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Australia Free Trade Essay

1513 Words7 Pages

In 2005, Australia and China began negotiations to establish a free trade agreement. The entire process entailed 21 rounds of negotiation and five different Prime Ministers of Australia, a deal was struck in September of 2015. In this paper, I will use the factors model and firm-level trade theory to explain the free trade agreement made between China and Australia, and highlight areas that contradict model/theory predictions, concluding that the factors model is more comprehensive in explaining and predicting outcomes of the China-Australia free trade agreement.
Factors Model
The factors model is based on the idea that countries are resource abundant and scarce in the factors of production (land, labor, capital). The model predicts that countries …show more content…

Tariffs on Australian agricultural products, natural resources, metals, and auto parts were cut to zero. Tariffs on sugar and wheat exports remained in place. The cuts in tariffs are logical given that Australia is relatively abundant in products such as beef and dairy cows, coal, and natural gas, comparatively to China, but wheat and sugar tariffs remain in place because China has relative advantage in producing those crops. Australia agreed to cut tariffs on Chinese-manufactured consumer electronics, appliances, to name a few. This also follows the logic of the factors model given that manufactured goods require higher levels of unskilled labor, a factor is relatively abundant in …show more content…

The theory indicates that trade liberalization will lead to an increase in national income. With an increase in liberalization, Australia’s GDP (in billions of USDs) grew from $693.1 to $1454.7 and GDP per capita (USDs) grew from $48,656.5 to $54,232.7. China’s GDP grew from $2,286.0 to $10,482.4 and GDP per capita grew from $2,738.2 to $6,108.2. The theory correctly predicted increases in national income. The theory also predicts that exporting firms will become more dominant and profitable and will export even more. This is illustrated in Australia’s exports to China that rose from $12.3 (billion USDs) to $88.8, indicating that exporting firms were able to become more profitable and continued to

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