Trade Between China and Australia

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MODELLING THE POTENTIAL BENEFITS OF AN AUSTRALIA-CHINA FREE TRADE AGREEMENT

Dr Yinhua MAI Centre of Policy Studies, Monash University Professor Philip ADAMS Centre of Policy Studies, Monash University Dr Mingtai FAN Chinese Academy of Social Sciences Professor Ronglin LI Nankai University Dr Zhaoyang ZHENG Nankai University

An Independent Report Prepared for: The Australia-China FTA Feasibility Study

2 March 2005

The Centre of Policy Studies
Centre of Policy Studies Building 11E Monash University Clayton, Victoria 3800 Australia Web address: http://www.monash.edu.au/policy/ ABN No 12 377 614 012

Contact persons at the Centre of Policy Studies:
Dr Yinhua MAI Senior Research Fellow Tel: 61-3-99055482 Fax: 61-3-99052426 yinhua.mai@buseco.monash.edu.au Professor Philip ADAMS Director Tel: 61-3-99055094 Fax: 61-3-9952426 philip.adams@buseco.monash.edu.au

Contacts in China
Dr Mingtai FAN Institute of Quan. & Tech. Economics Chinese Academy of Social Sciences 5 Jianguomennei Street Beijing 100732 China Tel: 86-10-65125895 Fax: 86-10-65137561 mtfan@mx.cei.gov.cn Professor Ronglin LI Institute of international Economics Nankai University 94 Weijin Road, Tianjin, 300071, China Tel: 86-22-23505235 Fax: 86-22-23502437 lronglin@mail.zlnet.com.cn

Acronyms and Initials
CGE CoPS DFAT FTA GDP GNE GNP GTAP MMC MOFCOM nec ROW WTO Computable General Equilibrium Centre of Policy Studies Department of Foreign Affairs and Trade, Australia Free Trade Agreement Gross Domestic Product Gross National Expenditure Gross National Product Global Trade Analysis Project Monash Multi-Country Ministry of Commerce, People’s Republic of China not elsewhere classified Rest Of the World World Trade Organisation

Table of Contents
EXECUTIVE SUMMARY 1. INTRODUCTION 2. GROWING ECONOMIC PARTNERSHIP BETWEEN AUSTRALIA AND CHINA 2.1 China’s demand for Australian agricultural and mineral products 2.2 Two-way trade in manufacturing products 2.3 Cooperation in the services sector 2.4 Deepening partnership in the future

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3. TRADE AND INVESTMENT BARRIERS BETWEEN AUSTRALIA AND CHINA 3.1 Border protection on merchandise trade 3.2 Restrictions on investment flows 3.2.1 Australia’s foreign investment regime 3.2.2 China’s foreign investment regime 3.3 Restrictions on trade in services

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4. REMOVING BORDER PROTECTION ON MERCHANDISE IMPORTS
4.1 GDP and Volumes of Trade 4.2 Real wages and Employment in the Long-run 4.3 Welfare effects and the Terms of Trade 4.4 Industry output 4.5 Industry employment

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5. FACILITATING BILATERAL INVESTMENT FLOWS 6. SERVICE TRADE LIBERALISATION 7. AGGREGATE EFFECTS OF AUSTRALIA-CHINA FTA 7.1 Macroeconomic impacts 7.2 Industry impacts 7.3 Labour market adjustment 7.3.1 Australia – Wearing apparel 7.3.2 Australia – motor vehicles and parts 7.3.3 China – Agriculture 7.3.4 China - mining 7.3.5 China - services

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8. FASTER VERSUS SLOWER LIBERALISATION 9. IMPACT ON REST OF THE WORLD 10. CONCLUDING REMARKS REFERENCES

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APPENDIX A. THE MODELLING FRAMEWORK – MMC
Overview: Economic agents and the nature of the markets CGE Core: Demands for inputs to be used in the production of commodities CGE Core: Household demands CGE Core: Inputs to investment CGE Core: Governments' demands for commodities CGE Core: International trade CGE Core: Factor markets CGE Core: Physical capital accumulation Model closure Solution software

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Executive summary
1. In 2002 Australia and China established a Trade and Economic Framework to enhance bilateral trade and investment. Under the framework, a joint feasibility study of a possible Australia-China Free Trade Agreement (FTA) is being conducted. 2. The Centre of Policy Studies was commissioned by the Australian Department of Foreign Affairs and Trade to conduct modelling analysis on the potential benefits of an Australia-China...
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