A Free Trade Agreement between China and Australia - Case Study Example

Analysis of the Implication of a Free Trade Agreement (FTA) Between China and Australia on the clothing industries of both countries Introduction Australia and china have over the last two decades increased their volumes of trade across different secto0rs of the two economies. In the financial year 2011-2012, the volume of trade between the two countries averaged at $ 120,229 million. From this amount Australia exported goods worth $ 76824 million and imported goods worth $ 43405 million from china. This was an overall growth of 13.5 % from the previous trading year. The good trading relations and statistics for the past two decades confirm that the two countries are major trading partners. It is statistics such as this that led the two countries to consider a Free Trade Agreement (FTA) which analyst believe it will benefit the two countries (Ministry of Commerce, 2009). However there are sections of industry players in various sectors who believe the intention is good but may have unexpected impact on the Australian economy (Vidot, 2013). In light of this understanding, this paper seeks to analyze the impact of FTA on the clothing industry in Australia considering the fact that Australia is a major importer of Chinese made clothing. Within the period of 2011-2012, Australia imported $ 4229 worth of clothing from china; this meant that clothing was number three of the major Australian imports from china after telecom equipments and computers (Department of Foreign Affairs and Trade, 2013). Impact of FTA on Chinese clothing industry Increased demand Currently Australia is importing more of Chinese made clothing and textile products. This means that the Chinese clothing industry is currently doing very well as compared to the Australian clothing industry. The Chinese clothes manufacturers not only export to Australia but also to other world destinations. Over time the Chinese industry has been able to increase it efficiency in production as compared to the Australian industry which serves; mainly the local domestic market (Australian Industry Group, 2004). It therefore means that if the FTA deal goes ahead the demand for clothing from the Australian market will go up since the tariff and non-tariff barriers will be reduced or abolished all together. The price of the Chinese clothing in the local Australian market will go down as compared to the locally produced clothing which is expensive. The low priced Chinese products will be in high demand in Australian increasing the sales for the Chinese manufacturers (Australian Industry Group, 2004). Some Australian manufactures are already aware of this implication and are thus against the FTA agreement since it will result in influx of cheap Chinese products in the market and therefore reducing the demand for their own products (Vidot, 2013). Efficiency As the Chinese industry textile industry increases its exports to Australia as a result of removed tariff and nontariff barriers, the industry will have to achieve production efficiency due to the good earnings the industry will make (Australian Chamber of Commerce and Industry, 2005). This will mean that the companies can re invest the profits made into acquiring new equipment and advanced production technology thereby achieving efficiency in production. Consequently the Chinese clothing will get even cheaper in the Australian market as the companies in China achieve production efficiency. Increase in economies of scale The Chinese industry will experience a boom due to better production technology and a large market for their goods where they have a competitive advantage. This will mean that the industry will grow and achieve economies of scale in production, transportation and other industry economies of scale. This will make the industry even more capable of competing with locally made clothing in Australia who might not be enjoying same economies of scale and thus their goods will be highly priced due to their high production cost (Australian Chamber of Commerce and Industry, 2005). Growth of the industry The lucrative profits in the Chinese clothing industry will attract even more investors pin the industry as the share prices appreciate. This will ensure the companies; invest more in growth due to availability of expansion funds and reinvestment of the profits made by the competing firms in the Chinese industry. As a result the industry will grow in size and in productivity to continues the growth trend and take advantage of growing market in Australia and world over. This has been the main growth strategy adopted by the Chinese economy to grow and dominated global trade (Schnabel, 2010). Job creation The Chinese government has put up very spirited efforts to ensure it gets as many FTAs as possible with its trading partners. It shows the major benefits the country hopes to achieve with the FTA agreement with such countries. The removal of tariff and nontariff barriers will improve trade between the two countries. China being an export oriented economy will benefit largely by creating jobs for its local population (Australian Industry Group, 2004). This is exactly what will happen with the FTA agreement between china and Australia. If the agreement to have a FTA between the two countries pushes ahead, then the Chinese industry which is already having a competitive advantage over the Australian industry will be able to increase its growth by attracting even more investors and entrepreneurs in the clothing industry as; a result there will be an influx of employment to the Chinese population. The labour costs in china are considerably low as compared to the Australian industry meaning more jobs will be created by the sector in China as it increases efficiency productivity and economies of a scale. Kerr & Gaisford (2012) note that this phenomenon will have an effect of exporting unemployment to the importing industry by exporting already finished labour intensive clothing products form the exporting industry, in this case Chinese industry which enjoys favourable local policies from its government. Impact of FTA on Australian clothing industry Increased competition The Chinese clothing industry is made up of export oriented companies who are very strong in terms of efficiencies and production methods. Allowing the Chinese firms to export their clothing product to Australia without experiencing any tariff or non-tariff barriers will expose the Australian industry top increased competition. The Australian industry is not a very strong competitor in clothe production as compared to the Chinese companies. This means that the Chinese companies will have an upper had in the market since their products will be cheaper than the Australian made clothing products (Australian Chamber of Commerce and Industry, 2005). The effect of this will be increased demand of Chinese products which will be even cheaper as they are not charged any tax. On the other hand the already highly priced Australian clothing products will have a low demand in the Australian market due to their high price. It will therefore expose the Australian companies to the possibility of going out of business due to low productivity which will mean the companies in the industry are not able to service their costs nor even finance growth. Essentially the companies will not be able to attract investors due to their low profitability and therefore the whole industry will be faced with a danger of collapsing as investors shy away from the local industry due to the investment risk involved. Inefficiency in the industry The Australian industry will experience increased competition from china which largely benefits the Chinese industry. As a result the firms in Australia will make little if any profit from their sales (Australian Industry Group, 2004). Considering the fact that the Chinese industry is vey much advanced in terms of serving even bigger markets in the world such as Europe and United States, the Chinese will have an upper hand in the clothing sector of Australia. This state of affairs will leave the Australian manufacturers with limited profits to plough back into research and development and technology upgrade as a result the firms in Australia will experience high inefficiencies as compared to their counterparts in the Chinese industry. Consequently the firms in Australia will produce goods that are majorly of high prices or low quality in nature due to lack of adoption of new technologies. These inefficiencies will work to put the Australian industry at a disadvantaged competitive position in the industry presently and also in future as lack of development in the short run will surely affect the expected future growth and productivity in the sector. Increase in diseconomies of scale The industry in Australia will make limited profit due to increased competition from lowly priced Chinese products. As a result the industry will not be able to capitalize on the gains made from the local industry to increase economies of scale pin production and market based economies of scale. This will mean the companies will have stagnated growth as a result of not having economies of scale in production. The market will not suffer the high prices that come with diseconomies of scale since the consumers will have an option of buying form the available imported Chinese clothing merchandise. According to Bagwell & Staiger (2004) the outcome of such a scenario will be a local industry that is experiencing high production costs reflected on the price of their products and in effect lose market share to the Chinese imports. Such a market will force the domestic companies to either focus on niche markets as opposed to mass market focus which will expose them to price sensitive competition that they can’t capitalize on (Czinkota and Moffet, 2009). The niche markets may provide a market with relatively inelastic demand and therefore maintain demand stability of the locally manufactured clothing products. This will require the firms to invest more on differentiating their products and concentrating their market. However, in the long run the diseconomies of scale will impact negatively on the industry unless sustained investment is made to improve local productivity. Possible