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The China Australia Free Trade Agreement is causing continuous tariff reductions for both Chinese and Australian companies engaged in international trade.

China-Australia Free Trade Agreement Augments International TradeARTICLE

By Mike Faden

The China-Australia Free Trade Agreement (ChAFTA), which took effect in December 2015, is a significant addition to the global landscape for international trade. Besides directly affecting companies engaged in import-export trade between Australia and China, ChAFTA also has potential implications for U.S. companies, since China is the largest goods trading partner for the U.S.1

China accounted for roughly AU$155 billion ($117 billion, based on June 2017 exchange rates) in import-export trade with Australia in 2016, including AU$93 ($70.3) billion in Australian exports.2 As the Australian Trade and Investment Commission puts it, “China is Australia’s number one export market, our largest source of international students, our most valuable tourism market, a major source of foreign direct investment and our largest agricultural goods market.”3

ChAFTA progressively eliminates tariffs on most goods and services traded between the two countries. According to the Australian Government, China’s tariffs were initially cut or eliminated for roughly 85 percent of Australia’s exports; that will rise to 93 percent by January 2019 and 98 percent by 2029.4 For goods and services flowing in the other direction, ChAFTA cut tariffs to zero on 82 percent of Australia’s imports from China on day one, rising to 100 percent tariff elimination by 1 January 2019.5

The agreement also has implications for some companies in the U.S., which does not have a free trade agreement with China. U.S. goods and services trade with China totaled an estimated $648 billion in 2016, and U.S. companies compete with Australian firms in several export categories. U.S. exports of agricultural products were worth $21 billion in 2016, for example, and include several categories in which Australian companies are also active exporters such as animal hides, wine and dairy products.6 The U.S. exports coal to China and attracts billions of dollars in education spending by Chinese students, two sectors in which Australia also gets significant revenue from China.7,8

The Australian Government says ChAFTA gives Australian businesses a competitive edge, since relatively few other countries currently have free trade agreements with China.9 Before ChAFTA, according to a blog post from international law firm Ashurst, Australian exporters of agricultural products were at a competitive disadvantage compared to countries that already had a free trade agreement with China, such as New Zealand, Chile and the ASEAN nations. “ChAFTA generally removes these tariffs, thereby giving Australia a significant advantage over other large trade partners with China, such as the US, EU and Canada.”

This post discusses some of the tariff reductions, and the benefits and issues to date for Australian import-export trade.

Effects of ChAFTA on International Trade

ChAFTA’s potential impact varies depending on the type of product or service. Natural resources account for almost two thirds of Australia’s exports to China.10 Some of those, including iron ore, which is Australia’s biggest export by far, as well as gold and crude petroleum, were already tariff-free; for those, the Government says ChAFTA locks in zero tariffs, providing greater certainty for exporters.11 However, the treaty does eliminate the 3 percent tariff on coking coal, Australia’s second largest export to China.

Much of the attention has focused on the effect of the agreement on agricultural products. China is Australia’s largest agriculture, forestry and fisheries export market; sales doubled in five years to reach AU$10 billion in 2015-16, and demand for high-quality produce in China continues to grow rapidly.12 Australia accounts for more than 26 percent of China’s imported beef, for example; ChAFTA eliminates the 12 to 25 percent tariffs on beef imports by 2024.13 ChAFTA also eliminates or cuts tariffs on other major agricultural exports including dairy products, wool, animal hides, and wine.

China is also Australia’s largest services export market, worth AU$10.7 billion in 2015-16; nearly half of that ($4.7 billion in 2015-16) is education-related, including income from Chinese students attending Australian higher education institutions.14 ChAFTA benefits include raising the profile of more Australian institutions by listing them on a key Chinese government website. ChAFTA also addresses tourism, another major export to China, guaranteeing that Australian companies can establish wholly owned subsidiaries, hotels and other facilities in China. ChAFTA also affects financial services; for example, it assures Chinese financial institutions that they can participate in Australia’s real-time gross settlements (RTGS) system.15

ChAFTA Progress

There is evidence that ChAFTA has already produced benefits for some Australian companies engaged in international trade. The Australian Government claims that the agreement has put Australia in a strong position to capitalize on China’s growing middle class and its increasing demand for goods and services. It points out that as tariffs were cut in 2016, Australian exports to China grew sharply for products including some fruits, milk powder, and zinc. And it predicted that Australia’s competitive edge will grow as tariffs are cut further each year.16

Australia’s Wine industry group said that wine exports to China climbed 40 percent to AU$520 million in 2016, as China overtook the U.S. as Australia’s top wine export market. "There's a whole range of factors at play," said the group’s chief executive. "Clearly the China Free Trade Agreement has provided a great fillip for that [growth] story.”17 Under ChAFTA, tariffs of 14 to 20 per cent on Australian wine imports are being eliminated.18 Australian cheese also gained market share in China in 2016 as U.S. cheese imports declined, a shift that The Wall Street Journal attributed largely to ChAFTA.19

ChAFTA Issues

Not all reports of ChAFTA’s implementation to date have been favorable, however. Companies involved in international trade have complained of problems caused by non-tariff barriers and documentation issues. For example, importers noted that incorrect or missing documentation can make it difficult to prove that goods arriving from China qualify for favorable tariffs.20,21 Some Australian companies said that a lack of market access to China prevented them from realizing the benefits of lower tariffs on exports.22 There were also concerns that the agreement would allow more competition from lower-cost foreign workers.23,24

The Takeaway

Reports suggest that ChAFTA has already produced benefits for some Australian companies engaged in international trade, and that it will continue to play a significant role in future as Australia seeks to maintain a competitive edge with its largest trading partner. The Australian and Chinese governments continue to work on reviewing and improving aspects of international trade, including efforts to smooth the import of agricultural products.25 Australia is also working on other trade liberalization deals, such as a potential agreement with the EU.26

Mike Faden - The Author

The Author

Mike Faden

Mike Faden has covered business and technology issues for more than 30 years as a writer, consultant and analyst for media brands, market-research firms, startups and established corporations. Mike also is a principal at Content Marketing Partners.

