Free Trade Agreement Between Australia And China

Range of Goods and Services Covered in the Agreement

Questions:

(1) What is a Free Trade Agreement? What range of goods and services are covered in the new agreement between Australia and China? Identify the types of trade and investment policies covered in this agreement and the timelines involved.

(2) Which industries are likely to be directly affected both positively and adversely by this trade agreement in Australia and China? Explain your answers. What factors will determine how these industries will respond to the new bilateral trading conditions in the short and long term?

(3) Choose an industry in Australia or China that will be directly affected by this trade agreement and use economic theory to explain the impact in terms of equilibrium price and quantity traded.

(4) Identify industries likely to be indirectly affected by this trade agreement in both Australia and China. Explain why you chose these industries.

(5) Discuss the strengths and weaknesses of economic theory to guide our decision making in terms of international trade. Explain your answer in terms of theoretical assumptions and welfare outcomes.

(6) Reflecting back on the entire ECON11026 course this term, which topic did you find the most interesting or relevant? Explain your choice. What was the most important thing you learned about economics during this term?

(1) Free Trade Agreement:

Free trade happens between two or more countries. Howarth (2009, pp. 577) stated that it helps the involved countries to develop a particular area for free trade where the trading is made for the goods and services. In this free trading situation, the trading is conducted beyond the borders between the involved countries. This free trade agreement allows the involved countries to perform the trading between the countries without paying any tariffs. On the contrary, Frank and Bernanke (2004, pp. 175) opined that the labour and the capital can be moved freely within the involved countries. The involved countries only have to pay the common external tariff that is also called the uniform tariff on the trading with the countries those are not involved within this free trade.      

Range of Goods and Services those are covered in the new agreement between Australia and China:

The range of goods and services those are covered within the new agreement between Australia and China includes the agricultural products, other resources products, financial products, trade in services, investment products etc. The agricultural products those are involved within the free trade agreement between Australia and China are the daily products, beef food products and wines. The tariff on these products is removed under this free trade agreement. Ling He (2013, pp. 695) informed that the tariffs are removed from the non-cooking coal, pharmaceuticals and the resources of energy products such as gold, iron ore and cooking coal.

The educational institutions are open in China by the Australian education providers that allow the overseas students. Australian service providers got the permission to operate the Australia owned restaurants and hotels in China. Weder (2010, pp. 9) informed that the insurance companies of Australia got the access in to the China’s third party liability motor vehicle market. The waiting period for Australian banks reduced from 3 to 1 year in engaging the local currency of China, Renminbi. The investment of China in the Australian market has increased by 41.2% (NewsComAu, 2014).  

Types of Trade and Investment Policies Covered and Timelines

Types of Trade and Investment Policies covered in this agreement and the timelines:

There are two types of free trade agreements including bilateral agreement and multilateral agreement. According to Siriwardana (2009, pp. 394), the free trade agreement between Australia and China is the type of bilateral agreement where there is a negotiation exists between the governments of the involved countries.  On the other hand, George Mulgan (2009, pp. 39) argued that in the Multilateral agreement, the negotiation happens between the 157 members of the World Trade Organisation (WTO) where the special consideration is done for the weak and poor countries.

Activities	Time (Days)
Agreement signature after legal review	7
Tabling the agreement in Australian Parliament	20
Inquiry on the agreement by Joint Standing Committee on Treaties (JSCOT)	15
Introduction of legislations considered by Parliament	15
Undertake by Chinese Government about their domestic treaty-making processes	30
Exchange of diplomatic notes	30
ChAFTA will come to force	—

                                                                                 Table 1: Timelines for free trade investment

                                                                                             (Source: Cheng, 2009, pp. 35)

(2) Industries those are directly affected both positive and adversely by the trade agreement between Australia and China:

The agricultural, the mineral resources, and these industries of Australia affected positively with the free trade agreement between Australia and China. From this agreement Australia has become an important supplier towards China for supply of material inputs and energy inputs. Kirchner (2012, pp. 412) informed that it has helped the economy of China to face a rapid growth in their economy. The industrialization has improved in the Chinese market.  Increased industrialization helped to generate more urbanization. It makes the people less dependent on the lands for effectively managing their daily life. So, the number of people increased in China those are dependent on the commercial products. It has helped China to increase their demands for more import in the agricultural products.

Moreover, China is the largest iron and steel producer country of the world. It has helped to increase the demand of Australia for iron. Furthermore, Hoa (2009, pp. 21) added that the economic growth for China made them to import oil and gas from the overseas market. It has changed the inve3stment pattern of China. The modified farming and mining technology has helped China to make the future bilateral investments.

