The clock is ticking down to the end of year deadline Australian Prime Minister Tony Abbott has given for sign off on a free trade agreement with China. In this China-Australia FTA series we explore what it’s taken to get to this stage, what’s still standing in the way, and what the signed deal will mean for Australian business.
For its part, Beijing has also offered hints an agreement will be reached within the same time frame. The speculation is a grand signing will take place in mid-November when Chinese President Xi Jinping will be in Brisbane for the G20 meeting.
Given that governments from both countries have staked their credibility on such a schedule, it is more likely than not pen will be put to paper next month.
But the significance of an Australia-China FTA is at least as much about diplomacy as it is about economics. The reality is that the Australia-China economic relationship does not really need an FTA to flourish. Agreements on all access in various sectors are concluded constantly without need for it to be part of a grander sounding FTA. Meaning the excitement behind the likely conclusion of an agreement will exceed the actual significance of such an agreement.
Bored into agreement
Let’s begin with what an FTA actually is. Rather than comprehensive economic agreements covering broad aspects of one’s economy, they tend to end up as rather piecemeal agreements covering specific sub-sectors that negotiators chose to target. Additionally, rather than expressing a broad meeting of minds, philosophies and policies between two economies, they contain extremely detailed provisions.
For example, there might be something about “processed dried stone-fruit” attracting a lower tariff than “semi-processed dried stone-fruit” with appendixes indicating what “processed” and “semi-processed” means, what constitutes a “stone-fruit”, what proportion of the product has to have dried fruit in its ingredients for it to be classified as “dried fruit”, and which stone-fruit are excluded from the provisions etc. It is no wonder that trade negotiators tend to admit the side that becomes bored first tends to lose.
Moreover, when one signs an FTA, especially with China, they tend to be treated as much as political and diplomatic agreements as well as economic ones. In this context, the Tony Abbott government has understood the “me too” mentality in Northeast Asia and played intra-Northeast Asian jealousies well. With Australia having signed FTAs with Japan and Korea, China pushed its own negotiators to fast-track an agreement with Australia.
Foreign investment thresholds
However, since Beijing needs the FTA for political and diplomatic purposes, it will want the appearance of a breakthrough in China-Australia relations. This will come in the form of China insisting that no Foreign Investment Review Board (FIRB) process is required for Chinese investment into Australia under one billion dollars, whether this be investment by Chinese state-owned-enterprises (SOEs) or private firms.
Such a threshold has been applied to Japan and South Korea under Australia’s FTAs with those countries. As China wants the FTA to demonstrate that it too has a special economic partnership with Australia, even if there are strategic and political differences, Beijing will insist on being treated the same as other Northeast Asian neighbours in this context.
For Australia’s part, this was always only really a political sticking point that Canberra will likely relent on. As surveys such as the annual Lowy Institute Poll demonstrate, there is widespread public suspicion of Chinese foreign direct investment (FDI), most of it being undertaken by state-owned enterprises, even if the reasons for such suspicions are not well formed or articulated. In opposition, Abbott appeared to share some of these fears. But in government, his tone seems to have changed. After all, FDI entering into Australia still has to play by Australian rules and follow Australian laws and regulations.
The reality is that the vast majority of Chinese FDI applications into Australia have been approved over the past decade, despite some high profile knock-backs. All indications are the Abbott government will accommodate Beijing’s insistence to raise the threshold to one billion dollars knowing that almost all Chinese FDI applications would have passed the FIRB test in any event. Besides, Canberra will be happy to reduce this hurdle for Chinese firms since FIRB is only an advisory body, albeit an influential one, and the relevant minister can still knock back FDI applications on national security or other grounds.
In return, Australia will receive better access to the Chinese domestic market for our diary and agricultural goods, but this would have occurred in any event without an FTA since provincial governments in various Chinese markets have been agitating for high quality imports in these sector and would have formally and informally made it possible for Australian firms to more easily access those provincial markets.
When it comes to Australian access to the services markets such as legal and financial, we are likely to receive some concessions. But the real barriers to entry in these Chinese markets are local ones at the regulatory and social levels, and an FTA will not reduce these barriers.
The bottom line is that both countries want an FTA for diplomatic reasons. The major, headline concessions that both sides will offer carry few costs to the conceding country, would have occurred in any event, or were already happening in practice. If the acceptable standard is that an FTA should “do no harm” at the very minimum, then that low threshold will be met in November.
Read the other pieces in our China-Australia FTA series here: