China-Australia Free Trade Agreement (ChAFTA)

Trade between Australia and China has historically proven mutually beneficial for the two countries. The China-Australia Free Trade Agreement (ChAFTA), which went into effect on 20 December 2015, enhances the relationship between the two long-time trading partners, according to the Australian government's Department of Foreign Affairs and Trade. The agreement contained provisions by which an overwhelming majority of previously enforced trade restrictions and tariffs would be lessened or completely eliminated. In addition to fostering enhanced trade between the two countries, ChAFTA has been heralded by proponents as a mechanism that will promote Australian investment and entrepreneurialism in China (and Chinese investment in Australia). ChAFTA's framers spent years negotiating this comprehensive agreement, which spent months in Parliament as ministers discussed its potential benefits and risks. Overall, however, it is believed that ChAFTA will benefit most of Australia's industrial sectors, particularly agribusiness and services.

Background

The process by which ChAFTA was developed spanned over a decade. However, the economic relationship between Australia and its largest trading partner has been developing far longer. Since the 1970s, China's infrastructure and economy have been growing and strengthening consistently. China's urban centres have been in a constant state of development. Such growth has been contingent on the availability of building materials, sources of energy and other resources.

Australia has long been positioned to meet China's needs in this arena. Historically, Australia's major exports, particularly to China, are coal, iron ores and concentrates and wool fibres used in the manufacturing of clothing. Additionally, Australian tourism—one of the country's strongest economic sectors—greatly serves Chinese consumers, who are among Australia's top visitors for recreation, business and education.

On 24 October 2003, Australian trade minister Mark Vaile and Chinese vice minister of commerce Yu Guangzhou signed the Australia-China Trade and Economic Framework in the presence of Australian prime minister John Howard and Chinese president Hu Jintao. This agreement was intended to bolster the economic and trade relationship between the two countries. It also called for a feasibility study to investigate the establishment of a free trade agreement (FTA) between Australia and China. Completed in 2005, the study revealed that both countries stood to gain from an FTA that would, the report concluded, increase Australia's and China's real GDP by $24.4 billion (US$18 billion) and RMB529.7 billion (US$64 billion), respectively, between 2006 and 2015. The report also stated that significant barriers impeded free trade.

The issues that prevented an immediate FTA largely centred on trade restrictions and tariffs. Negotiations often stalled because of inequities between the two nations. For example, during one of many discussions, Australian negotiators pointed to their efforts to liberalise the trade of goods and called upon their Chinese counterparts to enact similar measures on such items. Such impasses led to the parties pausing negotiations, returning to the table weeks and sometimes months later. Such delays are not atypical, particularly given the broad and comprehensive scope of the agreement. In some cases, such issues were tabled in favour of forward progress, with the expectation that, once the agreement was signed and implemented, those matters would be revisited.

Overview

ChAFTA was seen by proponents as a historic agreement that further cemented the strong economic relationship between Australia and China. The success of the commercial relationship between Australia and China is evident—in 2020, China purchased $102 billion in Australian imports (over a quarter of Australia's global exports). China is a major importer of Australia's resources, energy, manufactured products, services and agricultural products. Meanwhile, China (which exports to Australia a large volume of manufactured products, including computers) has been an increasingly strong investor in Australia's markets. ChAFTA has, therefore, been welcomed as a mere formalisation of a long-standing mutually beneficial relationship.

One of the central elements of ChAFTA is the rapid reduction or elimination of tariffs on imports and exports. Consumers in Australia, for example, will spend significantly less when they purchase a Chinese-made computer or phone, since ChAFTA will phase out Australia's 5 per cent tariff on Chinese manufactured products by full implementation in 2029. Similarly, since 2019, Chinese consumers have paid much less when purchasing an Australian-made manufactured product, as the China-imposed tariff—between 3 and 14 per cent—on Australian manufactured products, was phased out.

A major beneficiary of ChAFTA was Australia's agricultural sector. Pre-ChAFTA, the tariff on Australian beef imports into China was between 12 and 25 per cent, and imports on live Australian cattle into China was about 10 per cent. ChAFTA eliminated tariffs on beef by 2024. With market demand increasing for Australian beef (and prices increasingly as a result), lower tariffs will inevitably add value to the Australian beef export sector.

ChAFTA's expected benefits for Australia affect some of the country's strongest export sectors. In addition to the elimination of tariffs on wine, beef and other meats, seafood and other Australian agribusiness products, ChAFTA will allow Australian entrepreneurialism within China's borders. For example, wholly Australian-owned hospitals and for-profit nursing homes are permitted to operate throughout China under this agreement. Additionally, Australian-owned tourism and hospitality operators can manage subsidiary restaurants, hotels and resorts in China. Two of Australia's most prominent service exports—tourism and health care—stand to benefit from this agreement.

Furthermore, Australian investors are, under ChAFTA, able to establish more of a presence in China. Australia-based legal firms and financial advisories, for example, are able to enter into enhanced business partnerships with their counterparts in China. In fact, Australian business can become majority stakeholders in China-based agricultural, forestry, hunting and fishing joint ventures. Australian firms will even have new rights to sue Chinese government entities for policy changes that negatively impact their businesses.

Some analysts have, however, found in ChAFTA potentially adverse elements. Among these issues is the fact that many substantial Australian agricultural exports—including wool, rice, sugar, cotton, corn and wheat—are not among the commodities for which tariffs would be eliminated. Additionally, there are limits on the amount of Australian beef that can, without the imposition of tariffs, be imported into China. If such imports exceed these limits, China can impose customs duties on the shipment.

Furthermore, just as Australian companies operating in China can sue government entities for unfair regulation or practices, so too can Chinese businesses operating in Australia sue government entities for policies that adversely affect them. Additionally, Chinese business engaged in Australia-based projects whose values exceed $150 million may, without first testing local labour markets, bring into the sites temporary migrant workers. This element of the agreement created some concern in Parliament, particularly among Labor Party leaders. However, as ChAFTA is designed to evolve with continued negotiation, these controversial issues may be revisited.

Bibliography

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"China-Australia Free Trade Agreement: Pros and Cons." ABC, 20 Oct. 2015, www.abc.net.au/news/2015-06-17/china-australia-free-trade-agreement-pros-and-cons/6553680. Accessed 17 June 2024.

Gartrell, Adam. "Australia's Long-Awaited Free Trade Deal with China Finally Comes into Force." The Sydney Morning Herald, 20 Dec. 2015, www.smh.com.au/federal-politics/political-news/australias-longawaited-free-trade-deal-with-china-finally-comes-into-force-20151218-glqzra.html. Accessed 17 June 2024.

He, Ling Ling. "On Re-Invigorating the Australia-China Free Trade Agreement Negotiation Process." Journal of World Investment and Trade, vol. 14, no. 4, 2013, pp. 672–96.

Holmes, Anne. "Australia's Economic Relationships with China." Parliament of Australia, www.aph.gov.au/About‗Parliament/Parliamentary‗Departments/Parliamentary‗Library/pubs/BriefingBook44p/China. Accessed 17 June 2024.

"Impact of the China-Australian Free Trade Agreement on Australian Agribusiness." Deloitte, Deloitte Touche Tohmatsu, 2024, www2.deloitte.com/au/en/pages/consumer-business/articles/impact-china-australia-free-trade-agreement.html. Accessed 17 June 2024.