Factors those can determine how these industries will respond to the new bilateral trading conditions in the short and long term:

The factors those help to understand how the involved industries within the bilateral trading perform within the short and long run are the revenue factor. It shows the profitability of the sectors within both of the countries. The revue in the agricultural sectors in Australia is improved, as they do not need to pay any tariffs to export their commercial food products in China. It is seen from the research that China bought the Australian agricultural products worth $9 billion as the tariffs are zero for the last four years. Australia also supplies ore and coal to China without any tariff, so, it has helped to improve the Australian industry of ore and coal. On the other hand, China produces steel with the help of the ore and coal exported by Australia. Australia exported energy resources over $85 billion to China in 2013 (Smh.com.au, 2014).  

Factors Determining Industries’ Response to the Agreement in the Short and Long Term

(3) The directly affected industry in Australia and China by the trade agreement:

The directly affected industries from the free trade agreement between China and Australia are the agricultural industry, commercial food industry, energy industry, coal industry, steel industry etc. The commercial food items are required by China. It is so, because the urbanisation is increased in the Chinese market. It helped to make the people of China less dependent on the land for their livelihood (Breen, 2010, pp. 659). So, the people of China have become more dependent on the commercial food products. It made them to import the commercial food products from the market of Australia. Australia exports the dairy products and the beef food items to China. Within this free trade between Australia and China, the exports of these commercial food items are tariff free for Australia in China.

Moreover, Kirchner (2012, pp. 419) stated that China is the largest producer country of steel. For the steel production they need ore and coal. Australia has the ability to import the required ore and coal for the steel production in China. These imports of ore and coal are also tariff free in China. Australia also exports wines to China without paying any tariff. On the other hand, China exports non-coking coal to Australia without paying any tariff for the last two years. The tariffs on the export and i9mport of the pharmaceutical products also have removed for more than last four years.   

Economic theory to explain the impact in terms of equilibrium price and quantity traded:

                                                                                           Figure 1: Equilibrium point

                                                                                      (Source: Siriwardana, 2009, pp. 396)

General equilibrium theory helps to understand the concepts of supply and demands within the economy including more than one competitive market. This theory shows the objectives that prove that the prices of the products will be on the equilibrium point. The concept of equilibrium point shows that in this point, the supply matches the demands for a particular product. The advancement in the technologies helps to get the solutions towards achieving the general equilibrium prices and quantities. From the previous figure, at the point P1, the market can meet the demand with the supply. Frank and Bernanke (2004, pp. 431) stated that when the price level is P2, the demand is more than supply. In this situation, supply cannot match the demand. In the price level P3, the supply is more than the demand, so there is excess supply and the firm faces loss in this situation.

(4) Indirectly affected industries by the trade agreement in Australia and China:

The indirectly affected industries from the free trade agreement between Australia and China are the financial services industry and the educational industry. As per the result of the free trade agreement, the government of China allowed the insurance companies of Australia to access the third party liability motor vehicle market of China. For the Australian banks those are involved in the local currency named Renminbi, the waiting period has reduced from 3 years to 1 year. Furthermore, Dixon (2009, pp. 642) added that the securities brokerage and advisory firms of Australia became able to provide the trading accounts, custody and portfolio management towards the investors of China to invest in offshore. This situation has helped China to grant Australia a Renminbi quota. It helped the financial institutions of Australia to make offshore investments.

On the other hand, Howarth (2009, pp. 576) informed that as per the free trade agreement, Australia got the permit to open the educational institutions in China. It allows many overseas students to come to China for study. The members of Australia manage the hotels and restaurants in China owned by the Australian companies only.    

Explanation behind choosing these industries:

The financial industries and the educational and restaurant and hotel industries are the strong sources for Australia to generate money from the foreign market. Free trade agreement between Australia and China did not affect these markets of financial industries, the educational and the restaurant and hotel industries. Free trade agreement helped the Australian government to get the easy and open access in the economy of China. This open access helped the Australian government to invest more in the foreign market of China (NewsComAu, 2014).

(5) Strengths and Weaknesses of Economic Theory towards decision making in terms of international trade:

The main strength of the economy theory is that within the international trade, it helps the organisations in making their international trading decisions. It helps to analyse the collected information about the market. Ling He (2013, pp. 697) stated that these proper analyse of the collected information about the international market helps to making a proper decision so that the profitability of the country will increase. It helps the government and firms of the country to make their investment decisions in the foreign market.

