ChAFTA There can be little doubt that the Australian’s have pulled off a rather remarkable piece of diplomatic manoeuvring to strike what appears to be such a comprehensive and far reaching Free Trade Agreement with the Chinese government. The broadly based FTA includes agreement on areas including Agriculture, Resources, Service industries, Investment and Worker mobility. Few expected anything so extensive or comprehensive.
The immediate removal of the 3% tariff on coking coal was a headline win for Australia, though the greater prize is to be found in the more gradual reduction and removal of tariffs on dairy, beef and wine exports in the agricultural sector. The removal of restrictions on Service sector activities will also be important to the Australian economy, with the governments objective being to diversify the country’s activity and revenue base away from its current level of dependency on the resource sector. Australian Law firms will now be able to establish commercial associations with Chinese firms in the Shanghai free-trade zone, and the banks will benefit from the designation of Sydney as an RMB clearing hub. Education, Health and Tourism also get the boost that they desired, with Australian firms now able to open and operate hotels, restaurants, hospitals and aged care facilities within China.
Trade Minister Andrew Robb is being rightly credited with managing to deliver on a deal that most assumed was years away. As recently as 3 weeks ago China/Australian relations appeared to be worsening rather than improving, with the Australian’s following the guidance of the United States in declining to participate in the Chinese led Asian Infrastructure Investment Bank. Shortly after that decision was announced the Chinese unexpectedly increased tariffs on imports of Australian coal. They will now of course be removed.
Robb appears to have smartly focussed on what could be delivered, rather than getting bogged down in what could not. As such he simply dropped the negotiations around free-trade on Sugar, Wheat, Rice and Cotton, as well as a few other key commodities that had proved difficult to agree upon in the past. Instead he drove negotiations surprisingly quickly to a conclusion in a number of other compatible areas, and secured one of the most meaningful Free Trade Agreements that China has yet signed. Included in this was the honorific that Australia is now regarded in the Most Favoured Nation group that China will deal with.
The benefits to Australia are obvious, though the majority of them will not be immediate. The tariff reductions will mostly take a number of years to occur, and the there will no doubt be hiccups and unexpected delays along the way. Nevertheless Australian exporters will start to move forward quite quickly. The Australian Financial Review reported yesterday that two new iron ore deals have been signed which are linked directly to the new agreement3, and interestingly the paper reported this morning that the New South Wales State Treasury Corporation will become one of the first government issuers in the world to offer an RMB denominated bond. The size is expected to be a modest A$ 250-400mn, and is likely to be very well supported.
More interesting perhaps is why the Chinese have decided to do this at this particular time. It is a well known fact that the Australian’s have been trying to agree an FTA with China for most of the past 10 years, but various blocks have always been put in place have not permitted this to happen before. Those blocks appear to have been removed surprisingly quickly once Chinese President Xi Jinping decided to take control of economic matters directly, rather than leaving them with the office of the Prime Minister as had been previously done.
Part of the Chinese reluctance to strike an agreement with Australia was no doubt linked to Australia’s strong and open alliance with the United States, and its primary Asian ally Japan. Shortly after being elected as the new Australian Prime Minister Tony Abbott delivered a speech in which he named Japan as Australia’s best friend in the region. That was at a time when the China/Japan dispute over the Diaoyu/Senkaku islands was at its height. Given the obvious economic importance of the China trading relationship to Australian many thought that the decision to make such an explicit statement was needlessly affronting.
Despite this the Chinese have granted the Australians an FTA and for them it will come with some advantages too
· It will reduce China’s explicit reliance on single-country producers of soft commodity products, such as Whole Milk Powder imports from New Zealand. This will diversify production sources in case of any future food quality scare, and it will improve price competition in the domestic retail market
· In bringing Australia further into the China economic fold it will make Australia’s economy even more reliant on the Chinese growth engine, providing more tension to the perpetual challenge that Australian policy makers face as they attempt to balance political and military allegiances with economic need in the APAC region. Australia and China will need each other more than ever.`
· The FTA is a two-way agreement. Australia gets to sell more product directly into China without tariffs, but in return the Chinese will also have increased access to buy Australian companies, land and resources to improve their own energy security. The threshold for scrutiny of non-State backed Chinese investment in Australia has been raised.
· The Australian’s have agreed to the immediate removal of the tariffs that still remained on Chinese imports, and they have put in place phased in timelines for tariff free imports of steel, car components and textiles amongst other things. There has also been some further easing in labour transfer laws between the two countries, which will mostly mean more Chinese nationals are granted working visas in Australia.
· The FTA covers financial services which should increase the amount of AUD/CNY dealing that takes place. This serves to increase the importance of the CNY in global commerce and markets, and chips away a little further at the word’s reliance on the US Dollar as the intermediary currency for all transactions. (Note that the increasing level of non USD bilateral trading that takes place the less power US authorities have to regulate international transactions. One of the complaints made not just by the Chinese, but by many other foreign leaders in recent months has been about the degree of US regulatory over-reach as American financial rules have effectively become binding on everyone who deals in global markets).
· The other thing this will do of course is give the Chinese more leverage over Australia when it comes to cracking down on graft and illegal transfers of capital out of China. The Chinese authorities have previously asked the Australians to be more vigilant in this area and they would expect that their requests are more vigilantly enforced going forward.
The Free Trade Agreement has now been signed in principal. Given that the Chinese Premier Xi Jinping has given his assent we can confidently assume that the agreement will be put in place on the Chinese side without too much difficulty. The greater challenge will of course come in Australia where the detailed proposals contained in the FTA will be reviewed first by the Parliamentary Joint Standing Committee on Treaties, before then being translated into legislation that can be debated in the Australian Parliament.
In all likelihood there will be some considerable debate in Australia over some of the inbound concessions on labour immigration and investment. This will likely call for a few more Australian horses to be traded between the political elites to get the deal signed off, though its merits should ensure it passes fairly quickly through the Canberra process.
Sean Keane of Triple T Consulting