Modelling the potential impacts of economic reform in a partnership between Australia and China

Effective economic reform agendas provide a means for promoting national economic growth, raising living standards and adapting to changes in trading conditions, new technologies and ways of working. Taking as a focus the Australia-China economic relationship, the GTAP model of the global economy is used to project the implications for Australia and China of preferential, unilateral and broader approaches to trade liberalisation, a broad agenda for reform across the services sector and financial market reform. The simulations show that reform strategies based on non-discriminatory trade liberalization and broadly-based concerted domestic reforms are likely to deliver substantive economic benefits and contribute to growth. Agendas that are restrictive, either through preferential deals between trading partners or through a narrow sectoral focus domestically are likely to constrain gains below levels that would otherwise be attainable. The effects of any particular economic reform program are specific to the modalities of the program, the barriers to economic efficiency, as well as the structures of the economy involved and those of its trading partners. The modalities of a reform program can include reductions in border protection, trade facilitation measures, reductions in barriers to investment, mutual recognition of products and qualifications within economic regions and across national borders, service sector reforms and financial market reforms. The magnitude of benefits from reform will also vary depending on many contextual factors including how broadly the reforms are applied, the scale of activities affected and how far they reach into the economy. The potential benefits from trade reform will be influenced by whether reductions in border protection are applied on a preferential or non-preferential basis. Services sector reform, which can reduce the resource cost of providing services to industry and consumers in the economy, can also increase the competitiveness of domestically produced goods and services on global markets. The opening up of merchandise and services sectors can provide additional leverage to productivity enhancing reforms in the services sector. Financial market reform will help the intermediation of savings to investments where they are most productive, improve access to capital and reduce the risk premium of capital investment generally.