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Impact of China-Australia Free Trade Agreement on China

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On 17 November 2014, the prime minister of Australia Tony Abbott and the president of China Xi Jinping concluded the negotiations regarding a free trade agreement between the two countries.  The announcement by the two leaders marked a historic foundation that would inform the relationship between the two countries. It is expected that the free trade agreement will open opportunities for investment for both countries. The FTA will seek to improve the flow of trade and will also impact on other aspects of the relationship between the Austrian and China (Asia Monitor, 2015). The FTA will not only seek to do away with tariffs but it also seeks to ensure that there are minimal barriers of trade beyond the border. The aim of this paper is to determine the impact that the FTA between the two nations will impact China. It will also make suggestions on how China can position itself to garner maximal benefit from the agreement.

When it comes to the formation of FTA, You, Liu, & Du (2014) assert that China has a strategic position. The ability of the country to come up with policies that allow tax reduction on particular services and products has been one of the main tenets upon which the manufacturing hub of the world has been founded. The new FTA between Australia and China will have a positive impact on the flow of business in the country. However, it is essential to point out that the impact on the economy will lean more on the Australian side than the Chinese (Asia Monitor, 2015). Considering that Australia is the destination of only less than 2 percent of the exports of China and has traditionally provided less than 3.5 percent of the imports of China, the lion’s share is not China’s (Asia Monitor, 2015). However, China found it quite convenient to conclude the discussions concerning the FTA in November 2014 because of the positive outlook of trade between the two countries. According to Wu & Salzman (2014), it has been estimated that the logarithmic economic growth in China is expected to slow down significantly over the next 5 years. Therefore, diversifying the national economy even in the most subtle ways makes sense for China. In accordance with Chandra (2014), it is estimated that the FTA between China and Australia will culminate in an increase in employment in China. However, this is still small compared to the employment impact that the FTA would have on Australia. Nevertheless, over time this marginal increase in the level of employment would ultimately return to the baseline level.

The FTA will disadvantage the resource sector in China while merit the manufacturing sectors (Trakamn, 2014). Under the agreement, the service sector will only have a small change. Chen, Ma, & Xu (2014) imply that although some sectors will gain while other may be poised to lose, the general impact on Chinese industries is positive. Some of the sectors area are expected to be on the losing end include minerals, energy, sugar and dairy. Such a result would be negative when considering that those sectors are very strong in Australia.  In addition, the barriers of imports in these sectors in China are also more stringent. Consequently, their liberalization will lead to the best practice sectors in Australia gaining some share of the Chinese market. In so doing, the Australian companies will displace the local production. Based on Ken, as Australian exporters seek to export sugar, dairy, energy and minerals into China, they will have to vacate some of their existing markets. Such vacated markets will be filed by other exporters, including China. Consequently, Trakamn (2014) notes that after the FTA is fully in place, Chinese exports in minerals, energy, sugar and dairy will increase but China will not be exporting to Australia.  The dairy exports of China into the other countries of the world would increase more than the dairy exports of Australia into China. Such an increase in the Chinese exporters would come in handy in offsetting the impact that liberalization would have on the local Chinese industries.

The liberalization of the textile, clothing and footwear (TCF) sector in Australia would result in an increase Chinese TCF exports. The FTA would also lead to an increase in the output of the TCF sector in China. Moreover, Dunn (2014) avers that the TCF sector in China is also equally or may be more protected than Australia’s. Therefore, liberalization in China would also mean an increase in the TCF imports. Animal products such as hides and wool will also record a very significant importation change. Such products are essential inputs of the TCF sector. Therefore, the expansion of the TCF sector in China will mean an increase in the demand for wool and other animal inputs. With liberalization, such inputs will come from Australia and so the volume of imports will increase. According to Thomas (2015), the capture of the local market share and the increase in the volume of animal inputs from Australia will be so large that the output of the industry in China would fall. This would happen despite that the exports would increase as China tries to fill the international void that Australia would have left in order to supply animal inputs to China.

Therefore, China may not benefit much from the FTA in the short term. However, Fletcher (2014) posits that this agreement carries immense strategic significance on the part of China.  China has responded rather positively to the formation of trade agreements with Europe, the United States, South Korea and Japan. Currently, the trade relationships between China and Europe and the United States are not the best that could be. Sithanonxay & Toshihisa (2014) state that the economic uncertainties that come with trading with the US and Europe make Australia an important trading partner for China. The United States and Europe were also the most hit by the global economic and financial crisis of 2008. Coupled with the increasing tension between China and the United States and Europe, China has to look for future markets of its goods and services. Therefore, the agreement with Australia makes perfect strategic sense.

