China-Australia Free Trade Agreement Inked

June 19, 2015International Tradeby Dan Steinbock

It took a while, but the China-Aussie FTA is expected to benefit both states.

The China-Australia free trade agreement is not just another FTA. In the coming decade, it will make a unique contribution to stability and prosperity in the Asia Pacific.

After almost a decade of talks, China and Australia recently signed a Free Trade Agreement (FTA). After more than 20 rounds of talks spanning across three governments and five prime ministers, the two key negotiators, China’s Commerce Minister Gao Hucheng and Australia’s Minister for Trade and Investment Andrew Robb, eventually inked the deal.

To Gao, the agreement represents the highest degree of liberalization among all FTAs that China has so far signed. “[It] is going to provide us with more open, convenient, and regulated institutional arrangements for our trade and investment exchanges going forward,” he said. In turn, Robb believed that the FTA with China would deliver an A$20 billion (US$ 16 billion) to boost to trade by 2035.

The FTA was signed in the presence of Australian Prime Minister Tony Abbott. He thought it was “history-making for both our countries. It will change our countries for the better. It will change our region for the better … change our world for the better.”

Whenever an FTA is signed, trade negotiators and career politicians like to offer a narrative of mutual benefits and ultimate success. Nevertheless, the China-Australia FTA is not just any free trade agreement. It will mean great progress economically, and perhaps even more geopolitically. Moreover, it did not come easy.

The long march

The bilateral FTA talks began after a joint feasibility study under John Howard’s government in Australia. After languishing for several years, even trade optimists began to have second thoughts about the prospect of a successful conclusion.

Reportedly, a breakthrough was achieved in the talks in May. Essentially, the two countries shelved controversial topics that were slowing the talks, including the treatment of Chinese SOEs in Australia and the Chinese tariff rate quotas in agricultural areas.

At the same time, Minister Robb made a strong case for the role of Australia in supporting China’s transformation from an export-led and manufacturing-based economy toward services, consumption, and innovation.

Pushing for greater Australian-Chinese rapprochement in economic relations, Robb also supported a review on the previous government ban on the Chinese telecom giant Huawei taking part in the national broadband network, as well as signing up to the China-proposed Asian Infrastructure Investment Bank (AIIB).

In the past, the bilateral trade has been driven mainly by China’s demand for resources and energy, whereas Australia has purchased cheap Chinese manufacturing products. Under the FTA, China will gain from the progressive elimination of the 5% tariff imposed by Australia on Chinese electronic goods and home appliances.

In turn, over 85% of Australian exports will become tariff free. In addition to the abolishment of tariffs on agricultural products, tariffs on Australian resources, energy products and manufactured goods will also be removed.

Since coming into power, Abbott’s government has sealed similar FTAs with Japan, and South Korea.

Australia’s economic transition

Before the global financial crisis, the Australian economy grew for 17 consecutive years. However, those years are now history. In the early 2010s, Australia’s policy rate was almost halved to 2.5 percent. It may be cut to 1.5% during the ongoing year. Still, real GDP growth has decreased to 2.5%.

Over the past decade, a strong increase in export prices and a boom in mining investment supported income growth and rising living standards in Australia. However, as mining investment is slowing, Australia needs to achieve higher productivity and broaden its export base to sustain that rapid improvement in prosperity. Australia is in a new crossroads.

In politics, the erosion of growth has amplified pressures between and within both major parties. After Kevin Rudd took the Prime Minister office in 2007, infighting in the Labor Party caused him to lose the post to Julia Gillard in 2010 and then to reclaim his post. In the process, Abbott’s Liberal/National coalition replaced the Labor government.

Before taking office, Abbott argued that Australia’s “foreign policy should have Jakarta rather than a Geneva focus.”

Between China and the U.S.

Canberra’s close ties with Washington are driven by security objectives, while its efforts to develop relationships with China and emerging Asia are fueled by economic needs.

In security, Australia’s position has been shaped by its historical, though ambivalent relationship with the West. In November 2011 U.S. President Obama and Australian Prime Minister Julia Gillard announced plans for a sustained U.S. presence on Australian soil. In June 2014, the US and Australia reached the new Force Posture Agreement, which is likely to increase the number of U.S. marines rotating through Darwin and possibly open up an Australian port for access by U.S. destroyers.

At the same time, Abbott’s government has supported stronger economic relations with China, especially the FTA. In trade, Australia has hedged its bets by ensuring presence in both US-led Trans-Pacific Partnership (TPP) but also in China-proposed AIIB and China-inclusive trade and regional efforts.

These policy shifts have become more visible in Australian perceptions of China. According to the new 2015 Lowy Institute Poll, almost 80% of Australians now view China as “more of an economic partner” compared to only 15% who see the mainland as “more of a military threat.”

It is this precarious balancing act between continued security cooperation with the U.S. and deepening economic relations with China, which could pave way to greater stability and prosperity in Asia Pacific as well.

Hedging Between Beijing and Washington is republished with permission from The Difference Group

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