Australian Free Trade Agreements - Case Study Example

Australian Free Trade Agreements Customer Inserts His/her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name 25/05/ 2011 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 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. 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 on. 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 growing. 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 micro- economics 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 trade for a 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). The free trade agreements benefit both Australia and its trading counter- parts. One benefit is that there will be increase in production. This is because free trade enables Australia and its trading partners to specialize in products that they have a comparative advantage. Specialization enhances efficiency in operations and use of economies of scale hence increasing output. When there is an increase in production, supply will be high since there are readily available markets created by international trade in Australia or its trading partner. On the other hand, consumers in domestic countries will benefit from free trade since they can acquire a great variety of products and services. Free trade ensures that consumers obtain even those products that have a competitive disadvantage in their respective countries. As well there will be increased competition due to the great variety of goods which in addition attracts low supply costs. When the goods and services are supplied at low costs their prices reduce while consumers demand increases. For instance, if Australia exports more of automobile products to Chile, while it imports more agricultural products from Chile, the demand for the agricultural products will be high while they still have a comparative disadvantage. Australia and the trading partners will benefit from free trade through foreign exchange gain. When Australia sells the products that it has a comparative advantage it receives pay in form of currency of that trading partner. This pay enhances the economic welfare of Australia. On the other hand, the trading partner earns foreign exchange from Australia when Australia imports the products it has a comparative disadvantage. Usually, foreign currency earned by any country is used to buy or import other products whether from free trade member countries or non- members. In addition, the countries will experience economic growth in terms of improved living standards and foreign income (Edge, 1999). The employment sector of the trading partners is also impacted by free trade agreement. The Ricardian Trade Theory of comparative advantage and disadvantage has implications on the employment sector. This is because, for trading partners in a free trade agreement to enjoy the benefits of trade liberalization, they must incur equal costs of production in terms of labor and capital. However, this is unrealizable since certain countries can easily such as Chile can afford labor at low cost, while Australia labor costs are high. Therefore, the Ricardian Theory assumes that costs of production for free trade are equal. In free trade there is creation of losers as well as winners as resources move to more productive areas of the economy. This is to mean that, resources will move to the country producing a product which it has a comparative advantage. Therefore, employment will rise in industries of these product and employees will be displaced as import competing industries close down due to competition. Generally, with free trade agreements there is an increase in employment levels in Australia and its trading partners since more jobs are created. This is supported by the fact that, those industries that had been closed down due to high operational costs associated with tariffs and other trade restrictions have been eliminated. Consequently, not everyone will benefit from the free trade agreements. Particular industries such as those dealing with alcoholic drinks and drugs as well as certain employment may not benefit from them. With free trade virtually anything can be sold even if certain quality standards are put loopholes will highly exist compared to economies with trade restrictions. On the other hand, since the governments of these trading partners are more concerned with low productions costs they may force employment groups to reduce wages. As such, due to reduced wages these employment groups will fail to source qualified and experienced employees hence adversely affecting operations. Furthermore, as noted earlier on, some of these countries can afford quick and cheap labor such as Thailand while others such as Australia is prone to expensive labor. Hence, there will be no particular time in their trading operations that these two countries will be operating at the same production costs level (Kerr and Perdikis, 1998). The Ricardian Theory argues that countries in a free trade agreement should specialize and exports the product they have a comparative advantage, while import a product they have a comparative disadvantage. Due to this proposal, a country with comparative advantage for agricultural products may not benefit much compared to Australia whose comparative advantage is on automobile and machinery products. This is because agricultural products face unfavorable terms of trade where their imports are more than their exports in terms of prices for agricultural products compared to automobile products. Further, automobile and machinery industries will benefit more from free trade than agricultural industries. In addition, there is dependent on economies of trading partners that might eventually harm one another. For instance, recession in United States results to a decrease in demand for Australian exports leading to lower Gross Domestic Products and a decrease in employment levels. Further, an international business environment is characterized by high competition; new industries may find it hard to enter into the market since it is difficult to develop or even acquire economies of scale in a competitive business environment. As highlighted above, there are many benefits accorded by the free trade agreements to Australia and its trading partners. These benefits include: specialization, increase in production, assess to variety of products and foreign income among others. These benefits are discussed with reference to the Ricardian Trade Theory. These theory advices the trading partners in free trade environment to emphasize or specialize in production and export or sell to member countries a product that they have a comparative advantage and import or buy the product they have a comparative disadvantage (Zhang, 2002). On the other, some trading countries or industries are bound to benefit more from free trade than others based on terms of trade where a country spends a lot in imports compared to what it exports. Generally, there are many benefits of free trade agreements for Australia and its trading partners. References 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 Structures, Springer. Read More