Australian Sugar Industry, Tariff Rates and Impact of ChAFTA on This Industry - Case Study Example

The Australian Sugar Industry Name Institution Date The Australian Sugar Industry Introduction Despite its declining share in GDP, the agricultural sector is still very important part of the Australian economy. Australia and China completed the negotiation of the China-Australia Free Trade Agreement (ChAFTA) and signed the ChAFTA on 17 June, 2015. In April 2016, the Australian Prime Minister led the largest business delegation to visit China in order to reap the benefits from the ChAFTA. The ChAFTA is generally regarded as a win for Australia, especially for agricultural related industries. The ChAFTA deal is very encouraging for the sugar industry in Australia. This paper considers the Australian sugar industry with a view of analyzing the various economic variables within it. Nature of the Australian Sugar Industry It is important to understand the definition of a competitive market before deciding whether the sugar industry is in this category. A competitive market refers to one where many producers usually compete for the several customers available (Puig, 2016). The competition is normally about the satisfaction of the human wants and needs. In this kind of market, the producers are price-takers while consumers have no influence over the existing production level and prices. The various features of a competitive market make the Australian sugar market not competitive. This market is basically monopolistic. For in the Australian sugar industry, QLD produces 90% of the total sugar within Australia (Jiang, 2013). This large size of production that is controlled by this company simply implies that it is the monopoly in the country in terms sugar production. Where there is a competitive market, then there is no entity that can control over 90% of the whole market. Australia is the second largest sugar cane producer in Asia Source: He (2015) The Australian sugar industry has been the subject of constant legislation meant for regulation. These regulations that are implemented in this industry have always provided some level of stability for the growers and millers. Each group has been shielded from the competitive pressures of each other (Milford, 2001). None of these groups takes responsibility for the most marketing and specific production decisions. It is important to acknowledge the fact that most of these matters are controlled by the producers in the case of the other industries. The level of output in the Australian sugar industry has increased exponentially. Producers now sell all their output without the condition of providing credit. Moreover, the existence of the compulsory acquisition condition in this industry has enhanced the returns got by producers through permitting domestic prices to be held above the export prices. The Australian sugar industry is international highly competitive. However, there has been decline in the export opportunities for the sugar that is raw and refined. Within Australia, the lack of competition in the marketing of sugar has lowered the level of discipline on the part of the Queensland Sugar Corporation in terms of seeking for the highest market returns and minimal costs. Being the giant producer of sugar in Australia that accounts for 90% of the whole country, the Queensland Sugar Corporation implements monopolistic tactics of ensuring it boosts its profits and minimizes costs. Therefore, it sometimes produces sugar at a level that is not sufficient enough to satisfy the market demand from the consumers. This insufficient sugar output is then sold at a very high price. This decision is made by the company so that it can achieve the super-normal profits. It, therefore, sets its output at the point where price equals the marginal cost. Potentially Relevant Markets The potentially relevant markets in this industry within Australia include those of the millers and growers. Growers are the ones who produce the raw sugar and sell it to the companies for processing. This market is very crucial in the entire sugar industry. Without the growers then millers have no raw materials for their business of refining sugar. It is a complementary market within the sugar industry. Growers perform the basic agriculture in the farms (He, 2015). Normally, the growers must implement some agricultural knowledge in their practice of farming sugar cane. The other complementary market is the millers’ one. This market is comprised of the sugarcane factories that refine the raw sugar into refined product ready for use. The pricing of the refined sugar depends on the existing farming costs and the labor expenses. The sugar industry has no substitute products. There is no good, which can be used in the place of sugar. Tariff Rates and Impact of ChAFTA on this Industry On 17 June 2015, Australia and China signed the China Australia Free Trade Agreement, ChAFTA, exactly seven months after the Declaration of Intent was entered into in November 2014.1 The terms of ChAFTA are consistent with the terms of the Declaration of Intent. Australia's economy is expected to benefit greatly from ChAFTA, given that China is Australia's largest trading partner with two way trade valued at over $160 billion. The two-way trade between China and Australia has a valuation of over $160 billion. This figure makes China to be the largest trading partner of Australia. According to the provisions of ChAFTA, Australia will benefit by having over 85% of its agricultural goods exported to China. These goods will enter China duty free. The exports from Austrtalia to China are expected to rise to a level of 95% after the full implementation