Collapse of industry The removal of tariff and nontariff barriers will definitely benefit the bigger player in the FTA agreement and in this case china. The Australian textile industry is incapable of competing effectively with the already mature clothing industry in china. By removing the barriers, the agreement will expose the manufactures in Australia to competition from cheap Chinese clothing imports. Customers being rational decision makers will go for what fits into their budget plans. The implication of this will be low profitability in the industry hurting the established players in the Australian clothing industry and also discouraging growing companies in the industry. The state of the market will also act as a barrier to new entrants in the Australian industry due to the low priced Chinese products which the new companies cannot be able to compete with given their production capacity, efficiency and economies of scale (Australian Industry Group, 2004). The FTA will therefore stifle the development of the local clothing industry by exposing it to unfair competition and eventually the industry will collapse as the players don’t make significant profits to sustain their activities and give value to shareholders (Australian Chamber of Commerce and Industry, 2005). Loss of jobs When a country imports more than it is exporting then it exposes its population to loss of jobs in the local economy due to the fact that products come having been added value to (Gaisford, 2001). Australia imports from china are mainly labor intensive industrial products. The clothing products are no exception (Australian Industry Group, 2004). The Chinese industry will be taking away a lot of jobs from the Australian industry by importing cheap clothing to sell in the Australian market. when the local Australian companies will be experiencing low revenues and profitability due to reducing sales volumes, they will employ all measures to ensure they survive in an industry where the probability of become insolvent will be very high. One of the main options for the companies will be to reduce their wage bill through operating with a lean staff body. This will mean a lot of people will be retrenched by the l0cal companies as they seek to reduce their production costs (Australian Chamber of Commerce and Industry, 2005). The economy will generally lose since the industry will be offering very few if any jobs to the economy annually as the market becomes unfavorable to local manufacturers. By operating lean work force the companies will be able to utilize efficiently the little profits realized and ensure continued stay in the industry. Conclusion From the discussion in this paper it is evident that FTA between Australia and china will have massive negative implication on the Australian clothing industry. The Chinese industry is already mature and exporting in large volumes to the Australian market. Further reduction in trade barriers will boost the volumes of clothing imported to Australia. The effects of this will be the development and growth of the Chinese industry resulting in job creation and increased profitability. The Australian industry will suffer due to increased importation of cheap Chinese clothing that will have a competitive advantage in the market thereby making the local manufactures lose market share. The result will be jobs loss, reduced profitability and possible collapse of the industry. References Australian Chamber of Commerce and Industry. (2005). Riding The Chinese Dragon: Opportunities and Challenges for Australia and the World. Australian Chamber of Commerce and Industry. Australian Industry Group. (2004). Australia-China Free Trade Agreement Feasibility Study. Australian Industry Group. Bagwell , K., & Staiger, R. (2004). The economics of the world trading system, MIT Press Czinkota, M.,& Moffet, M. (2009). Fundamentals of international business, Wessex publishing Department of Foreign Affairs and Trade. (2013). Australia-China Free Trade Agreement negotiations. Retrieved May 15, 2013, from Department of Foreign Affairs and Trade: http://www.dfat.gov.au/fta/acfta/ Department of Foreign Affairs and Trade. (2013). Fact Sheet [PDF] available online at HYPERLINK "http://www.dfat.gov.au/geo/fs/chin.pdf" http://www.dfat.gov.au/geo/fs/chin.pdf [accessed 15 May 2013] Gaisford, J. (2001). Economic analysis for the international trade negotiations: the WTO and Agricultural Trade, Edward Elgar publishing Kerr, W., & Gaisford, J. (2012). Handbook on international trade policy, Edward Elgar Publishing Ministry of Commerce. (2009, October 24). China-Australia FTA- Australian business leader urges early agreement of free trade with China. Retrieved May 15, 2013, from Ministry of Commerce: http://fta.mofcom.gov.cn/enarticle/enaustralia/enaustralianews/200911/1590_1.html Schnabel, J. (2010). Productivity, exchange rates, and competitive advantage, International journal of commerce and management, (20)1, pp 43 Vidot, A. (2013, April 19). Australia gives up on full free trade agreement with China. Retrieved May 15, 2013, from ABC: http://www.abc.net.au/rural/news/content/201304/s3740645.htm Read More