Australia-China Free Trade Agreement - Case Study Example

Australia-China Free Trade Agreement: Analysis & Recommendations A Working Definition of a Free Trade Agreement A free trade agreement in its most literal, ideal form is an agreement between two or more different countries not to impose tariffs or other restrictions on the flow of goods from one country to another. An ideal free trade agreement is a likely impossibility, because all countries have an interest in protecting the prosperity of their own producers and merchants by ensuring, at a minimum, that their access to domestic markets is not placed at a disadvantage by the presence of foreign goods. Thus, a working definition of a free trade agreement could be an agreement on transnational trade that approaches the ideal of no restrictions, while maintaining a reasonable amount of safeguards for each country’s domestic producers, and which has five key components (Matteucci, 2005): 1. Free trade in goods, in accordance with ‘origin rules’ concerning the sources of the component ingredients or parts of finished goods. 2. Market access, meaning that tariff restrictions that are removed by a free trade agreement should not be replaced with other regulatory restrictions on where, how, or what amount of the goods reach the domestic market. 3. Free trade in services as well as goods. Examples of these would include banking, or purchasing insurance from foreign businesses. 4. Sensible protection for intellectual property that encourages rather than stifles creativity and innovation. 5. A clear process for dispute resolution. The Hub & Spoke Arrangement of FTAs The current shape of most of the world’s free trade agreements is best described as a “hub & spoke” arrangement. This occurs when one country has free trade agreements with two or more countries that do not have free trade agreements with each other. (Alba, Hur, & Park, 2008) For example, Australia (together with New Zealand) has a free trade agreement with the ASEAN nations and one with the United States, but the US and the ASEAN nations do not yet have their own free trade agreement. In this instance, Australia is the “hub” nation and the US and the members of ASEAN are the “spokes”. If a free trade agreement with China is concluded, another “spoke” would be added, since China does not yet have agreements with either of the other two parties. The significance of the hub & spoke arrangement is that it provides a definite export advantage to the “hub” country. (Alba, Hur, & Park, 2008) On the other hand, it may make the conclusion of other free trade agreements more difficult. New free trade agreements can become limited by the conditions imposed by the existing ones, even if the same conditions do not actually exist in the new relationship. (Siddique, 2007: 218) Thus, the countries in any new agreement must not only assess their needs from the point of view of their respective economic circumstances but with respect to unrelated existing agreements as well. In analyzing and recommending a best course of action for a Sino-Australian free trade agreement, the existing agreements with the US and the ASEAN nations will have to be referenced; the US agreement is relevant because it is comparable in scale, and the ASEAN agreement is relevant because of its application to the Asian market and economy. Concerns for Australia that have been raised by other FTAs Any free trade agreement will almost inevitably extend beyond the relatively straightforward issues of tariffs and import-export restrictions into areas such as investment, services, and the movement of people. The Australia-New Zealand-ASEAN Free Trade Agreement (AANZFTA) signed in February 2009 has provisions covering not only trade in goods and services, but also investment, intellectual property, migration, electronic commerce, and competition, and is in this respect very similar to other regional FTAs. (Avila, 2004, and Jones, 2009) From a cursory point of view, a China-Australia FTA would seem to have definite advantages for Australia: China, by their own admittance, requires commercial food products, iron and coal for its steel industry, and gas for its energy needs, all of which can be supplied by Australia. (Sheehy & Maogoto, 2005) On the one hand, a bilateral trade agreement has the advantage of removing some of the ‘consensus-based’ shortcomings of multilateral agreements, provisions that meet the lowest common denominator of what all the participating countries will agree to and result in poor standards or weak rules that have harmful consequences for domestic sectors. (Mercurio, 2004) On the other hand, there is a disadvantage to a bilateral agreement because of the potential for harm to relations with countries that are not a part of it. One of the many criticisms raised against the Australia-US Free Trade Agreement was that it would be detrimental to future arrangements with Asian countries – notwithstanding that Australia had, by that time, already concluded FTAs with Singapore and Thailand – because the extreme free-trade policy of the US starkly contrasted the more protectionist policies of Asia. (Mercurio, 2004, and Sheehy & Maogoto, 2005) This could be a disadvantage for Australia in two ways. First, China could reasonably expect that Australia should be consistent in applying liberalized policies to trade negotiations, even though there are reasons why Australia would not want to do so with respect to China. Wool, for example, is one agricultural product which both countries produce in exportable quantities, and thus both have an interest in maintaining protections for their own wool industries, considerations that differ quite significantly from those related to agricultural products from other countries, such as the US. (Adams & Yinhua, 2005, Hufbauer & Wong, 2005, and Kilby, n.d.) A second way in which a bilateral agreement could