Overview of Free Trade Agreement
Discuss about the Impact of FTA on Regional Economic Integration.
Free Trade Agreement refers to a form of negotiation or agreement between two nations or among many nations in terms of international trade and exchange of goods and services. The agreements mostly deal with determination of tariff rates and impositions of various export and import duties in international trade. A free Trade Agreement of higher standard plays pivotal role in promoting as well as supporting trade liberalization globally. The agreements bind the nation legally under commitments that allow the nations to access each other’s market (Naoi and Urata 2013). Australia presently has almost ten Free Trade Agreements in operation with the nations like China, India, Japan, USA, Singapore, Thailand, Chile, New Zealand, Malaysia and Association of South East Asian Nations.
The paper presents a report on the bilateral trade agreement between Australia and India shedding light on the economic impact of this agreement of free trade upon the Australian regional economies.
There are several states IN Australia that have set up trade offices in Indian territory. Mumbai and Chennai have trade offices established by the Western Australia and Southern Australia respectively. There are several signing of Memorandum of Understanding between State of Victoria and Karnataka in 2005 in order to promote the education, information communication technology and tourism and manufacturing in biotechnology (Aggarwal and Urata 2013). A MOU between Queensland and Karnataka state government has been signed in 2003 to promote transport and tourism infrastructure, mining services and bioscience. Following the Australia-India comprehensive economic cooperation agreement negotiations the recent years has brought remarkable growth in the international trade situation and relationship between these two nations (Gantz 2012).
The trend line regarding the intra-country trade has been upward rising especially from 2002 and in the year 2008-09 it reached US$16 billion out of which US$12.9 billion consist of trade in goods. The growth is explained by the economic complementarities of the two nations. While the Australian export of coal, iron ore help Indian economy to meet the gap in infrastructure and growing economic demand. Australia on the other hand has benefitted in terms of cost benefit and productivity from the Indian industries providing services.
Figure 1: Australia-India Trade of Goods& Services
Source: Australia-India Joint FTA Feasibility Study
The fact that Australian export to India has grown at an average speed of 25% during 2002-2009 reveals growth of India as biggest market destination for Australia. As per the data by 2008, India turned out fourth largest destination for goods market and fifth largest destination for service export from Australia. The import share of India from Australia is increasing evident in the fact that from 2.4% in 2001 the import share has risen up to 3.5% in 2008 showing growth in trade.
The huge Australian investment made to Indian economy can be well captured in the rising amount of FDI reaching US$133.6 billion up to June, 2009 after the liberalization of Indian economy (Kirchner 2012). Liberalization of many-closed sector to receive the FDI in 2008 expedited the process leading to even higher receipt of it over time. Since the inception of New Industrial Policy of 1991, the inflow of FDI has gone up from the lower base and grew remarkable to reach a higher level over time (Aggarwal and Urata 2013). The data shows post 2004 the rate of FDI inflow as percentage of total FDI in India has fallen.
State Offices in Indian Territory
Figure 2: FDI from Australia to India
Source: Australia-India Joint FTA Feasibility Study
For India, Australia has grown to become important destination for export, which is evident in the fact that by 2008, Australia becomes 14th largest trading partner of India in terms of merchandise trading (Irwin 2015). The Indian export in terms of good is US$1.45 billion whereas in terms of services the volume of trade is US$520 billion (Naoi and Urata 2013). The major export item from India to Australia is the service in form of travel, business, IT and IT based services. The increasing interest by Indians on Australia as destination of tourism and education sector is evident in the trade data.
Figure 3: India’s Export to Australia
Source: Australia-India Joint FTA Feasibility Study
A lot of Indian investment is received by the Australian sectors like copper mining, coal, software development, biotechnology and so on which has calibrated dimensions toward new ways of bilateral trade in goods and services. Compared to the Australian FDI, the FDI inflowing to Australia from India was US$48 million that shows a growing trend over the years (Kirchner 2012).
Opportunities:
The FTA between Australia and India broadens the base of merchandise trade by relaxing the trade barrier as well as restrictions imposed in border upon the trading of goods and service.
