The China Australia Free Trade Agreement (ChAFTA) is a game changer for Australian companies involved with China as it paves the way for easier trade between the two countries. This bilateral agreement will not only put Australia on a level playing field with other nations who have already signed FTAs with China, it will also put Australia at an advantage over some of the major competitors in the Chinese market.
What opportunities and benefits does the ChAFTA bring businesses?
China is Australia’s largest two-way trading partner – it’s our largest export destination and largest source of imports. The two-way trade was valued at over $150 billion in 2014, accounting for 23% of Australia’s total trade with the world. This agreement is set to unlock significant opportunities for Australia as the barriers to trade and investment are significantly reduced. Under the agreement, over 86% of Australia’s exported goods to China will enter tariff-free now, rising to 94% by 1 January 2019 and 96% when the agreement is fully operational (1 January 2029).
Through the reduction and/or removal of tariffs on Australia’s high quality goods and services, our exports will be more competitive in the ever-growing Chinese consumer market whilst Australian businesses and consumers will benefit from cheaper imported goods as tariffs are eliminated on Chinese imports.
It is well known that China is a highly restrictive market. Breaking into the Chinese market has long seemed like an impossible task for foreign companies with limited or no experience of doing business in the region due to the sheer size and scale of the market (with China’s population of over 1.37 billion people) as well as the complex web of laws and regulations across the various industries in the region. These factors have also led to the failure of many foreign companies who couldn’t navigate and manage the complicated and regulatory environment.
The China Australia Free Trade Agreement is a game changer for Australian companies involved with China as it paves the way for easier trade between the two countries.
Luckily, the signing of this agreement will see Australian business better equipped to operate and expand in the Chinese market as the trade agreement will secure and improve access for Australian service providers in the region.
An estimated 5,600 Australian SMEs are currently doing business directly with China, with another 4,800 SMEs trading with China through Hong Kong and a further 3,000 SMEs having a physical presence in the country. For these companies and the ones looking to expand into the market of our biggest trading partner, the signing of the China-Australia Free Trade Agreement presents significant opportunities, particularly for our key industries such as agriculture, manufacturing, services, investment, resources and energy.
What the China Australia Free Trade Agreement means for our key industries
Agriculture and Food Processing: China is currently Australia’s largest agricultural export market and the region’s desire for high-quality agricultural and food products is growing rapidly. The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) predicts that China will account for 43% of global growth in agricultural demand by 2050; in 2014-15, this market was worth $9 billion to the Australian agricultural sector.
In the past, Australian producers and exporters have been at a competitive disadvantage compared to other countries that have FTAs with China in place due to the significant tariffs these exporters faced. The new agreement provides Australia with an advantage over our major agricultural competitors, including the US, Canada and the European Union, whilst also countering the advantages Chile and New Zealand currently enjoy through their FTAs with China.
ChAFTA has completely eradicated tariffs on barley and sorghum (as of December 20th, 2015) and will also see a rapid reduction on other agricultural exports such as seafood, sheep meat, pork and a variety of horticulture. The trade agreement will see tariffs for beef imports (currently ranging from 12-25%) eliminated by January 2024, tariffs on sheep and goat meat (12-23%) ended by January 2023, tariffs on dairy products (up to 19%) removed between January 2019 and 2026 and tariffs on Australian pork (up to 20%), wine (14-20%) and spirits (up to 65%) removed by January 2019, as well as the removal and/or reduction of many other tariffs currently affecting the industry.
Resources, Energy and Manufacturing Products
China is Australia’s biggest export market for resources, energy and manufactured goods – exporting over $70 billion worth of products to China in 2014. The trade agreement will provide greater certainty for exporters in the industry by locking in current zero tariffs on some of our major resources and energy products, including iron ore, gold, crude petroleum oils and liquefied natural gases.
Tariffs will also be cut or reduced on a number of other resources and energy products, including the elimination of the 3% tariff on coking coal (Australia’s third largest export to China, worth $2.5 billion in 2014), elimination of the 6% tariff on thermal coal by January 2017 and the elimination of the 1-2% tariffs on unwrought refined copper and alloys, among many others.
ChAFTA will create significant opportunities for Australian manufacturers as tariffs are reduced or eliminated to make Australian manufacturers more competitive in this ever-growing market. The agreement will see the elimination of the current 3-10% tariffs on pharmaceutical products, tariffs on car parts and engines of up to 20%, 6.5-14% tariffs on plastic products, 3 and 8% tariffs on precious stones (including opals) as well as the elimination of current tariffs on medical technology, aluminium, beauty products and many other manufactured products by January 2019.
China is Australia’s largest services export market, with the industry worth $8.8 billion in 2014. ChAFTA will deliver China’s best ever service commitments, including the provision of significantly improved market access that has not been included in any of China’s previous FTAs with other countries. The industry sectors that will most benefit from the agreement include Australian banks, insurers, law firms, professional service providers, education, aged care, health, construction, tourism, manufacturing and telecommunications services.
Legal Industry: The agreement will allow Australian law firms to establish commercial associations with Chinese law firms in the Shanghai Free Trade Zone, allowing these companies to offer Australian, Chinese and International legal services, without restriction on where clients must be located.
Education: The trade agreement will grant Australian private higher education providers with greater access to China’s higher education market as China will list Australian private higher education institutions on a key Ministry of Education website in the region.
Health and Aged Care: The healthcare and aged care services industry will be allowed to establish wholly-owned Australian hospitals in the cities of Shanghai, Beijing and Tianjin as well as some other listed provinces. Australian-owned aged care facilities will also be able to be established throughout China, without any locational restrictions.
Construction and Engineering: China has guaranteed market access to Australian construction and engineering companies established in the Shanghai Free Trade Zone (SFTZ) to undertake joint construction projects with Chinese counterparts in Shanghai. Australian companies will also be exempted from business scope restrictions, giving them the ability to work on a wider range of projects in the region.
Tourism: China has guaranteed that Australian tourism service providers will be allowed to construct, renovate and operate wholly Australian owned hotels and restaurants in China. Australian tour operators and travel agencies will also be able to open wholly Australian-owned subsidiaries in the region, opening up a world of opportunity for businesses in the industry.
Manufacturing: China will guarantee access for Australian-owned subsidiaries to provide contract manufacturing services for a wide range of manufactured products. This will provide certainty for Australian investors in the sector and ensure the competitiveness of Australian companies in the Chinese market.
Telecommunications: The agreement will guarantee market access for Australian companies investing in specific value-added telecommunications services in the Shanghai Free Trade Zone. This will allow Australian-owned enterprises to supply Chinese domestic multi-party communication services, application store services, store and forward services and call centre services; it will also provide Australian telecommunication providers with improved foreign equity limits and guaranteed access to participate in joint ventures in the SFTZ to supply online data and transaction processing services.
The China-Australia Free Trade agreement gives us unmatched access to a highly restrictive market; however, Australian businesses need to take advantage of these concessions as quickly as possible in order to secure first-mover-advantage as China is busily obtaining similar agreements with other trading partners around the globe.
Further information can be found here.