Business beware China's FTA tripwires

An FTA with China is long overdue, and there's no doubt it will yield benefits for Australia. But businesses should be wary of rushing into anything too quickly. New Zealand's experience shows that the process has been far from smooth sailing.

After eight years and 19 rounds of negotiations with no sign of a free-trade agreement with China, Australian businesses could be forgiven for giving up all hope – until the new Abbott government made no bones about its goal of finally sealing a deal within one year. Going so public with the goal may have weakened our hand at the negotiating table (Abbott's in danger of a Chinese checkmate, October 11), but at least it indicates the government has made it a high priority.

And early signs from the Chinese side indicate that they too are willing to come back to the table. As Julie Bishop told the ABC, when Prime Minister Abbott met with President Xi Jinping in APEC "the notion of a free trade agreement was raised and was enthusiastically welcomed by China".

Once signed, a free trade deal with China will be a boon for Australian business. Australian goods and services exports to China are worth just over $75 billion annually, and have plenty of room to expand in a country with GDP over $8 trillion in 2012, and rapidly growing.

But we should expect a few bumps along the road. Events like China’s sudden suspension of chilled beef imports last month will not necessarily be a thing of the past once an FTA is signed. The latest explanation for that sudden ruling centres on the translation of the words for frozen and chilled on health certificates.

If an FTA is signed, expect a lot more nit-picking in Chinese customs as their domestic industries feel the pinch from Australian competition. Unless Australia wants more of its produce lost in translation, business needs to be scrupulously careful, dotting all Is and crossing all Ts.

Across the Tasman, the FTA success story – largely in the meat, timber and dairy sectors – has recently soured somewhat as complacency has set in and critical mistakes have been made.

In the space of about six months, hundreds tonnes of lamb and beef, worth around $NZ100 million have been held up in Chinese ports after labelling wasn’t changed to reflect the revised name of New Zealand’s agriculture ministry. Milk powder exports have been badly damaged by two scares in April and August, involving bacteria finds in New Zealand products as well as locally-produced Chinese goods with counterfeit New Zealand labelling.

Misfortune can’t be guarded against completely, and slip-ups are to be expected from time to time. But if the New Zealand experience is any guide, China will not hesitate to come down hard on importers when there’s a jump in commodity volume.

Alex Worker, son of the New Zealand Ambassador to China and himself an importer of gourmet goods, says that these incidents have “sent a strong signal and red flag to the Chinese regulatory authorities – particularly CIQ and customs – that something is not right”.

Things weren’t always so difficult. For most of the five years since the FTA was signed, New Zealand businesses have seen windfall profits, with exports almost tripling from $NZ2 billion ($A1.75 billion) a year to $NZ6.9 billion in 2012. According to Prime Minister John Key, the country has done more business in five years than in every year prior to that combined.

In dairy, the FTA proved decisive. The Sanlu melamine scandal in 2008 almost coincided exactly with the removal of tariffs on dairy products under the agreement. Now up to half of all dairy products coming into China are from New Zealand and 86 per cent of milk powder hails from the isle.

However, the trade relationship has a narrow base. The biggest gap in the trade relationship is on the small to medium-sized enterprise level. As ANZ New Zealand Chief economist Cameron Bagrie points out, the gains have largely been felt by Fonterra. Other than that, "we’re hardly setting the world on fire". For smaller players, getting food and beverages across the border has been hard enough without the latest scandals.

And while big players like Fonterra can afford to smooth over their mistakes with the Chinese government, smaller players are being squeezed out of the game. Many may have no choice but to consolidate and get bigger as the increasingly concerned Chinese demand further assurances.

Put simply, exporters simply won’t be able to get their product into the country if they don’t control their whole supply chain. Their milk powder will have to be canned in New Zealand before it hits Chinese shores.

All of which is prompting a rethink back in New Zealand about how to manage the speed bumps. Five years into their FTA, the New Zealanders know the rewards for trading with China can be vast. But the relationship requires putting in great amounts of time, effort and resources.