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Pragmatic China Deal Proves Critics Wrong

Pragmatic China Deal Proves Critics Wrong

John Lee

The free trade agreement with China is a significant achievement given overhyped fears that the Coalition’s security policies favouring deeper strategic engagement with countries such as the US and Japan would damage economic relations with our largest trading partner.

On the contrary, China signed what appears to be the most comprehensive FTA with any country, confounding the simplistic logic that enhanced security relation with one country will lead to deteriorating economic relations with another.

Caught up in the excitement of such an agreement, much Australian commentary is now changing tack, proclaiming that the FTA represents not just a new era in Australia-Sino relations but clear evidence that China has changed course, pursuing genuine domestic reform and is unreservedly embracing the regional and global open-trading system.

While signing the FTA is in Australia’s national interest and will enhance opportunities for many local firms, the agreement signals no such seachange. It is a bargain based on pragmatism rather than common values, and significant obstacles remain.

Take the breathless proclamation that this is a transformative event in Australian-Sino economic relations. Yes, there is a deal but resolution of significant disagreements will need to be confronted later. No concessions were given to local wheat, rice or sugar farmers. On the other side, the Abbott government held firm against Chinese insistence that foreign direct investment by Chinese state-owned-enterprises be exempt from scrutiny by the Foreign Review Investment Board for amounts less than US$1 billion — a concession that Beijing wanted more than any other.

When these issues are revisited in three years’ time as planned, you can bet that Beijing will be in a less compromising mood — using tariffs against the yet to be exempted Australian agricultural goods as leverage in negotiations. The reason is that helping its SOEs buy into world-class firms from advanced economies is an explicit part of the country’s industrial policy to hasten the transfer of technology and know-how to Chinese SOEs, which is considered essential if China’s inefficient and less innovative SOEs are to become world-class firms.

Moreover, in refusing an exemption for SOEs but granting one to Chinese private firms, the Abbott government has signalled SOEs are to be treated as entities of the Chinese state. While this is a prudent assessment — considering the way SOEs are governed and their senior management appointed by Chinese Communist Party committees — it is hardly evidence Australia has shed its discomfort with the state-dominated Chinese political-economy.

Then there are the post-agreement obstacles. China’s record of sticking to deals is inconsistent. Just before the concession to Australian beef producers was signed, China reaffirmed longstanding domestic policy that it would be self-sufficient in beef, as well as pork, poultry, wheat and rice, by 2025. The concession was given because the rapid demand for beef by Chinese consumers cannot be met by domestic producers in the short to medium term.

Yet, we have many examples of what happens when importers gain a strong foothold in industries considered important to Beijing. In 2003, it banned American beef (largely at the request of domestic beef producers) after Chinese authorities discovered the existence of mad cow disease in just one animal, and has yet to relax the ban even now. This is part of a well-practised strategy that China has followed with many trade partners, including some with whom it has signed FTAs. Agreements tend to emphasise reducing or eliminating tariffs as has been done with this FTA. Having done so, Beijing has frequently resorted to using ad hoc regulatory or legal hurdles to restrict the import of goods and services, as well as weaken the market position of foreign firms.

Other protectionist strains are emerging. The political use of antitrust laws passed in 2008 has been applied to international firms such as Microsoft that are making too much ground in the domestic market as far as China is concerned. It is no coincidence that licensing requirements become more onerous after FTAs have been signed to “regulate” foreign entry and access even after tariffs have been eliminated.

All this is not reason to dismiss the FTA since Australian firms will benefit hugely in sectors not subject to Chinese political interference. The point is that Beijing knows exactly what it seeks to gain by signing the agreement and offering concessions — and under what circumstances such concessions might be drawn back.

Neither is the FTA signalling the beginning of a major genuine reform process about to blossom within China, and arguing that a trade agreement with Australia represents such a shift overstates our place in China’s worldview.
Finally, if there is no true meeting of minds and hearts between Australia and China, at least pragmatism won the day with this trade agreement.

Contrast this with the false idealism of Barack Obama’s climate change “grand compact” with China. Having ambushed a hostile Congress with the deal, the US President knows that American caps on carbon emissions are unlikely to ever be passed into law.

The vague promise by China that its emissions will peak by 2030 was something that Beijing’s own modelling suggested would occur as a result of “business as usual” combined with demographic realities. Unlike Obama’s pledge, a smiling China knows that no state intervention will be needed if it indeed achieves that goal. In a region where the cunning of America and China is obsessively compared, it’s been a good week for Beijing.

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