China's coal stance ups the FTA ante

China's position on coal imports shows that it is ready to drive a hard bargain in FTA negotiations. Our miners have a right to be nervous.

Australia has just had an illuminating lesson in Chinese negotiating tactics. Now we just have to wait a little while to find out exactly how skilful their methods are.

Less than two weeks after it announced a levy on coal imports -- which would have had a much greater impact on Australia than other countries -- China has promised to repeal the tariff on Australian coal imports, once a free trade agreement between the two countries is reached.

This puts Tony Abbott in an especially awkward position. He’s been quite open in saying the FTA is on track for a November sign-off when Chinese President Xi Jinping will visit Australia for the G20 leaders' meeting. If it isn’t finalised in the coming weeks, it’ll be pretty embarrassing -- right at a time when global eyes will be focused on the G20.

There’s been some debate on whether the coal tariff was a last-minute bargaining chip or if it was more to do with China’s attempt to clean up its energy act.

Some argue that China imposing a resource tax on its struggling coal industry shows how serious it is about combatting the country’s worsening environmental crisis, and a tariff is just another step in that direction. But looking beyond the headlines makes for interesting reading.

At the same time as China is imposing the new tax, its Ministry of Finance and the State Administration of Taxation have advised that the government will eliminate the current mineral resource compensation levy and will also stop collecting other fees for the coal, oil and gas sectors starting December 1.

In addition, the new resource tax will be on the sale of coal, not coal production. What’s more, individual provinces will be allowed to set their own tax rates within the range of 2 to 10 per cent. This will surely be welcomed by China’s coal producers, since it allows coal mining regions such as the Shanxi province to apply for the lowest possible tax rate.

While there are genuine forces within China trying to cut down on coal by targeting foreign companies rather than local companies, the fact that Beijing directed a lot of the tariff announcements toward Australia makes it clear this was more a negotiating tactic than anything else.

China has a history of focusing on a specific sector of importance to the country they’re negotiating with and flagging the prospect of a tariff or some other regulatory burden. We saw this in negotiations with the ASEAN-China FTA when China flagged the idea of putting some regulatory hurdles on incoming machine parts, which would have had a big impact on its partners. They didn’t do it in the end, but it was an effective negotiating tactic nonetheless.  

Even when China signs FTAs, there is a tendency to lower tariffs but impose regulatory burdens, which are not covered by the FTA. So while there might not be a formal tariff to pay at the door, once you get in there’s all sorts of barriers to deal with.

The protectionist line emerging in China towards its mining industry should be particularly concerning for the Abbott government because of the potential implications for our iron ore industry.

Rio Tinto and BHP Billiton are flooding the market with iron ore, which is pushing the price lower and putting intense pressure on China’s high-cost producers. We don’t know what China will do to protect its iron ore miners, but if its action on coal is any indication, we may soon see exactly what kind of message it wants to send to our big miners.