Can Abbott crack China's FTA challenge?

Tony Abbott said before the election that he will make China the second stop after Jakarta on his first overseas visit as prime minister. While the sentiment to make an early visit to our biggest trading partner, source of foreign fee-paying students and tourist spending is laudable, he should do so only after visiting Tokyo. Japan is in a state of existential anxiety over its diminishing world role and especially its declining power relative to its bigger neighbour and former colony.

Symbols of relevance and importance matter enormously to Japan these days, whereas China is confident in its rising power and status. It doesn’t seek reassurance from Australia or other smaller powers. But an early visit to Australia’s biggest customer is sensible (Flexing China makes for a cheery outlook, September 11). 

China will want to hear directly from the new prime minister what his vision is of the relationship and his expectations for it. Beijing will be looking for reassurance that the prime minister appreciates the mutual dependence that now exists in the economic relationship and hence the need for stable and consistent policies towards it.

An early visit also provides the opportunity to re-visit the free trade agreement negotiations afresh. After 19 rounds over eight years of inconclusive negotiations, a new government can set aside the negotiating approach, which has yielded so little. A new government will also have the political authority to deal with interest groups that may otherwise hold up negotiations with unrealistic and unrealisable demands. And China’s new leadership may well wish to use the conclusion of the FTA to mark a symbolic new phase in our bilateral relations.

The change in negotiating approach will require Australia to move away from the rhetoric of negotiating a “high-quality, fully comprehensive, liberalising” FTA. Former Chinese commerce minister, the now disgraced Bo Xilai, used to say to former Australian trade minister Mark Vaile, you are “too bookish, too stubborn”. Practically in the negotiations this has meant that the Australian side would not countenance carving out for exclusion any sectors or industries. This was something to which the Chinese could never agree. 

As our competitors in New Zealand, Chile and elsewhere have done, we will need to have a concise list of market access priorities to discuss with the Chinese. While it is anathema to Australian officials, the reality is that today everything cannot be on the table if we are going to conclude a negotiation.

The game has now changed. Australia was the first developed economy with which China agreed to commence negotiations (though New Zealand actually started negotiations before Australia). At the time, Australia was ahead of the pack and looking to steal a march on its competitors. Eight years later Australia is behind, playing catch up, trying to defend market share in China from competitors that now enjoy substantial preferential tariff margins.

The new government will need to use its political authority to decide on a list of negotiating priorities. These would obviously start with those items where our competitors have stolen a march on us – namely dairy, sheep meat, beef, wine and horticulture. We should aim to get as much access as our competitors achieved, but only where it is commercially sensible for us to do so. 

We should not (as happened in the US FTA with respect to beef quotas) use negotiating coin for access that we cannot supply. Similarly, while some industries will not be included in the initial list, notably sugar, excluded industries will be no worse off. The government needs to avoid being pressured into compensating industries that miss out – as happened with sugar in the US FTA – but are not disadvantaged by the agreement.

Australia has taken an ambitious position on financial services in the negotiations to date. We have real interests but China has refused to budge, hiding behind a fixed position that it can only negotiate if existing laws do not have to be changed to accommodate the outcomes. Again this will not change, but with Beijing about to embark on a new round of economic reforms and with financial sector reforms expected to be at the forefront, new opportunities might present themselves.

The long-standing demand that Australian banks be allowed to increase their equity preferentially in county and municipal banks will not be accommodated. But since the negotiations began, our banks’ interests have become much more diversified and complex. Licenses to conduct other types of business, which have been granted only to some foreign financial institutions, could be extended to Australian financial institutions. A deal on financial services, however, would probably only come at the very end and would probably require prime ministerial intervention.

The main coin Australia brings to the negotiations is the possibility of adjusting Foreign Investment Review Board thresholds for both Chinese state-owned enterprises and private investors. The Chinese demands are aggressive, but that is what one should expect at this stage of the negotiations. It was a major shock to the Chinese when former trade minister Craig Emerson announced unilaterally that investment would not be covered. 

Investment, including some form of investor-state dispute resolution, will have to be covered by the FTA. The Chinese understand that the final result will depend on the value of the package to Australia. The more there is in it for Australia, the more we should be prepared to give in this area.

More difficult politically for the new government is China’s request on movement of natural persons (skilled labour movement). Addressing this issue will require high-level political engagement with China to set out the sensitivities in Australia around this issue and the constraints on our government. 

The Chinese side understands that Australian ministers will need to be able to sell politically a package which is balanced and of real commercial value. But this is a long way from the “fully comprehensive” mantra of past approaches of Australian governments.

An FTA, however, involves a lot more than settling just the key market access issues. Over the years, while no result has been achieved, officials have done a great deal of work on the rules that will apply when, and if, an FTA is concluded. Consequently, if the market access issues can be settled, an agreement can be reached quickly now.

Whereas it is neither necessary nor wise for the prime minister to go to China ahead of some other countries, the new trade minister should make an early trip to Beijing to restart the negotiations. Beijing should be the first overseas port of call as no country matters to Australia commercially as much as China. Cabinet will need to approve the minister’s negotiating list of issues with full knowledge that there will be some political push-back from interest groups that feel left out. 

It is unlikely all issues could be resolved by the trade minister, but as much work as possible needs to be done by ministers to prepare the way for the prime minister to conclude the few remaining issues during his first visit to China, whenever that occurs.