China and Australia announced on Monday that they have formally completed their negotiations on a free-trade agreement (FTA). This means the two countries will soon sign a pact and implement it, probably within this year.
The deal is a landmark that reveals China’s strategy on FTA negotiations.
The importance of the trade pact firstly lies in the fact that Australia is the largest Western economy that will have an FTA with China.
Among China’s 10-plus free-trade partners, New Zealand emerged as the first Western economy to implement an FTA with China in 2008. Iceland became the second and Switzerland the third, last year.
But Australia’s position in China’s FTA map is apparently higher. Australia was the world’s 12th-largest economy in 2013. It is also the largest economy that has completed FTA talks with China, followed by South Korea, the world’s 14th-largest economy last year.
Given the fact that China has not initiated bilateral FTA talks with any economy that is larger than Australia, Canberra is expected to remain the largest bilateral FTA partner of China for years.
In terms of trade value, two-way trade between China and Australia stood at US$136 billion last year, much larger than any other Western economies that have FTAs with China. Switzerland’s trade with China was US$59.5 billion, while the figure for New Zealand was at US$12.4 billion, and that of Iceland at US$450 million. In this sense, the Australian deal represents new height in China’s global free-trade map.
Earlier, China’s FTA partners were mostly its neighbors such as the Association of Southeast Nations (ASEAN) members or less developed nations such as Chile.
If deals with New Zealand, Iceland and Switzerland can be regarded as China’s cautious trials in running free trade with the West, the Australia deal formally marks the beginning of Beijing’s efforts to strike high-quality free-trade pacts with major Western economies.
It won’t be a surprise if China strives for FTAs with the United States and the European Union in the future.
Looking into the Sino-Australian FTA, it can be found that China has become more open in trade talks.
Australia runs a significant trade surplus with China, so any exemption of tariffs for Australian goods could mean a greater surplus. But China held a rather open attitude in FTA negotiations.
For Australian goods with high comparative advantages, such as dairy products, wine and coal, China agreed to scrap the tariffs with a grace period of four years. This means these goods will be subject to free trade from 2019.
This shows that China is now ready to compromise in the agricultural sector, an industry that policymakers tended to protect. So long as the country’s food security is not threatened, top policymakers now are open for foreign agricultural products to enter the country. The decision helps meet the rising consumption demand for high-quality food products.
That is a remarkable mindset change. Earlier protectionism was pervasive in China’s traditionally weak industries such as agriculture. But years of experience has shown that weak industries do not necessarily grow up under protectionism. So, policymakers now seem willing to invite competition to deepen reforms and promote the development of weak industries.
The opening of the agricultural sector also gives China more power to ask FTA partners to open their markets wider in areas where China has comparative advantages but has long been restrained. But here the Chinese focus has been changing too.
Earlier, China focused largely on market-entry for its competitive goods. But investment moved up on its agenda in recent free-trade talks.
In the deal with Australia, China especially pushed Australia to loosen its scrutiny of Chinese companies investing in the country. The appeal came after a few high-profile Chinese investments were rejected by Australian regulators.
Under the deal, Australia is expected to loosen its reviews on investments by individual and private Chinese investors. Greenfield investments and listed Chinese companies are also expected to be subject to easier Australian rules.
Asking other countries to be more tolerant toward Chinese investment came on the heels of intensified go-global efforts. China is expected to be net investor this year, and globalization has become a national strategy.
Therefore, China’s future FTAs will focus more on investment.
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