Australia and China Reach Free Trade Agreement

Australia and China finalized a bilateral free trade agreement (FTA) during President Xi Jinping’s November 17 visit to Canberra following the Group of 20 summit in Brisbane. The agreement is the fruition of nine years of negotiations. Both countries must now undertake a legal review of the final text, with Chinese and English language versions prepared before it is signed into law in 2015.

China is the largest destination for goods exported from and source of goods imported to Australia. Two-way trade totalled $150 billion in 2013, but investment between the two countries has lagged. Canberra watched closely as New Zealand-China trade tripled in the four years following the conclusion of their bilateral FTA in 2008. The new Australia-China FTA will promote investment and help implement a Chinese strategy to use economics as a foundation to promote its power and strengthen its role as a driver of economic integration in Asia.

Q1: Is this a good deal for Australia?

A1: Australian business believes so, as does Prime Minister Tony Abbott and his Liberal-National coalition government. The opposition Labor Party isn’t so sure, worrying publicly that the agreement may have been rushed as a deliverable for Xi’s state visit. Australian Dairy Industry Council chairperson Noel Campbell was unequivocally optimistic, saying, "With respect to looking at tariffs and safeguards, we believe that we got what we've asked for." Australia’s $13 billion dairy industry is certainly one of the big winners with tariffs to be phased out over 4 to 11 years, depending on the product, and protective quotas to remain only on whole milk powder. The biggest tariff reductions will be in the agricultural sector, where tariffs are currently as high as 25 percent. These will also be phased out over an extended period.  

The persistent concern for Australia is its increasing dependence on the Chinese economy, and worry that China might eventually use economic levers to influence Australia’s commitment to a U.S.-based regional security guarantee. Australia’s trade minister Andrew Robb played down these concerns, noting that the China deal completes “the trifecta” of agreements by Australia, including those with South Korea and Japan. Australia has also moved to allay fears caused by increased Chinese investment in the agriculture sector by retaining a $15 million threshold for the purchase of land and a $53 million threshold for the purchase of an agribusiness to trigger review by the country’s Foreign Investment Review Board (FIRB).

Q2: What does China get?

A2: The benefits for China are not as easily quantifiable as Australia’s, but the deal helps assure access to Australian natural resources and food, alleviating concerns over energy and food security in the world’s most populous country. By increasing the threshold at which private investment will trigger an FIRB review from about $250 million to more than $1 billion, the FTA will enable more Chinese investors to provide the capital required to meet their needs without the time consuming intervention of the review process.

But the different development levels between the Australian and Chinese markets means that China will benefit far more from what it can learn rather than what it can earn in Australia. Beijing applied a similar logic when negotiating the China–New Zealand FTA, which it saw as a low risk opportunity for China to test integration with a developed economy. The China-Australia FTA presents a step up in the size of the developed economy China is integrating with, as well as in the breadth of engagement with the inclusion of services such as tourism, telecommunications, and financial and legal services.

The agreement may also present strategic benefits for China as it attempts to advance its own trade priorities and regional interests. China can use this agreement to demonstrate to western powers that it can cooperate economically on a win-win basis. As a model, it also helps reinforce China’s vision of regional economic liberalization in which it can demonstrate that pursuing non-comprehensive agreements—the path of least resistance—has greater potential to produce results than more comprehensive agreements such as the Trans-Pacific Partnership (TPP) which has yet to produce anything. Other measures such as the creation of a renminbi clearing bank in Australia will also advance China’s place at the center of regional architecture by further internationalizing the Chinese currency and facilitating the future work of the China-led Asian Infrastructure Investment Bank.

Q3: What about the quality or level of ambition of the agreement?

A3: Australian Prime Minister Tony Abbott described the FTA as “the most comprehensive agreement that China has concluded.” This is an encouraging sign of China’s increasing openness to higher level, binding international agreements, and may signal Beijing’s moving toward eventually being able and willing to join a world-class agreement such as the TPP.  But the China-Australia FTA falls well short of the U.S.-Australia agreement that entered into force in January 2005. The new agreement’s timelines for agricultural tariff reductions are very long, and sensitive sectors such as rice, wheat, cotton, and sugar are exempt, although there is the opportunity to renegotiate tariffs on those goods three years after signing. Coverage of the services and financial sectors is incomplete and fails to address behind-the-border regulations, marking a “low hanging fruit” approach instead of trying to attain very high level, comprehensive, and legally binding agreements.

Ernest Z. Bower is senior adviser and Sumitro Chair for Southeast Asia Studies at the Center for Strategic and International Studies (CSIS) in Washington, D.C. James Hurndell is a researcher at the Pacific Partners Initiative at CSIS.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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James Hurndell

Ernest Z. Bower