The FTA may not be carrying significant economic impact of China in the meantime. Nonetheless, Ha (2014) notes that minerals are very important to China. Minerals like copper, manganese and iron are running in short supply in China as the economy of the country continues to grow exponentially. Australia is one of the leading exporters of minerals in the world. Therefore, China has a keen eye on Australia as a key supplier of raw materials in the future. According to Ken, minerals have been the main products that Australia exports to China. In agreement with Salov (2015), the amount of minerals that Australia has been exporting to China has increased every year from 2006 to 2012 by at least 45 percent. Therefore, the FTA is a part of the long-term strategy of China. The relationship between the two counties differs markedly with regard to factor endowments. The FTA will affect the areas that Australia has maintained a clear advantage over China. Consequently, in the implementation process the two countries have to focus on balancing interests of both sides.  In addition, the Chinese side needs considerable allowance with regard to timetable and scope in the process conceding tariffs in the sectors where it is slagging in comparison to Australia.

The FTA will have a vital impact on the development of the agricultural sector in China because of the relative strength of Australia. According to Li, Wang & Whalley (2014) the efforts that both countries made in the process of negotiations would not be enough to find considerable space to manoeuver. Therefore, China has to put in place important internal adjustments. This means that in opening up its agricultural market, the country needs to be quite gradual for products that would be mostly affected by the FTA. In addition, Kuiler (2015) advises that China has to keep an eye on the behaviour of Australia to set up barriers through phyto-sanitary and sanitary measures. China also has to grow and invest in its agricultural sectors both financially and in technology in order to make them more competitive. He & Yang (2015) points out that such investment is especially needed in the production of labour intensive products such as fruits and vegetables.

In conclusion, the FTA between China and Australia will provide immediate economic benefit to Australia but not so to China. However, over the medium and longer-term, China will garner numerous benefits form the liberalization of trade with Australia. With relationships between China and other western countries not being the best, Australia will provide China with an alternative trading partner. At the rate that the economy of China has been growing over the past decade, China will also need a major minerals supplier. However, in the liberalization process, China needs to put in place adjustments the will protect its agricultural sector.

References

'Asia Monitor', 2015, Asia Monitor: China & North East Asia Monitor, vol. 22, no. 1, pp. 1-12.

Chandra, P 2014, 'WTO subsidy rules and tariff liberalization: evidence from accession of China', Journal of International Trade & Economic Development, vol. 23, no. 8, pp. 1170-1205.

Chen, B, Ma, H, & Xu, Y 2014, 'Measuring China’s trade liberalization: A generalized measure of trade restrictiveness index', Journal of Comparative Economics, vol. 42, no. 4, pp. 994-1006.

Dunn, G 2014, 'Follow the Money', Harvard International Review, vol. 36, no. 2, pp. 4-6.

Fletcher, M G 2014, Australian Industry Group Submission on Australia-China Free Trade Agreement.

Ha, J C 2014, China-Australia Free Trade Agreement: Chinese Legal System, Contractual Implications and Alternative Dispute Resolution. Contractual Implications and Alternative Dispute Resolution (November 27, 2014).

He, F., & Yang, P. (2015). China's Role in Asia's Free Trade Agreements. Asia & the Pacific Policy Studies.

Kuiler, A 2015, 'FTA: Not Right, Not Yet', Food Magazine, pp. 7-9. 

Li, C, Wang, J & Whalley, J 2014, China's Regional and Bilateral Trade Agreements (No. w19853). National Bureau of Economic Research.

Salov, A 2015, 'Trans-Pacific Partnership Update', Alaska Business Monthly, 31, 2, pp. 62-63

Sithanonxay, S, & Toshihisa, T 2014, 'Impact of Regional Trade Agreements in East Asia on Members' Trade Flows', Journal of Southeast Asian Economies, vol. 31, no. 3, pp. 361-378

Thomas, N 2015, The Economics of Power Transitions: Australia between China and the United States. Journal of Contemporary China, (ahead-of-print), 1-19.

Trakamn, LE 2014, 'Investor-State Arbitration: Evaluating Australia's Evolving Position', Journal of World Investment & Trade, vol. 15, no. 1/2, pp. 152-192.

Wu, M, & Salzman, J 2014, 'the next generation of trade and environment conflicts: the rise of green industrial policy', Northwestern University Law Review, vol. 108, no. 2, pp. 401-474.

You, J, Liu, C, & Du, G 2014, 'With Economic Integration Comes Financial Contagion? Evidence from China', Emerging Markets Finance & Trade, vol. 50, no. 3, pp. 62-80.