The Impact of the China-Australia Free Trade Agreement on Australia - Example

The Impact of the China-Australia Free Trade Agreement (ChAFTA) on Australia Introduction The China-Australia Free Trade Agreement (ChAFTA) is a comprehensive free trade agreement (FTA) between China and Australia. The agreement, which is regarded as one of the most comprehensive ones that Australia has ever got into, came into force in June 2015 (“China-Australia free trade agreement: Pros and cons,” 2015). Interestingly, there has been controversy on how the provisions of the agreement will impact the Australian economy in general and the specific sectors of the Australian economy in particular (Department of Foreign Affairs and Trade, 2016). On one hand is the argument that the agreement may have an adverse impact on the Australian economy since its provisions work to benefit Chinese businesses at the expense of the local Australian ones (Howe, 2015, p. 2). On the other hand is the argument that the agreement is a significant win for Australia and that its provisions will benefit not only the Australian agricultural sector, but also other sectors that are key to the economic prosperity of the country. This essay evaluates the impact of the agreement on the Australian economy. Data on specific sectors of the economy as well as specific provisions of the agreement are analysed to determine the likely impact of the agreement on specific sectors of the Australian economy over the course of time. Why Australia signed the ChAFTA One of the main reasons as to why it is argued that the ChAFTA will have a general positive impact on the Australian economy is based on the perceived trade imbalance between China and Australia on one hand and the documented high rate of growth of the Chinese economy on the other. Atkinson (2012, p. 78) notes that prior to the signing of the deal, China was one of the major trading partners of Australia although there was a large level of trade imbalance in favour of China. The trade imbalance between China and Australia can be attributed to several factors; however, one important factor is the difference in the volume of trade and economic activity between the two countries. By 2010, China was exporting goods and services worth US$ 2,081 billion while the total exports for Australia at the time were worth US$ 322 billion (Appleyard & Field, 2016, n.pag). Similarly, China exceeded Australia in terms of imports. The figures for 2011 indicate that China imported goods and services worth US$ 1,981 billion while Australia imported goods and services worth US$ 304 billion (Appleyard & Field, 2016, n.pag). Therefore, the need to close this gap and ensure that the elimination of barriers to trade and overall liberalisation of trade between the two countries could work for the benefit of Australia was one the main motivations that informed Australia to seek to get into an agreement with China (Atkinson, 2012, p. 79). Related to the need to help Australia close the gap in trade with China was the desire of Australia to take advantage of the rapid level of economic growth that has been taking place in China over the recent past. China has been undergoing rapid economic growth since 1979 (Mai & Adams, 2010, p. 133). According to a research conducted by the United States Department of Agriculture (cited in Wainio, Gehlhar & Dyck, 2011, p. 44), the gross domestic product (GDP) of China grew at an annual rate of 9.9% between 2004 and 2009. Similarly, the rate growth of the GDP of the country between 2009 and 2014 was predicted to be 8.8% per annum, which was higher than that of many countries and regions in the world, including Australia (Wainio et al., 2011, p. 44). Similarly, Atkinson (2012, p. 79) notes that initial predictions indicated that an FTA with China would increase the real GDP of Australia by 18 billion US dollars. Therefore, it can be seen that for Australia, the need to take advantage of the rapid economic growth of China and to close the gap in Australia-China trade were the main motivations for entering into the FTA. Also, according to the Australian Government, the ChAFTA is expected to help Australia build on the premise that China is Australia’s greatest trading partner and that it can benefit considerably from removing barriers that hinder trade between the two countries (Department of Foreign Affairs and Trade, 2016). In this regard, the department predicted that the working of the agreement will be beneficial to the economy of Australia in several ways, the most important ones being opening up the vast Chinese market for Australian goods and helping Australian services companies to successfully set up businesses in China (Department of Foreign Affairs and Trade, 2016). It is argued that some of the reasons why countries trade with each other in the first place are related to the need for countries to access different goods and services, gain economic growth from international trade and increase their level of competitiveness at the international level (Appleyard & Field, 2016, n.pag). The need to close the trading gap between China and Australia, take advantage of the rapidly growing Chinese economy and increase the overall production of goods and services in Australia, which informed the formation of the ChAFTA, correspond to the reasons identified in theory. Impact of the ChAFTA on agriculture and other