The trend shows there is huge potential between the nations to cause expansion in the trade of services. The FTA is a good source to facilitate growth in this through promotion of transparency less restrictive regulations regarding trade process.
Existence of higher trade complementarily in the agricultural sector between two countries leads to growing Australian export to meet the demand in the domestic economy of India due to shortfall in production. There are opportunities to trade on the seasonal agricultural items by both nation on counter-seasonal base. Australian dairy product and few other food items are frequently imported from Australia (Baldwin and Jaimovich 2012). The Australian market over time has grown to become important destination for India’s processed food. Indian produces hold the majority of Australian inputs, which further enhances the production of Australia at national level. FTA ensures the flexibility regarding access in the important good and service market (Aggarwal and Urata 2013). The FTA also provides Australia’s export to receive a competitive position in the world. The agreement brings more prospects for increased two-way investments. The relaxation of trade norms in form of reduced trade barriers like higher tariffs closeness of the economy were the fruits of free trade agreement that facilitated reduction in import cost and promotion in the Australian as well as Indian businesses.
Threats:
The free trade agreement allows one nation of greater access to national economy and its market. This is not always beneficial for the economies of Australia and India as the regional as well as national economy might get hurt for the competition that free trade evokes. Too much of export of services lead to subsequent loss in the employment of both the nations (Baldwin and Jaimovich 2012). While Australian export has led to meet the demand of growing demand of food, dairy products and agricultural produces, the free flow of goods has also created competition in the Indian agricultural sector in terms of lower price and higher quality that over time capture the market share (Aggarwal and Urata 2013). Apart from market competition there are other issues related to adverse condition of the workers that leads to lowering of the wage rate as well as standard of working in specific regions of Australia. Moreover, there are substantial capacity constraints in the Australian export due to the lack of availability of arable land and sufficient water. The export market in Australia revolving around the agricultural sector needs to continue its services. The agricultural export of Australia is not expected to create tough competition for the subsistent farmers of India who are much vulnerable owing to seasonal and infrastructural limitations they face in agricultural processing (Naoi and Urata 2013). The niche market of highly populate urban areas are targeted more by the exporters from Australia that exerts vulnerable effect on the economic operation as a whole.
Conclusion:
It can be concluded that the most common feature of FTA is its evident impact on volume of trade. The FTA has caused greater trade deficit and further leading to slower rate of reciprocal growth in the exports as well as diversion in trade in terms of products that are sourced from the nations with which Australia has zero rate of tariff. FTA model adopted by nation causes structural imbalances that further leads to higher trade deficit. It has greater implication in the imperfect market condition that hampers full employability of the resources as well as hinders the economic growth.
References:
Aggarwal, V. and Urata, S. eds., 2013. Bilateral trade agreements in the Asia-Pacific: Origins, evolution, and implications. Routledge.
Baldwin, R. and Jaimovich, D., 2012. Are free trade agreements contagious?. Journal of international Economics, 88(1), pp.1-16.
Felbermayr, G., Heid, B., Larch, M. and Yalcin, E., 2015. Macroeconomic potentials of transatlantic free trade: A high resolution perspective for Europe and the world. Economic Policy, 30(83), pp.491-537.
Fukunaga, Y. and Kuno, A., 2012. Toward a consolidated preferential tariff structure in East Asia: going beyond ASEAN+ 1 FTAs. ERIA Policy Brief, 3.
Gantz, D.A., 2012. Regional trade agreements. In The Oxford Handbook of International Trade Law. Oxford University Press.
Irwin, D.A., 2015. Free trade under fire. Princeton University Press.
Kirchner, S., 2012. Foreign direct investment in Australia following the Australia–US free trade agreement. Australian Economic Review, 45(4), pp.410-421.
Naoi, M. and Urata, S., 2013. Free Trade Agreements and Domestic Politics: The Case of the Trans?Pacific Partnership Agreement. Asian Economic Policy Review,8(2), pp.326-349.
Stromquist, N.P. and Monkman, K. eds., 2014. Globalization and education: Integration and contestation across cultures. R&L Education
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