ASEAN-Australia-New Zealand Free Trade Agreement - Case Study Example

Name Tutor Title: Asean – Australian – New Zealand Free Trade Agreement Institution Date 1. Executive summary ASEAN-Australia-New Zealand Free Trade Area has enhance cooperation and business participation of the member countries enabling closer ties and more exchange of goods. This paper explores the formation of the Trade Agreement giving an overview of the major benefits to the member countries. The introduction gives a brief explanation of AANZFTA and what it means for someone who does not know any thing about it. In the later stage real gross domestic product, real consumption, investment and capital flows have been explained in relation to the AANZFTA member countries. The subsequent chapter has extensively discussed the gains and implication that Australia industries will have following the formation of ASEAN-Australia-New Zealand Free Trade Area. There are also recommendations given after this chapter and finally a conclusion included at the end (Chandra, 2008). Table of Contents 1. Executive summary 2 Table of Contents 3 2. Introduction 4 3. Major economic benefits for the parties to the ASEAN – CER free trade agreement. 4 3.1. Real gross domestic product 6 3.2. Real consumption 7 3.3. Investment and Capital flows 8 3.4. Real exchange rates 9 3.5. Sectoral Changes in Production 10 4. Australian industry sectors gain most from AANZFTA 11 4.2. Tourism and travel services 12 4.3. Freight logistics services 13 4.4. Education services 14 4.5. Food sectors 15 5. Economic implications of this agreement on Australia’s industries 16 5.1. Implication for Australia producers of goods 17 5.2. Implications for Australian service providers and investors 17 6. Conclusion 17 7. Recommendation 18 Bibliography 19 2. Introduction ASEAN-Australia New Zealand Free Trade Area (AANZFTA) is a single-undertaking and comprehensive economic agreement that creates and opens up new opportunities for the 600 million population of ASEAN, Australia and New Zealand which possess a combined output of economy of about USD 2.65 trillion based on a platform of more, facilitative, transparent and liberal market investment and access regimes among the signatories to the Agreement. Other parties apart from New Zealand and Australia comprises of Brunei, Cambodia, Burma (Myanmar), Laos, Indonesia, Philippines, Malaysia, Vietnam, Singapore and Thailand. The agreement for establishment of ASEAN-Australia-New Zealand (AANZFTA) was signed on February 27, 2009 in Thailand. The AANZFTA got into force on various dates during the year 2010 for, New Zealand, Australia, Burma, Brunei, Philippines, Malaysia, Thailand, Vietnam and Singapore. It entered into force on 4 January for Cambodia and 1 January 2011 for Laos. AANZFTA avails for great commitment on the reduction and elimination of tariffs. 3. Major economic benefits for the parties to the ASEAN – CER free trade agreement. There are many benefits that have been occasioned by the formation of AANZFTA Agreement to the parties involved. The major economic benefits for parties to this agreement include the following; The low tariffs are bound and delivering gradual tariff elimination from the more developed ASEAN Member states and Vietnam on from 90 to 100 percent of tariffs lines covering 96 percent of the prevailing Australia Export to the region. The trade agreement also supports the development of more competitive and efficient industries by tapping into supply chains globally via regional rules of origin. AANZFTA ensures meaningful commercial improvement to prevailing World Trade Organization (WTO) commitments throughout a variety of service sectors that even comprises of construction, professional services and mining-related services, financial services, telecommunications and education (Weiss, Thurbon, & Mathews, 2004). Through AANZFTA there is the creation of a regime that is significant of protections of investment, an investor-state dispute mechanism of resolution, and a work program that is forward for market access commitment on investment. Through this agreement the ever present disputes concerning investment will be settled faster for more trade participation as opposed to problem resolution that are brought about by existence of many barriers. When there are so many restrictions there is a high possibility of one breaking these regulations that sparks off a resolution program that would consume more time that could have been used in trade participation. The agreement provides also a framework where by countries are able to make commitments on temporary business entry of natural persons that go beyond suppliers of services, to include sellers of goods and investors (Merino-blanco, 2011). The AANZFTA Agreement provides an economic cooperation component that is substantial and to develop more economic integration including the enhancement of intellectual property systems that are sound, and moreover the ability to enforce intellectual property rights. There are also review mechanisms and built-in agendas in areas such as non-tariff measures, investment, rules of origin and services. This ensures that AANZFTA remains a ‘living document’ that possesses commercial relevance that is ongoing. 