GTAP Model Analysis of the Economic Effects of an Australia-China FTA: Challenges and Opportunities for Bilateral Trade Policy

Abstract

The global trading system has seen a very substantial increase in preferential trading arrangements over the past decade. The Australian government has signaled an interest in regional trade agreements and successfully signed Free Trade Agreements (FTAs) with Singapore, Thailand and the U.S., as well as a Closer Economic Relations Trade Agreement with New Zealand. The Australia-China Free Trade Agreement (ACFTA) is already in the process of being negotiated by the two governments. This study applies the Computable General Equilibrium (CGE) modelling approach using the Global Trade Analysis Project (GTAP) model and its database version 6 for a quantitative analysis of the economic effects of proposed ACFTA. Four scenarios with full merchandise trade liberalisation are examined in this study focusing on flexible and fixed current account positions within short run and long run respectively. Equivalent variation and real consumption are used to measure the welfare effects resulting from the formation of the ACFTA. The results from the GTAP simulations provide quantitative evidence that there are positive welfare effects for both Australia and China in all cases and the two economies would obtain gains according to their comparative advantage. The modelling results also indicate that the ACFTA has a negligible impact on the rest of the world's real GDP and welfare, and would generate trade creation greater than trade diversion for the world as a whole. It is evident that the ACFTA would have not only bilateral but global benefits. From Australia's perspective, securing closer economic integration with China via the ACFTA would be a strategically sensible option.