Oct 1, 2019 in Economics
China-Australia Free Trade Agreement

The People’s Republic of China has grown to be Australia’s largest two-way trading partner. This makes China an important trading partner, in addition to its growing influence in the world. China has developed an excellent strategic position over the years with regard to establishing free trade agreements. This policy allows introducing duty-free arrangements and tax deductions on specified items and this has elevated it as the manufacturing hub of the world. The signing of the Free Trade Agreement between the ten ASEAN member states and China has had and will continue to have a big impact on China and South Asia’s development story.

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The China-ASEAN Free Trade Agreement (CAFTA) establishes a free trade area between the ten member states of the Association of Southeast Asian Nations (ASEAN) and the People’s Republic of China. The treaty was inaugurated on January 1, 2010. However, the initial framework agreement which led to the establishment of China-ASEAN relations was established on November 4, 2002, in Phnom Penh, Cambodia. This free trade area forms the world’s largest trading block with regard to human population numbers and the world’s third-largest block with regard to the nominal Gross Domestic Product figures after the European Free Trade Area and the North American Free Trade Area. The combined nominal GDP figure for the eleven nations is close to $ 6 trillion (2008) with a combined total population of almost 580 million.

Australia stands to benefit much from the fast-tracking implementation of its FTA with China despite its reservations based on its agricultural products. Australia has a population of approximately 23.6 million with GDP estimated to $ 1.041 trillion (2014). These good economic prospects have seen the country ranked second in the UN Human Development Index and first in Legatum’s 2008 Prosperity Index. The company has a persistent negative balance of payments position due to its focus on the export of commodities rather than manufactured goods. The average economic growth rate of 3.5% against the regional average of 2.5% has been sustained for over 15 years. The export markets for most Australian products include China, Japan, South Korea, the United States, and New Zealand.

The 2008-2009 global financial downturns affected all developed nations with an exception of Australia. Its six major trading partners have been affected by the recession in the near past which has significantly hampered the country’s economic prospects. This saw an increase in unemployment levels to 5.1% in 2014 while youth unemployment stood at 11.2%. Therefore, the fast-track FTA negotiation is necessary to open up the Australian market to Chinese products and services. It will also see the establishment of favorable tariffs between the two trading partners, the growth in Australia’s exports to the Chinese market and the development of the manufacturing sector which is important in creating jobs and thus, reducing the unemployment rates.

Our Process

The China-ASEAN Free Trade Agreement

Chinese dominance in the export market of Southeast Asian countries started in early 2000 when the proposal for a Free Trade Area was put forward then the planning started in 2002. Although the arrangement stands to benefit both parties, there are some drawbacks that are associated with the China-ASEAN Free Trade Agreement (CAFTA). In 2004, China granted a duty-free status for nearly 500 agricultural products originating from ASEAM member states. It was followed by the implementation of a comprehensive duty reduction program that was adopted by the 11 parties within the CAFTA. In 2007, various nations entered into an agreement to open up trade in service markets which was then followed by opening up the investment markets between the two trading blocks in 2009.

The China - Australia Free Trade Agreement represents the largest trading agreement in terms of population and the third largest with regards to GDP. It has significantly boosted the Chinese economy given that the combined GDP is close to $ 2 trillion. This means that the China-ASEAN trading volume has been boosted and is a key factor that Australia should take into consideration. Another important factor to note is the complementarity factor of the Chinese and ASEAN industries. This ensures that there is a collaboration between all sectors of these nations’ economies. As can be seen from the ’90s, expatriate Chinese entrepreneurs used different ways to create an economic superpower in Asia.

The implementation of a duty-free policy between China and six members of the ASEAN on January 1, 2010, witnessed the greater movement of goods into and out of these nations namely Brunei, the Philippines, Indonesia, Malaysia, Thailand, and Singapore. This can be attributed to the fact that the arrangement makes 90% of products from such nations duty-free. The remaining four nations; Vietnam, Laos, Cambodia, and Myanmar will see their products enter the Chinese market duty-free on January 1, 2015. Thus, Australia will also benefit from a duty-free arrangement with the Chinese. This will, therefore, lead to the improvement of the country’s balance of payments.

Our Benefits

Owing to the global financial downturn of 2008-2009, most industries in the United States were shut. Although the U.S maintains its position as the largest export market for many nations in Asia, it does not present a proper integration regime for these nations. This has seen the Chinese reinforce a policy to deepen trade ties with the Asia-wide trade community. All this is meant to reduce the dominance of the U.S. in global economies and therefore Asia should take this opportunity in order to do away with the economic neocolonialism and unfair treatment directed towards them in the present world economic system. This can only be achieved by adopting a regionwide economic community that goes beyond the CAFTA (China Daily, 2010). Being a part of the nations of Southeast Asia, Australia should, therefore, take the unprecedented opportunity to become a part of this transformation process.

