ChAFTA Post-Implementation Review – ACBC Submission

On August 7th 2020, ACBC made a submission to the Regional Trade Agreements Division of the Department of Foreign Affairs and Trade as part of its Post-Implementation Review of the China-Australia Free Trade Agreement. 

You can read the document in full below.

ChAFTA Post-Implementation Review

1. The Australia China Business Council (ACBC) is a membership-based, non-profit, non-governmental organisation comprised of over 700 member companies engaged in bilateral trade and investment. Founded in 1973, we actively promote two-way trade and investment between the business communities of Australia and China.
2. ACBC supports constructive engagement with China. We believe that Australia’s interests – and that of our members – are best served by Australia’s active engagement with China, one grounded in mutual respect for each other’s sovereignty and mutual non-interference in each other’s internal affairs. We believe that both sides should seek common ground on issues that are of importance to each and manage differences in a respectful manner. The comments below relating to the ChAFTA review are provided against that backdrop.
3. At the outset, we affirm ACBC support for high-quality, comprehensive free trade agreements (FTAs), particularly with our largest trading partners. They play an important role in complementing global trade liberalisation and are a valuable tool that the Australian government can use to pursue a national trade policy. We recognise, however, that trade policy is becoming increasingly complex and that the benefits that flow from FTAs can be amplified (or diminished) by the ability (or otherwise) of Australian businesses to take advantage of the FTA provisions. In that regard, domestic productivity, competitiveness and Asia-ready skill sets are relevant. We do not comment on those issues in this submission.
4. ACBC has advocated strongly for ChAFTA before and since its signing in 2014, as evidenced by our ChAFTA training program, which took place between 2016-7 and saw hundreds of businesses in Australia and China trained in the technical and practical elements of the agreement. We made these efforts because we formed the view early on that ChAFTA would represent one of the largest and most important opportunities for Australian businesses in decades, putting Australian companies in a preferential seat to benefit from the growth of the Chinese economy.
5. Today, some five years since ChAFTA came into operation, we remain confident in our belief that ChAFTA has delivered tangible benefits for Australia and Australian businesses. It has built on Australia’s pre-existing commercial relationship with China by lowering tariffs, increasing access for services exports to China, and supporting two-way investment.
6. Having said this, in contrast to the optimistic atmosphere when ChAFTA was concluded in 2014, the last two years have been challenging for the Australia-China relationship with a deterioration in bilateral political relations. Nevertheless, the business community remains optimistic about the long-term potential of the Australia-China economic relationship given its inherent complementarities and the significant opportunities afforded by the rising Chinese middle class.
7. We acknowledge the recent calls to diversify Australia’s trade portfolio to manage business concentration risks, a concern amplified in the environment of the COVID-19 epidemic. It is important for businesses to actively manage a wide range of based on the specific conditions of their business and the broader environment in which they operate. While a diversity of markets is a usually a great asset, the scale and consumption capacity of China provide current markets and further opportunities unlikely to be matched in the medium term. All Australian business would welcome strong growth in other emerging markets, such as India, Indonesia and other markets, to drive global growth and prosperity and provide expanded opportunities for Australia but they will not rival China for quite some time. China represented 31% of Australia’s total trade in 2019, including 36% of exports, whilst India accounted for just 3% of total trade. Sheer complementarity also matters, not just the size of a market.  Even the world’s largest economy, the developed US market, represented just 7% of Australia’s trade and 4% of exports in 2019, although it is of course the source of the largest stock of foreign direct investment (FDI) in Australia, accumulated over seven decades since World War II.
8. At its most basic, trade leads to jobs and economic growth. It is the view of ACBC that a China Plus strategy be pursued and that emerging markets should be targeted to complement and not substitute for our trading relationship with China.
9. That said, discriminatory trade and investment measures by one or both sides in an otherwise mutually beneficial economic relationship are undoubtedly damaging to business confidence. Trade retaliation will inevitably change the risk assessments of business and potentially lead to diversion of some trade with a loss of benefits to both sides.  Similarly, national security issues are of crucial importance for any country and the foreign investment regimes of both China and Australia take such considerations into account. However, ACBC believes that restrictions based on such grounds will always carry a cost to national economic welfare and advocates that they be used judiciously and as transparently as is possible.
10. It should also be noted that the COVID-19 pandemic had dramatic direct effects for the education and tourism sectors. However, the implications for these sectors in the context of the pandemic and recovery from it are beyond the scope of this submission.
11. In summary, we believe active and constructive engagement in trade and investment with China is essential to Australia’s interests. Post-ChAFTA, this engagement has significantly contributed to Australia’s employment, national wealth and economic prosperity. How have opportunities for Australian businesses changed under ChAFTA, such as the competitiveness of Australia’s goods and services exports?
12. ChAFTA has given Australian business a competitive advantage in the China market, with 94% of Australian exports now entering China tariff-free and all Chinese imports entering Australia with zero tariffs.