3.1. Real gross domestic product Real Gross Domestic Product is an inflation-adjusted measure that shows the value of all services and goods produced in a particular year expressed in base-year prices. It is sometimes referred to as constant dollar GDP, constant price GDP or Inflation-corrected GDP. Real GDP can take care of changes in the price level and avail more accurate figure. (Oxford Business Group, 2009). The line graph shows the percentage growth of Real GDP over period of six years commencing from 2004 to 2009. This is the real gross domestic product trend prior to establishment of ASEAN-Australia-New Zealand Free Trade Area. It is expected that there will be a positive trend after the establishment of the Trade Agreement that provides more space for business growth and participation (Pomfret, 2004). 3.2. Real consumption Changes in real household consumption are more demonstration of changes in the welfare from liberalization of trade as opposed to changes in the real GDP. Consumption can vary from the production of a country by overseas borrowing. In the model consumers are forward looking and can anticipate the extra gain to income as a result of tariff reductions that were announced. While Singapore and Malaysia reported less GDP gains as compared to other members of SEAN. Their real welfare gain in terms relativity are greater as compared to Philippines and Indonesia owing to the fact that they relatively borrow more against their future anticipated wealth. The following graph shows Australian merchandise with other members of the AANZFTA Agreement. (Source: ASEAN Merchandise Trade Statistics Database) 3.3. Investment and Capital flows To realize the promotion of more liberal investment area in AANZFTA the various parties have committed to a number of functions. National Treatment shall provide to investors treatment no less favourable than that it accords, in similar circumstances, to its own investors and their investments. The definition of investment used in AANZFTA is a broad, non-exhaustive asset-based definition. For investments that are covered, AANZFTA provides a variety of protections to investors even the possibility of having to deal with a dispute through dispute settlement action of investor-state. The parties to the agreement are required to avail equitable and fair treatment to covered investments. They have to treat investors of other partners to AANZFTA no less favourable as compared to their own investors or non-party or those of any other Party in relation to compensation for suffered losses by investments due to armed conflict, state of emergency or civil strife. The partners’ obligation is to ensure that any expropriation or nationalization of any investment is carried out for a public purpose and a manner that is non-discriminatory. There should also be free transfer of funds concerning covered investments without hesitation, only subject to certain expectations that are defined in relation to issues such as rights of creditors’ protection, taxation, and crime proceeds recovery (Low& Capling, 2010). The trade liberalization under AFTA-CER is responsible for the more efficient use of resources and improves access to markets. Consequently AFTA-CER lifts income and productivity in every member country. The improved efficiency and any other any gains in terms of trade lift the return on capital in every economy. In the wide global market there is movement of funds to where highest returns can be earned (Emerson, 2006). The formation of AFTA-CER free trade area results in capital flowing between countries. A positive change is a pointer to a net flow of capital in to a country. AFTA-CER economies gain from the capital flows which permit increase in consumption, production and investment. Whereas the capital flows shows an increase in the current account deficit they also reflect the increasing attractiveness of investment in these particular countries. They demonstrate the capital movement to every economy permitting residents to increase their investment and consumption without having an impact on domestic savings. Extra foreign investment result in addition to extra domestic investment resulting in every economy to rise ( Emerson, 2006). 