MODELLING THE POTENTIAL BENEFITS OF AN AUSTRALIACHINA FREE TRADE AGREEMENT.docx

MODELLING THE POTENTIAL BENEFITS OF AN AUSTRALIACHINA FREE TRADE AGREEMENT.docx

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MODELLINGTHEPOTENTIALBENEFITSOFANAUSTRALIACHINAFREETRADEAGREEMENT

MODELLINGTHEPOTENTIALBENEFITSOFANAUSTRALIA-CHINAFREETRADEAGREEMENT

DrYinhuaMAI

CentreofPolicyStudies,MonashUniversity

ProfessorPhilipADAMS

CentreofPolicyStudies,MonashUniversity

DrMingtaiFAN

ChineseAcademyofSocialSciences

ProfessorRonglinLI

NankaiUniversity

DrZhaoyangZHENG

NankaiUniversity

AnIndependentReportPreparedfor:

TheAustralia-ChinaFTAFeasibilityStudy

2March2005

TheCentreofPolicyStudies

CentreofPolicyStudies

Building11E

MonashUniversity

Clayton,Victoria3800

Australia

Webaddress:

http:

//www.monash.edu.au/policy/

ABNNo12377614012

ContactpersonsattheCentreofPolicyStudies:

DrYinhuaMAIProfessorPhilipADAMS

SeniorResearchFellowDirector

Tel:

61-3-99055482Tel:

61-3-99055094

Fax:

61-3-99052426Fax:

61-3-9952426

yinhua.mai@buseco.monash.edu.auphilip.adams@buseco.monash.edu.au

ContactsinChina

DrMingtaiFANProfessorRonglinLI

InstituteofQuan.&Tech.EconomicsInstituteofinternationalEconomics

ChineseAcademyofSocialSciencesNankaiUniversity

5JianguomenneiStreetBeijing100732China94WeijinRoad,Tianjin,300071,China

Tel:

86-10-65125895Tel:

86-22-23505235

Fax:

86-10-65137561Fax:

86-22-23502437

mtfan@lronglin@

AcronymsandInitials

CGEComputableGeneralEquilibrium

CoPSCentreofPolicyStudies

DFATDepartmentofForeignAffairsandTrade,Australia

FTAFreeTradeAgreement

GDPGrossDomesticProduct

GNEGrossNationalExpenditure

GNPGrossNationalProduct

GTAPGlobalTradeAnalysisProject

MMCMonashMulti-Country

MOFCOMMinistryofCommerce,People’sRepublicofChina

necnotelsewhereclassified

ROWRestOftheWorld

WTOWorldTradeOrganisation

TableofContents

Executivesummaryiii

1.Introduction1

2.GrowingeconomicpartnershipbetweenAustraliaandChina3

2.1China’sdemandforAustralianagriculturalandmineralproducts3

2.2Two-waytradeinmanufacturingproducts4

2.3Cooperationintheservicessector4

2.4Deepeningpartnershipinthefuture5

3.TradeandinvestmentbarriersbetweenAustraliaandChina6

3.1Borderprotectiononmerchandisetrade7

3.2Restrictionsoninvestmentflows10

3.2.1Australia’sforeigninvestmentregime10

3.2.2China’sforeigninvestmentregime10

3.3Restrictionsontradeinservices11

4.Removingborderprotectiononmerchandiseimports13

4.1GDPandVolumesofTrade13

4.2RealwagesandEmploymentintheLong-run14

4.3WelfareeffectsandtheTermsofTrade15

4.4Industryoutput16

4.5Industryemployment17

5.Facilitatingbilateralinvestmentflows18

6.Servicetradeliberalisation21

7.AggregateeffectsofAustralia-ChinaFTA23

7.1Macroeconomicimpacts23

7.2Industryimpacts24

7.3Labourmarketadjustment25

7.3.1Australia–Wearingapparel25

7.3.2Australia–motorvehiclesandparts26

7.3.3China–Agriculture26

7.3.4China-mining26

7.3.5China-services27

8.Fasterversusslowerliberalisation27

9.ImpactonRestoftheWorld28

10.Concludingremarks28

References30

AppendixA.Themodellingframework–MMC32

Overview:

Economicagentsandthenatureofthemarkets33

CGECore:

Demandsforinputstobeusedintheproductionofcommodities33

CGECore:

Householddemands34

CGECore:

Inputstoinvestment34

CGECore:

Governments'demandsforcommodities34

CGECore:

Internationaltrade34

CGECore:

Factormarkets35

CGECore:

Physicalcapitalaccumulation35

Modelclosure35

Solutionsoftware36

Executivesummary

1.In2002AustraliaandChinaestablishedaTradeandEconomicFrameworktoenhancebilateraltradeandinvestment.Undertheframework,ajointfeasibilitystudyofapossibleAustralia-ChinaFreeTradeAgreement（FTA）isbeingconducted.

2.TheCentreofPolicyStudieswascommissionedbytheAustralianDepartmentofForeignAffairsandTradetoconductmodellinganalysisonthepotentialbenefitsofanAustralia-ChinaFTA.ThestudywasundertakenjointlywithexpertsfromtheChineseAcademyofSocialSciencesandNankaiUniversity.

3.InthisstudywesimulatethreeaspectsofanFTA:

removalofborderprotectiononmerchandisetrade,investmentliberalisation,andremovalofbarrierstoservicestrade.Theanalyticalframeworkisamulti-country,multi-sectorcomputablegeneralequilibriummodel,theMonash-Multi-Countrymodel.InoursimulationweassumethattheimplementationofpolicychangesundertheFTAcommencesin2006.