13. ChAFTA came into force at the end of 2015. In the four years to June 2019, two-way goods and services trade has risen at a compound annual growth rate (CAGR) of 13%, with CAGR in exports of 16% to reach a record high of A$235 bn in 2019. China is now Australia’s largest trading partner by a big margin while Australia is China’s 7th largest source of imports[1].
14. Many sectors to have benefitted. In the four years to June 2019, 80 Australian export product categories achieved growth of over 20%. Of these, 34 product categories grew by over 50% annually. Besides the well understood growth in minerals and resources, such as iron ore, there are many other growth sectors worth noting. Australian beef exports to China increased by 131% to $1.8 bn in 2019. The education and tourism sectors became Australia’s second and third largest export sectors, benefiting from a significant rise of Chinese students and Chinese travellers. Exports of niche product have also grown strongly during this time – exports of crustaceans (including lobsters and prawns) grew 38-fold, pharma products 23-fold, fruit and nuts 8-fold, and alcoholic beverages 3-fold.
15. ChAFTA has also given Australian services increased access to the China market, in areas such as legal, education, telecommunications, financial, tourism and health and aged care services, albeit quite limited in some of these sectors. By way of example, the opportunity offered under ChAFTA for Australian aged care service providers to set up a wholly Australian-owned profit-making aged care institutions anywhere in China (rather than as a minority partner or through a joint venture) provided significant competitive advantage to several Australian companies, which remains today.
16. CHAFTA also contained several commitments on financial services, including provisions on transparency, regulatory decision making and streamlining of financial services licences applications. In the early days of the FTA, major Australian banks took advantage of these provisions to establish branches and set up operations in the then newly established Shanghai Pilot Free Trade Zone. The removal of minimum working capital requirements and streamlined approval processes to undertake renminbi (RMB) related business provided the banks with an early competitive advantage and enabled them to develop focussed banking lines, particularly to support two-way trade. However, these early ChAFTA benefits were soon granted more widely to other nations and in the face of significant local competition, many of those banks have since relinquished their licences or scaled back their activities.
17. At the same time as the signing of ChAFTA, a separate MOU was signed that facilitated the establishment of an official RMB clearing bank in Sydney. This came shortly after the confirmation that the Australian Dollar was to become the third currency in the world to be directly convertible into the RMB and a commitment by the Reserve Bank of Australia to include RMB-denominated assets in its pool of reserve currencies. This ‘trifecta’ provided a push by all the major Australian banks to include RMB-denominated products and service offerings to support bilateral trade and investment opportunities and facilitated the establishment of offshore branches of Chinese banks in Australia. Although the use of RMB as a global trading and investment currency remains relatively low, its use within the Asian region is increasing significantly. Australian banks and investors have done the hard work to build RMB capability into their operations, and although the return on investment is still low, Australia is now, by virtue of this work and strong policy settings, an integral part of the financial architecture of the region. The importance of this integration of Australia into the regional RMB payment infrastructure is likely to become more apparent as currencies and payment systems become more digital.
18. One of the most significant intangible benefits is that through hundreds of ChAFTA-related roadshows, seminars and match-making opportunities Australian companies have accelerated their understanding and awareness of business opportunities in and with China and helped Australian companies to understand and manage risks arising from operations in China and the broader Asian region.
19. ChAFTA tariff reductions and eliminations have increased business confidence for Australian companies doing business in China with the number of Australian firms claiming to have benefited from the agreement increasing year on year. This sentiment is evidenced in the many regular business sentiment surveys undertaken by various firms and organisations, including the ACBC and AustChams in China.
20. According to the 2018 Westpac Australia China Business Survey in 2018, 78% of businesses also claim that ChAFTA has contributed to greater competitiveness and profitability in their trade with China – mostly due to tariff reductions or tariff elimination. Additionally, the signing of ChAFTA raised the awareness and significance of the China market in general. This intangible benefit has changed the mindset of many Australian businesses that look to break into China.
21. With the reduction in tariffs, ChAFTA has encouraged new Australian entrants to the China market. With Australia’s enviable strength as an agricultural exporter, ChAFTA has also empowered many regional Australian businesses to enter (or expand in) the China market. Tasmania is a good case study of a small regional economy that has benefited from enhanced export opportunities (especially with regard to its premium seafood, beef, wine, dairy) as well as jobs and economic growth arising from tourism and international education exports, and some strategic inbound investments.
22. Other businesses have indirectly benefitted from ChAFTA, because of improved relationships with stakeholders, such as Chinese buyers, distributors, and customers, all conducive to better business outcomes.
23. Further, ChAFTA promotion events in China run by Austrade, AustChams and ACBC, as well as Festival of Australia events and the China International Import Expo (CIIE) have raised awareness of what Australia has to offer – high quality premium products and services. ChAFTA has been an important part of building Brand Australia and providing ballast to the overall relationship.  Australian exporters acting on opportunities provided by ChAFTA have raised the profile of Australia with Chinese consumers demand for our clean, green and safe products. This rise in demand is evident in the surge of online sales with increasing numbers of Australian products being made available across China’s e-commerce platforms. For example, Alibaba Singles Day Sales regularly list Australia in the top 3.