3.4. Real exchange rates As it has already outlined, trade liberation increases economy productivity. One of the effects is the causing increase in the return to capital in each of the economy. Returns to capital which are higher will be a reason for investment encouragement, a section of which will emanate from foreign capital inflow. The outcome is that the real exchange rate appreciates for each economy against the US dollar. So long as the foreign investment has happened, the exchange rate weakens in order for the exports to be encouraged over imports and the current account is inclined towards surplus to service the foreign investment. 3.5. Sectoral Changes in Production The extra investment in each economy result in production rising and exports to change. This increase in production is different through out all sectors due to different of protection being removed across sectors and a variety of demands for goods that are domestically produced. Durable manufactured goods like motor vehicles are obvious category where there exists a large investment good component. The huge absolute increase in production happens in the services sectors for both AFTA and CER. This occurs because services comprise such a huge proportion of the economy for every member. In terms which are relative, the biggest increases in production are in agriculture and both non-durable and durable manufacturing. For CER a substantial proportion of non-durable manufacturing would be made of processed food like beef, sugar and dairy products. According to Anjaria (2003) production of durable goods increases partly due to this category comprising of investment goods that are higher demand due to result of higher levels of efficiency realized after liberating trade. There are three extra demands for domestic production when countries come together to form a free trade area. Some part of investment demand will be met by imports as well as some final consumption demand, but huge portion of the extra investment demand and final consumption will emanate from goods produced domestically. All the three demands-investment, final consumption, and investment rose initially owing to the formation of the free trade area ( Plummer & Yue, 2009). 4. Australian industry sectors gain most from AANZFTA Australia industry sectors stand to gain greatly from the inception of AANZFTA Trade Agreement. AANZFTA will enhance trade owing to reduced barriers and many industry sectors in Australia will open up to more market and more supply of labor as well as export of technology. 4.1. Mining and energy related services E.g. BHP billiton Co. (www.bhpbilliton.com) Australia is very fortunate to be among few countries that possess plentiful supplies of many forms of renewable energy. The AANZFTA member countries are providing ready market for Australia energy products. Australia is abundantly rich in mineral resources. It possesses large resources of nickel, lead, uranium, zinc, alumina and bauxite. Australia will find easy market for its minerals due to elimination of barriers in the AANZFTA region. The industry also will benefit from getting workers from the member countries of the Trade Agreement. BHP Bilton supplies and produces world markets, comprising of the developing Asia and many other economies, with the vast of the natural resources they depend heavily on to fuel their growth. The resources include iron ore, nickel, copper, manganese, alumina, uranium, coal, gas and oil. BHP is a leading is a leading natural resource company that is central to the growth of the developing economies of the world. BHP Billiton shareholders who are up to A$2 per registration to Landcare Australia to help with the rehabilitation of wetlands in Australia. More shareholders have come from the ASEAN member countries following the registration of AANZFTA which has expanded trade links and the general market trends (Merino-blanco, 2011). 4.2. Tourism and travel services According to Kawai (2011) Australia tourism sector is the largest sector of the economy. In 2003/04 the tourism sector accounted for 3.9 per cent of GDP of Australia at a value which is close to A$32 billion to the national economy. Being a popular tourist destination the incorporation of AANZFTA will enhance tourism and speed up the process of foreigners getting travelling documents. This will result in the expansion of the tourism and travel sector as infrastructure development is also encouraged. Domestic tourism takes the largest share in the tourism contribution. Australians took close to 49.2 million trips with the borders of their country, comprising of 210 million nights away from their homes. The greatest popular accommodation preferred was the home of relatives or a friend, this accounting for 45% of nights away from home. Motels and hotels with facilities stood for 18% of nights, 8% of caravan parks and house flats rented were 7%. The popular form of transport in used on domestic trips was private vehicles representing 78%, followed by aircraft at 11% and coach or bus accounting for 5%. With the signing of the