Australia Secures Far-reaching Benefits in Free Trade Agreement with China

November 19, 2014 Posted by China Briefing Reading Time: 6 minutes

SHANGHAI – China and Australia concluded a Free Trade Agreement (FTA) on November 17 in Canberra, with Chinese President Xi Jinping and Australian Prime Minister Tony Abbott signing the official document. This marks the conclusion of negotiations originally begun in 2005.

China is Australia’s largest trade partner, with 20 percent of Australian imports coming from China, and 36 percent of exports going to China. Previously, bilateral talks had stalled over two main key points: China reducing its tariffs on agricultural products and services, and Australia easing the investor climate for inbound Chinese companies.

Agriculture, mining, manufacturing

Australian producers and exporters of dairy, wine, seafood, and meats should be seen as the biggest winners in this deal. Tariffs on dairy are set to be lifted within four to eleven years, while those on livestock, horticulture products, seafood and wine – major industries in Australia – will be removed after four years.

As for meats, the import duties levied on lamb will be reduced over eight years, and those on beef over nine. Australia also received an additional duty-free quota for wool, above and beyond China’s current WTO quota. To the chagrin of Australian export producers, additional allowances were not granted for rice, sugar, wheat and cotton.

Tariffs on a range of mining products have been removed as well, effective once the treaty has fully entered into force. Pharmaceuticals, car parts, plastics, precious stones and pearls will also become duty-free after two years.

Services

China is Australia’s largest export market (12.5 percent) for services, and accordingly this agreement contains a number of advantages granted to Australian service providers. The agreement was hailed by the Australian government as China’s most generous concession on services, second only to those with Hong Kong and Macao.

For example, it will allow fully Australian owned companies (WFOEs) registered in the Shanghai Free Trade Zone to offer certain telecom services, whereas other foreign investors are required to establish a joint venture with a Chinese partner to achieve this end. The agreement also allows Australian WFOEs to construct and operate hospitals, aged care centers and travel agencies in China.

Dezan Shira & Associates has positioned itself as a leading advisor to Australian SMEs with operations in China. Richard Cant, Yangtze River Delta Regional Director and an Australian himself, had this to say of the agreement: “This is a landmark deal and one over a decade in the making. It provides great opportunities to a range of Australian companies in the agriculture, mining and services industries. We expect to see an ever greater engagement by Australian companies in trade and investment in China.”

Chinese investment into Australia

On the other side, the FTA is set to ease restrictions on Chinese investment into Australia, which has risen rapidly over the past several years. The threshold at which the Foreign Investment Review Board screens investment in non-sensitive sectors will be raised from AUD 248 million at present, to about AUD 1 billion.

To put this in context, Chinese investment into Australia has amounted to roughly AUD 32 billion to date. Government screening will remain in place for sensitive sectors like media, defence, telecom, agricultural land and agribusiness. The same deal was given to Japan and South Korea in their respective FTAs with Australia signed earlier this year.

Wider significance

The agreement has generally been well-received, but the economic impact of the new treaty should not be overstated. It is great news for the specific industries involved, but does not mean that China is now massively ramping up its commitment to free trade. The deal with Australia goes further than those China has closed with other nations, but those were all smaller economies to begin with.

Rather, the agreement should be seen against the background of China’s FTA with ASEAN, which is set to lift tariffs raised on virtually all goods traded, thus creating a nearly 100 percent duty-free zone. Furthermore, China has on several occasions resorted to throwing up new regulatory burdens where it feels foreign imports threaten its domestic producers, such as bans on American beef, pork and Filipino bananas.

While China has generally followed the global trend towards free trade in goods, the country’s service sector is still largely protected from foreign participation. The concessions China has offered to Australia are interesting, but should not be taken as an indication that China is ready to open its service sector. Australia’s own service sector is small compared to that of the U.S. or E.U. nations, with services only making up 18.7 percent of Australia’s exports. Within this, by far the biggest export service is education, followed by tourism.

“I’ve always taken the view that you should take what you can get today and pitch for the rest tomorrow,” Australian Prime Minister Tony Abbott said of the FTA last year. Indeed, this week’s agreement appears prompted by the fact that New Zealand and Chile, major economic competitors to Australia in trade with China, signed their own respective FTAs with China in previous years.

On the same day, the Reserve Bank of Australia and People’s Bank of China signed an agreement to facilitate the development of the RMB market in Australia. The agreement includes setting up an official clearing bank for RMB in Australia, and granting Australia a quota of RMB 50 million to invest in China under the RMB Qualified Foreign Institutional Investors’ (QFII) scheme. China has recently signed similar agreements with RMB clearings banks in Canada, Qatar, South Korea and several European nations as well.

While Australia’s engagement with Asia has historically lagged behind other developed economies, its signing of FTAs with three Asian powerhouses – Japan, South Korea and China – all in this year is a strong signal that this dynamic is set to change.

An overview of the main features of the China-Australia FTA can be found here.

About Us

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com.

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