Australia has a relatively small open economy that has heavily based its economic growth on increasing exports, mostly natural resources and agricultural commodities, and foreign capital. During the last decade, the mining boom and China's rapid economic growth rendered an unprecedented economic boost to Australia's economic prosperity and high living standards. At the same time, Australia pursued trade policies integrating multilateral, regional, and bilateral approaches to gain market access opportunities for its exporters. Successive governments have favoured trade policies that are open to negotiating regional or bilateral trade agreements that deliver substantial benefits.
Consequently, Australia has implemented World Trade Organization (WTO)-consistent Free Trade Agreements (FTAs) with many important trading partners: New Zealand, the USA, Singapore, Thailand, Chile, Association of South-East Asian Nations (ASEAN)-New Zealand, and Malaysia. The recent additions are FTAs with South Korea and Japan. FTAs, which improve market access and strengthen trade flows, are an important vehicle to improve bilateral trade relationships and enhance domestic welfare (Dixon and Rimmer 2010, p.143). These bilateral and regional trade agreements deliver substantial benefits when the parties are prepared to move faster and undertake more profound liberalisation than what is currently achievable by the WTO multilateral trading system (Lloyd and Maclaren 2004, Lloyd 2010).
The Abbott government secured the two latest free trade agreements in 2014 with Australia's second and fourth largest trading partners-Japan and South Korea. Both Japan and South Korea are significant destinations for Australia's national resource exports such as coal, iron ores, and copper ores in addition to a range of agricultural goods. In return, Australia receives a significant proportion of its manufactured imports from both countries. Given the obvious trade complementarities, trade economists and policy makers envisage significant gains to Australia from these FTAs.
While cconomic returns from such trade treaties could be quantified to justify their efficacy and viability, there are perhaps important environmental considerations that need to be addressed. One such issue is increased trade in emissions-intensive goods resulting in elevated levels of greenhouse gas emissions due to these preferential trade agreements. Despite the apparent relationship between trade liberalisation and environmental degradation, there has been limited analysis to address the environmental impact of FTAs generally at global level and particularly in Australia. Cebon (2003) has examined the ways in which the environment can be affected by policies that increase exports in agricultural commodities. He asserts that the bulk of Australia's environmental problems such as salinity, water overuse, land clearing and biodiversity loss, water and soil pollution, and greenhouse gas emissions are due to the overexploitation of land and extreme agricultural practices. Extra pressure placed on demand for energy sources to meet export targets also contributes to Australia's energy-related emissions. Cebon (2003) criticises the apparent lack of environmental considerations in economic modelling carried out by different commissioned agencies prior to implementing previous FTAs such as the Australia-US agreement.
In this paper we examine both economic and environmental impacts of the two new Australian FTAs (with South Korea and Japan) using the multi-sector, multi-country Computable General Equilibrium (CGE) modelling approach. In particular we use the Global Trade Analysis Project-Environmental (GTAP-E) model which has a detailed specification of energy substitution possibilities and explicit carbon emissions accounting in addition to detailed trade flows. The analysis reported in the paper is based on the GTAP-E version 8.1 database. We consider two trade policy scenarios: the first is the free trade scenario where bilateral tariffs are eliminated between Australia and Japan and Australia and South Korea; the second is the green trade scenario where the free trade scenario is in place, but complements it by adding an environmental policy through an Emissions Trading Scheme (ETS) between Australia, Japan, and South Korea to reduce the environmental impact. The results indicate that the two trade agreements enhance Australia's trade at a modest expense to the environment. The paper illustrates that FTAs complemented by an ETS could mitigate emissions arising from increased economic activity due to increased trade. However, it is achieved with a substantial economic cost to all parties.
The paper is organised as follows. Section Il gives an overview of Australia's approach to preferential trade agreements. In Section III, bilateral trade between Australia and Japan, and South Korea are analysed in the context of Australia's world trade. The section also emphasises trade in emissions-intensive goods with these two trading partners. In Section IV, we outline the GTAP-E model used in the analysis.
Policy designs for simulations are in Section V. Section VI presents the results of two policy simulations. Finally, Section VII concludes. Перевди