Australia's Recent FTAs: Insights from Theory and Modelling on Rationale, Welfare Gains and Political Heat

Abstract

This paper uses the theory of efficiency gains and terms‐of‐trade losses to explain the proliferation of free‐trade agreements (FTAs). It then focuses on Australia's FTAs with Japan, Korea and China in a discussion of gains from FTAs. Continuing that focus, the paper explains why FTAs (and trade policies more generally) are politically divisive. With regard to the China‐Australia FTA the conclusions reached in the paper are: (1) There will be a modest but worthwhile welfare gain for Australia; (2) The gain will be mainly from terms‐of‐trade improvement, not employment; (3) The Government is exaggerating the likely gain; (4) There will be losers as well as winners; (5) The Opposition is well within its rights to question labour‐market aspects of the agreement; and (6) The formation of FTAs is likely to be a continuing process and the Government would best serve the Australian public by encouraging evidence‐based discussion and providing answers to legitimate queries.