Part 1: What is a free trade agreement (FTA)?

There’s been a lot of talk in the news lately about free trade agreements (FTAs). The PM recently returned from a whirlwind Asian tour, the aim of which was to set up FTAs with South Korea, Japan and China. Team Australia, consisting of around 600 of our business best and brightest, bowed, did the sake, smiled though the spicy kimchi and told the Chinese how much we really like them. For better or worse, this seems to have done the trick because South Korea and Japan are on board, and China looks like  jumping on the FTA bandwagon too.

An FTA is an agreement between two countries, or even whole regions, to eliminate things that hinder free trade such as import duties, export bounties, domestic production subsidies, trade quotas, import quotas and trade tariffs. Taxing imports protects domestic industries against competition from cheaper (sometimes better) imports, which encourages us to buy Australian. This is known as protectionism, the upside of which is good because money stays here to fuel employment and other sectors. On the downside, protectionism shields local companies from the real trading world, which can stifle innovation and the pursuit of excellence.

(Cue fanfare) Enter, stage left, the free trade agreement … Fans of FTAs point to the wonders of an economic theory called comparative advantage, which dictates that each nation should concentrate on selling what it can make cheaply and efficiently, and trading this for things it can’t. For example, our recently-signed FTA with Japan, which covers electronic goods, makes sense because Japan does electronics much better than we do. So, we drop import duties on Japanese electronics and they drop them on Aussie coal, which creates a FTA based on comparative advantage. It’s a win-win, capiche?

Next week we’ll look at some nuts-and-bolts of the actual agreements that have been signed with Japan and South Korea, and what it all means for you.

Zài jiàn!