China and Australia Enter into a Free Trade Agreement

China and Australia Enter into a Free Trade Agreement On November 18, 2014, Australia and China sealed a free trade agreement after nearly a decade of negotiations. This agreement followed hot on the heels of similar free trade agreements between Australian and South Korea, and Australia and Japan. China is Australia’s biggest trading partner, accounting for nearly 32 percent of Australia’s merchandised exports in 2013 and 15 percent of the country’s imports. During the 2009–2013 period, Australia’s exports to China surged on the back of an increase in trade in raw materials, and particularly iron ore. While the growth in Chinese demand for Australian minerals is expected to slow, proponents of the trade deal argue that it will make it easier for Australian agricultural and service firms to sell into China, thereby helping offset any decline in the growth rate of mineral exports. Under the terms of the deal that now has to be ratified by the Australian Parliament, tariffs on Australian dairy products, which are as high as 20 percent, will be removed within 4 to 11 years. Tariffs on Australian exports of beef, sheep meat, and live cattle will also be phased out over 4 to 9 years. Tariffs on Australian wine exports to China, which currently are as high as 30 percent, will be eliminated within 4 years. Australia’s natural resources sector will also benefit from tariff reductions. Most notably, Chinese tariffs on imports of Australian coal will be removed. The agreement also grants Australian service exporters unprecedented access to the Chinese market. Australian financial service firms, including banks, insurance companies, and investment fund managers, will enjoy access to the Chinese market second only to that enjoyed by firms based in Hong Kong. The agreement will also allow Australian tourist and health care providers to wholly own, build, and operate hotels and hospitals in China. As for the Chinese, the agreement will eliminate tariffs on imports into Australia of Chinese-manufactured goods including cars, clothes, textiles, and electronic equipment. This will help Chinese companies compete against their South Korean and Japanese rivals in the Australian market place. The deal will also make it easier for Chinese firms to invest directly in Australia. Investments under $1 billion will no longer have to be reviewed by Australia’s Foreign Investment Review Board, putting Chinese investors on an equal footing with those from New Zealand and the United States. When the deal was being negotiated, estimates from economists suggested that it would result in gains in real GDP for Australia of A$150 billion over 20 years, and gains to China of A$131 billion. More recent estimates suggest that the gains to Australia might be quite a bit larger. As for China, because the Chinese economy is so much larger than that of Australia, the direct impact will necessarily be smaller. However, economists believe that by entering into deals such as this, China is trying to inject more competition into the Chinese marketplace, pushing Chinese producers to become more efficient. In the past China has promoted domestic market–oriented economic reforms under the cover of international trade agreements, most notably prior to the country’s entry into the World Trade Organization in 2001. Although the deal with Australia is much smaller in scale, it fits with this general strategy. Discussion Questions: 1. What is the primary reason Australia and China entered into a free trade agreement? 2. What are some of the sectors that will benefit from tariff reductions under the agreement? 3. What advantages will Australian financial service firms gain from the agreement? 4. How will the agreement affect Chinese firms’ ability to invest in Australia?