Singapore Australia Free Trade Agreement

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Introduction

Free trade is an important component of International Economics. The objective of this report is to examine the latest Singapore Australia Free Trade Agreement (SAFTA) and the benefits it brings or will bring to Australia. It examines Free Trade Theory and discusses it in Relation to Australia. It further examines its advantages and disadvantages. The Report then provides an overview of SAFTA, its benefits to Australia and its criticism in general.

Free Trade

In the past trade used to be controlled by the government as good and services have been traded around the world for years. Free trade is an essential part of national and international economic policy. It is also part of a much wider movement towards deregulatory free market policies.

More recently, it has been recognized that some countries are better at producing certain types of product than others. That is the country can produce the good more cheaply, quickly or efficiently. Hence, countries specialize in producing the goods that they can produce most efficiently, and to trade their surpluses of those goods for the products they cannot produce, or are less efficient at producing. This is known as the principle of free trade. Free trade occurs when there are no barriers put in place by governments to restrict the flow of goods and services between trading nations.

If each country decides to be self-sufficient and produce its own food and clothing both countries will be using some of their resources in a less efficient way. Each country should produce goods that are cheap to produce in their country and exchange that for products for which the cost is high in their country. This would mean all the free-trading nations can realize a larger real income from the given supplies of resources available and each countrys output will be greater than it would otherwise have been. Therefore, they will both be better off.

Free trade increases competition and discourages monopoly. Domestic firms are forced to lower their cost of production due to increased competition by foreign firms. This would force firms to be more innovative in both the product quality and production methods therefore could result to economic growth. With free trade the resources are allocated more efficiently and there is higher standard of living for the world as a whole and the welfare of nations can also be better through free trade. Free trade can increase real national product but decrease social welfare if it shifts the distribution of income and wealth in an unfavorable direction.

Free Trade Theory

Figure 1 Free Trade (Source Perloff, 00)

When trade barriers, such as tariffs and subsidies are put in place, they protect domestic producers from international competition. More competition means higher risk and this could affect a countries wealth. There are many barriers of free trade that exist in order for countries to protect themselves.

They can impose taxes such as tariffs on imported goods. This would make foreign goods more expensive hence consumers have to pay more. However this protects the domestic producers because they do not have to compete against cheaper foreign imports. Tariff distorts consumption and production i.e. it destroys both the equality of MRT (slope of transformation) and TOT (terms of trade) and the equality of MRS (slope of substitution) and TOT.

A country could introduce subsidies. Where a firm thinks a good is more attractive to produce than it was before. Usually they end up making the wrong decision. Perfect equilibrium no longer exists and the production line is distorted hence production is worse off. i.e. MRT and TOT line is destroyed however it does not upset consumption i.e. MRS and TOT are equal.

Free trade is not the same in all countries as some countries have more barriers to free trade in order to protect themselves than others. Some countries impose quotas, where only a limited amount of a specific good may be imported during the year.

Australian Perspective to Free Trade

Australia benefits from trade as they have a surplus of resources they sell the surplus to other countries and use the export dollars to buy other goods and services. Australia's GDP ratio was 15 percent in the past but now has risen to 0 percent because of the increase in exports and imports. Australia's industrial base has become stronger due to the increase in exports.

Australians have seen a change in the standard of living due to an expansion of imports, as this has benefited consumers and businesses due to an extensive range of products to choose from. Reducing tariffs have saved Australian families an average of $1000 per year. They have also seen that exporters pay more to workers than non-exporters because they sell to a bigger market hence sell more and earn more profit. There has also been a study conducted stating that removal of tariff would create 40000 jobs in years. Export is good for Australia as it is important for economic growth and job creation (Trade 00).

Free Trade Advantages

Free Trade increases production where countries specialize in the goods in which they have the comparative advantage. It lowers opportunity cost of producing. International trade increases the size of the firm's market, economies of scale, increases productivity and lowers cost.

When trade opens up it increases competition hence goods and services can be purchased at a lower price. Consumers are also about to choose form a wide variety of goods and services. Increased competition encourages innovation, the use of new technology, marketing and distribution methods. There is also economic growth, better living standards and an increase in the level of income for the countries involved in free trade

Increase in exports leads to appreciation of currency. For example, when exporting goods overseas Australia can gain currency from other countries that it sells these goods to, hence there is a foreign exchange gain. The appreciated currency can be used to purchase luxury imports such as cars. It makes imports relatively cheap.

Free Trade Disadvantages

Removal of trade barriers can cause structural unemployment in short term. Since workers in other countries may have lower wages, production of some goods may take place in other countries causing a loss of jobs in the higher wage country.

