason, countries need to cement their position in the global market the best they can to prevent their economies from going under. However, no country can be fully self sufficient. Australia understands this. In this regard, Australia is particularly keen on aligning its economy with bigger economies, such as China. This gives Australia an improved market presence and thus a competitive advantage over countries with no FTAs. References Australian Government Department of Foreign Affairs and Trade, Fact Sheet: Resources, Energy and Manufacturing, viewed 20 September 2015, www.dfat.gov.au/trade/agreements/chafta/fact-sheets/Pages/fact-sheet-resources-energy-and-manufacturing.aspx Burrows, D & Kirk, A 2006, Australia, China free trade agreement: the pursuit of a new welfare gain, viewed 20 September 2015, http://www.mannkal.org/downloads/scholars/aust-china-fta.pdf Department of Foreign Affairs and Trade 2012, Australia-China trade factsheet, viewed 20 September 2015, http://www.dfat.gov.au/fta/acfta/australia-china_trade.html Department of Foreign Affairs and Trade 2012a, Australia-China free trade Agreement negotiations, viewed 20 September 2015, http://www.dfat.gov.au/fta/acfta/ Gillard, J 2011, Speech to the Australia China Economic and Co-operation Trade Forum, Department of Foreign Affairs and Trade, viewed 20 September 2015, http://www.pm.gov.au/press-office/speech-australia-china-economic-and-co-operation-trade-forum-beijing Grimson, M 2014, ‘Free Trade Agreements: What is an FTA and what are the benefits?’ Tuesday 8 April 2014, viewed 20 September 2015, www.mobile.abc.net.au/news/2014- 04-07/free-trade-agreement-explained-bilateral-fta-tpp/5371314 Holman Fenwick Willan 2014, ‘China- Australia Free Trade Agreement: an Australian perspective’, December 2014, viewed 20 September 2015, www.hfw.com/China-Australia-Free-Trade-Agreement-an-Australian-perspective-December-2014 Hurst, D 2015, China and Australia formally sign free trade agreement. The Guardian, Wednesday 17 June 2015, viewed 20 September 2015, www.theguardian.com/business/2015/jun/17/china-and-australia-formally-sign-free-trade-agreement Lawrence, T 2015. ‘The impact of ChAFTA on foodservice’, June 29 2015, viewed 20 September 2015, www.foodserviceconsultant.org/region/asia-pacific/the-impact-of-chafta-on-foodservice McCalla, MF 2003, ‘Liberalizing agriculture trade: will it ever be a reality?’, Journal of Agricultural and Resource Economics, vol. 28, no. 3 Mendoza, R & Bahadur, C 2002, ‘Towards free and fair trade: a global public good perspective’, Challenge, vol. 45 Sheppard, E. (2005). Constructing free trade: from Manchester boosterism to global management. Transactions of the Institute of British Geographers, 30(2), 151-172. Read More