Possible Costs and Benefits for Australia if it Signs a Free-Trade Agreement with China - Literature review Example

Possible costs and benefits for Australia if it signs a Free-Trade Agreement (FTA) with China Introduction Vigfusdottir (2008) highlights how international trade has expanded over the years between many countries of the world and how Australia and China have not been left behind. According to the same author, free trade dictates the economic status of a country and this makes it critical since its stability is based on its wealth. Countries that have signed the Free Trade Agreements are bound to experience prosperity and security and these are known to attract investors, thus promoting stable and healthy trading relationships (Vigfusdottir, 2008). This case study seeks to evaluate the possible costs and benefits that Australia would get if she signed a Free Trade Agreement with China. Possible benefits for Australia if it signs a free-trade agreement with China Australia has a population of 22 million people and her signing a Free Trade Agreement with China will open her up to a market with over six billion potential clients (Edge, 2010, p.1). Bearing in mind that Australia has surplus resources, the best way to dispose of them in an economic friendly way is to open up her trade boundaries to China, which is a prolific business hub (p.1). Australia is famed for her resources such as world class ferries that are know for their speeds, computer software, wines, and exotic foods among many others that have a ready market in China (p.2). China on the other hand has commodities such as sporting goods, toys, clothing, computers, as well as telecommunications equipments (p. 2 & 3). Some of the potential benefits for Australia include: Macroeconomic impact According to Mai (2005, p.5), Australia’s GDP will definitely grow if she entered into an FTA with China. It is estimated that by 2015, Australia’s GDP will have grown to 0.37%, which translates to US$3 billion. This will however depend on the trade structure implemented by both countries where trade barriers will have to be eliminated to allow for a free trade (p.6). The facilitation of bilateral investments will also make an impact in regard to macroeconomic, as it will lead to increased trade flows (p.6-7). Low tariffs According to Burrows and Kirk (2005, p.17), Australia will enjoy low tariffs from this bilateral trade with China and this will give her a stable foundation on which to build her FTA with her. Australia is known for her liberal policies in trade and the low tariffs will facilitate this. According to studies done, Australia’s tariffs currently stand at 3.5% and come 2015 they are bound to decrease and this will mean more business for her (p.17). Increased production Free trade opens a wide market for the comparative goods and in this case, Australia will end up producing more to counter the growing demand of her commodities in China (p.2). Specialization also comes in and since the commodities are in demand, various exporters will have to increase their production to cater for the large market (p.2-3). The running and manufacturing costs will also be significantly lower and this means that production will definitely increase (Mai, 2005, p.5). Increased employment According to Burrows and Kirk (2005, p. 24), a key benefit of the Free Trade Agreement between China and Australia is increased employment opportunities. The exporting industries will for instance hire more labour to cater for the commodities awaiting exportation. These industries include service and manufacturing industries. On the other hand, unemployment could also result from the FTA since an increase in tariffs calls for reduced production and this renders many people jobless (p. 24). Importing companies also suffer the blunt of FTA since they are forced to close down most of the time as the competition rages (p.25). A good example is the footwear and textile industries in Australia that were forced to close down in 1984 following an increase in tariffs (Edge, 2010, p. 1). Production efficiency According to Edge (2010, p.1), the resources produced have a ready market and thus the production will increase due to an efficient use of the commodities. This will definitely prompt the industries to produce more commodities since they are moving fast courtesy of the free market. The domestic output will also be on a high due to increased innovation and technology (p. 2-3). Other sectors that will benefit from this production efficiency include the marketing and distribution industries (p.3). Foreign exchange Free trade will bring in foreign currency and this will with no doubt lead to a high economy growth. In return, the Australian government will be able to invest in other commodities that she does not produce. These include cars and electrical equipment that can be bought affordably in the free market (Garry, 2004, p.1). High Economic growth According to Burrows and Kirk (2005, p.3), China is rated third when it comes to the most powerful nations of the world when classified according to their GDP. Australia’s alliance with this world power will definitely make economic sense to her. China’s economy is growing rapidly and in the coming years, she would clinch a higher title than she currently holds. Australian businesspersons would therefore have the privilege of talking advantage of this and exploit her fully to improve their economic standing too (p. 4-5). Net welfare According to Balli (2010, p.16), Australia’s FTA with China will help her gain in matters where welfare is concerned. Her exports will rise and this will be reflected in her GDP and by 2015, she will boast of up to US$18 billion (p.16-17). This is possible