Unprecedented access to Australia’s largest export market offers new opportunities for SMEs
The lankmark China-Australia Free Trade Agreement (ChAFTA) announced this week will assist Australia to broaden its export performance and provide new opportunities to SME exporters, by delivering unprecedented access to China’s burgeoning agricultural and services markets. Australia’s exports to China have expanded by an average 25% per year over the past decade — it is now by far our most important export market. But surging exports to China have been heavily dominated by resources.
After nearly a decade and 21 rounds of intense negotiations, Australian Prime Minister Tony Abbott and Chinese President Xi Jinping shook hands on a comprehensive free-trade agreement this week. ChAFTA allows for 85% of Australian goods exports to enter China tariff-free upon entry into force, rising to 93% in four years and 95% on full implementation. While many of the details are still to be finalised (official documents will be signed in 2015), the Government estimates the deal will generate $18b in economic benefits over a decade (1.1% of GDP).
ChAFTA completes the government’s ‘trifecta of trade’ with Australia’s three largest export markets after securing similar agreements with Japan and South Korea earlier this year. These three North Asian markets collectively accounted for more than half of Australia’s exports last year.
The unprecedented importance of the Chinese market
Australia sold a record $102b worth of exports to China last year, making it our most important export destination (32% total). Indeed, Australia sold more goods and services to China last year than to the next four export markets combined (Chart 1).
Exports to China have significantly outgrown those to Australia’s other key trading partners — expanding by an average 25% per year over the past decade (Chart 2). By contrast, over the same period annual exports to ‘other’ markets have increased by an average of only 5%. As a result, the concentration of Australia's export destinations has increased dramatically — now more than ever, China’s economic fortunes are critical to our own.
Even with growth subsiding from double digits to around 7.5%, the IMF expects China’s US$17.6tn economy to overtake the US this year, to become the largest in the world in purchasing-power-parity terms.
Despite gradual economic slowdown, an extraordinary surge in China’s middle class — expected to expand by 400 million people over the decade to 2022 — will continue to drive healthy growth in private consumption and spur Chinese demand for Australian exports.
FTA to help Australia broaden its strong export performance to agriculture and services
Chinese demand for Australian exports has been focused on resources over the past decade. Australia’s minerals exports to China have increased almost 20-fold over the last 10 years, fuelled by China’s rapid industrialisation and urbanisation. But Australia’s exports of other goods and services have been more subdued (Chart 3).
ChAFTA provides significant benefits to Australia’s resources and energy exports. On entry into force, 93% of Australia’s current resources, energy and manufactured exports will enjoy duty-free entry into China, increasing to 99.9% on full implementation. Importantly, the recently imposed 3% coking coal tariff will be removed immediately and the 6% tariff on thermal coal will be phased out within two years.
But a free trade deal with China will also boost Australia’s non-resource export competitiveness and promote diversification of exports. As widely expected, ChAFTA delivered greater access to China’s burgeoning agricultural and services markets in particular. This should help Australia rebalance growth towards non-resources — an important economic cushion as the mining boom ends.
China is expected to account for almost half of a 75% increase in world food demand between 2007 and 2050. While resource constraints will curtail Australia’s ability to become a ‘food bowl of Asia’, there may be a competitive position for Australia as the ‘delicatessen of Asia’. Already Australian businesses are winning niche sales in premium markets by trading on the clean and green image of the ‘Made in Australia’ label. Indeed, Australia's agricultural exports to China have almost tripled over last the five years to a record $8.7b (Chart 4). China is now our most important agricultural export market.
But there remains significant scope for expansion.ChAFTA will cultivate export opportunities by removing import tariffs on a range of Australia’s agricultural products in coming years. In particular, tariffs as high as 20% will be abolished on dairy products within four to 11 years. Australia’s beef farmers will gain from the removal of tariffs ranging from 12-25% over nine years. Tariffs on sheep meat of up to 23% will be phased out over eight years. Restrictive tariffs on Australian wine, horticulture and seafood will fall to zero mostly within four years.
China is also the most important destination for Australian service exports — at around $6.9b in 2013, China accounted for 12% of total services exported. This has been driven by rapid increases in travel and education exports — which have increased by an average of 17% and 12% a year respectively over the past decade (Chart 5).
The government stresses that ChAFTA secures ‘the best ever market access provided to a foreign country by China on services’. Australian operators will enjoy greater latitude to build and operate private hospitals and nursing homes, the higher education sector will be allowed to market directly to Chinese students, tourism operators will be allowed to buy restaurants and hotels, and Australian insurance companies will get access to the third-party motor vehicle insurance market.
Delivering improved international competitiveness
ChAFTA will reinforce export momentum and provide Australia’s exports an advantage over major competitors from the US, Canada and EU. It also places Australia on equal terms with competitors from countries like New Zealand and Chile that have already negotiated trade deals with China.
For instance, Australian beef exports to China are currently taxed almost 19%, while comparable exports from New Zealand enter the Chinese market almost duty-free. ChAFTA will counter this advantage over coming years, and provide Australia the same terms offered to any other country that signs a FTA with China in the future.
Others successful in securing FTAs with China have benefited from large increases in trade flows. For example, China’s imports from New Zealand have grown over 450% since the China-New Zealand FTA entered into force in October 2008. China’s total imports increased only 50% over the same period (Chart 6).
ChAFTA also means that 95% of Chinese goods imported into Australia will be duty-free after four years — delivering significant savings on input components. This will reduce the cost of doing business and lift Australia’s export competitiveness.
Separately, Australia and China also signed a Memorandum of Understanding this week to establish official renminbi (RMB) clearing arrangements in Australia. This will enable Australian exporters to conduct cross-border RMB transactions more straightforwardly — with the potential to reduce the costs of those transactions by between 2–3%, by reducing the need to hedge against forex risk. These measures are another win for Australia’s export competitiveness.
Supporting the ambitions of Australia’s optimistic export sector
Research indicates that Australia’s rural exporters are already ambitiously targeting new opportunities in the Chinese market. The Australian International Business Survey found that 80% of agricultural respondents planned to expand overseas in the next two years. At 34%, China was overwhelmingly the most popular new target market (Chart 7).
This is despite three quarters of respondents also indicating that China is more difficult to do business in when compared to Australia. China performs relatively poorly in the World Bank’s measures of both Ease of Doing Business and Governance compared to other key export markets (Chart 8).
But evidently the payoff is worth the challenge. These trade policy developments will improve market access and help Australian exporters realise the full potential of what will soon be the world’s largest economy.
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Cassandra Winzenried, Senior Economist
Photo credit: © David Gray / Reuters / Picture Media