Chafing at the bit for ChAFTA: Why China-Australia free trade matters
Something happened in the Australian political scene when I was away last week. The issue of the Chinese Australia Free Trade Agreement (ChAFTA) hit fever pitch.
And guess where I was? I was in China. Specifically I was in Shanghai, Xian in northwestern China, and Hong Kong teaching an AGSM MBA programme and talking with various companies, both Australian and Chinese, about the stock market, the exchange rate and ChAFTA.
On the Chinese side, there were some jitters in the Shanghai stock market but as these are small traders with no institutional investors, it is expected not to greatly affect the real economy in China. At Baosteel, they bemoaned the price of iron ore, and the wish to capture global supply chains controlled by Brazil and Australia but the hot steel kept rolling through the factory.
The steelmakers and other Chinese industrialists did welcome the recent devaluation of the yuan as helping Chinese industry but they still aim to transition away from being a “nation of shippers” reliant on exporting to a “nation of shoppers” by boosting consumption.
Out west in Xian, director Fu Hua from Intel said he believed the strong growth in the second- and third-tier cities would counterbalance any drop off in Shanghai and Shenzhen. That is why Intel has R&D facilities in Xian (as does Johnson and Johnson) and manufacturing in Chengdu.
In fact, second- and third-tier cities have created a boom for Australian construction businesses and architects like Hassells (which employs 600 people in China). As Beijing directs economic activity westwards, demand for infrastructure grows and Australian services providers in building and construction, architects and designers are helping to build “the great mall of China”, and the roads, airports and civic buildings.
Overall, on the Australian side, most Australian exporters support ChAFTA. According to DHL Export Barometer, around 58 per cent of exporters think an FTA with China will have a positive effect, 41 per cent support an FTA with Japan and 38 per cent think the FTA with South Korea will have a positive impact.
There are some issues that need to be looked at in detail regarding ownership of land, investor provisions and labour market testing. On some of these issues, we need to proceed with caution as state-owned enterprises do possess monopoly power and can distort markets in other countries
These figures generally improve over time if we look at experience with the US and Asean trade pacts. While business representatives I spoke to at Austcham Shanghai see the need for an agreement, there was a view that Trade Minister Andrew Robb had “rushed in a bit” and made some concessions to the Chinese government “that he didn’t need to make”.
In fact, the main concerns with ChAFTA concern the labour market. Overall, having an open economy is good for workers. My research at UNSW shows that exporters, on average, pay 60 per cent higher wages than non-exporters, have better occupational health and safety and equal employment opportunity standards, spend more on education and training, and are more productive and profitable as a result.
Under an open economy, Australia has created more jobs than has been lost, exporters create higher quality jobs and most jobs with exporting companies are unionised. Overall we need this dynamism in the labour market that an open economy brings.
And as a former research officer of the Australian Council of Trade Unions, I obviously cannot be accused of being anti-union or anti-worker. But there are some issues that need to be looked at in detail regarding ownership of land, investor provisions and labour market testing. On some of these issues, we need to proceed with caution as state-owned enterprises do possess monopoly power and can distort markets in other countries.
In case of labour market testing we don’t need it to undermine labour standards. For example, in some limited cases, China may need to use executives and managers like they do on mining and infrastructure projects in Mongolia, Africa and Latin America.
But we don’t want trade agreements to adversely affect labour standards and the provision of public goods and labour market testing could be tackled without affecting ChAFTA.
And as a former chief economist of the Australian Trade Commission (Austrade), I cannot be accused of being anti-trade either.
All in all, ChAFTA will bring important benefits to Australian exporters in China. Having a 48 per cent tariff like an albatross around the neck of some Australian exporters – particularly in the agribusiness sector – is too much of a burden, especially when they are competing with the likes of Chile and New Zealand who already have an FTA with China. Remember Australia is not alone negotiating with China in a vacuum; over 125 countries on earth have China as their No 1 trading partner, just as we do.
Australia has been one of the world’s most successful open economies – and reliable trading partners of China – in the past 25 years. Opening up to trade has been a positive step for business, workers and consumers but we need to support our economic and social institutions – particularly in the labour market – that have enabled Australia to be such a successful open economy.
Tim Harcourt is JW Nevile Fellow in Economics at UNSW Australia Business School and author of The Airport Economist and Trading Places