Sources

1.“The People's Republic of China,” Office of the United States Trade Representative; https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china
2.“Australia's trade in goods and services 2016,” Australian Government Department of Foreign Affairs and Trade; http://dfat.gov.au/about-us/publications/trade-investment/australias-trade-in-goods-and-services/Pages/australias-trade-in-goods-and-services-2016.aspx
3.“Export markets - China,” Australian Trade and Investment Commission; https://www.austrade.gov.au/Australian/Export/Export-markets/Countries/China/Market-profile
4.“Guide to using ChAFTA to export and import goods,” Australian Government Department of Foreign Affairs and Trade; http://dfat.gov.au/trade/agreements/chafta/fact-sheets/pages/guide-to-using-chafta.aspx
5. Ibid.
6.“The People's Republic of China,” Office of the United States Trade Representative; https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china
7.Quarterly Coal Report, October - December 2016, U.S. Energy Information Administration; https://www.eia.gov/coal/production/quarterly/pdf/t7p01p1.pdf
8.“Chinese students pouring billions into US local economies,” Asia Times; http://www.atimes.com/article/chinese-students-pouring-billions-us-local-economies/
9.“China FTA Network,” China Ministry of Commerce; http://fta.mofcom.gov.cn/english/
10.“China,” Australian Government Department of Foreign Affairs and Trade; http://dfat.gov.au/trade/resources/Documents/chin.pdf
11.“Fact Sheet: Resources, Energy and Manufacturing,” Australian Government Department of Foreign Affairs and Trade; http://dfat.gov.au/trade/agreements/chafta/fact-sheets/pages/fact-sheet-resources-energy-and-manufacturing.aspx
12.“Fact sheet: Agriculture and Processed Food, Australian Government Department of Foreign Affairs and Trade; http://dfat.gov.au/trade/agreements/chafta/fact-sheets/Pages/fact-sheet-agriculture-and-processed-food.aspx
13.Ibid.
14.“Fact Sheet: Trade in Services,” Australian Government Department of Foreign Affairs and Trade; http://dfat.gov.au/trade/agreements/chafta/fact-sheets/Pages/fact-sheet-trade-in-services.aspx
15.Ibid.
16.“One year on, China-Australia FTA delivers for Australia,” Australian Government Minister for Trade, Tourism and Investment; http://trademinister.gov.au/releases/Pages/2016/sc_mr_161219a.aspx
17.“Australian wine exports to China climb by 40pc to $520 million in 2016”,ABC News; http://www.abc.net.au/news/2017-02-11/australian-wine-exports-to-china-climb-by-40-per-cent-in-2016/8256206
18.“Fact sheet: Agriculture and Processed Food, Australian Government Department of Foreign Affairs and Trade; http://dfat.gov.au/trade/agreements/chafta/fact-sheets/Pages/fact-sheet-agriculture-and-processed-food.aspx
19. “As Australia Becomes Bigger Cheese in China Trade, U.S. Loses Ground,” The Wall Street Journal; https://www.wsj.com/articles/as-australia-becomes-bigger-cheese-in-china-trade-u-s-loses-ground-1483007707
20.“ChAFTA Update: 4 Problems And Solutions In Realising Benefits,” BCR Blog; http://logistics.bcr.com.au/blog/chafta-update-4-problems-and-solutions-in-realising-benefits
21.“Industry Opinion: Import benefits on hold with extra ChAFTA processing requirements,” Lloyd’s List Australia; https://www.lloydslistaustralia.com.au/lla/blogs/paul-zalai/INDUSTRY-OPINION-Import-benefits-on-hold-with-extra-ChAFTA-processing-requirements-511989.html
22.“Benefits of China trade agreement lost on Australian farmers still waiting for market access,” ABC News; http://www.abc.net.au/news/rural/2016-11-24/farmers-say-benefits-of-chafta-stopped-by-market-access-issues/8047634
23.“ChAFTA worker influx ‘a trickle, not flood’ despite union fears,” The Australian; http://www.theaustralian.com.au/national-affairs/foreign-affairs/chafta-worker-influx-a-trickle-not-flood-despite-union-fears/news-story/297860c95961f94d184127f5ef8bf04d
24.“ChAFTA has opened door to unqualified workers,” Sydney Morning Herald; http://www.smh.com.au/business/workplace-relations/chafta-has-opened-door-to-unqualified-workers-20160602-gpajfz.html
25.“Recent progress in Australian trade deals: ChAFTA, RCEP, the EU and India,” Clayton Utz; https://www.claytonutz.com/knowledge/2017/april/recent-progress-in-australian-trade-deals-chafta-rcep-the-eu-and-india
26.“Australia-European Union Free Trade Agreement,” Australian Government Department of Foreign Affairs and Trade; http://dfat.gov.au/trade/agreements/aeufta/pages/aeufta.aspx

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