of ChAFTA. ChAFTA also greatly increases access to China for Australian services businesses in specific industries and improves investment facilitation between Australia and China. ChAFTA spells out a number of reforms on the sugar trade between China and Australia. Many people have noted that ChAFTA has very mixed results for the Australian sugar industry. This agreement states that there will be a 15-30% tariff cut on sugar export trade. Cutting the tariffs to enhance free trade will lead to significant impacts in the Australian sugar industry. Firstly, the Australian producers will have an increased access to the Chinese market. They will have a widened market as a result of the free trade. The price of sugar will also fall since China will also be able to export its sugar to Australia. According to the reports from policy-makers privy to this deal in both countries, it is estimated that the economy of Australia is set to benefit by over AUD$18 billion within a period of 10 years after the implementation of this agreement (Capling & Ravenhill, 2015). ChAFTA is thus a very significant trade deal for Australia. All should hold this deal as quite positive and progressive for Australia. However, it has not been highly debated in China in equal measure to the case in Australia. Therefore, Australia won big from this trade agreement. It is important to understand the fact that commitments made in this agreement by the two countries will greatly bring growth and high performance in the sectors enlisted in it. One of the sectors is sugar farming, which now stands to be transformed if this opportunity is effectively tapped. However, there have been murmurs that the agreement’s provisions fall short of what can be described as free trade between the two countries. In the deal, if a sector is not enlisted then the exporters from Australia have to abide by the normal trade policy regime of China. Therefore, for such industries operations will be as usual after the deal is implemented. From the political point of view, Chinese government may not have agreed to the stronger negative-list framework in ChAFTA. The government of Australia seems to have been put in a difficult situation, where it had to choose between what to take and leave. The government had to select it winners from this trade agreement while setting its priorities. In this list of winners, sugar, beef, dairy and horticulture are included. It is important to note that they are all agricultural-based products hence the agricultural sector is the one that won big. Such listing of the winners implies that there are also those sectors that lost from the deal. These other sectors were cut off the negotiations table in exchange for China also shelving its requests on the state-owned enterprise investment (Hyde, 2015). It is important to note that with the importation of cheap sugar from China into Australia, will increase competition against the Queensland Sugar Corporation sugar products. The company will have to leave its monopolistic character and embark on competing with the imported sugar from China. It must be observed that China has very cheap sugar. The products sold from China are always very cheap. Conclusion ChAFTA offers a big chance for the Australian agricultural industry to grow. With the Australian able to enter the Chinese market without tariff charges, the Queensland Sugar Corporation has all the reasons to expect a very positive future. Since it will be able to export at minimal costs, the company can take this advantage by lowering the price of its commodities so that it attracts more consumers. Australia produces high quality sugar. It is, therefore, expected that a lot consumers in China will be satisfied in terms of the utility of the Australian sugar product. It is vital to note that the Australian food and fibre products have made up the largest share of its exports to China after increasing in the recent years. The players in these sectors are quite optimistic that these sectors will continue with their upward trend in terms of exports. Deloitte pointed the agribusiness industry of Australia as the most promising in terms of growth in the coming years. This projection must have been based on the current surge in demand for these products from Australia in China. This analysis and projection must be received with some caution because the Australian producers have always faced difficulties and barriers accessing the Chinese market relative to the countries that already have trade agreements with the country. Some of these nations include ASEAN, New Zealand and Chile. Therefore, this latest free trade agreement with China will put Australia’s producers on a level playing ground with all the other nations in terms competing for the Chinese market. Moreover, it also gives Australia an advantage over other big agribusiness competitors for the Chinese market like the United States, European countries and Canada.  References Capling, A., & Ravenhill, J. (2015). Australia's flawed approach to trade negotiations: and where do we sign?. Australian Journal of International Affairs, 69(5), 496-512. He, L. (2015). Reassessing the China-Australia free trade agreement negotiation process. Frontiers L. China, 10, 714. Hyde, M. (2015). Key agricultural outcomes of recent free trade agreements.Agricultural Commodities, 5(1), 23. Jiang, Y. (2013). Australia-China FTA Negotiations. In China’s Policymaking for Regional Economic Cooperation (pp. 71-110). Palgrave Macmillan UK. Milford, B. (2001). The Australian sugar industry. Zuckerindustrie, 126(9), 687-692. Puig, S. (2016). Sugar and the Making of International Trade Law. AJIL, 110, 415-415. Read More