Free Trade Agreements – A Fair deal?

Australia has recently signed free trade agreements or FTA’s with Japan, China and South Korea which are some of Australia’s most important trading partners in the Asia-Pacific region.

What is a Free Trade Agreement? An FTA is an international treaty which removes barriers to trade and facilitates stronger trade and commercial ties, contributing to increased economic integration between participating countries. FTAs can cover entire regions with multiple participants or link just two economies. For example while Australia has bilateral or two country FTA”s with China, Chile, the United States, Korea Japan, Thailand, Malaysia and Singapore, Australia has regional FTA’s as the Association of South East Asian Nations or ASEAN which includes New Zealand.

How do FTA’s work? Free Trade Agreements open up opportunities for Australian exporters and investors to expand their businesses into key overseas markets by breaking down the tariffs or trade barriers between countries. For example in the 2014 FTA with China, it was agreed that China would remove tariffs on dairy products over four to 11 years, remove tariffs on wines over four years and remove tariffs on beef within nine years.

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Who gains from FTAs?

The big winners out of the Free Trade Agreements are companies that trade overseas or have access to overseas markets. The Department of Foreign Affairs and Trade (DFAT) believes that Free Trade Agreements open up opportunities for Australian exporters and investors to expand their businesses into key overseas markets. When Australia signed the FTA with China in November 2014, one of the big winners for Australian industry was the Agricultural sector as China agreed to remove tariffs on dairy products, wines and beef would be removed which allows Australia greater access to Chinese markets. According to the Sydney Morning Herald, in 2013 China bought $9 billion worth of Australian agricultural products.

Another big winner of the FTA’s is the Resources sector already suffering from declining prices. The removal of tariffs on all resources and energy products, including iron ore, gold and coking coal will help with the growth of the resources sector. In 2013, China imported more than $85 billion worth of Australian resources, energy and manufactured goods. High-cost miners who are struggling with falling commodity prices will enjoy a slight cost reduction. China is the largest market for Australian pharmaceutical companies, importing $559 million last year, with China’s ageing population offering a huge opportunity.

FTAs can improve market access across all areas of trade — goods, services and investment — and help to maintain and stimulate the competitiveness of Australian firms. In the 2014 FTA with China, the Sydney Morning Herald reported that in 2013 the total Chinese investment in Australia jumped 41.2 per cent to $31.9 billion. Australian companies as Australian insurance companies will have access to China’s third-party liability motor vehicle market. while Australian securities brokerage and advisory firms will be able to provide trading accounts, custody, advice and portfolio management to Chinese investors allowed to invest offshore.

According to the Australian Government, the FTA with China will boost the Australian economy by $18 billion over 10 years in a win-win for both countries. Prime Minister Tony Abbott claimed that ‘It opens the doors to Australia and it opens the doors to China,”

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Who are the losers out of the FTA’s?

The Free Trade Agreements are not always a blessing for everyone. Sometimes the purpose of signing the Free Trade Agreement at all is called into question. In 2005, the Australia-United States Free Trade Agreeement or AUSFTA came into force. At the time the FTA promised big gains for Australia’s manufacturers, farmers and producers, service providers and for the mining industry. But in 2010, Rodney Tiffen in his article for the Sydney Morning Herald reported that the gains from the AUSFTA had been very slow to materialise and labelled AUSFTA as a ‘dud’. It is only in 2015 that DFAT has written on the 10th anniversary of the AUSFTA and the U.S finally dismantling some of its trade barriers.

While the Chinese-Australia Free Trade Agreement (ChAFTA) is regarded as the most important FTA that Australia has signed, can China still avoid removing barriers to trade to protect its own industries? In his article ‘A reality check for the China-Australia FTA’, John Lee points out that while the FTA opens up markets for Australian banks, insurance companies, legal firms and financial planners, China has ‘frequently resorted to using ad hoc regulatory hurdles to restrict the import of goods if the government believes that China is not ‘winning’ from the agreement; or sometimes this is done for political reasons’ John Lee cites the example of the banning of bananas from the Philippines and the use of anti-trust laws to stop the expansion of Microsoft in China.

Australian consumers are often said to be the big winners out of Free Trade Agreements as imports from China, Japan and South Korea will bring competition to markets and cheaper prices for items. The belief that the FTA signed with Japan will result in cheaper cars for Australians has been disputed by Joshua Dowling in his article ‘Why new car prices won’t be cheaper with Japan Free Trade Agreement’. Joshua Dowling points out that factors as the decline in the value of the Australian dollar and the decision of the Japanese government to stop undervaluing the Japanese Yen (to boost exports), could actually increase the prices of Japanese imported cars.

While Australia gains access to Chinese markets, it also means that China will gain greater access to Australian markets and will be able to import greater amounts of clothing, telecommunications and equipment, computers, furniture, mattresses, toys. prams etc.According to the ABC, Australian manufacturers say the deal is a missed blessing with potentially cheaper input costs on the one hand, but tougher competition on the other hand. For example, the Free Trade Agreement with South Korea could result in cheaper cars imported into Australia, damaging the car industry in Australia.

In conclusion, there is no doubt that Free Trade Agreements bring great advantages for Australian business in promoting their industry overseas. But before Australia rushes off to sign FTA’s, we have to make sure that every Australian wins from the deal – and not just big business.

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