4.InsimulatingtheimpactsofpolicychangesunderanFTA,wefirstsimulateabusiness-as-usualscenario（orbaseline）.ThebaselinedescribestheevolutionoftheAustralianandChineseeconomiesintheabsenceofanAustralia-ChinaFTA.TheeffectsofthepolicychangesundertheFTAarereportedaschangesrelativetobaselinelevels.

5.FromourmodellingweconcludethatforbothAustraliaandChinatheFTAyieldsincreasedoutputandiswelfareenhancing.TheFTAisestimatedtoboostthepresentvalue（seeFigure7.1onpage42）ofrealGrossDomesticProduct（GDP）andrealGrossNationalProduct（GNP）between2006and2015asfollows:

∙AustraliarealGDP,US$18billion;

∙ChinarealGDP,US$64billion;

∙AustraliarealGNP,US$22billion;and

∙ChinarealGNP,US$52billion.

6.Intermsofaverageannualgrowthratesbetween2005and2015,theFTAisestimatedtoincreaseAustralia’sreal-GDPgrowthby0.039percentagepoints;andincreaseChina’sreal-GDPgrowthby0.042percentagepoints.

7.RealGDPincreasesinbothcountriesduetoincreasedcapital,improvedproductivityandbetterutilisationofresources.AkeyfactorunderlyingtheincreaseinAustralia’srealGNPisanimprovedtermsoftrade.

8.TheFTAenhancestheeconomicpartnershipbetweenAustraliaandChinabyincreasingbilateraltradeandinvestmentflows.Itisalsotradecreatingfortheworldasawhole.ThevolumeofworldimportsincreasesfromitsbaselinelevelasaresultoftheAustralia-ChinaFTA.

9.Inachievingabetterutilisationofresources,adjustmentoflabourbetweensectorsdoesoccur,largelyduetotheremovalofborderprotectiononmerchandisetrade.However,duetothecomplementaritiesofthetwocountries,suchreallocationoflabourbetweensectorstendstofacilitatethenaturalcourseofadjustmentalreadyoccurringinthetwocountries.Furthermore,suchadjustmentissmallinscalecomparedwithwhatisoccurringinthetwocountriesamidglobalisationwithoutanFTA.

10.TheAustralianindustriesthatbenefitmostfromtheFTAarecerealgrains,wool,wooltops,minerals,andnon-ferrousmetals.TheChineseindustriesthatbenefitmostfromtheFTAaremanufacturingindustries,especiallytextiles,wearingapparel,andmiscellaneousmanufactures（toysandsportinggoodsetc）.ServicessectorinbothcountriesbenefitfromtheFTA.

11.Ifthepolicychangesareimplementedgraduallybetween2006and2010,thelong-runeffectsoftheFTAin2015aresimilartothosefromfullimplementationin2006.However,fasterimplementationleadstoearlierdeliveryofthegainsforbothcountries.Asaresult,thepresentvaluesofgainsinrealGDPandrealGNParesmallerwithslowerimplementation.

1.Introduction

TheCentreofPolicyStudies（CoPS）wascommissionedbytheDepartmentofForeignAffairsandTrade（DFAT）toconductamodel-basedstudyintotheeconomicimpactsofaFreeTradeAgreement（FTA）betweenAustraliaandChina.ThestudywasundertakenjointlywithexpertsfromChineseAcademyofSocialSciencesandNankaiUniversity.

ThestudyisbasedonsimulationsundertakenwiththeMONASHMulti-CountryModel（MMC）ofAustralia,ChinaandtheRestOftheWorld（ROW）developedatCoPS.MMCfeatures:

∙Dynamicmechanismsthatallowthetime-pathofeffectsofashock,suchastheimplementationofanFTA,tobeanalysedoveranumberofyears;

∙Anindustrystructure（seeTable1.1）thatallowstheindustrialimpactsofanFTAtobeanalysedinconsiderabledetail;

∙ArealisticbaselineconsistentwiththeviewsofexpertforecasterssuchastheWorldBankandtheInternationalMonetaryFund.

∙Specificaccountingfortradeflowsbetweencountriesthatallowsforthesimulationofremovingborderprotectiononbilateralimports;and

∙Specificaccountingforbilateralinvestmentflowsthatallowsforthesimulationofinvestmentliberalisation,aswellastheliberalisationofservicestradeofthecommercial-presencetype（definedinBox1.1below）.

Box1.1Fourmodesoftradeinservices

AccordingtotheWorldTradeOrganisation（WTO）,tradeinserviceshasfourmodes:

cross-bordersupply–servicessuppliedfromonecountrytoanother（e.g.internationaltelephonecalls）;consumptionabroad–consumersfromonecountrymakinguseofaserviceinanothercountry（e.g.tourism）;commercialpresence–acompanyfromonecountrysettingupsubsidiariesorbranchestoprovideservicesinanothercountry（e.g.abankfromonecountrysettingupoperationsinanothercountry）;andmovementofnaturalpersons–individualstravellingfromtheirowncountrytosupplyservicesinanother（e.g.anactressorconstructionworker）.

Inthisreporttheexplanationofresultsarepresentedinanon-technicalmannersoastobereadilycomprehensibletoreadersunfamiliarwiththeMMCmodel.AbrieftechnicaldescriptionofthemodelisgiveninAppendixA.

ThemodellingcoverssimulationsofthefollowingthreeaspectsoftradeliberalisationunderanFTA:

∙theremovalofexistingbarriers（tariffandnon-tariff）totradeingoodsbetweenAustraliaandChina;

∙theliberalisationofinvestmentflowsbetweenAustraliaandChina;and

∙tradeliberalizationinserv