Last month saw the agreement, in principle, for the conclusion of the China-Australia FTA (ChAFTA), nearly 10 years after the start of negotiations. Hailed by Prime Minster Tony Abbott as “the most comprehensive agreement China has concluded with anyone,” ChAFTA does indeed appear to be groundbreaking. In Bridging the Pacific, we analyzed China’s free trade agreements and I will compare some of them to ChAFTA in a moment. For Australia, ChAFTA represents continued success in trade policy, having completed FTAs with Japan and Korea early this year, and its leadership in the Trans-Pacific Partnership (TPP), possibly concluding next year. For China, it represents a major shift, relenting on many areas where it had earlier refused to budge, especially in services, where China committed to further liberalization than it had before.
What took so long? Australia granted China market economy status at the beginning of the negotiations in 2005, which seems to have been a mistake, as Australia lost a critical negotiating card. China resisted opening up its agriculture and service market. Before ChAFTA only New Zealand, a relatively small ag producer, was able to negotiate fairly open market access for its agricultural exports to China.
China currently subjects some Australian exports to tariffs of around 40 percent, but four years after implementation, 93 percent of tariff lines will be tariff free. Most importantly for Australia, its energy and resources exports, which account for over 70 percent of Australia’s $90 billion worth of exports to China, will have zero tariffs. Significantly, most of Australia’s manufactured products will also face zero tariffs. This degree of tariff liberalization is in line with China’s FTA’s with ASEAN and Chile.
After the China-New Zealand FTA went into force, New Zealand’s exports to China quadrupled in the following five years, largely due to tariff cuts. Australia will likely see similar increases in ag exports to China. A host of dairy products look set to enter China tariff free within 9 years, without safeguard measures (except milk powder). Beef and lamb will enjoy tariff free access within 9 and 8 years, respectively, although beef is subject to safeguards. After 4 years, Australian wine will be tariff free for China’s rapidly growing market, along with most fruits and all vegetables. All of this gives Australia a big advantage over other large agricultural producers like the US.
China’s FTAs with Chile (2006) and Costa Rica (2011) contain the most far-reaching commitments for services liberalization among China’s FTAs, which built on China’s GATS commitments. Still, significant liberalization had been elusive. Improvements were seen in ChAFTA: for example, in financial services Australian banks will only need to wait 1 year (instead of 3) to engage in local services, with the two-year profit making requirement discarded. However Australian banks will still only be able to accept deposits of more than 1 million RMB, and won’t be able to make loans to local individuals. Australian insurers, while still limited, will now be able to provide auto insurance to Chinese citizens, a big gain considering the size of the market.
Australian firms will have privileged access to China’s booming health services, with the ability to establish wholly foreign owned hospitals, as well as elder-care institutions. Australian law firms can establish commercial associations with Chinese law firms in the Shanghai Free Trade Zone (SFTZ), and to advise clients throughout China. The SFTZ will also be open to Australian firms investing in certain value-added telecoms services, along with joint ventures in online data processing services, opening significant opportunities for the Australian ICT industry.
One of the major concessions made by China is that all its state-owned enterprises will still have to submit to Australia’s national security review before investing in Australia, although China did get the increase they wanted in the threshold for mandatory reviews of acquisitions by private Chinese firms: the figure was raised to $1 billion. Investor-state dispute settlement through the World Bank’s ICSID (International Centre for Settlement of Investor Disputes) was also agreed to, a feature that Australia had previously resisted.
Concessions to China
As Australia is already a fairly open market, the benefit to China’s exporters will be relatively small. Australia will remove any remaining barriers on agricultural products, some over time. All tariffs on electronic goods from China will also be eliminated.
China still remains one of the most restrictive countries in the world in terms of service trade barriers. The OECD’s latest index on service trade restrictiveness showed that China belonged to the top 5 most restrictive countries in 14 of 18 categories (among a group of the OECD members plus 6 other countries). Heavy restrictions cover areas like commercial banking, construction, distribution, insurance, legal, transport services, and telecoms. The OECD figures are in line with World Bank estimates. It remains to be seen if China’s non-tariff barriers to merchandise trade will be reduced. While the elimination of tariffs is a great step, China could still hinder trade in certain industries by insisting on health and safety licenses for imports or mandating other regulations to slow trade. While the final text has yet to be released, there has been no mention of further intellectual property protection, export taxes, or government procurement. While ChAFTA is certainly an improvement over China’s prior FTAs, it is still a long way from the liberalization TPP is seeking to achieve.