Tuesday, February 14, 2006

Australia China FTA

The proposed Australia China free trade agreement (FTA) has been the subject of little blog analysis. The proposal envisages the removal of all trade barriers between the countries. It also targets removal of restrictions on foreign investent. DFAT maintains a webpage on progress of negotiations, here. The gist of the Government's view (based on their feasibility study) is that, with full liberalisation, from 2006:

  • Australia's real GDP would gain A$24.4 billion in present value terms over 2006-2015
  • China's real GDP would increase by A$86.9 billion over the same period.
The larger benefits to China reflect the gains China stands to reap from the liberalisation of its own economy. Australia has already reaped such benefits from earlier economic reforms. Indeed, in 2005, Australia's average tariffs were 3.5% while Chinese rates were 9.9%. Thus most efficiency gains go to China because it is currently doing most damage to itself through trade restrictions. China imposes significant tariffs on Australian agricultural exports (average 15.3%), on coal and alumina with hefty tariffs on beef (12-25%) and lamb (12-23%).

The main Australian industries benefiting from an FTA are cereal grains, wool, sugar, dairy products, minerals and non-ferrous metals. DFAT does not include beef presumably because China itself is a significant producer.

China has strong growth prospects over the next decade and Australia must take advantage of export market opportunities irrespective of any FTA. In 2004 about 2/3 of Australia's exports to China were primary commodities (minerals, agricultural products). China is also a significant market for Australian manufactures - exports of electrical machinery and telecommunications equipment have been growing at 20% per year. China's exports to Australia have been growing at 26% or 4 times as fast as Australia's imports overall. While traditional exports to Australia (clothing, footwear, furniture) remain important, higher value-added products (computers, telecommunications equipment, household electrical goods) are growing even faster.

China is Australia's fastest growing international market for services, mainly education and tourism. In 2004, 251,000 Chinese travelled to Australia (5% of all tourists) compared to 42,600 in 1995. Visitor numbers could reach 1 million by 2010. Australians are visiting China too in substantial numbers - around 300,000 in 2002 and growing at 12% per year.

Reform also targets what is euphemistically called 'transparency in administrative decision making at all levels of government'. This reflects concerns about the rights of Australian firms to an impartial Chinese legal system, secure property rights and rights to repatriate profits.

According to DFAT, in the last 2 years, China has accounted for 1/4 of world growth and a significant share of world trade growth. Moreover, China's demand for energy, resources, agriculture, specialty manufactured products and services will continue to grow. In the next decade, it should overtake Germany to become the world's 3rd largest economy after the US and Japan.

China is a significant market for Australia. In total, growth in Australian exports to China has averaged 19% per year for the past 5 years. China is our third-largest trading partner, with two-way trade valued at A$31 billion in 2004.

In many respects the proposed FTA with China addresses many of the criticisms directed toward the recent Australia-US FTA. It offers Australia potential to export more primary products and ties Australia's future directly to a key economic growth area.

DFAT claim the FTA will be negotiated with the 'two sides negotiating as equal trading partners'. This is hard to believe given the difference in size of the countries. China is more important to Australia than Australia is to China. It will be interesting to see if a lopsided agreement is negotiated and if so, how China pursues its greater bargaining power.

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