The Australia-China Economic Relationship and Prospects for an FTA

The Australia-China Free Trade Agreement (ACFTA) is already in the process of being negotiated by the two governments. This paper applies the Computable General Equilibrium (CGE) model using Global Trade Analysis Project (GTAP) database version 6 for a quantitative analysis of the economic effects of proposed ACFTA. Four scenarios are examined in this paper focusing on flexible and fixed current account positions within short run and long run. Equivalent variation (EV) and real consumption are used to measure the welfare effects resulting from the formation of the ACFTA. The results from the GTAP simulations show positive welfare effects for both Australia and China in all cases. The different magnitudes of changes in the two countries represent the relative significance and size of bilateral trade to each country. The modeling results also indicate that the ACFTA has a negligible impact on rest of the world's real GDP and welfare, and would generate trade creation greater than trade diversion for the world as a whole. Specifically, the two economies will obtain gains according to their comparative advantages. In the case of Australia, primary commodities such as grains, sugar and mining products dominate exports to China whereas in the case of China, manufactures such as wearing apparels, textiles and miscellaneous manufacturing benefit most. Labour force is estimated to move from declining sectors to growing sectors in most cases in the two economies. The sectoral adjustments of trade balance, output and demand for primary factors exhibit similar directions of changes. It is evident that an Australia-China FTA would have not only bilateral but global benefits. (JEL F13, F17).