ChAFTA – ‘real’ big deal – but!

On balance is a fair term when describing trade. However, when you say Free Trade there has been some disquiet across a number of industries. Clearly there are some clear winners and some areas of concern apparent from the China Australia Free Trade Agreement (ChAFTA) signed, 17 November 2014, between the two countries. As with all good stories comes a more interesting one. How to make it work will come in time. It is time that is most important. If you think culturally, something becomes obvious – Western world thinks 5 years is a good plan, Eastern World sees no sense in less than 10 years and prefers 100 years. So is it about plans or planning?

If you did not already know – NZ released a press announcement on 7 April 2008 that it signed a Free Trade Agreement with China. For reference go to chinafta.govt.nz – as far as we can tell the last press release was 12 April 2013 on progress on that sight – maybe someone else knows why?

One topic on the official NZ site is the comment: Are you ready for China, and that forms the discussion from this point.

Starting with two words that seem popular – collaboration and cooperative. We find a world of difference yet seemingly very similar words. It is how they operate that matters. One is a verb and the other an intransient verb – inner or outer if you prefer.

To collaborate suggests to work with others and is an intransitive at an intellectual level whereas the Australian version of ChAFTA is missing encouragement of cooperatives to take advantage. Why is this important? Because it is yet to be fully explained what is the level of risk. Risk of the franchise is the more important thing to work through when considering the deal.

The talk from the positives claim it will build on the indications from China that it values a further deepening of our trading relationship. For instance, the setting up of a ‘settlement hub’ in Sydney, based on Chinese Renminbi exchange. This hub is designed to make doing business with and in China easier. While restrictions to trade and tariffs ranging from dairy products, wine, processed foods and pharmaceuticals, to processed metals, plastics, medical devices, cosmetics are lifted. A very strong point is also being made that a new mechanism for resolving non-tariff barriers to trade which have caused so many issues with the implementation of previous FTAs is part of the positive. That said, not all are happy and it is not necessary the raw material suppliers it is also those that realize there is a lack of the detail and effectiveness of this mechanism and all is yet to be tested.

Another concern is anti-dumping may be not be possible as the ChAFTA only uses the wording ” full access for Australian producers to trade remedies available under the WTO, including anti-dumping and countervailing measures.” Which like Australian Intellectual Property is often seen as an unnecessary barrier by Chinese firms. That said it is claimed China is moving towards more rigorous protection of IP as a natural progression. Some experienced people in this area may be saying – waiting – waiting – time will tell!

The positive also argue that while the service industry will no doubt benefit the Chinese market is good news for manufacturers as they will often be able to incorporate Australian manufactured products in their offerings.

Architects, for example can partner with local Australian suppliers to offer broader solutions to Chinese needs. Healthcare providers can similarly partner to tackle the China market. Other restrictions being relaxed on services will clear the way for Australian equipment and technology suppliers. The later point is claimed as a win for innovative technology and product suppliers.

One area of both opportunity and concern is the easing of restrictions on the use of imported Chinese labour. That labour source can undermine workers’ conditions and the competitiveness of firms operating under Australian law, so who wins? Comparative advantage is what the economists would argue would determine the winner.

While the positive argue it is all good. They also acknowledge there is no doubt China benefits greatly from this agreement and with that will come greater competition and threat to Australian business. It then means the Australian government must be more active in follow up on industry concerns as the details of the agreement are revealed and issues emerge. The difficulty in this is it is actually counter to the current government’s intention ‘of open for business’. It is even more difficult if you consider the need to collaborate outside of the cooperative of Australian Values.

So from all this comes the ‘real’ issue of not knowing about the mechanism proposed for addressing non-tariff barriers. Kindly provided is the following summaries to assist highlight what might be of concern. Not in any particular order:

  • Customs-related issues: – import tariffs, onerous customs procedures, including customs valuations, other import taxes and charges, rules of origin/certificates of origin, market access quotas
  • Technical issues – standards and certification: conformance testing and certification requirements
  • Other internal regulations issues – internal taxes, restrictive import licensing agreements, visa requirements and work permits, ownership and investment restrictions, banking and foreign exchange issues, governance and competition-related issues, differing processes for obtaining government approvals, transparency and fairness in tendering procedures for government contract and in the – award of tenders, ineffective enforcement of intellectual property rights
  • Social or market-related issues: staff recruitment, local business culture.

It is suspected that these barriers in China are extensive and complex.

In addition, it needs to be appreciated that arguably Australia’s largest barrier to trade, particularly in the services sector, is the very low level of mandarin speaking skills and understanding of Chinese Confucius-based business culture by Australians. Add to that the comparatively low level of ‘in country’ trade development support offered by the Australian Government and the need for Australians to invest considerable time and resources necessary to build up relationships before any deals can be concluded are also important factors.

We also seem to forget the high level of competition which Australians will face not only from European countries that have been far more active in Chinese markets in recent years, but also the very strong presence of mandarin speaking Taiwanese business interests who will be actively chasing service market opportunities.

Despite the current level of political rhetoric being generated about opening up ‘services-based’ markets in China, the reality is likely to be quite different. Only time will tell!

So was it so clever to have financial services hold the key to trade that is controlled by exchange. What is different for building trade over services is the key advantages of building trade around ‘hard products’ (commodities and manufactures) is that they are ‘language and culture’ neutral; if the price is right and the technical and other barriers can be addressed, market opportunities can be realised. Simply put the agenda is obvious and transparent.

As we see it the hurdle that many Australian companies within an exchange will be the need to learn and understand the soft diplomacy required in bedding down arrangements as the cultural context of business is different to that of the West.

A mixed blessing is probably the best description. A number of major concerns with this agreement:

  1. Firstly there is no mention of China needing to float it’s currency to achieve a more honest and realistic exchange rate.
  2. The agreement favours large-scale innovative makers and mining.
  3. Maintaining small to medium business input will be difficult.
  4. China is not required to place a carbon footprint on it’s export products, an economic advantage. In addition Australia does not require imports to place a carbon footprint on products. Should such a footprint be costed in real terms local manufacturing competes.
  5. China’s agreement with the USA may result in pollution issues being costed.
  6. We have heard no analysis of any imbedded uncompetitive clauses that may have a detrimental effect on Australian export business and local business alike.

Meanwhile back in NZ. After signing the NZ/China FTA Plinius Audio based in Christchurch NZ spent almost 5 years getting the CCC approval process to work for its products to enter China having been tested and proved compliant here.

Back to the now in Australia we are having our own ‘realities’ where according to our agribusiness contacts China is always going to control raw materials into China, it is a balancing act between feeding the people with Grain, clothing the people and exporting, and manipulating the price of commodities into China. Why? Because if they lose too much control, they cannot keep the rate of growth in the range where they have it. It follows that if China’s economy slows down it has huge implications not just for China, but for its main trading partners, of which Australia is a major one for Raw Materials.

Whether it is perceived or ‘real’ most feel the so-called free-trade agreements and other international contracts zap control from sovereign nations and hand it to rootless instrumentalities, undermining the role of governments.

It all culminates with: Planning, the timeframes that each culture believes plans should be projected forward and whether your side is proactive or reactive and when to be so inclined.

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