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China, Australia inch closer to FTA talks

Asia Times, Mar 24, 2005

China, Australia inch closer to FTA talks

BEIJING - China and Australia may be one step nearer to launching talks on a free trade agreement (FTA), and a feasibility study to be released this month strongly proposes the deal.

"China and Australia are highly complementary in economy and trade, and an FTA between the two sides would benefit both countries and largely promote a bilateral cooperative relationship for mutual prosperity," Ma Xiuhong, China’s vice-minister of commerce, cited the report as saying. Ma said the feasibility study has been conducted smoothly over the past 15 months and is now at its "final stage". Chinese and Australian experts have been working on the study since the two countries signed the Trade and Economic Framework in October 2003 during Chinese President Hu Jintao’s visit to Australia.

Australia is the largest developed country trying to reach an FTA deal with China, which has been trying to establish FTAs with the 10-member Association of Southeast Asian Nations (ASEAN), the six-member Gulf Cooperation Council and the five-member South African Customs Union, Chile and New Zealand. A specific timetable for the FTA has not been announced but analysts said it could be expected in April, when Australian Prime Minister John Howard visits China.

Geoff Raby, deputy secretary of the Department of Foreign Affairs and Trade of Australia, said that following the completion of the feasibility study, the two governments would decide "whether or not to take the historical step of launching the FTA negotiations... Both governments will give careful consideration to the results, and weigh all elements to reach the decision."

Australia will first have to decide whether to treat China as a market economy. China is now Australia’s third-largest trading partner, second-largest export market and second-largest origin of imports. Trade between China and Australia has been growing rapidly over the past few years. Chinese figures show that two-way trade reached US$20.39 billion in 2004, up 50.3% from a year ago, double the figure in 2002 and more than 230 times the figure when the two countries established diplomatic relations in December 1972.

Service trade between the two countries has also experienced a big growth. The service trade volume in education hit $250 million in 2003. About 60,000 Chinese students are studying in Australia. As the negotiations approach, China has proposed that special attention be given to agriculture and service trade in the negotiations. Ma said a China-Australia FTA would exert a "relatively big pressure" on China’s agriculture and service sectors because they are quite vulnerable, being less developed than Australia’s.

Earlier this year, Australian Trade Minister Mark Vaile had said he was confident that Australia can secure a free trade deal with China by the end of 2007. "If we launch one when the prime minister meets President Hu Jintao, I think there’s a very strong possibility that we can complete it before the end of 2007," Vaile had said. Everyone wants to dance with the world’s boom economy. And Australia has its name top of China’s dance card. Australia is all but certain to begin negotiations very soon. Australia’s Department of Foreign Affairs and Trade (DFAT) even anticipates the green light within a few weeks. Those in trade circles expect the FTA to be bigger, more difficult, and perhaps more important, than Australia’s recent deal with the United States. The key reason is China’s population of 1.3 billion potential consumers, and a middle class larger than the entire population of the US, offering business opportunities on a scale hitherto unimaginable.

As China becomes richer and its middle class bigger, the opportunities to sell products and services there will grow almost exponentially. In merchandise trade alone, China has now become Australia’s second biggest trading partner - although China is certainly enjoying more from that partnership. Australia’s trade in goods deficit with China hit a record $5.4 billion for the first seven months of the current financial year, equaling the total deficit for 2003-04 of $5.4 billion. While Australian exports to China have grown 22.2%, or $1.2 billion, so far this year, imports from China have skyrocketed 32.2%, or $3 billion. By comparison, exports to the US grew just $6 million to $5.4 billion over the same period, while imports climbed 6% to $12.3 billion.

HSBC senior economist John Edwards said both Australia and China are keen to knock down the trade barriers. He said China would be keen to clip Australia’s textile, clothing, footwear and motor vehicle tariffs. It also has an interest in opening up the investment supply chain, particularly in the key metals, minerals and energy sectors. Some minerals are likely to be extracted, such as copper, while others, such as gold, are not.

Australia, for its part, would want to clean up the bureaucratic maze that is a major hazard of the Chinese economic playing field. "Australia would be looking for easier access and a faster track into the Chinese economy, and use the FTA to work through those difficulties," Edwards said. Australia will be the largest economy to gain a free trade deal with China if the negotiations are successful.

But European and American firms are already well entrenched in Shanghai, Beijing and other parts of China. Edwards said Australian firms, particularly in the manufacturing area, were unlikely to make large gains even under an FTA. The biggest winners, he believes, will be those in the services sector, in areas such as property and finance. "Services is where the growth is going to be in China over the next 20 years, much larger than the growth in manufacturing. If Australian firms can get a foot in with services, they could get ahead of competitors from Europe and the US."

Indeed, most in the Australian business community are keen on a Sino-Australian FTA. Companies, including Qantas, Holden, BHP Billiton and Alcoa, have joined groups such as Minerals Council, Dairy Australia and the Australian Food and Grocery Council to back the agreement. These groups hope an FTA would overcome some of the problems inherent in China, such as banking and investment regulations. Bureaucracy, particularly where there are conflicts between provincial, city and central governments, are a major headache. Standards and testing, and the protection of business rights - particularly in relation to contracts - are also key issues. And then there are the genuine concerns in Australia about what an FTA might mean for Australia’s manufacturing sector.

China is currently forcibly restricting exports of its super-cheap textiles and clothing sectors, to ensure it does not wipe out other low-cost producers. The Australian Industry Group’s chief executive, Heather Ridout, said her members were daunted by the prospect of China’s unfettered access to the Australian market. "Our members are very clearly worried about China taking their markets, it has been very aggressive in terms of taking market share away from Australia and the rest of the world," she said recently. Her group has expressed concerns over the market economy status issue.

Australia, if it reaches an FTA deal, will have to grant China market-economy status, something that neither the European Union nor the US is prepared to do. Conferring market economy status makes it more difficult to challenge a country under anti-dumping rules. Many Australian manufacturers believe socialist/communist China is so competitive because it maintains state-sponsored internal subsidies. There is also growing concern about Australia’s ability to manage four concurrent bilateral trade negotiations on top if its heavy commitment to the World Trade Organization (WTO) talks.

By comparison, the United States, which has a far larger bureaucratic resource base than Australia, is involved in six ongoing bilateral trade negotiations. These include the substantial Free Trade of the Americas deal, and those with southern Africa, Oman, Andean, Thailand and Panama. But Australian Trade minister Vaile said resources have been built up to deal with the Australia-US FTA, and his department could handle the coming talks. "We have every confidence that the resources available in DFAT at the moment will be able to accommodate what we have coming before us as well as the multilateral negotiations," he said.

It took more than 12 months to negotiate the US-Australia FTA and then six months more to massage the legislation through parliament. That was between two English-speaking, capitalistic countries with very similar legal systems. China presents a lot more potential problems. But Australia can’t wait to shake a leg with the new dance partner all the same.

(Asia Pulse/XIC)

 source: Asia Times