China-Australia FTA: Miracle or Mirage

The conclusion of ten year negotiations of a free trade agreement (FTA) between Australia and China was announced on the 17th of November 2014, with the agreement expected to be brought into force by late 2015.

The principle behind a FTA is the “theory of comparative advantage”, where each country will specialise in producing goods and services that they are relatively better at producing, resulting in both countries being able to produce more and share the benefits of greater production through trade. To work it requires barriers to trade to be dismantled.

A lot has been said in the media about the industries that stand to gain from ChAFTA. Queensland’s level of trade with China has already been rising steadily over the past decade (see Figure 1) but will ChAFTA take Queensland’s trading relationship with China to another level?

Figure 1 Queensland’s trade relationship with China

Note: p – projected
Data source: Queensland Government Statistician’s Office

Under the FTA, 85 per cent of exports to China will be tariff-free immediately, 93 per cent after 4 years and 95 per cent when in full force. All potentially good news for Australian exporters.

For example, the removal of tariffs provides Queensland cattle producers with easier access to the growing Chinese market. Meat and meat preparations comprise 71 per cent of Queensland’s food and live animal exports overseas. However, the initial benefit for producers will be small as the tariffs will be phased out over 9 years.

A phased introduction is designed to allow industries receiving protection from trade barriers to become more efficient before protections are removed. China’s policy is to be a net exporter of meat products by 2025. In this regard, the FTA is better presented as an opportunity rather than a guarantee. To reap the benefits Queensland’s producers will have to remain innovative and adaptive to change.

Not all Queensland rural exports benefit from the ChAFTA. Important industries such as cotton and sugar will not receive lower tariffs. Chinese demand for sugar is expected to grow by 100% to 2050, which explains the disappointment among sugarcane growers that missed out on this possible competitive gain.

China’s rising middle class also provides opportunity of another of Queensland’s major export, tourism. China is Australia’s highest yielding inbound tourism market and expenditure from Chinese tourists is expected to double by 2020. Even without ChAFTA, Queensland tourism from China would still rise. Chinese tourists to Australia prefer Queensland as a holidaying destination, with 59 per cent visiting Queensland.

Even though the ChAFTA dismantles trade barriers it is not a guarantee of profitable business. Attempting to penetrate the Chinese market is difficult, as many large, multinational firms have found out. Recently, firms such as L’Oreal, Best buy, Tesco, and Yahoo have pulled out of the country. As the CEO of General Electric, Jeffrey Immelt, put it, “China is big, but … (other) places are equally big, but are not quite as hard”. Understanding rising labour costs, government restrictions and the diversity of consumer tastes and culture in China are critical to successful business. Queensland exporters need to be innovative when dealing with the Middle Kingdom. Adapting products and services to the needs of the growing middle class could mean that higher value products, not necessarily higher volumes of products, become more worthwhile.

Queensland has a successful trading relationship with China. The ChAFTA enhances this relationship by reducing trade barriers thus opening the door wider for increased exports. The changes will boost exports to China, but ultimately the factors that lead to Queensland’s successful trade relationship with China before the ChAFTA are the factors that will guarantee its future success.