The long march to the China FTA

When Trade and Investment Minister Andrew Robb was about to walk into a meeting at Deakin University to talk about the Competitiveness Agenda last Thursday, he got a long-awaited phone call from Jan Adams, Australia's lead negotiator for a China free trade agreement.

Adams told Robb that the Chinese commerce minister was happy with Australia's proposition and that both countries could finally conclude their decade-long trade negotiation marathon. “I was in a pretty good mood,” Robb told the Business Spectator.

During the final hours of negotiations with the Chinese, the last remaining issue was around dairy products. Australia wanted a deal that is at least just as good as New Zealand's, which has been enjoying a milk bonanza from its trade with China after signing a free trade agreement.

Robb said there were two issues, one of which was around safeguards. Australian negotiators managed to win major concessions from the Chinese on the last issue. Under the signed deal, most Australian dairy products will not be subject to the protective safeguards which current apply to New Zealand dairy exports to China. 

So in the end, Australia ended up with a New Zealand-plus agreement on dairy products.

Apart from major breakthroughs in the agricultural sector, China is also set to grant Australian companies unprecedented access to the country's booming services sector. 

The deal has surprised many people including Professor Hugh White, an academic at the Australian National University and a former deputy secretary at the Department of Defence, who has been a vocal critic of the government's foreign policy towards China.

White wrote that Abbott had won his free trade agreement with China despite his enthusiastic alignment with Japan and America to resist China's regional ambitions. 

When Abbott announced the ambitious agenda to conclude free trade agreements with Korea, Japan and China, many were sceptical about whether the government was only interested in a so-called 'photo op' agreement.

The negotiation with China started under the Howard government in 2005 and languished for many years. The prospect of a conclusion didn't seem promising at the time. The agricultural offer was the same one that was made to the previous Labor government back in 2006, Robb said. 

It is understood senior Australian public servants even advised the former Treasurer Wayne Swan on a potential exit strategy from the free trade negotiation, because it was proving to be diplomatically damaging for highlighting the major differences over the treatment of Chinese state-owned enterprises under Australia's foreign investment regime.

The Chinese had been demanding fairer treatment for state-owned enterprises investing in Australia from the beginning. Canberra had toughened its policy stance over Chinese state investment after Chinalco launched an audacious bid for a large share of mining giant Rio Tinto and some its crown jewel assets.

Beijing has publicly complained about the discriminatory treatment of Chinese state-owned enterprises and the issue is one of the major stumbling blocks for moving the free trade negotiations forward. So in order to conclude a deal in time for Chinese president Xi Jinping's state visit in November, the issue needed to be resolved.

The breakthrough took place in May during a meeting between Andrew Robb and the Chinese commerce minister Gao Hucheng.

“That was the real turning point,” Robb told Business Spectator. “They were looking for concessions on SOEs and we had been going around in circles for a couple of months.”

As part of the trade poker game, Robb asked the Chinese to make concessions on tariff rate quotas, which cover sensitive agricultural areas such as rice, sugar, grain and cotton. The tariff is a trade policy tool used to protect China's domestic industry from competitive foreign imports.

Robb said: “I can't move on SOEs unless I can see some progress on these products.”  His counterpart then suggested that Beijing would drop the demand for equal treatment of state-owned enterprises if Australia would leave out politically sensitive agricultural products like sugar and rice.

“This sounds like a fair deal, but only if we have an agreement in the free trade agreement to revisit all these issues and the rest of the agreement in three years time,” Robb told the Chinese commerce minister, who then nodded in reply.

It was this exchange that led to the current two-stage free trade agreement formula. Australia and China have managed to shelve ultra-controversial topics like state-owned enterprises and protectionist measures around agricultural commodities like rice and sugar.

The minister explained how sensitive the Chinese were about protecting their subsistence farmers from cheaper Australian imports.  “The fact that they were prepared to put aside SOEs, which they have talked about for a very long time, it told me in the most profound way about the sensitivity around these areas,” he said.

Business Spectator can reveal that China's major sugar producing province had lobbied Beijing to increase tariffs on imported sugar. A senior Ministry of Commerce official said the province wanted to lift sugar tariffs from the current 50 per cent to 98 per cent. 

Guangxi is a relatively poor province in south-western China, that produces 66 per cent of the country's sugar. The industry employs 20 million people out of a total population of 52 million.

“If we reduce tariffs on sugar, it will have a huge impact on our cane growing industry. Even with a tariff at 50 per cent, imported sugar still poses a threat. Can you imagine if we further reduce tariffs, it will completely decimate Guangxi's sugar industry,” a senior Chinese official told Business Spectator.

Once Robb and his Chinese counterpart removed the biggest political roadblock, Australian and Chinese negotiators were able to move on to hammer out the details of the deal.

The services industry has been impressed by China's willingness to grant unprecedented access to the country's booming consumer market. Business Spectator asked the Minister what had prompted the Chinese to make these concessions.

The short answer is self-interest and a bit of clever diplomacy. The Chinese government is in the middle of implementing an ambitious program to transform its economy from an export-oriented and manufacturing based economy into a services economy.

The transition is not easy and Beijing has to deal with a myriad of challenges such as pollution. Robb pitched to the Chinese that Australia could help you to make this transformation. “I'd be saying you have got to open up services, we've got something that will benefit us -- it is to get services in, but it will benefit you, because you need to come up in your services capabilities and we can help,” he said.

In order to soothe Chinese concerns about the potential impact of opening up the services sector, he used a Chinese policy analogy to present Australia's case. He told Beijing to treat Australia as a “special economic zone”.

“We're not big enough to swamp China with services and if it doesn't work in some areas, you can just say to others they were a special economic zone -- we are not giving it to you, but we will do the things that do work,” he said. The Chinese government often pilots reform programs in special economic zone to test the water before they rolling out policies nationally.

The Minister said his pitch seemed to have an effect on the Chinese and the services door opened up during the last two months. “It does prove to me that it is in their self-interest. They know the best way to get these services and that IP and expertise, skill sets, to train their people, is to bring in significant numbers of people who do know what they are doing.”

What also helped in sealing the deal was Andrew Robb's decision support the Chinese on several important issues. Despite the Abbott' governments antagonistic stance towards China, the trade minister is one of only a few cabinet ministers who has gone out his way to win hearts and minds in Beijing.

Robb and Malcolm Turnbull both supported a review on the previous government ban on Chinese technology giant Huawei taking part in the national broadband network. He and the Treasurer Joe Hockey also advocated for signing up to the Chinese-backed Asian Infrastructure Investment Bank.

A strong political commitment from the Chinese president and the Australian prime minister also played a key role in sealing the deal. Robb said political will on both sides were critical -- especially from the Chinese president. “The fact that Tony Abbott said publicly and unambiguously about signing these three agreements, sent a strong signal to Korea, Japan and China.”

After 21 rounds of negotiations that spanned across three governments and five prime ministers, Australian negotiators finally clinched the deal. A staffer who was with Robb at the time Jan Adams called, said the minister was visibly relieved.