The trade and investment relationship between Australia and China demolishes the theory of comparative advantage. According to Adam Smith and Ricardo, it makes sense for a country to focus on the production of goods and services it can do efficiently and purchase goods and services it produces less efficiently from other countries. When this theory is applied to the trade relationship between Australia, a rich country and China, a poor country, we arrive at a paradoxical outcome. The introduction of a free trade regime resulting in Australia-China trading relationship implies that Australian consumers will pay lower prices for imported goods from China which would lower real wage rates in Australia and there would not be net gain for the Australian economy, according to Hill et al. (2014). However, while both China and Australia will gain from the trade relationship, the net gain is going to be more for Australia. It is estimated that Australia will gain A$146 billion in real GDP (in 2008) over the period 2010-2030, while China’s real GDP gain is estimated at A$131 billion.
The calculation of trade advantage to Australia is based on a modeling conducted by the Centre For International Economics. In addition, it is estimated that 20 years after the commencement of Australia-China Free Trade Agreement GDP of both economies would gain, but Australia’s GDP is estimated to be 0.7 percent higher otherwise while in the case of China the estimated gain is just 0.1 percent.
The greater gain for Australia is entirely logical. China has higher trade barriers than Australia and China is of greater value (important trading partner) to Australia than Australia to China. China is the destination for 12.8 percent of Australia’s exports resulting in greater gains for Australia in comparison to China, while Australia is the destination for 1.4 percent of China’s exports. In addition, Australia already has low trade barrier. Study of 100 countries conducted by Sachs and Warner between 1970 and1990 has shown that open economies grow faster in comparison to the economies that are relatively less open.
Australia has trading relations with several nations among whom China is its largest trading partner with almost one third of all Australian products being bought by China. It is also among the top overseas market for a large number of Australian commodities. In other words, the trade partnership between the two nations is highly complementary, extensive and also growing rapidly. Australia’s future is, therefore, intricately related to the development of the Chinese economy. The development of the Chinese economy implies the changing consumption habits of the Chinese middle class. It is, therefore, quite logical that a more diversified relationship between the two nations will flourish. China will need a large number of services from Australia such as aged care, health, finance and other professional services. The bilateral trade figures clearly indicate this trend. The growth in export in wine, cheese, financial services and insurance/pension services from Australia has been to the tune of 17 percent, 35 percent, 97 percent and 18 percent respectively over the last five years. In 2013-14, China was the largest two way trading partner with nearly a third of Australian exports going to China constituting nearly a third of the Australian exports. In recent years, China has been Australia’s largest services, resources and agricultural market. The services exports from Australia to China in 2013-14 were of the order of $7.5 billion indicative of 11.3 percent growth. The tourism income at $5.3 billion in 2013-14 was the largest indicative of 16 percent growth. In the same financial year (2013-2014) there were largest overseas student enrolments.
In 2005, the governments in Australia and China entered into negotiations for removal of barriers to bilateral trade and agreement. The agreements resulted in the liberalization of merchandise and service trade and led to greater access of the Chinese producers into the market in Australia on one hand, and also improved the competitive position of the Australian producers in the most populous and the fastest growing market, on the other. However, the two nations – Australia and China – at the time of undertaking the negotiations were open (or close) to different degrees. There were 6256 identified tariff lines under the Australian tariff schedule of which only 52 percent were duty free, while the remaining 48 percent were being levied with ad valorem tariff. On the contrary, only 8.6 percent of the 7614 identified tariff lines of the Chinese tariff schedule were duty free, while 90.1 percent attracted an ad valorem tariff.
On December 20, 2015, the China-Australia Free Trade Agreement actually came into existence. The agreement is based on the GATT principles that include the MFN (Most Favoured Nation) principle and National Treatment principle. In other words, it would create a level playing field for the two partners and the global businesses. Nevertheless, there are still some unresolved WTO issues in the creation of an ideal level playing field such as anti-dumping policies, agricultural protection, enforcement of intellectual property rules, and tariff protection of non-agricultural products.
Nevertheless, the historic foundation of the next level of Australia-China trade relationship has begun with China-Australia Free Trade Agreement. Accordingly, the two nations as per the agreement have agreed that “Neither Party shall introduce or maintain any export subsidy on any good destined for the territory of the other Party.”. Also, “For products in respect of which China establishes a Country Specific Tariff Quota (“CSTQ”) in its Schedule to Annex I (Schedules in Relation to Article 2.4 (Elimination of Customs Duties), China shall grant duty-free treatment to imports of such products of Australian origin up to the quantity for each year as specified in Annex 2-A after entry into force of this Agreement.”. The FTA with China, therefore, will eliminate tariffs on merchandise trade and therefore improve the competitiveness of the Australian investors and exporters against other foreign competitors. The bilateral trade treaty would be advantageous to both the nations. Moreover, experts have predicted that even without the FTA, the investment and trade relations between the two countries would continue to grow because of the existence of complementarities.