In assessing these indirect impacts, we cannot underestimate the economic importance of the returning Chinese students with their preference for Australian branded quality products and services. Personal recommendation is a powerful driving force in China marketing and provides economic benefit to Australia beyond the direct benefits to our education system and the fostering of stronger people to people links.

Have outcomes of ChAFTA met business and other stakeholder expectations?

While ChAFTA is a significant milestone in the Australia–China economic relationship, it is not (and was not intended to be) an endpoint in the relationship. It is comprehensive, but deliberately left untouched many sensitive areas. It does however provide mechanisms for future discussions and a formal review after three years. While there were several rounds of preliminary discussions and mapping of next steps, those discussions have faltered, and the formal review remains outstanding. We support the resumption of these discussions as a matter of priority.

25. As noted above ChAFTA has been a successful trade agreement which has eliminated 94% of tariffs for Australian goods entering the competitive China market. While ChAFTA has given Australian products more competitive access to the China market, non-tariff barriers still exist for Australian exporters, for example:
    – product and laboratory testing requirements
    –           arbitrary regulatory enforcement
    –           labelling issues
    –           cross border e-commerce regulatory development

These are issues which remain to be addressed when the review process is resumed. We note, also that China has also claims non-tariff barriers in relation to exports of some products to Australia.  Any use of non-tariff barriers’ by either country will tend to undermine the effectiveness of ChAFTA, and we recommend more clarity on rules and consistency and timeliness in implementation of ‘behind the border’ regulations that impact two-way trade.

