Free Trade Area (Fta) Analysis In China

2445 words - 10 pages

As globalization becomes the main stream of the world, countries have more tight relationship between each other both in politics and economy. To achieve this, regional economic integration has the leading effect. Free Trade Area (FTA) is perceived as the fundamental level of economic integration and also the most popular form, where all the government interferences and regulations on trade of goods and services among member countries are removed e.g. it reduces or ceases the tariff and nontariff barriers in the region. Meanwhile, the members can set their own trade policies to the countries outside the FTA. (Hill, 2007) In the first section of this essay, the advantages and disadvantages of FTA to the member countries and the rest of the world will be discussed. Furthermore, there is another discussion about the gains and loses of Chinese industries based on the ongoing formation of FTA among China, Korea and Japan. After the analysis in section 2, the reasons for recommending China to support the establishment of this FTA will be listed.To form a FTA, a series of negotiation will be made among members to concede to open up their markets. Thus, FTA is considered as a driver of trade liberalization. (the Australian APEC study centre, 2001) With better access to the each other's market, FDI as one of the important impacts come along with trade liberalization can be seen as the advantages of FTA. After forming FTA, it is more attractive for FDI from both inside and outside of the FTA. The establishment of FTA could involve both developing and developed countries. In a developing country, there is lower labor cost and cheaper factors of production, besides, owing to the less restriction of capital flow among member countries within the FTA, multi-national enterprises have more willingness to invest "internally". From the rest of the world, once MNEs invest in one member country, it can possibly get access to other members' markets with less cost, as the FTA combines all the members' markets in to a single one. Take North America Free Trade Agreement (NAFTA) for example, Table 1 compares the mean (magnitude) and standard deviation (volatility) of FDI flows of for the year 1983-1993 (before NAFTA) and 1994-1998 (after NAFTA). It is clear from the table that after the formation of NAFTA, there is an enormous influx of FDI into Mexico. Besides the significant change in average, the smaller figure of standard deviation of Mexico after NAFTA indicates the decline in FDI volatility. In other words, FDI inflows in these countries become more sustaining and stable.Table 1: Basic Indicators of FDI flows, before and after NAFTA.(in U.S. $)Source: Own elaboration with data from the World Bank and the Bureau of Economic Analysis(Cited from Monge-Naranjo, 2002)Trade creation is another advantage that FTA brings to the member countries. Hill (2007) defines trade creation as the phenomena that high-cost domestic producers are replaced by the low-cost producer in...

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