Australia’s trade position with China in relative terms has remained stable during the past decade. By 2004, Australia was China’s 11th largest trading partner, 13th largest export destination and 11th largest import destination. In 1995, the share of Australia in China’s total merchandise trade was 1.5 percent which had grown to 1.8 percent in 2004. Since China’s GDP was three times larger than Australia’s GDP, there was enough scope for Australia to enhance its two way trade. However, after 1990 the trade deficit with China was growing. Australian imports from China exceeded its exports indicating the growing trade deficit during this period. However, in recent years there has been an upsurge in the Australian exports and consequent favourable trade balance.
China has developed rapidly over the last decade with the consequent rise in demand for coal and iron ore, partly met by Australian exporters. In fact the Chinese demand for these resources have been so huge that it has offset the rapid growth in Australian imports from China. Today, Australia is among very few developed nations today that remains routinely in surplus with China. In order to meet its needs of food and manufactured items, China primarily needs raw material inputs for manufacture, building materials for development of infrastructure and urban areas and energy for transportation and electricity. In order for the manufacturing engine of China to run smoothly, there is a huge need or iron ore. Although China produces iron ore in sufficiently high quantum, which is about half of the global pig iron production, they are not enough to meet the domestic needs which accounts for nearly 60 percent of the global seaborne iron ore supply. Australia is best placed to meet a substantial portion of the Chinese iron ore needs, that is, about 45 percent of its imports making Australia the largest exporter of iron ore to China. There has been an average 23 percent year to year growth in Australian iron ore exports to China. In 1999, the iron ore export to China was 26 million tonnes, while the same in 2011 had grown to 305 million tonnes. Prior to that Japan was the primary consumer of the Australian iron ore export but its share fell down to 17 percent from 47 percent during the same period even as the quantum increased.
There are a number of factors that make Australia a natural trade partner of China. These include Australia’s political stability, location, and geology. The political stability and sovereignty of Australia supports long-term investments. Geology favours Australia because the nation has an abundant reservoir of minerals. In addition, the nation’s proximity to the ocean means a low cost transportation because the export products can be easily loaded and shipped. In most cases, the iron ore deposits are relatively closer to the coast even as the deposits like the Bowen basin and the Pilbara are located in the remote parts. These factors give Australia a competitive advantage over Brazil, the second largest iron ore exporting nation. In addition, Australia is closer to China in comparison to Brazil.
It is evident that Australia is making a strong presence in the Chinese market especially since China began reforms and opening up since 1978. At that time China was primarily an agrarian economy while its share in the world trade was less than one percent. The rapid growth and expansion of the Chinese economy brought it to number one position in global merchandise with 10.4 percent share in global exports and to second position in the share of global imports by 2011. The expansion of the Chinese economy has benefited both Australia and China, since China needs raw materials, goods, services in a number of sectors and investment that Australia is best suited to meet. However, the challenge for Australia is to maintain its competitive advantage in the service sector with other nations especially as the world is globalised and competitive.
References
Australian Government, Department of Foreign Affairs and Trade (N.D). Background Paper: The Australia-China Trade and Investment Relationship. Available at: http://dfat.gov.au/trade/agreements/chafta/fact-sheets/Pages/background-paper-the-australia-china-trade-and-investment-relationship.aspx (Accessed 10 January 2017)
Australian Government, Department of Foreign Affairs and Trade (2015), Text of the China- Australia Free Trade Agreement. Available at: http://dfat.gov.au/trade/agreements/chafta/official-documents/Pages/official-documents.aspx (Accessed 12 January 2017)
Australian Government, The Treasury (2004). Australia-China: Not Just 40 Years, Economic Roundup, Issue 4. Available at: http://www.treasury.gov.au/PublicationsAndMedia/Publications/2012/Economic-Roundup-Issue-4/HTML/article1(Accessed 11 January 2017)
Centre for International Economics (Nov. 2008), Estimating the impact of an Australia-China trade and investment agreement, 2008 economic modelling update, Australia China Business Council.
Hill, Charles W.L., Cronk, Thomas ., Wickramasekera, Rumintha (2014), Global Business Today. McGraw-Hill Education (Australia)
Mai, Y., Adams, P., Fan, M., Li, R. and Zheng, Z. (2005), Modelling the Potential Benefits of an Australia-China Free Trade Agreement, Centre of Policy Studies, Monash University, Clayton.
Siriwardana, Mahinda (2007), Economic Effects of the Proposed Australia-China Free Trade Agreement Economic Effects of the Proposed Australia-China, Researchgate. University of New England (Australia) & Centre for Contemporary Asian Studies Doshisha University
