The Australia—China Free Trade Agreement: Some Modelling Issues

General equilibrium modelling has been used to analyse many policy proposals. This article aims to help non-modellers assess general equilibrium analyses, particularly of a potential Australia—China free trade agreement (FTA). General equilibrium modelling is effective in studies of unilateral tariff reductions. However, most general equilibrium modelling assumes given technologies and information. For issues where the essence is technology transfer and new information, general equilibrium models can only produce results after most of the analysis has been done outside the model. In an Australia—China FTA, tariff cuts may be only a small part of the package. The main part may be goodwill, technology transfer and increased mutual awareness. Thus, for analysing FTAs, general equilibrium modelling is of limited value. The only conclusion for Australia that general equilibrium modelling of an Australia—China FTA can deliver with any certainty is that such an agreement will cause significant contraction in the Australian clothing industry.