Jane Prentice (Ryan, Liberal Party) Share this | Hansard source

The coalition went to the last election promising three core free trade agreements, and the Korea-Australia Free Trade Agreement is the first of those to be negotiated and completed by the government. The coalition government is securing stronger trade relations with our most prominent trading partners as part of our strategy to build a stronger economy for the benefit of all Australians. There has been a lot of confusion about these free trade agreements in the media, where some people think exports equals 'good' and imports equals 'bad'. This is not the case at all. When discussing the impact the Korea-Australia FTA will have on the economy, it is important to look at a number of factors. There are five major elements that affect the extent of changes in exports that arise from the implementation of free trade agreements and are captured in the economic models.

One, the size of the trade barrier that is removed by the FTA has a major impact on the extent to which changes occur. Removal of a tariff barrier leads to the first round impact of decreasing the price paid by importers and increasing the price received by exporters. This acts to increase demand for these products, so the removal of tariffs would be expected to increase exports and also increase production of the goods. The extent of the increase depends on the magnitude of the tariff reduction. A large reduction in tariffs resulting, for example, from the complete removal of a high tariff would lead to greater changes in exports and production than a small reduction in tariffs from the complete removal of a small tariff or a decrease of the tariff rate. A free trade agreement will not result in this first round effect on products for which there are no tariffs to be removed, or for product lines excluded from the agreement.

Two, the exporting country's initial share of imports to the importing FTA trading partner will affect the degree of change in exports. If the share is small then the relative impact of the tariff reduction will be large. For a larger share, the tariff reduction will lead to a relatively smaller change in exports.

Three, when the demand for export products changes there are flow-on impacts to other sectors of the exporting country's economy. In order to meet an increase in demand for exports of one product, resources in the exporting country are redistributed towards production of that product, but away from other products. This will lead to a decrease in production, and potentially exports, of these other products. The extent to which production of other products decreases will depend on the pattern of input use and the elasticity of demand for these products. The opposite will happen if demand for exports of a product falls.

Four, trade liberalisation will increase the income—GDP—of both trading partners. Increased income will mean that countries are able to increase consumption and increase imports from all countries. This impact will be greater for FTAs that lead to greater trade creation, and therefore greater increases in GDP. It is possible that countries outside the FTA increase exports of some products due to the increase in imports by the countries within the FTA.

Five, consumer preferences in the importing country will also determine the extent of changes in trade flows. If there is greater preference for products from the FTA trading partner compared to other countries and products, the removal of tariffs will have a greater impact on imports from that country. The importers will substitute towards products from the FTA trading partner.

There are two related scenarios that were developed and analysed for this particular project. The first scenario looked at the impact of the Korea-US and Korea-EU free trade agreements on Australia where Australia did not have a similar agreement with Korea. This scenario was aimed at understanding how trade patterns are likely to develop as Korea's free trade agreements with the US and the EU are implemented, and what it meant for Australian trade. Considering trade in goods, the Korea-US and Korea-EU free trade agreements would result in Australia's exports being diverted away from Korea to other countries. At the end of the FTA implementation period, compared to what would be without the Korea-US and Korea-EU FTAs, Australian exports to Korea were 4.7 per cent lower, as Korean importers sourced their products from US and EU exporters at lower prices. As the US and EU gained increased access to the Korean market through the implementation period and displaced Australian products, Australian exporters redirected their products to other countries but received lower prices for their goods.

Exports to other countries are higher under the FTA scenario, compared to the baseline. The total volume of exports to all countries is higher by 0.03 per cent in the FTA scenario. This is, in part, because the expansion in the US and EU demands more resources from Australia. Overall, the terms of trade decline as a result of the two FTAs, and in order for Australia to maintain the volume of total exports the value of exports declined. Real wages in turn are lower by 0.2 per cent as firms adjust to the lower income from exports.

The second scenario looked at the impact of the Australia-Korea FTA in the presence of the FTAs between Korea and the US and EU. The baseline for this scenario was the result of the first scenario where the US and EU have free trade agreements with Korea. The objective of this was to understand the benefits that would arise from a new agreement between Australia and Korea, relative to the current situation. Australia's total exports are higher with the implementation of the Australia-Korea Free Trade Agreement than would be otherwise. Australia's exports to Korea are 25 per cent higher under the FTA than they would be without it, driven by lower tariffs and greater access to the Korean market. Australian exports to other countries are slightly lower as a greater proportion of Australia's output is directed towards the more profitable Korean market and, overall, the total quantity of exports from Australia increased by 0.1 per cent of $280 million as a result of the FTA. Real wages are higher than they would have been without the FTA and as Australia's terms of trade improve as a result of the FTA.

Building stronger trading relationships in Asia is critical to Australia's economic future. Signing the Korea-Australia FTA takes Australia closer to realising our goal of finalising FTAs with our major North Asian partners, which together account for 37 per cent of Australia's overall trade and two-thirds of our total goods exported. The coalition's success in negotiating this free trade agreement shows that only the coalition is serious about sending a strong signal that Australia is indeed open for business. I commend this bill to the House.

Debate adjourned.

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