Sino-Australian Trade Deal Boosts Exports Beyond Mining

Australia will reach a free trade deal with China tomorrow, cementing ties with its biggest economic partner and reducing its reliance on resource exports.


“The free-trade agreement to be announced tomorrow with China will be a game changer,” Josh Frydenberg, parliamentary secretary to the prime minister, said in an interview in Brisbane today.

 

“Opening up the Chinese economy in various sectors, including services and agriculture, to Australian exports, is going to be really beneficial.”

 
Australia is the most China-dependent developed economy in the world, with exports to the nation accounting for 5.3 percent of gross domestic product, according to Commonwealth Bank of Australia.

 

Two-way trade, which reached A$151 billion ($132 billion) in 2013, has been driven by China’s insatiable appetite for resources and energy, while Australia mainly buys cheap Chinese manufactured products.

 
“There is the distinct possibility of a knee-jerk lift in the Australian dollar upon the announcement,” said Richard Grace, chief currency and rates strategist and head of international economics at Commonwealth Bank, the nation’s biggest lender. “Both the Australian and Chinese economies are likely to benefit from these developments, but Australia’s smaller economy will benefit proportionally more.”

 
Chinese President Xi Jinping will be in Canberra tomorrow to deliver an address to the Australian parliament.

 
‘Great Significance’

 
“We all are anticipating that during President Xi’s state visit, he and Australian Prime Minister Tony Abbott will oversee the signing of an agreement that is of great significance to the two countries’ economic relations,” China’s Vice Finance Minister Zhu Guangyao said in Brisbane, where Group of 20 leaders met yesterday and today.

 
Negotiations on the trade deal began in 2005 and languished under the previous Labor government. Abbott, who was elected in 2013, imposed a target to sign it by the end of this year. The FTA would be the third that Australia has reached this year following agreements with Japan and South Korea.

 
China supplied 20 percent of Australia’s A$256 billion of imports in 2013 and bought more than 35 percent of its exports last year, International Monetary Fund data show.

 
Under the deal with Australia, China has agreed to reverse higher duties it recently imposed on Australian coal exports: the coking coal duty will be cut to zero and the thermal coal duty to 4 percent from 6 percent and then phased out across two years, the Australian newspaper reported yesterday. It said Australian agricultural exports including beef, most grains and seafood will see tariffs cut to zero between now and 2021.

 
China Transition

 
Australia’s exports to China will need to adjust as the government in Beijing engineers a transition to consumption-led growth from fixed investment. That will require Australia to market its services industries to China rather than digging holes in the ground.

 
While services account for about 70 percent of Australia’s GDP, they made up just 17 percent of exports in the 12 months through June 2013, government data show.

 
Some companies are already adapting to the change and diversifying away from mining.

 
Gina Rinehart, the Australian billionaire who built her fortune on iron ore, is planning a A$500 million investment to supply infant formula to China
Hope Dairies Ltd., controlled by Rinehart’s closely held Hancock Prospecting Ltd., is seeking to acquire about 5,000 hectares (12,400 acres) of farmland in Queensland state and is targeting first production in the second half of 2016.

 
Middle Class

 
The move comes as Australian miners including Fortescue Metals Group Ltd.’s Andrew Forrest expand into food production to tap rising demand from Asia’s middle classes. It positions Rinehart, the richest woman in Asia, to compete in an infant formula market in China forecast to swell after the world’s most populous nation loosened its one-child policy last year.

 
“The FTA will deliver a net benefit to both the Australian household and business sectors. Most of the benefits will take time to deliver a material impact, but some of the benefits will be immediate,” Commonwealth Bank’s Grace said. “Australian households are expected to benefit through the removal of up to A$1 billion of tariffs imposed on Chinese-made clothes, shoes, cars, components and electronics.”

 
Source: Bloomberg / Nov. 16, 2014

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