be harmful to Australia’s other foreign relations is that the policies towards China of some of Australia’s allies and countries with whom Australia has FTAs, most notably the US, are linked to larger political issues such as human rights and environmental protections. (Sheehy & Maogoto, 2005, and Hufbauer & Wong, 2005) Any actual or implied compromise in these areas on Australia’s part for the sake of concluding a trade pact with China may complicate relations with other nations, including presenting additional sticking points in the future renewal of existing FTAs. Should Australia form a FTA with China? Implications and Recommendations Overall, there is more to be gained than lost by Australia’s concluding a free trade agreement with China, but it must be done so with caution. The Chinese market for Australian goods and services is too large to ignore, and the market advantage that China would enjoy in comparison to other exporting countries that do not yet have free trade arrangements with Australia might well serve to encourage other agreements. In this way, bilateralism actually strengthens the multilateralism of the GATT and WTO frameworks to which Australia has already committed. Critics of bilateralism have asserted that separate agreements of this kind do just the opposite and fragment multilateral efforts, but in practice this has not proven to be the case. Nevertheless, the negotiation of a bilateral agreement must take into account its effect on present and future multilateral arrangements. (Mercurio, 2004, and Hufbauer & Wong, 2005) The best way in which this can be done is to link the progressive implementation of a free trade agreement to standards of international concern, such as labor conditions and environment standards. (Sheehy & Maogoto, 2005) China can be presented with a comparable framework similar to the AUSFTA as an ultimate objective, with tariffs and other restrictions gradually reduced as China demonstrates progress in correcting problems in these areas. Another area of concern is the protection of intellectual property. China has long been regarded as the world’s largest source of pirated and counterfeit goods, particular media (New, 2007), and intellectual property protections have been a significant source of criticism in Australia against trade agreements even with countries with strong IP protections such as the US. (Kilby, n.d.) Addressing the issue of IP assertively from the outset will not only have the practical effect of reducing or removing the threat of pirated or counterfeit goods reaching the Australian market, but will also forestall some of the anticipated dissent against an Australia-China free trade agreement. In conclusion, a free trade agreement between Australia and China, if carefully planned and negotiated, serves Australian interests well. With respect to China, Australia benefits from being in the position of the “hub” country, a position from which Australia can confidently address concerns of labor standards, the environment, fairness to different economic sectors, and IP protections. China as the “spoke” country has more to lose than to gain from not entertaining a trade arrangement from Australia, because it would then risk being shut out of Australian markets by countries which enjoy fewer trade restrictions. In addition, it is in Australia’s best interests to pursue a free trade agreement with China now, while negotiations for an agreement between China and the US are still far from being concluded, to avoid putting Australia at a disadvantage with respect to Chinese markets. Handled with care, an Australia-China free trade agreement will not only provide access to the enormous Chinese consumer market for Australian goods and services, it will give Australia an advantage in future agreements as well. Works Cited Adams, Philip D., and Yinhua, H. M. (2005) “Trade Liberalisation Scenarios for Wool Under an Australia-China Free Trade Agreement”. Monash University Centre of Policy Studies/IMPACT Working Paper g-156, October 2005. [Internet] Available from: Alba, Joseph D., Hur, Jung, and Park, Donghyun. (2008) “E­ffects of Hub-and-Spoke Free Trade Agreements on Trade: Panel Data Analysis”. Asian Development Bank Economics Working Paper Series No. 127, October 2008. [Internet] Available from: Avila, John L. (2004) “A Comparative Study of Bilateral FTA/CEP Arrangements”. Philippine Institute for Development Studies Discussion Paper Series No. 2004-28, August 2004. [Internet] Available from: Hufbauer, Gary C., and Wong, Yee. (2005) “Prospects for Regional Free Trade in Asia”. Institute for International Economics Working Paper No. 05-12, October 2005. [Internet] Available from: Jones, Doug. (2009) “Australia: ASEAN-Australia-New Zealand Free Trade Agreement” Mondaq International Law, 17 March 2009. [Internet] Available from: Kilby, James. (n.d.) “Submission to the Senate Select Committee on the Free Trade Agreement between Australia and the United States of America (AUSFTA)”. [Internet] Available from: Matteucci, Aldo. (2005) “Free Trade Agreements: Praise & Prejudice”. Asia-Pacific Research Institute Asia Forum, 14 September 2005. [Internet] Available from: Mercurio, Bryan. (2004) “Should Australia Continue Negotiating Bilateral Free Trade Agreements? A Practical Analysis”. University of New South Wales Law Journal, 27(3): 667-702. [Internet] Available from: New, William. (2007) “USTR Toughens IP Stance On China, Russia, Thailand; Praises EU, Brazil”. Intellectual Property Watch, 30 April 2007. [Internet] Available from: Sheehy, Benedict, and Maogoto, Jackson. (2005) “China-Australia Free Trade Agreement: An Opportunity for Fair Trade?” Macquarie Journal of Business Law, 2005 (2): 169-188. [Internet] Available from: Siddique, Muhammed A. B. (2007) Regionalism, Trade and Economic Development in the Asia-Pacific Region. Cheltenham, UK: Edward Elgar. Read More