(BEO3378) International Economics and Finance 国际经济理论作(7)

Part 4 :Key costs and benefits of ChAFTA

Benefits

The trade creation effect

The FTA involves the tariff concession in both parts. China promises not to impose tariff for most Australia’s goods while Australia promises not to impose tariff for all goods from China. Because of the price reduction caused by no tariff, the demand of imported products will be expanded in both countries. After that, the original income could buy more goods and thus create the trade volume. For example, the import price of cereal, dairy products, iron ore and wool will be reduced in China, so the consume volume will be expanded.

Benefits from comparative advantage in some industry

CHENG (2008) examined the comparative advantage of both China and Australia and concluded that the trade mode of China and Australia exactly reflects the comparative advantage in factor endowments. China exported textiles and garments with high labor intensity and Australia exported resource-based products. There is an intense comparative between China and Australia.

Cost

The cost of unexpected shocks and crises

Unexpected shocks and crises will forced the company to treat with new method and thus increase cost. For example, the trade of iron sand between Australia and China, Thomas (2012) argued that China's steel industry is sensitive to the international commodity market price, and will affect the production of iron sand in Australia. If the demand from China is weak enough, the producer of Australia will have to find new buyers and thus increase the transaction cost. Identify the main winners and losers in China and Australia

According to the research made by Cheng (2008), Australia would benefit from the FTA more than China. Actually, the FTA can increase exports volume of Australia by enhancing the Australia’s advantages. He estimated that, from the macro perspective, FTA will result in an upward trend of 0.08% in GDP of China and 0.6% in Australia’s GDP. As a result, both countries are winners.

Actually, both countries will be the winners of the FTA, otherwise they will not to contribute a considerable efforts and time to negotiate with each other for FTA. Still, it should be mentioned that although FTA will benefit both countries, its mechanism is not automatic, both companies and policy-makers should always be ready to make strategies and plans for adapting to the new environment in FTA.

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