AANZFTA will lead to more tourists from the Asia region finding their way to Australia as an attractive destination. The main aim of visit to Australia is holiday accounting 62% of the total followed by visiting relatives at 18% and business account for 9%. The main source of visitors to Australia was Japan accounting for 22%, New Zealand accounted for 17%, UK 10.7%, US 9.4% and 5.2% being represented by Singapore. There more visitors to Australia from the Asia region in the recent times. Australians participated in 2.3 million overseas trips which are short-term in the year 1993. The most vital destination for Australians visiting overseas was New Zealand with about 15.3% voting for it as a main destination. Asia is the greatest important destination region accounting for 36% of travelers choosing a country in Asia as the major destination. 4.3. Freight logistics services Freight logistic services have been enhanced with the formation of this Trade Agreement. Freight forwarders avail a wide range of options for finding the rate that is more cost efficient. For export of goods, the transport of the product to markets overseas is a very crucial affair that has been enhanced with the signing of the Trade Agreement for the region. Shipping terms have been enhanced as well as the air travel industries. There are more goods finding their way to the international market. The estimate of Australian logistic market shows the following contribution to the logistics costs: Transport 40% Inventory 20% Storage 25% Administration 15% BY the estimation of freight costs of transport, these could be applied to estimate the total logistic costs. In relation to a variety of sources, suppliers of Australian freight transport services received revenues of operation close to $33 billion in the year 200o, spread as follows; Trans Maritime transport: $1 billion (Sd+D estimate) Port services: $12 billion (Sd+D estimate) Rail transport: $3 billion (ARA website) Air transport: $0.5 billion (Sd+D estimate) Road transport: $16.5 billion (BTRE 2003a) In relations to primary freight, Woolworths is aiming to reduce the amount of direct store deliveries and controlling of inbound freight volumes into its distribution centers, using a management system that is transparent. Woolworths has national workshops involving 1,100 of its vendors with the aim of cutting down on volume of direct store deliveries. Coles Myer like Woolworths is targeting to cut down on direct-to-store deliveries from 24% sales units to 5% cartons network (Severino, 2006). 4.4. Education services Australia training and education providers have a vast attraction for those wishing to study in a wide range of fields. Australia is the lies third behind UK and US for popular English speaking destination. AANZFTA Agreement has open more doors for accessibility to the education services in Australia. The member countries of AANZFTA will want to keep pace with Australia and consequently there will be many who will want to come to Australia and study. This enhances growth of the education sector in Australia. There are 38 government sponsored universities and only two private universities in Australia. It is a home for the most prestigious universities in the world. Studying tuition costs remain affordable for both foreign and domestic students. Australia visa reviews were aimed at enhancing the foreign student enrollment to the universities in Australia. This will make Australia competitive not only in education but also tourism. With the formation of AANZFTA most of the barriers to travel for the member states have been scrapped (Kawai, 2011). 4.5. Food sectors Australia food industry is a significant component of the economy. Food forms forty six percent of all turnover retailing in Australia, total liquor and food retail spending has rose substantially over the past few years. The food industry makes an important contribution to the regional area economies by means of employment, service and business opportunities. The formation of AANZFTA has led to the rapid expansion of the food sector owing to increased trade and efficiency in production means. The AANZFTA members have created more market and expansion for food sector in Australia. Food processing industry in Australia has several sectors as outlined in the table below. (Source: Food Australia 5th edition, ABS 5722; press search) Coles Myer limited is exposed less to the grocery industry as compared to Woolworths with food and liquor sales accounting for 55% of the total turnover in the year 2004. Coles Myer is experiencing the same impediments as Woolworths and has managed to enhance growth by the Coles Express initiative and the chain Office works. 5. Economic implications of this agreement on Australia’s industries The Australia industries have a vast opportunity of making the best out of the Trade Agreement. There are many implications that come with the signing of the trade agreement to various industries of Australia. 