When Trade Minister Andrew Robb and his record delegation of 600 businesspeople land in Beijing next week, the trip will coincide with Tony Abbott’s visit to China, Japan and South Korea.
Having already concluded a free trade agreement with Seoul that needs only formal ratification, a breakthrough with Japan and China is needed to achieve the trifecta of FTAs that was pledged by the end of the year.
Although a breakthrough with Tokyo could be imminent, an agreement with Beijing by the end of the year is unlikely. But this may be a blessing in disguise. Unlike Japan and South Korea, the Chinese political economy is in flux. Reform-minded Chinese Premier Li Keqiang seeks to transform the country’s economic model. Until we are in a better position to know whether he succeeds, rushing into one will needlessly weaken Australia’s negotiating position, while putting an Australia-China FTA on hold could well lead to a better agreement into the future.
A sticking point is that Australia would like greater access to China’s highly protected agricultural sectors.
In response, Beijing is unlikely to yield significant ground on these sectors without Australia granting the concession that foreign direct investment by Chinese firms into Australia will not be subject to Foreign Investment Review Board scrutiny for amounts under $US1 billion — the same concession granted to major economic partners such as the US, New Zealand and, more recently, South Korea under the terms of the impending FTA with the latter. Beijing is also likely to demand a watering down of restrictions against Chinese firms such as Huawei on national security grounds.
For Australia, Chinese agricultural sectors are particularly important. While average duties imposed on Australia’s non-agricultural exports to China are a minuscule 0.2 per cent, with iron ore exports attracting no tariff, agricultural exports to China attract average tariffs of more than 21 per cent. If Australia wants to be a food bowl for Asia, our capacity to competitively sell to the Chinese market is critical.
China’s rising demand for food and Australia’s excess agricultural capacity would seem to be a natural economic match made in heaven. Yet Beijing retains an obsession, a legacy of the Mao Zedong years (1949-76), with self-sufficiency in agricultural policy.
Since it joined the World Trade Organisation in 2001, the Chinese government has increased its expenditure in agricultural research and development more rapidly than any country. Despite the investment, farming productivity and technologies are far behind that of advanced economies such as Australia and the US. Even many of its larger farms are inefficient and economically unsustainable.
More recently, the country’s 12th five-year plan (2011-15) reaffirms that the government is committed to attaining self-sufficiency across a broad spectrum of foods.
For example, Beijing insists that it should be 95 per cent self-sufficient in corn, wheat and rice. Protective policies are put in place to ensure that the country is almost totally self-sufficient in beef, pork and poultry. In fact, China’s previously stated goal is to be a net exporter of meat products, wheat and rice by 2025. This means that Beijing is keen to purchase foreign expertise and technologies to improve domestic productivity in these sectors but is resisting importing these products. This is despite a consensus among its own agricultural economists that such expensive and inefficient policies do not enhance the country’s food security.
Accessing many of these agricultural export sectors are critical for Australian farmers. But until the political mindset of agricultural self-sufficiency shifts, Beijing is unlikely to offer meaningful concessions in these areas to Australia.
Even if an agreement covering these sectors is concluded with tariffs slashed or eliminated, Beijing’s other approach is to use regulatory hurdles to restrict the import of agricultural goods. For example, Beijing banned American beef in 2003 after Chinese authorities discovered the existence of mad cow disease that was traced to just one cow in Washington state, and has yet to comprehensively relax the ban. Beijing banned American pork that uses small amounts of growth-inducing chemicals, even as Chinese farmers use the same or similar hormones.
To be sure, Li is sympathetic to calls for the “rationalisation” of Chinese agricultural policy and an end to the autarkic mindset. But this means that rural household income — already one-third of urban counterparts — will take an immediate hit. To prepare the way, Beijing needs to wind back the privileges of the centrally and locally managed state-owned enterprises to support the tens of millions of fledging small and medium private firms.
Doing so would help spread commercial opportunity and the fruits of economic growth, and raise across-the-board incomes including in rural areas at the expense of dominant SOE firms.
Until this is done, it will be difficult for Chinese reformers to weaken the suite of protective agricultural measures, let alone abandon hopes for self-sufficiency so ingrained in policy.
Opening its agricultural sectors is therefore just one part of a larger reform story, and will not happen in isolation. If Li succeeds in the bulk of his reforms, then Australian agricultural products eventually will be welcomed into the Chinese market with or without a trade agreement.
As record sales of iron ore suggest, the lack of an FTA will not prevent China from buying what it needs. And China will increasingly need our food.
Meanwhile, setting a timeline for an agreement seems neither wise nor feasible. For the moment, Beijing will attempt to use intransigence in protectionist agricultural policy as a bargaining tool to enhance its leverage in ongoing FTA negotiations. For the Abbott government, encouraging the reform process and exercising patience are keys to a good future trade agreement with China.