The Australian, Canberra

10 September 2004

Fear grows as FTA looms

Firms dependent on anti-dumping rules worry about a deal with China, writes Florence Chong

CANBERRA seems certain to press ahead with negotiations for a free trade agreement with China, possibly within a year, despite growing concerns from manufacturers.

And if that seems hasty, think again, counsels a senior official in Canberra.

"The sceptics assume that the rest of the world is not doing anything and that we have the luxury to pick and choose our timing," the official says.

"We’ve made a strategic decision to move now and to lock Australian exporters in a privileged position in the Chinese market before our competitors."

The overriding consideration, he says, is that China will soon take over from Germany as the world’s third-biggest economy.

"We’re concerned about enhancing our competitiveness in the Chinese market," says the official.

Politically, it suits China to negotiate an FTA with a developed country like Australia as part of its overall regional ambitions.

Long-time Chinese trade negotiator Long Yongtu says Beijing realises the strategic importance of an east Asian economic bloc.

It envisages an east Asian grouping acting as a balance in a world already carved up into blocs — the European Union, the North American Free Trade Arrangement and the proposed Free Trade Agreement of the Americas covering the western hemisphere.

Long says an agreement with Australia and New Zealand would be a building block for an east Asian arrangement.

Beijing and Canberra are already fast-tracking a feasibility study, expected to be completed by April.

A Canberra source says that if the study is accepted, it is likely negotiations would begin by the middle of the year.

Opposition Leader Mark Latham has said that Labor will look at each FTA on its merits.

China will negotiate on the condition that Australia grants it "market economy" status. New Zealand, Chile and South Africa, which are planning bilateral FTAs with China, have already done this.

But Australia’s leading companies, especially manufacturers, need to be persuaded — or cajoled — into supporting an FTA with China.

The Australian plastic, cement, paper and chemical sectors — which use protective measures such as anti-dumping to slow cheap imports — have the biggest worries.

In a study of 800 firms in Australia, the Australian Industry Group (Ai Group) found just 13.2 per cent of respondents supported the proposal, with 45.2 per cent against, the rest undecided.

The Ai Group represents manufacturers who contribute 12 per cent of the national output and 43 per cent of Australian exports.

The Australian manufacturing sector feels "extremely vulnerable" because "China now sets the world price on products" says Ai Group’s chief executive Heather Ridout.

Of the respondents, 87.9 per cent said they had been affected by China, which is estimated to have cost the Australian manufacturing sector $560 million in the past year alone. Although Australian exports of manufactured goods to China increased from $650 million five years ago to $1.8 billion last year, the figure is well below the $10 billion China exports to Australia, Ridout says.

Long, who is secretary-general at Boao Forum Australia, says Australian tariffs have already been reduced — and even if the FTA reduces them by another 2-3 per cent, it will not make that much difference to Chinese exporters.

"The role of China in global manufacturing is exaggerated," Long says.

"China is not in a position to influence world price, except in some industrial products like steel and cement."

He says there is "tremendous interest" in an FTA on both sides, but any agreement must take into account the concerns of domestic industries.

Ridout says: "I can understand that there is a real opportunity to have a preferred arrangement with China, but not at any cost."

She says two key issues must be addressed in any negotiation with China.

The first is that manufacturers must be able to continue to seek redress against unfair competition from Chinese exporters through anti-dumping measures. "We don’t mind what name they put on it, as long as our members continue to be able to access surrogate third countries for comparative pricing."

Anti-dumping actions are initiated by domestic manufacturers against imported products which they believe are priced below the market.

Australian Customs requires proof that importers are dumping the products, and Australian companies must provide prices to support their case.

Ridout says it is impossible to go to China to get the comparative prices because it is still not a market economy. Under current provisions, Australian companies can go to a third country to obtain comparative prices to support their case.

She says that this year China added steel-making capacity equivalent to the entire capacity of the British industry.

"China may not export steel now, but it will in four or five years," she says.

Ridout says Australia needs to anticipate developments in China and to ensure that its industry has the means to protect itself.

She says the second issue is ensuring that Canberra can negotiate for changes to entrenched Chinese business practices, including non-tariff barriers, and its opaque rules and regulations.

Meanwhile, the Ai Group wants a level playing field for Australian investors in China.

When senior executives of Telstra and Qantas addressed a Australia-China FTA seminar in Sydney recently, they spoke of the frustrations in trying to cut through the Chinese way of doing business.

Qantas withdrew from China in 2001 after flying there for many years, beaten by complex and opaque regulations designed to protect the local aviation industry. But now its subsidiary Australian Airlines plans to re-enter the Chinese market later this year. Although it has an active operation in China today, Telstra’s Asia president Brian Pilbeam also spoke of difficulty of operating in a protected telecommunications sector.

Ridout says it is one thing to have an agreement, with all the safeguards, but another to ensure that China delivers on its promises.

China is Australia’s largest market for resources and raw materials.

The private sector maintains that China buys where supply is reliable and prices are acceptable, and that it does not require an FTA to reinforce the resource trade.

But a Canberra source says it should not be forgotten that Australia has a lot of competitors in the world.

If Brazil were to sign off an FTA with China, it could affect Australian exports of iron ore to China, because it would become the preferred supplier, the official says.

He points out that the federal Government was deeply involved in helping Australia secure the $25 billion LNG contract with China in 2002.

"If, for example, Qatar is also competing for a contract and the negotiation is referred to the Chinese central leadership for its decision, we would like to think that our FTA would be worth something."

It took Australia 13 years — with most of the negotiation concentrated in the last eight — to conclude a bilateral agreement with China on its accession to the World Trade Organisation.

But most agree that today’s China is different, and negotiations need not be protracted.

Graeme Thomson, who led Australia’s bilateral negotiation with China for eight years, says the key difficulty will be achieving what he terms a "whole-of-government" approach in negotiations in China.

He warns that competing Chinese ministries will try to protect their own vested interests.

Although the Trade Minister, Bo Xilai, is regarded as progressive and a reformist, Thomson says the final authority for various industries — such as financial services or telecommunications — often falls outside his purview.

Ultimately, it is in China’s interest — as it is in Australia’s — to get a good agreement.

Thomson says that if China started off with a flawed agreement with Australia, it would set a bad precedent for other bilateral negotiations.