sectors in Australia The impact of the trade agreement on the agriculture-related sectors in Australia can best be analysed by considering the performance of the sector before the implementation of the agreement, what the specific provisions of the agreement are and the different ways in which the provisions will affect the agriculture sector of Australia. Prior to the implementation of the ChAFTA, Australia had been exporting different types of agricultural commodities to China. According to Mai, Adams, Fan, Li and Zheng (2005, p. 7), the rapid economic growth that is currently being experienced in China has spurred a growth in urban populations in the country. The rapid growth in the economy and the urban population in China have created a demand for agricultural products in the country (Mai et al., 2005, p. 8). On the other hand, agricultural production in Australia has been increasing over the recent past (Australian Bureau of Statistics (ABS), 2015). For example, the total value of agricultural production in terms of crops, livestock slaughtering and livestock products for the year 2014 was 56,624.8 million dollars, which represented a 5% increase over the total value for the previous year (ABS, 2015). What these two trends imply is that prior to the signing of the agreement, there was a genuine demand for agricultural products in China and a corresponding capacity to produce the agricultural products required by China in Australia. According to the Institute for International Trade (2015, p. 17), China has been the major destination for the various agricultural product categories produced in Australia. For example, it is noted that the percentage of the amount of main agricultural products such as grapes, different types of meat and fruits that Australia exports to China to that which Australia exports to the rest of the world has ranged from 10% to 25% over the years (Institute for International Trade 2015, p. 18). The high amount of Australian agricultural products which are exported to China means that China is a major destination of Australian agricultural products and one of the most important trading partners of Australia. The FTA between China and Australia has specific provisions for the agricultural sector. For example, the agreement seeks to eliminate the tariffs on beef. Currently, tariffs on beef and related products, which are in force, range from 12% to 25% (Department of Foreign Affairs and Trade, 2016). However, it is expected that the tariffs will be progressively reduced to 1% by the year 2024 (Department of Foreign Affairs and Trade, 2016). In addition to this, the agreement seeks to eliminate all the tariffs on dairy products of Australia which currently stand at 20% (Department of Foreign Affairs and Trade, 2016). Other agricultural products that are covered by the agreement include the following: wool, processed food, horticultural products, barley, wheat, seafood, pork, hides and skins. For all these products, the agreement seeks to progressively reduce the amount of tariffs that the Chinese government is currently imposing on them when they are exported to China. There are several ways in which the agreement will impact on the Australian agricultural sector. First of all, the provisions of the agreement which seek to reduce the tariffs that are currently imposed on agricultural products from Australia will create an ideal situation for the exporters of agricultural commodities in Australia to gain increased access to the Chinese market. Currently, the Chinese government imposes varying levels of tariffs on Australian agricultural imports (Institute for International Trade, 2015, p. 17). This means that agricultural commodities cannot compete effectively with local commodities. It also means that exporters of Australian agricultural commodities find it difficult to competitively export their products to the Chinese market. However, with the reduction of tariffs over the course of time, exporters of agricultural commodities in Australia will find it possible to competitively export to China. Because of the liberalisation, it is expected that the level of production as well as export of specific agricultural commodities from Australia will increase over time (Department of Foreign Affairs and Trade, 2016). Secondly, the liberalisation of trade in agricultural products between the two countries as outlined in the agreement is likely to help Australia benefit from its comparative advantage over China regarding agricultural production and other forms of economic activity. The projected increase in production and export of Australian agricultural commodities is expected to correspond with the fact that China has very high levels of tariffs and controls on agricultural products as compared to what the case is in Australia (Centre for International Economics, Canberra & Sydney, 2008, p. 48). According to the Institute for International Trade (2015, p. 8), Australia has a key comparative advantage in the production and marketing of the following key agricultural products: meat and edible meat offal, products of animal origin and beverages, spirits and vinegar. Hence, following the progressive implementation of the agreement, the economy of Australia is set to benefit from increased performance in the agricultural sector of the country in general and in these specific sectors in particular. It is noted