The main weakness of the economic theory in decision making within the international market is that most of the times the collected information about the competitive foreign market are not reliable. The source of these information are very important for their authenticity. The economic theory fails to provide the proper suggestion towards the organisation about making the business decision in the foreign market when the collected information are wrong and it comes out with wrong analyse report. This model sometimes comes out with the unrealistic assumption. It happens when there in inability in the information process while making the decision. Furthermore, George Mulgan (2009, pp. 43) added that the decision maker are generally unable to get the optimal solution and they are more interested to get the satisfactory solution rather than the optimal solution.       

Explanation with theoretical assumption and welfare outcome:

The proper decision-making can bring the welfare towards the organisation. Breen (2010, pp. 675) stated that it helps to evaluate the welfare of the economy of the country in the aggregate level. Social welfare function helps the government of the country to make the feasible allocation of the available resources towards generating the social welfare. These functions of the government of the country include the economic equity and efficiency. It helps the country to achieve the economic freedom. It also helps the government of the country to increase their capability. The competitive equilibrium helps the country to generate welfare for the economies for their country.   

(6) Most and interesting topic from the entire course of ECON11026:

The most interesting topic from the entire course of ECON11026 is the free trade agreement between the government of Australia and China. This free trade agreement will create benefits for many people in Australia and China. The dairy producers of Australia got the benefits from the free trade agreement with China (Hoa, 2009, pp. 29). China increases their demands for the safe commercial food products and as a result, the import of the dairy, beef, wines products have increased from Australia. The opportunity for the farmers in Australia has also increased with the increased demand for the quality safe commercial food products from the people of China. The consumers are also get the benefit from this agreement as the tariff on the imported and exported products between Australia and China becomes nil. This agreement also helps to boost the job vacancy in China and Australia.   

Most important thing about Economics within this term:

During this term, the most important thing about the economics was the equilibrium theory. This theory says the equilibrium condition for the firm that shows the best condition for the organisation within the competitive market. According to Cheng (2009, pp. 39), the equilibrium point shows the situation where the supply can meet the demand. In this situation the price level and the level of quantity are fixed. When the demand is more than the supply then the organisation fails to supply the demanded amount of products. In this situation the price level will increase. On the contrary, when the supply is more than the demand, then there will be excess supply. In this situation, the organisations need to lower their price.

Conclusion:

This assignment helped the learner to understand the free trade theory among two or more countries. As per this free trade agreement, most of the Australian exports including the agricultural products, beef and dairy products etc to China will be free. The liberalization will exist in the Australian service sector. Because of this agreement many people of this two countries got benefits.

Reference List:

Books:

Frank, R. and Bernanke, B. (2004). Principles of economics. Boston, Mass.: McGraw-Hill.

Journals:

Breen, M. (2010). “Digital determinism: culture industries in the USA-Australia Free Trade Agreement”. New Media & Society, 12(4), pp. 657-676.

Cheng, D. (2009). “A Chinese Perspective On The China-Australia Free Trade Agreement And Policy Suggestions”. Economic Papers: A journal of applied economics and policy, 27(1), pp. 30-40.

Dixon, P. (2009). “The Australia China Free Trade Agreement: Some Modelling Issues”. Journal of Industrial Relations, 49(5), pp. 631-645.

George Mulgan, A. (2009). “Where Japan’s Foreign Policy Meets Agricultural Trade Policy: The Australia–Japan Free Trade Agreement”. Japanese Studies, 28(1), pp. 31-44.

Hoa, T. (2009). “Australia-China Free Trade Agreement: Causal Empirics And Political Economy”. Economic Papers: A journal of applied economics and policy, 27(1), pp. 19-29.

Howarth, R. (2009). “Emissions trading: Principles and practice”. Ecological Economics, 61(2-3), pp. 576-577.

Kirchner, S. (2012). “Foreign Direct Investment in Australia Following the Australia-US Free Trade Agreement”. Australian Economic Review, 45(4), pp. 410-421.

Ling He, L. (2013). “On Re-invigorating the Australia-China Free Trade Agreement Negotiation Process”. The Journal of World Investment & Trade, 14(4), pp. 672-696.

Siriwardana, M. (2009). “The proposed Australia-China Free Trade Agreement: global and country-specific effects”. International Journal of Trade and Global Markets, 1(4), p. 392-397.

Weder, M. (2010). “Economic Crisis and Economic Theory”. Economic Record, 86(12), pp. 7-12.

Websites:

NewsComAu, (2014). What Australia’s free trade agreement with China means for you. [online] Available at: https://www.news.com.au/finance/small-business/australiachina-free-trade-agreement-what-it-means-for-you/story-fn9evb64-1227118988690 [Accessed 23 Jan. 2015].

Smh.com.au, (2014). Who wins in Australia-China free trade agreement?. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/the-economy/who-wins-in-australiachina-free-trade-agreement-20141117-11ojvd.html [Accessed 23 Jan. 2015].