The removal of all tariffs will be beneficial to Australia. As can be seen from the China- ASEAN Free Trade Agreement, China, Indonesia, Thailand, Malaysia, the Philippines, Singapore, and Brunei did remove all tariffs effective from January 1, 2010. Most of the goods that are subjected to tariff elimination include manufactured items that were subjected to 5% import tax, agricultural products that were subjected to high import tariffs and also motor vehicle parts and heavy machinery. Australia will greatly benefit from the elimination of these tariffs especially since it is rich in agricultural products. The full potential of the export market for these products has not been fully exploited given that Agriculture accounts for 3% of Australia’s GDP. The elimination of tariff barriers will also benefit exports from the mining sector. Exports of iron ore, gold, and energy which contribute 5% to the GDP will be maximized.

The major issue that is brought about by the CAFTA is the impact of Chinese manufactured imports on the ASEAN industries and businesses. Indeed, the implementation of the CAFTA will lead to intense competition in particular industries which will reduce the market share of most manufacturing businesses in the Southeast Asian countries. The reason is the unlimited resources that these Chinese corporations have in terms of technology and financial power which will crash the manufacturing enterprises in these countries. In essence, it results in greater unemployment amongst the local labor and possible lockdown of local firms. Pushpanathan Sundram, the former ASEAN Deputy Secretary-General, acknowledges that some costs will be invested in the countries that the Free Trade Area takes effect but emphasizes the mutual benefit that these countries will gain. The traders and the investors will, therefore, have to consider many factors.

The China-ASEAN Free Trade Agreement has been successful unlike the European and North American Free Trade Zones. This can be attributed to the already low tariff rates that exist in Southeast Asia and the relatively stable commerce patterns. However, as it can be noted in a number of Southeast Asia countries, cheap Chinese products have found a way into these markets thus flooding them. The removal of import taxes will make it very difficult for manufacturers to retain their market share, let alone increase their market share. This will, therefore, limit the competition in these markets, leading to declining in sales or revenues of these companies. It will eventually result in job cuts in the Southeast countries and an increase in unemployment rates. This is an important factor that Australia should consider in the FTA negotiations with China.

The current stand-off between China and Australia has seen the delay in FTA negotiations due to concerns for Australia’s agricultural industry. Unlike the services sector which contributes 70% to Australia’s GDP, Australia’s agricultural sector contributes as low as 3% to the country’s GDP. Due to the increasing cost of labor in China and the problem of wage increase which has not been mitigated by Chinese firms, the ASEAN agreement offers these businesses an opportunity to reposition themselves in low-cost areas within Asia. While taking advantage of the low cost of labor in these countries, China will still be able to service its local market through duty-free imports under the FTA.

The Threat of Rising Chinese Influence and the CAFTA

There are also issues raised by the U.S concerning China’s rise which is based on unfair trading practices that only stand to benefit Chinese industries alone rather than mutual benefit. Australia should also take into account the role that the U.S. would play in promoting stability and development throughout Asia. It is worth noting that some Southeast Asian governments such as Myanmar, Cambodia, and Laos blindly follow Chinese rising influence without taking into account the possible ramifications.

Some nations led by Australia and Japan have adopted counteractive measures in order to guard against the adverse consequences that may be the result of China’s rise. For instance, Australia has augmented its military force, which will see it contain any undesirable effects of its trading relations with the Chinese. All these measures are meant to guard against perceived Chinese dominance and also to maintain good relations with the state. Australia should adopt such a policy, why not? In fact, Thailand, Singapore, and the Philippines have exercised reservations in their relations with the Chinese by developing such measures while other nations like Malaysia, Indonesia, and Vietnam have remained inactive on that front.

Chinese rising dominance is based not only on economic aspects but on military aspects too. There have been a number of countries developing contingency plans and wariness against China’s growing influence. For instance, the joint South Korea-U.S military drills and the US-Philippine alliance ensured that these nations became the sole strategic allies of the U.S over the foreseeable future in addition to the solidification of their relationships. In its turn, this will ensure that the risks that are associated with the growing Chinese power in East Asia are mitigated.

Conclusion

In order to strike the best deal out of the China-Australia FTA negotiations, Australian authorities should take into consideration the above-mentioned reservations. Greater focus should be directed towards a more active and effective policy to foster good diplomatic relations with the Chinese and other nations in Southeast Asia through bilateral and multilateral mechanisms (China-ASEAN zero-tariff 2011). The negotiations should be centered on building a good base to foster increased trade and investments between the two nations, targeting China’s assistance more effectively and maintaining a firm stand against the use of force by Chinese authorities in the South China Sea. Australia should move beyond the notion that the China-ASEAN pact is the U.S vs. China war and quickly secure the free trade agreement.

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