that in the current times, different nations approach international trade with the need to benefit from their comparative advantages (Appleyard & Field, 2016, n.pag). Countries enter into trade agreements that they believe will help them exploit their potential and access market for their products and services in the countries with which they seek to enter into agreements (Schumacher, 2012, p. 11). In this case, it can be seen that Australia has a comparative advantage regarding production of agricultural goods and mining. By entering into trade agreements under which tariffs for agricultural commodities are eliminated over the course of time, Australia can access the Chinese market for agricultural products and other materials. On the other hand, the comparative advantage of the country in terms of mining corresponds to the increasing demand for mineral resources by the Chinese economy. Australia has been exporting different types of minerals to China over the years (Mai & Adams, 2010, p. 133). Some of the minerals and natural resources that Australia has been exporting to China include iron ore, aluminium oxide, manganese ore and copper ore (Mai & Adams, 2010, p. 134). In 2015, the value of products that fall under the category of resources and manufacturing products that Australia exported to China totalled over 70 billion US dollars (Department of Foreign Affairs and Trade, 2016). Under the terms of the ChAFTA, it is expected that barriers in the form of tariffs on this category of products will be progressively eliminated over the next few years (Department of Foreign Affairs and Trade, 2016). It is expected that no tariffs will be applied to iron ore and other resources which will be imported to China from Australia (Department of Foreign Affairs and Trade, 2016). The application of zero-tariffs on these commodities will not only take advantage of the local capacity of Australia in the mining sector but also coincides with the rising demand for natural resources by the Chinese economy. Conclusion The ChAFTA will have positive impact on the Australian economy in general and the agricultural and related sectors in particular. The main reason for this is that the agricultural production and mining sectors form the main comparative advantage areas of the Australian economy. This means that Australia can increase its agricultural production and successfully mine its mineral resources as compared to other countries. Additionally, there is a growing demand for agricultural produce and material resources in China. The growing demand for these products is fuelled by a rapidly growing population and economy in China. Further, China has been a major trading partner of Australia. However, there has been a large gap concerning trade imbalance between the two countries. The imbalance has been attributed to the large size of the Chinese economy. Therefore, by entering into the ChAFTA, Australia will benefit from its comparative advantage, grow by accessing Chinese markets and benefit by taking advantage of the rapid rate of growth and size of the Chinese economy. References “China-Australia free trade agreement: Pros and cons (2015, 21 October). ABC News. Retrieved from, http://www.abc.net.au/news/2015-06-17/China-australia-free-trade-agreement-pros-and-cons/6553680 Appleyard, R.D., & Field, J. A. (2016). International trade. Sydney: McGraw-Hill. Australian Bureau of Statistics (2015). The value of agricultural commodities produced, Australia, year ended 20th June, 2015. Retrieved from http://www.abs.gov.au/ausstats/abs@.nsf/mf/7503.0 Atkinson, J. (2012). Australia and Taiwan: Bilateral relations, China, the United States and the South Pacific. Boston, Massachusetts: BRILL. Centre for International Economics, Canberra & Sydney (2008). Estimating the impact of an Australia-China trade and investment agreement. Retrieved from http://acbc.com.au/admin/images/uploads/Copy3report_fta_modelling.pdf Department of Foreign Affairs and Trade (2016). China-Australia free trade agreement. Retrieved from http://dfat.gov.au/trade/agreements/chafta/fact-sheets/Pages/quick-guide-agriculture-and-processed-foods-outcomes.aspx Howe, J. (2015). The impact of the China-Australia free trade agreement on Australian job opportunities, wages and conditions. Retrieved from, http://apo.org.au/files/Resource/chafta_report_press_edited.pdf Institute for International Trade (2015). Trade impact study for South Australia in relation to the China-Australia free trade agreement (ChAFTA). Retrieved from, http://www.statedevelopment.sa.gov.au/upload/China/chafta-trade-impact-study.pdf Mai, Y., & Adams, P. (2010). Resources sector and foreign investment. In S.K. Jayasuriya, D. MacLaren & G. Magee (eds.). Negotiating a preferential trade agreement: Issues, constraints and practical options (pp. 129-152). Cheltenham: Edward Elgar Publishing. Mai, Y., Adams, P., Fan, M., Li, R. & Zheng, Z. (2005). Modelling the potential benefits of an Australian-China free trade agreement. Retrieved from, http://dfat.gov.au/trade/agreements/chafta/Documents/modelling_benefits.pdf Schumacher, R. (2012). Free trade and absolute and comparative advantage: A critical comparison of two major theories of international trade. Postdam: University of Postdam. Wainio, J., Gehlhar, M., & Dyck, J. (2011). Selected trade agreements and implications for US agriculture. New York: USDA. Read More