Free Trade

Free trade is when there are no artificial barriers to trade imposed by governments.

Free trade allows the free flow of goods and services between countries. Free trade could also arise with the purpose of shielding domestic products from foreign competitors.

Trade liberalisation refers to the removal of barriers and protectionist policies over time. Protectionist policies are any policies that hinder trade, such as tariffs, quotas and subsidies.

A bilateral free trade agreement is made between two countries. Multilateral free trade agreements are made between two or more countries.

For the WACE syllabus, there are two free trade agreements (FTAs), that you should remember:

• The ANZCERTA (Australia-New Zealand Closer Economic Relations Trade Agreement) is the most comprehensive, bilateral free trade agreement. It was signed on 28th March 1983. There are many features of the ANZCERTA:

  • All tariffs and quantitative import/export restrictions are prohibited.

  • It contains measures to minimise market distortions, through domestic industry assistance, export subsidies and incentives.

  • The harmonisation of Trans-Tasman food standards means lower compliance costs for the industry, fewer regulatory barriers and more consumer choice.

  • The mutual recognition of goods and occupations removes technical barriers to trade and to the movements of skilled personnel between the countries.

  • The Protocol on Investment to ANZCERTA entered into force on 1 March 2013. Under the protocol, investors from both sides benefit from lower compliance costs.

  • The elimination of travel visas has also occurred. This has led to increased tourism for Australian operators, as more New Zealanders are travelling to Australia. However, there is increased competition, as New Zealand becomes easier to get to.

• The AANZFTA (ASEAN-Australia-New Zealand Free Trade Agreement) was signed on 27th February 2009. The following are key features of the AANZFTA:

  • Extensive tariff reduction and elimination commitments

  • Regional rules of origin provide new opportunities for Australian exporters to tap into international supply chains in the region

  • Promotes greater certainty for Australian service suppliers and investors, including through certain legal protections for investment in ASEAN territories

  • Provides a platform for ongoing economic engagement with ASEAN through a range of built-in agendas, economic cooperation projects and business outreach activities

  • The AANZFTA could lead to possible growth in emerging industries, such as clean energy and financial services.

  • Barriers could be in terms of tariffs or limits in supply or value, such as quotas

  • Whilst not the primary role, may FTAs require additional domestic legal and business reforms, such as including commitments on labour and the environment to encourage

  • Developing countries could improve their work conditions and environmental practices.

There are many benefits and challenges to FTAs for Australian owned businesses:

Benefits of FTAs

• Higher employment – this makes the economy stronger and helps businesses thrive

• Increased export income – the larger customer base that can be accessed globally leads to higher export income.

• Boosted productive capacity – due to the increased opportunities and prospects of overseas customers, underutilised and unutilised resources are used, increasing overall productivity.

• Specialisation – FTAs increase free trade, which can allow for specialisation and businesses can find their niche, differentiating themselves in the global market.

Challenges with FTAs

• Structural change in the economy – there may be new technologies and techniques brought into an economy. A business may be unable to adapt whilst their competitors advance ahead.

• Higher competition – Australian businesses need to compete with firms from all over the world.

• Difficulty in employment – global firms may seek educated talent in Australia and encourage them to move overseas. It may be hard for Australian businesses to find skilled candidates for certain roles.

• Increased economic instability – the interdependence between countries may cause issues, as the global market frequently changes (such was the case with COVID-19)