China-Australia trade agreement a compromised victory

After ten years of marathon negotiations, the China-Australia Free Trade Agreement (ChAFTA) was signed in Canberra this week. Australia now has an FTA with its number one trade partner, becoming one of the few developed economies (Singapore, Korea and New Zealand) to have signed agreements with China.

Negotiating ChAFTA has proven exceptionally fraught. Launched amid much fanfare in 2005, reaching mutually agreeable terms proved harder than expected. Twenty-two rounds of negotiation were required, talks “stalled” on several occasions, and at one point the then Trade Minister Craig Emerson described the FTA as “overrated”. Many in the Australian business and policy communities will be relieved the agreement is finally concluded.

The Abbott government has described ChAFTA as “history making”, and put considerable effort into spruiking the many gains it will offer for Australian exporters.

But the deal is what’s known as a “positive-list” trade agreement, which puts certain limits on the benefits it offers Australian industry.

The type of agreement matters

The “positive-list” and “negative-list” approaches are, broadly speaking, the two methods for negotiating trade agreements. While debates over trade negotiation strategies may seem arcane to all but the most seasoned trade lawyer, they are critically important in shaping the ultimate form of an FTA.

Under the negative-list approach, governments begin by agreeing to liberalise all forms of trade protection (typically, tariffs and quotas) between their two economies. Recognising some sectors as “too sensitive” for full liberalisation, they then negotiate a list of products for exclusion. The negative-list approach presumes everything is on the table, with talks focused on identifying what will be left out of a trade agreement.

Conversely, positive-list negotiations instead focus on what will be included. Governments start by presenting a list of “requests”, and then offer and counter-offer until an agreeable balance is struck. (E.g. “If I agree to your demand X, will you agree to my request Y?”). This presumes nothing is on the table initially, and gradually adds content as governments decide which sectors are most important to them.

These approaches tend to produce different outcomes. Negative-list lends itself to broader and deeper trade liberalisation, because it places the onus on governments to justify why a sensitive sector should be excluded. Positive-list often leads to shallower and narrower agreements, and is often frowned upon by “free trade” purists. However, it is a useful strategy in cases where trade liberalisation is politically contentious or difficult, and governments simply wouldn’t be comfortable with deep reform.

Prime Minister Tony Abbott watches as the president of China Xi Jinping shakes hands with Fortescue Metals CEO Andrew Forrest after signing a MOU as part of the free trade agreement.Alan Porritt/AAP

Who are the positive-list winners in ChAFTA?

While the ultimate agreement was as much about what Australia requested as what China was willing to concede, there are three sectors which have emerged as the big winners:

• Agriculture, where tariffs on Australian beef, dairy, wine, fruit, pork, sheep meat, seafood and some grains will be phased out over a period of years
• Services, where increased market access will be offered to the legal, education, telecommunication, financial, tourism and healthcare sectors
• Mining, where tariffs on coal, alumina and some base metals will be eliminated.

These commitments will be transformative for the Australian industries that have been lucky enough to get on the positive-list. But they fall well short of what could genuinely be described as “free trade” between Australia and China. If a sector is not on the list, Australian exporters must contend with China’s normal trade policy regime. For these industries - including sugar, wheat, many manufactures, and most professional services - life after ChAFTA will be business as usual.

Even for the industries included, positive-list means ChAFTA commitments often fall short of full liberalisation:

• Certain commitments in the transport, construction, telecommunication and legal sectors will only apply in the “Shanghai Free Trade Zone”, not the entirety of China.
• Wool exporters get duty-free access for only a fixed volume of exports (initially 30000 tonnes, rising to 45000 by 2024)
• Australian-owned hospitals can only be established in four Chinese provinces and three cities.
• In education, the only firm Chinese commitment is to list some 77 Australian providers on a government website
• Farmers will have to wait for some time - nine years in the case of beef and cheese - for tariff cuts to fully take effect.

These caveats and carve-outs illustrate the inherent trade-off in the positive-list approach: a tricky trade agreement is made easier, but only by sacrificing across-the-board liberalisation.

Picking winners also means picking losers

The political reality is that the Chinese government is unlikely to have ever agreed to the stronger negative-list approach in ChAFTA. However, this has meant the Australian government has been forced to make difficult choices over what to prioritise, and what to leave out.

First, the government has had to “pick winners” when setting its priorities. The beef, dairy and tourism sectors have been the main beneficiaries. But picking winners also means picking losers, many industries have been left out. The long-suffering sugar and rice industries were both victims, reportedly cut from negotiations in exchange for China shelving requests around state-owned enterprise investment.

In this context, it’s worth asking how and why these decisions were made. Was “beef-in/sugar-out” a conscious decision to maximise national economic interests? Or does it reflect the relative lobbying strength of these sectors?

Second, the government has had to favour current exporters over future economic opportunities. ChAFTA will ensure 95% of Australia’s current (2013) exports to China will enter duty-free. However, by the time the agreement takes full effect in 2024, the Australia-China trade profile will surely have changed. As Chinese urbanisation and growth progresses, service exports are likely to become more prominent while primary commodities less so. Unfortunately, the positive-list ChAFTA agreement targets the export sectors of today, rather than those of tomorrow.

This raises questions about what will happen to emerging service sectors not presently on the list. While telecommunication firms now have access to the Shanghai Free Trade Zone, will this be the most important Chinese market in 2024 or 2034? And what of service sectors Australia has yet to develop?

ChAFTA is an imperfect agreement, borne out of political difficulties and the compromises these have entailed. Some sectors are in, but others are out, and carve-outs and caveats impose limits on many of the concessions. The unpleasant - but unavoidable - reality is that positive-list FTAs are not about “free trade”, but picking winners and commiserating losers.

Jeffrey Wilson receives funding from the Australian Research Council (ARC) for research into the Australia-China economic relationship. (Discovery Projects Grant No. DP150100217).