In November last year, Australia signed a free trade agreement (FTA) with China. We still don’t know the full extent of the deal. But in just under two months, we’ll have a much better idea. That’s because the so called ChAFTA will become public knowledge.
As a quick primer, a free trade deal breaks down trade barriers between nations. In other words, good and services flow more easily within the free trade zone. That’s because FTAs ease restrictions on exporting and importing goods and services. Included in this are tariffs, taxes and import quotas.
Here’s what we know about the ChAFTA: it could provide huge opportunities for Australia’s economy. Let me explain why.
Falling commodity prices have left the nation with a $35 billion budget deficit. The government wants other sectors in the economy to offset commodity exports. Non-mining sectors will need to do this if we’re to shift away from our reliance on resources. And that’s where the ChAFTA could come to our rescue.
Take the services sector. It might be the biggest winner from the ChAFTA. Banks, tourism, education, and healthcare will enjoy improved market access in China.
Healthcare in particular stands out for its potential. That’s because China is one of the fastest greying nations in the world. The one child policy has left China with too few young people. By 2050, the median age will be close to 50. Australia’s media age will also be close to 50. But in China that equates to 500 million elderly citizens. That’s 25 times larger than Australia’s entire current population. And all of them will need social care.
China will need help in providing for this growing class of elderly. For mature Australian healthcare services, that amounts to 500 million new potential customers.
China has also agreed to phase out tariffs for dairy products in the next decade. They’ve promised beef and lamb exporters a similar deal. Those industries should become more competitive against other international exporters in China. And it may even give them a platform to make inroads into Chinese produce industries.
But commodity exporters won’t be left behind by ChAFTA. In fact they may be the biggest short term winners. The removal of tariffs on resources will make exports cheaper. That could allow them to offset falling revenues if global prices fall further.
Australia exported $70 billion in iron ore, coal and copper to China in 2014. This was perhaps the primary reason China wanted a FTA in the first place. Anything that allows them to import resources for cheaper is enough motivation for China.
The pros and cons of free trade agreements
Not everyone believes free trade deals are good for the economy. Critics argue that hidden costs can outweigh the benefits of FTAs. For example, free trade deals can give large multinationals too much power. Their low-cost advantage can force smaller companies to lose their competitiveness. And that could result in layoffs and closures.
There is also the threat that Chinese capital could buy up Australia companies. That might lead to greater dependence on Chinese companies, making local businesses uncompetitive.
And what if Australia becomes too dependent on China? If China only wants our resources, what happens when there’s nothing left to mine? It could leave the economy in tatters. But this argument isn’t so convincing, as China already heavily influences demand for resources.
But FTAs have their cheerleaders too. Supporters say that efficiency in pricing goods and services is good for the market. The larger the FTA is, the cheaper the goods and services become for consumers. Anything that reduces tariffs will lead to increased competition in the market.
The positive from the FTA could help Australia’s economy through the tough times ahead. And China’s status as an economic power will only grow with time. Growth rates of 5–7% in China will present huge opportunities for Australia’s economy. The Daily Reckoning’s contributing editor, Phillip J. Anderson, is bullish on China. He’s been warning for years that official mainstream economic data on China is wrong. He thinks their boom is only beginning… and that it’s set to last another decade.
Phil wants to show how you can profit from the media’s ignorance. He’ll equip you with the right tools to invest confidently in China. To find out how to download his report, ‘The Cassandra Syndrome: After This Report, You Won’t Worry About China Again for Another Decade’, click here.
Contributor, The Daily Reckoning