Happily ever ChAFTA? The China Australia Free Trade Agreement and what it means

With more than a decade in the making, Australia’s long-awaited free trade deal with China, the China-Australia Free Trade Agreement (ChAFTA), finally entered into force on Dec 20th, 2015. Australia becomes one of the few developed economies (Singapore, Korea and New Zealand) to have implemented agreements with China. The Abbott government has described ChAFTA as “history making” and put considerable effort into spruiking the many gains it will offer for Australian exporters.

GettyImages-477382732Australian PM Tony Abbott looks on as Chinese Minister of Commerce Dr Gao Hucheng and Australian Minister for Trade Andrew Robb sign the Free Trade Agreement (Lukas Coch/AAP)

According to Australia’s department of Foreign Affairs and Trade, China is Australia’s biggest trading partner, with two-way trade valued at $150 billion annually. This accounts for around one third of Australia’s total trade with the world. China is also Australia’s No.1 import supplier and largest market for exports of each of the agriculture, resources and services sectors. ChAFTA successfully allows two countries to become more economically integrated by lowering tariffs on imported goods and easing restrictions on the ability of Chinese workers to gain employments in Australia. But, whether ChAFTA a good deal for Australia still remains unclear.

Australia’s Minister for Trade and Investment Andrew Robb, signatory to ChAFTA, said “this historic agreement with our biggest trading partner will support future economic growth, job creation and higher living standards through increased goods and services trade, and investment. China, with its population of 1.4 billion people and rapidly rising middle class, presents enormous opportunities for Australian businesses well into the future.”

chafta-infographic-201509.png                          (Source: Department of Foreign Affairs and Trade)

Since December 20, more than 85% of Australia exports to China – valued at more than $86 billion in 2014 – have already been tariff free. And, this number will rise to 93% within four years and 95% when it is in full force. Some of these goods were subject to tariffs of up to 40% before. Undoubtedly, Australian agriculture, resources and energy sectors have been regarded as two big winners with the cut of a host of tariffs and the planned phase down of many more. For instance, Australian wine industry, which faces fierce competition from New Zealand and Chile in Chinese wine import market, can be seen an immediate tariff reduction on bottled wine from 14% to 11.2%. Tariffs on diary of up to 20% will also go within four years, as well as tariffs on Australian beef and wool. In addition, Australia’s resources and energy sector are set to get a drop in Chinese tariffs on coking coal, alumina and gemstones.

“I trust that today our Chinese friends will enjoy the fine beef and the good wine that will soon be more readily enjoyed by their countrymen,” Prime Minister Tony Abbott said.

The ChAFTA also seems to be a good sign for Australian service sector. Nowadays, China is making appropriate financial decisions in light of its growing internal economy. Its shift towards a consumption-driven and increasingly service sector-led growth model will provide many Australian businesses with the chance to evolve and diversify. Under ChAFTA, increased market access will be offered to the legal services, education, telecommunication, financial services, tourism and health and aged care sectors. According to DFAT forecasts, an additional GDP increase of $24.4 billion and a boost in real consumption of $46.3 billion between 2016 and 2035 is expected.

ANZ-Services-Opportunities                                                                                  (Source: ANZ Research)

The ChAFTA will generate increased revenue for the primary producers, however, its contribution to job creation is minimal.

The Australian Council of Trade Unions (ACTU) says it is deeply concerned about the effect the deal will have on Australian labor, saying it could undermine local jobs and increase unemployment.

Although the government has come out and claimed that ChAFTA will create “many hundreds of thousands of jobs”, these figures are grossly overestimated and have been proved to be wrong. The employment gains from ChAFTA are derisory: 5434 jobs over a 20-year horizon, not the 178,000 figure trumpeted by Trade Minister Andrew Robb, who misquoted the government’s own research by wrongly multiplying it by 20!

China-Australian Free Trade Agreement (ChAFTA) also removes Labor Market Testing both in the text of the agreement as well as through the use of ‘Investment Facilitation Arrangements’, which allows Chinese companies to bring in temporary skilled workers to work on projects over $150 million, even without advertising those jobs to local first.

In recent years, Australia has entered into a range of bilateral free trade agreements with numerous countries including New Zealand, Japan, Singapore, US and etc. However, there is few solid evidences to support that existing FTAs have brought substantial benefit to Australia’s economy growth or job creation. Based on previous discussion, the ChAFTA is not an perfect agreement. In addition to labor market, it also reveals concerns about export. Under ChAFTA, Australia will reduce all its tariffs to zero, while China retains import tariffs over 250 lines. Australia government is expected to ponder the shadows which the agreement is surely casting over the future of Australia, work against and reduce these shadows, eventually realizing a win-win situation for two countries.












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