26. ChAFTA was seen at the time of signing as providing a first mover advantage over other major trading nations, which technically is still the case, as a practical matter, many companies would say that is has not fulfilled all the expectations they had of it. China continues to open its markets and economy to foreign participation and investment and many of the benefits afforded to Australia are now more widely available to other nations.
27. By way of example, a ChAFTA commitment was to allocate to Australian funds managers a quota to allow them to invest directly into China’s equity and bond markets through the Shanghai and Shenzhen securities exchanges, and securities and brokerage firms were permitted to provide cross-border securities trading, custody and portfolio management services to qualified Chinese domestic investors. These were ground-breaking commitments at the time. However, the subsequent broader and more liberal opening of Chinese capital markets and the inclusion of China in international benchmarking indices such as MSCI have made these provisions less of a competitive advantage.  The further opening and reform in the Chinse financial market has provided even more opportunities to all international financial services firms. Australian participation has been limited to date to a small number of firms, but interest in the opportunity remains high, as is evidenced by annual China Capital Market events that are run regularly in Australia and regular delegations each way to explore market opportunities  This comment is not so much a comment on the worth of the ChAFTA commitments, but a reflection of the fact that the appetite and the perceived risk/reward balance has resulted in a less than anticipated take-up of the opportunities.
28. Finally, while the efforts put in by government and business over many years resulted in a world-class FTA when ChAFTA as signed, the China’s markets have evolved rapidly since then, in ways that are not contemplated by the FTA. ChAFTA currently has a strong focus on physical goods. A future review of ChAFTA needs to consider not just the progress in these areas but also to reinvigorate the consideration of updating provisions to more accurately cover rapid developments in technology, e-commerce, capital and currency markets.
29. ChAFTA does not address, for example, cross-border digital trade, e-commerce platforms and the nuances of China’s on-line retail markets. In today’s world, e-commerce is essential to competitiveness and contributes benefits to many companies. For instance, switching to sustainable B2B (business-to-business) e-commerce facilitates the development of online trading applications and enables companies to meet the demands of more customers that are not necessarily their target audience. Failure by Australian companies to participate as equal players in these new digital platforms will undoubtedly affect the competitive advantage that is currently enjoyed via low tariffs and more traditional market access mechanisms.
30. Associated with these new digital platforms, is the major push by China’s financial institutions to trial and adopt blockchain encryption technology to power business operations. It is widely reported that China’s central bank (the People’s Bank of China, PBoC) is stepping up efforts to ensure that the industry uses common standards for the emerging technology. The widespread adoption of blockchain will revolutionise global supply chains globally and of course, those linking Australia and China. Although there is other work being done in relation to Australian participation in relation to the development of these new standards and technology, the potential to coordinate efforts with Australia’s most important trading partner could be enhanced if these efforts were to form part of a new round of ChAFTA discussions.
31. Finally, we note that China’s Belt and Road Initiative (BRI), which sets a wider framework for that country’s trade and investment priorities, was less fully formed at the time ChAFTA was signed. It would be desirable for this review to examine the opportunities for cooperation on specific projects under the initiative (both within Australia and in third countries), and also examine the compatibility of existing regional and international trade and settlement standards with those being developed and fostered under the rubric of the BRI.

iii. Have there been any unintended impacts of ChAFTA?

32. While the last two years have been challenging for Australia-China relations, the signing of ChAFTA delivered greater confidence and optimism for Australian business interests. Given the current tension in the bilateral relationship, ChAFTA potentially provides a useful channel of dialogue that both Australia and China can utilise to stabilise and develop trade relations and, potentially, the broader relationship.
33. ChAFTA (along with the other regional FTAs) has played an important role in changing the national business “mind-set” about the importance of becoming China-literate to take advantage of these opportunities.
34. While ChAFTA enshrines Australia a ‘most favoured nation’ status, protecting Australian industry from subsequent FTAs which China signs, the impact of the large Chinese commitment in the US-China trade deal obviously has some elements of concern to Australian exporters and may test the strength of that undertaking provided by China.
35. Multilateral agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP) continue to be important for Australia as we continually seek new markets and a diversification of our trade portfolio to complement trade with our number one trading partner, China. RCEP is particularly important as it includes China and the agreement addresses a number of the issues that we might otherwise have sought to include in an update These include improved mechanisms for tackling non-tariff barriers including in areas such as customs procedures, quarantine and technical standards and rules on e-commerce to make it easier for businesses to trade online.
    
    Has there been any effect of ChAFTA on any administrative or regulatory costs on business?
36. Regulatory approval process. Under ChAFTA, Australian exporters are required to submit a Certificate of Origin to claim the relevant tariff waivers, yet the New Zealand-China Free Trade Agreement does not require this additional regulatory hurdle. If this requirement were abolished and Australian firms encouraged to self-audit the provenance of their goods, it would demonstrate a much-needed level of trust in Australia-China trade. Some of our Australian health care and pharmaceutical companies, such as CSL and Cochlear, are global leaders and more collaboration to streamline regulatory approval processes could benefit patients in both countries.
37. With regards to people-people movement, ChAFTA could help streamline visa applications for business visitor, tourist and significant investor visas. We support an improved and simplified mechanism for business visa applications from both sides as this is an easy and practical way to accelerate the benefits of bilateral trade. Improved arrangements for two-4way movement of skilled workers and management personnel is an important practical measure to deepen the trade and investment flows to achieve long term trade and investment benefits, the ultimate goals of ChAFTA.