5.1. Implication for Australia producers of goods Australia producers of goods have a larger access to a vast market of their goods and this lead to rapid expansions of the sector. They go to member state countries and exploit any untapped markets or look for more resources that are available for processing. Australia producers have a big chance of improving in the long run with the improved trade (Emerson, 2006). 5.2. Implications for Australian service providers and investors Service providers and investors have a reason to feel happy with the provisions embodied in the trade Agreement. The main indication of more economic integration is the ability of service providers, sales people and investors from one country to enter and stay temporarily in member states country to explore business opportunities, enter into contracts and negotiate. AANZFTA avails a framework for countries to make commitments on temporary business entry encompassing all the sectors of the economy (Lian, 2009). 6. Conclusion This paper has brought to light some crucial developments that have been made possible with the signing of AANZFTA Trade Agreement. There are many members who are parties to this agreement and this paper a lone cannot be sufficient to explore each individual member. However, the highlight of Australia as a major member of the Trade Agreement goes along way to explaining the significance of this trade agreement to the rest of the members. The most recent figures may not have been used but those quoted are a big indicator of the trend that is happening in the AANZFTA member states (Severino, 2006). 7. Recommendation Non-tariff barriers let alone tariff barriers should more so be looked at, including issues in relation to conformity to technical standards and other requirements. Mechanisms of provision of more equitable handling of issues relating to Intellectual Property, accessibility to Government investment and procurement opportunities are also critical. Overall issues concerning administration laws and regulations that are transparent are also important to tackling the area of non-trade barriers. Tools of trade that are defensive including anti-dumping, safeguard measures, and countervailing measures must be assured to make sure trade happens on a basis that is equitable (Oxford Business Group, 2009). The Agreement should be in nature very comprehensive, and ensure provision of immediate liberalization across trade of merchandise to all save for a minimum of sensitive items, to which traditional arrangement of tariff reduction should be applied. The transitional arrangements should not be longer as compared to those used under intra-ASEAN trading arrangements, or be accorded to any external treaty partners. The rules of origin for treatment of preferential treatment should follow the specific methodology of product employed in the Thailand-Australia. Representatives of the industry should be included in mechanisms of review incorporated into the agreement. The barriers barring investment flows should be removed and supported by provisions facilitating the entry of business people temporarily. Bibliography Merino-blanco, E., 2011, Globalization and Natural Resources Law: Challenges, Key Issues and Perspectives. Melbourne: Edward Elgar Publishing. Lian K. K., 2009, ASEAN environmental law, policy, and governance: selected documents. Sydney: World Scientific. Low, P. & Capling, P.A., 2010, Governments, Non-State Actors and Trade Policy-Making: Negotiating Preferentially or Multilaterally? London: Cambridge University Press. Severino, R. ,2006, Southeast Asia in search of an ASEAN community: insights from the former ASEAN secretary-general. Singapore :Institute of Southeast Asian Studies. Oxford Business Group, 2009, The Report: Brunei Darussalam 2009. London: Oxford Business Group. Plummer, M. G. & Yue, C.S. (2009). Realizing the ASEAN Economic Community: A Comprehensive Assessment. :Institute of Southeast Asian Studies. Chandra, A.C. ,2008, Indonesia and the ASEAN Free Trade Agreement: nationalists and regional integration strategy. Maryland: Lexington Books/Rowman & Littlefield Pub. Kawai, M. ,2011, ASIA'S FREE TRADE AGREEMENTS: IS BUSINESS RESPONDING? London :Edward Elgar Publishing. Kirmani, N., & Calika, N., 2008, International Trade Policies: Background papers. New York: International Monetary Fund. Emerson, C. ,2006, Vital signs, vibrant society: securing Australia's economic and social wellbeing. Sydney: UNSW Press. Weiss, L.M., Thurbon, E., & Mathews, J.A., 2004, How to kill a country: Australia's devastating trade deal with the United States. Melbourne: Allen & Unwin. Pomfret, R.W.T., 2004, Australia's trade policies. London: Oxford University Press. Read More