Part 3: Evaluation of the key arguments for and against a free trade agreement
For afreetradeagreement
Although China has reduced a large extent of tariff when joining the WTO, Chinese average tariff level is still in a higher level relative to Australian. China commits to reduce to zero about tariffs of most products of being imported from Australia; Australia commits to fall to zero tariffs for all products imported from China eventually. Falling prices will further expand imports due to Chinese consumer increasingly demand for imports, which is trade creation effect. Due to China-Australia Free Trade Zone, no matter in the case of trade creation and trade diversion, China and Australia import prices go down compared to the original. Electronic products, wool dairy products are rich in demand price elasticity, so cancelling tariff measures will make the Sino-Australian bilateral trade volume increase and form trade expansion effect. After the completion of China-Australia Free Trade Area, the domestic markets of Australia and China will be merged into a unified big market, enterprise production scale and the corresponding expansion obtain scale economic benefit. For example, dairy products industry has always been the advantage industry in Australia, but New Zealand dairy products have strong competition. It has deep influence on market share. China-Australia Free Trade Area makes Australian dairy industry gain more market share and drives the cost down by Jun, Huang and Chou (2005). Against afreetradeagreement
However, part of Chinese gross domestic product will be replaced by Australian imports. In the letter of intent for China-Australia FTA, tariffs are reduced to zero, which means a large number of exports from New Zealand FTA to China since 2008 will be subject to severe impact, especially in dairy products. After the completion of China-Australia Free Trade Area, effects of competition will also highlight within the region competition and the competitiveness of area. China and Australia will specialize in the professional division of labor and industrial division of labor according to their comparative advantage and competitive advantage. Specialized division of labor in the area will be further refined and deepened, in turn, this will increase regional competition. In the zero tariff of China-Australia Free Trade Agreement, it means that it will have huge impact on agriculture and mining because of losing high tariffs. (Dollar and Kraay 2004)