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China free trade: icing on the cake or sugar coating?

The Age, Melbourne

China free trade: icing on the cake or sugar coating?

By Michelle Grattan

20 April 2005

As with the American FTA, there will be winners and losers.

The toast that Prime Minister John Howard and Premier Wen Jiabao drank to the start of negotiations for a free trade agreement might be the easiest moment for a long time in the tough battle for greater access to the glittering prizes of the Chinese economy.

Even Howard admits it. He was surprisingly downbeat about the free trade agreement in the hours before the deal was unveiled, suggesting it would just be icing on an already rich cake, and his announcement statement finished with the salutary line, "we should not underestimate the complexity of the negotiating process to come". "Difficult" is the word Howard uses when he talks about the coming haggling.

But that’s for later. His trip to Beijing has achieved all Howard could have wanted. The OK for the FTA negotiations - tied up well before the PM left Australia - was formalised. And, importantly for Australia’s regional diplomacy, Wen and President Hu Jintao were benign about Australia’s participation in the East Asian Summit later this year. Wen even promised to send a signal to ASEAN about the desirability of having Australia in regional architecture.

With Australia now apparently now headed to acceding to the ASEAN treaty of amity and co-operation, the main obstacles appear to have been overcome, although it is unclear whether Howard will want some firm guarantees that Australia will remain permanently on the guest list. Unless Australia tries to overplay its hand, a seat at the Kuala Lumpur summit should be reasonably assured.

Less assured is where the Australia-China free trade talks will end up - or indeed when they will end. Howard declines to put a time on it.

The bottom line of this week’s deal to talk about a deal is that a China-Australia FTA would bring benefits to Australia but it is impossible to know how sizeable they would be or when they would come. That’s assuming an agreement can be struck.

Howard was surprisingly downbeat about the free trade agreement in the hours before the deal was unveiled."The modelling in the feasibility study, released yesterday, suggests that if fully implemented next year (which it won’t be, of course), an FTA could be worth $24 billion to Australia between 2006 and 2015.

But that’s on the best scenario. Phase in the agreement, or carve out areas (as the US did with sugar in the Australian-American FTA) and the benefits are reduced.

The study also points out: "Reflecting the relative openness of both economies to trade in goods, the great bulk of these gains would come from liberalising trade in services and removing barriers to investment flows." By 2015, of the $4.1 billion annual gain to Australia, only $1.3 billion would come from trade in goods while $1.2 billion would come from investment gains and $1.6 billion from services.

Yet these last two are the very areas where Australia could find it hardest to win good concessions. It will be vital for Australia to get momentum behind the talks.

How hard it will be is obvious when we compare the Australia-US agreement. The Americans were particularly sympathetic to that because it was, in part, a "thank you" for Australian efforts in the Iraq war.

Even so, Australia ran into various points of resistance, and in the end Howard had to make a judgement on whether it was better to live with an agreement a long way short of rolled gold or let the whole thing slip, and possibly disappear forever.

This time, there will be neither the sense of debt to Australia, nor the urgency last year imposed by elections in both negotiating countries. Also, with Australia’s having granted China market status - China’s condition for starting negotiations - our negotiating partner has now got the biggest single advantage it is seeking.

Some of the problems with the US had to do with local constituencies, especially farmers. The democratic process is not there in China, but there are still pressures from constituencies - particularly the rural sector. It doesn’t seem to matter with whom Australia talks trade, whether the US, Europe or China - agriculture is a big problem.

In these talks, the very nature of the Chinese economy will also be a difficulty. Many of the concessions Australia wants go to the heart of achieving economic reform in China. But getting China to move in these areas is beyond Australia alone. Much will depend on whether China feels the need to respond to wider pressures and this coincides with the timing of the Australian negotiations.

While the Australian economy would gain overall from an FTA, specific sectors would feel the pinch, especially the clothing and car industries. On the assumption of totally free trade, for example, by 2015 the clothing industry would have lost 12 per cent of its present employment and the car industry 0.6 per cent.

Howard refuses to be drawn into the debate about these industries. There are two obvious points, perhaps working against each other. First, a government negotiating a deal is going to have to take account of sensitive industries. Second, market forces have forced much restructuring on them already and will continue to do so. Even without a free trade agreement, the Chinese clothing industry will press further in on its Australian counterpart.

The Australian Industry Group says if a satisfactory deal can’t be reached, Australia should be "prepared to walk away". But now the long journey has started, to have a road crash would be a bad look diplomatically and in other ways. So, as with the US agreement, we might one day end up with a trade deal that’s "free" more in name than substance. If it’s progress in the right direction, it will still be worth another toast.

Michelle Grattan is political editor.