since according to reports released by the World Trade Organization (WTO), Australia recorded an A$154 billion rise in her exports from a mere A$93 billion since its inception (p.18). Job creation also shot up to over 250, 000 and the same changes are speculated to reflect among the FTA’s benefits (p.18). Costs associated with a FTA between Australia and China Tariffs Despite the waiving of tariffs, they are still a major challenge that traders will, face according to a study carried out by GHA (2005, p. 2-3). This is foreseen to bring about issues such as market inaccessibility when exporting to either party. A high duty is also foreseen on products for export as well as exorbitant import and transport costs. A difference in the interpretation of these tariffs will also be an issue as well as quarantine requirements (p. 2-3). Technical barriers GHA (2005, p.5) highlights on how technical trade barriers can be a cost on the Australian businessmen. The processes prior to registration of consignments are long and these pose delays which can hinder the free flow of goods. Provincial governments also pose restrictions due to the distinct laws which bring forth misunderstandings. Quality control Quality control issues may not be new in free trade and some of the challenges that Australian people may face include poor packaging of products, poor quality, fabricated goods, faulty goods, missing consignments, inaccurate barcodes as well as damaged stock. There have been issues in the past whereby the manufacturer has declined to replace below standard goods and this always leads to massive losses (GHA, 2005, p. 5-6). Expense Another limitation that Australia and China will face in their quest to work together is the total expense that is presented by the FTA itself (Writing, 2010, p.1). In many instances especially that one of the NAFTA agreement, many committees had to be put in place to study and enact the agreement and this ended up costing the countries involved a lot of money. The devil is always in the detail and as each country tries to protect its best interests, complicated rules are installed which end up acting on the contrary of lowering the costs of commodities (p.1). Increased Unemployment Free Trade Agreements come with stiff competition since the countries have to compete for the same consumers (Pettinger, 2001, p.2). Many a time, this calls for advanced technological know-how in an effort to have an edge over the competitors. This results in the production of high profile goods which some countries may not be able to deliver since they are still undergoing technological development. In this case China maybe at an advantage due to her superiority and end up creating employment for her citizens though Australia will suffer increased unemployment since she does not have the capacity to compete with China (p.2). Infant Industry Argument Free Trade Agreements always put new industries at a crossroads since they lack the competency to have a comparative advantage over their competitors in the market (Saure, 2005, p.7). As a result, many of these industries are suppressed since they do not have the capacity for international competition. This puts growing economies like Australia at a disadvantage since it will take those years to be able to match their competitors in China. This also deprives the country of its revenue since much of it goes into establishing these industries and ensuring that the existing ones are upgraded to match the competition ( p. 7). Cultural identity Many countries in FTAs are afraid of loosing their identity through commercialisation or Americanisation and this presents a cultural and political limitation. This may make them more conservative against international trade thereby restricting them to what they consider preservative of their culture (Pettinger, 2001). Conclusion From this case study, it is quite evident that Australia is headed for another milestone once the negotiations towards the signing of the Free Trade Agreement bear fruit. The country has so much to gain and this is portrayed clearly in the possible costs and benefits. Australia can only hope to complete the negotiations sooner and embark on this prolific journey with one of the world’s economic giants. References Balli, F. (2010) Income smoothing and welfare gains across Pacific Island Countries: The role of remittances and Financial Aid and savings, Massey University, Available from www.nzae.org.nz/.../Balli__Income_Smoothing_and_Welfare_Gains.pdf (7th September 2010). Burrows, D. & Kirk, A. (2005) Australia, China Free Trade Agreement: The Pursuit of a net welfare gain. Law and Commerce. University of Notre Dame, Australia. Edge, K. (2005) Free Trade and protection: Advantages and disadvantages of free trade. Charles Sturt University. A Charles Sturt University Initiative. Garry, P. (2004). Analyzing the Economic Welfare Consequences of a Free Trade Agreement. Partial Equilibrium Methods for Industry Level Studies. GHA. (2005). Australia – China Free Trade Agreement Survey conducted by GHA. Australia – China Free Trade Agreement Joint feasibility study, Silverwater. Mai, Y. (2005) Modelling the potential benefits of an Australia-China Free Trade Agreement. Centre of Policy Studies, Monash University. Pettinger, T.R. (2001). Arguments against Free Trade Agreements. Economics, Oxford University. Saure, P. (2005). Some popular arguments against Free Trade and their limitations. Universitat Pompeu Fabra, Barcelona. Vigfusdottir, H. (2008) A free Trade Agreement between Australia and China. International Relations, University of Iceland. Writing, A. (1999). International Trade Agreements. Disadvantages of Free Trade Agreements. Library Economics Liberty, USA. Read More