As economies become dependant on global markets, there is greater instability introduced from international trade cycles. The Asian economic crisis in 18 and economic slowdown in the global economy in 001 illustrate this situation.

Some countries comparative advantage may not be an advantage. This would make them specialise in goods that do not have potential to grow in the future. Also, new industries may find it difficult to establish in a competitive market if there is no short-term protection by the government.

SAFTA

The Singapore-Australia Free Trade Agreement (SAFTA) was signed by the Australian and Singapore Trade Ministers in Singapore on 17 February 00 (DFAT 00). Signature of SAFTA followed by ten rounds of negotiations after the agreement between Prime Ministers John Howard and Goh Chok Tong in November 000 to conclude an FTA. The agreement became operational on 8 July 00 (Free law 00).

Overview of SAFTA

The SAFTA is intended to strengthen trade and investment links between Australia and Singapore. In accordance with the agreement, Singapore and Australia will eliminate tariffs on all goods imported from the other country from the date this agreement came into effect. For Australia, it means duty free entry of beer and stout (all other products enjoy duty free entry into Singapore). The parties have also agreed not to use export subsidies and not to apply safeguards measures against each other. A FTA (free trade agreement) for Australia will further enhance linkages with south-east Asia. The broader objective of this policy is to promote trade and investment liberalisation around Asia and the Pacific.

Singapore is Australia's largest trade and investment partner in the south-east Asian region. It is Australia's seventh largest trading partner. Australia's merchandise exports to Singapore during year 00 were valued at AUD 5.4 billion making it sixth largest export market. Imports from Singapore were valued at just under AUD 4 billion making it eight largest source of imports. Singapore was also the third most important source of investment in Australia in year 001-00 in terms of 'proposed' total final direct investment. It is worth to note that most of this investment can be attributed to the acquisition by Singapore Telecommunications Ltd of Cable & Wireless Optus Ltd for a consideration of AUD 14 billion. While the Singaporean economy experienced a significant dip in the wake of the East Asian economic crisis, a return to traditionally high levels of growth is predicted. The potential for increased exports of services (particularly financial, telecommunications, legal, educational and professional) to Singapore was identified by a number of the Australian companies consulted during the negotiations for SAFTA (Free Law, 00).

SAFTA agreement further guarantees increased market access for Australian exporters of services, particularly in education, environmental, telecommunications, and professional services. It is aimed at providing a more open and predictable business environment across a range of areas including competition policy, government procurement, intellectual property, e-commerce, customs procedures and business travel (DFAT, 00).

Benefits to Australia

Singapore has been a free port with minimal tariff protection since late 18th century. Most of the Australian goods exported to Singapore had little or no tariff previous to this agreement. After this agreement, all goods including Beer and Stout will enjoy tariff free entry into Singapore (Free Law, 00).

Service industry of Australia is the one that will significantly benefit from SAFTA. In particular Australian exporters of financial, professional and telecoms services. Both countries have to deliver a comprehensive and transparent negative lists of services sectors. Negative list of the industries will include the sectors which are not be covered by the Agreement and everything else is to be included (Free Law 00).

Singapore has undertaken to ease Wholesale banking licenses over time. Conditions are also eased for establishing joint ventures involving Australian Law firms. Australian law degrees recognised in Singapore doubled from 4 to 8 (Free Law 00).

Singapore has also committed to liberalise residency requirements for Australian professionals. Mutual recognition agreements (MRAs) between Australian architects and engineers and Singapore is underway. Short term entry for Australian business people extended from 1 month to months. Long-term business residents in Singapore granted total stay up to at least 14 years. Spouses of business people can work as managers, specialists, office administrators (DFAT 00).

The SAFTA is also intended to strengthen the position of Australian investors in Singapore, by providing formal protection against expropriation. Investment restrictions in Singapores government linked companies, which is an important element of its economic infrastructure and strategy will also be made more transparent. Australian firms will get national treatment status that is they will be treated same as local firms in government procurement by some 47 Singaporean government agencies. There will be stronger intellectual property protection in government tender processes (Free Law 00).

Singapore government has also committed to address anti-competitive business practices, with consultation-upon-request for any such practices of concern to Australia. Singapore government will also apply competitive neutrality disciplines to government business enterprises, which implies that such entities will not be allowed any net benefits by reason of their government ownership alone (ACCI 00).

There are many other benefits including paperless trading, promotion of ecommerce, etc. The benefits are large in number but their significance and criticism is examined in next section (Free Law 00).

Criticism

According to Australian Camber of Commerce and Industry, the overall macroeconomic impact of SAFTA is going to be modest. Previous to this agreement 84% of imports from Singapore entered Australia tariff free. 15% of imports are subject to general tariff upto 5% while remaining 1% attract tariff of more than 5%. Thus any adjustment effects on the manufacturing sector as a whole from the SATA will be extremely small.

Economic modelling commissioned by the Australian Government on the SAFTA found that the impact of tariff elimination on manufacturing was too small to reliably estimate (Australian Chamber of Commerce and Industry 00).

Another source has raised concerned about ownership of business in Singapore. Singapores data suggests that 60% of the economy is government controlled. Singapore government owns housing apartments where 0% of population dwells, Government owns road, airlines, telephone providers, food industries, etc. Permitting such government enterprises to own businesses in Australia will strengthen Singapore governments presence in decision making in Australia. Currently government run Singapore telecommunications owns a share in Optus Communications, Victorias power grid. The source estimates that Singapore government directly or indirectly controls $40 billion of Australian investments in critical industries whereas Australias investment in Singapore is $14 billion (Ellis 00).

Some Critics have warned that bilateral or regional free trade agreements could undermine efforts to open up trade on a global scale. But both countries have stated that they are strong supporters of world trade liberalization.

Conclusion

The ASFTA will play an important part in the trade and foreign policies of both the countries. Like the Free trade theory suggests that free trade leads to specialisation and increased competition. Increased competition leads to better prices for consumers and thus general welfare improves. Australias strength lies in the services industry. ASFTA will liberalise trade of services provided by Engineers, Architects, Accountants and Lawyers.

The question arises about who will benefit more? Is it going to be one way trade? From the research carried out by the team it seems that in dollar terms Singapore will benefit more than Australia. As mentioned before Singapore has traditionally been an open port. Thus Australian manufacturers of export goods have always benefited. The team envisages that it is the Singapore manufacturing industries that will benefit in comparison to Australia. But it will definitely be an opportunity for Australian services industries to specialise.

In conclusion, SAFTA will further enhance Australias linkages with south-east Asia and in particular with Singapore, one of the most dynamic countries within the region. It will be a step towards liberalisation in Asia Pacific region, which includes worlds big trading giant such as China, Japan, Hong Kong, South Korea, etc.

References

· 4 March 00, Singapore - Australia free trade agreement, done at Singapore on 17 february 00, and Associated exchange of notes, Free Law. Available at http//www.freelaw.net.au/au/other/dfat/nia/00/1.html. (Access Date 8 October 00)

· December 00, Australia-Singapore Free Trade Agreement, Australian Chamber of Commerce and Industry, Australia.

· Ellis E, Singapore Fling, Bulletin, Volume 10. No 47. Available at http//bulletin.ninemsn.com.au/bulletin/EdDesk.nsf/0/67c45f560cdfbcfca56c68001b58?OpenDocument. (Access Date 6 October 00)

· Free Trade Agreement, 00, Department of Foreign Affairs and Trade. Available at http//www.dfat.gov.au/trade/negotiations/australia_singapore_agreement.html. (Access Date 6 October 00)

· Free trade and protection advantages and disadvantages of free trade, Available at http//hsc.csu.edu.au/economics/global_economy/tut7/Tutorial7.html. (Access Date October 00)

· Free Trade, Oxfam. Available at http//www.oxfam.org.uk/coolplanet/milkingit/information/the_issues/free_trade.htm. (Access Date October 00)

· Perloff J. Intermediate Mircoeconomics, Agricultural & Resources Economics University of California at Berkeley. Available at http//are.berkeley.edu/courses/ECON100A/HW/Old/ans4.pdf. (Access Date 10 October 00)

· Singapore-Australia trade pact in effect, Canberra eyes more ASEAN deals, 8 July 00. Available http//quickstart.clari.net/qs_se/webnews/wed/bn/Qsingapore-australia.RCLO_DlS.html (Access date 5 October 00)

· Trade, Department of Foreign Affairs and Trade, Available at http//www.dfat.gov.au/trade. (Access Date October 00)

· Tuesday 01, July 00, Singapore-Australia-Free Trade Agreement (SAFTA), Attorney Generals Department. Available at http//www.ag.gov.au/www/ilsHome.nsf/0/4A4E84D816B4FCCA56CD007DEA6B?OpenDocument. (Access date 6 October 00)

· Wikipedia, 0 August 00, Free Trade. Available at http//en.wikipedia.org/wiki/Free_trade. (Access Date October 00)

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