China-Australia relations: coal, cotton curbs could violate trade rules, lawyers say

It was reported last week that Chinese authorities had started asking importers verbally not to buy Australian coal and cotton
The moves could violate World Trade Organization rules, as well as the China-Australia Free Trade Agreement

China-Australia relations

Su-Lin Tanin Singapore

Published: 4:30am, 20 Oct 2020

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China’s informal verbal prohibitions on Australian imports of coal and cotton could breach rules set out by the World Trade Organization (WTO), as well as the free trade deal between the two nations, according to trade lawyers.

Directing state-owned enterprises not to trade with Australian suppliers is viewed as a de facto barrier to trade, and contravenes WTO trading rules that stop members from discriminating trade with any country.

The moves against coal and cotton, which both emerged in quick succession last week, could also breach China’s WTO commitment which stipulates that it can only implement trade measures on another country after they have been made public and also made available to its trading partners, or in the extreme case of an emergency situation.

The two nations also have the China – Australia Free Trade Agreement (ChAFTA), which came into force in December 2015.

If the Chinese government, requires all Chinese enterprises not to import coal from Australia, it essentially means imposing a zero quota on Australian coal export to China

Jeanne Huang

“Currently, the facts of China’s measures are not clear. If the Chinese government requires all Chinese enterprises not to import coal from Australia, it essentially means imposing a zero quota on Australian coal exports to China. This likely violates the WTO and the China-Australia Free Trade Agreement,” University of Sydney ChAFTA expert Jeanne Huang said.

There have, however, been no indications from Canberra that it is considering filing complaints as they are still investigating the coal and cotton barriers. In May, trade minister Simon Birmingham did confirm Australia was preparing to take China to the WTO over its tariffs on Australian barley.

China has a “tariff rate quota” of up to 894,000 tonnes of cotton every year. If a country, such as Australia, is trading within that quota, it pays a tariff rate of 1 per cent, and then 40 per cent once its quota has been exceeded.

“In the boom years of the textile industry, China has voluntarily increased the tariff rate quota several times, but it‘s entirely up to China,” Singapore Management University associate professor of law Henry Gao said.

“The real problem is not with the amount of the quota, but how the quota is administered. As the administration is done by the Chinese government, and many of the importers eligible for quotas are state-owned enterprises, there’s a lot of room for manoeuvring in the administration of quotas, which is exactly what China has done here.”

Last week, China’s political friction with Australia stepped up a notch after Australian exporters and analysts expressed concerns over Chinese authorities verbally asking importers not to buy Australian coal and cotton.

This follows China’s trade actions on Australian barley, beef and wine, as well as the international student and tourism sectors earlier this year after Australia called for an international investigation into the origins of the coronavirus.

China imposed an anti-dumping duty over 80 per cent on Australian barley in May, and while the move was previously anticipated, it raised suspicions that it was also politically motivated as it rendered Australian barley uncompetitive compared to rival crops, including American barley.

That was followed by bans on exports from five beef abattoirs due to mislabelling and contamination, and an anti-dumping investigation into cheap Australian wine exports into China.

Timeline: China-Australia relations

Last week, however, the measures on trade were “softer”, reminiscent of other moves China has used in prior years.

On this occasion, China delayed entry of Australian thermal and coking coal shipments, and verbally discouraged power stations and steel mills from buying more Australian coal, deferring some forward orders. China applied the same directives to Australia’s US$750 million cotton trade.

China followed the same course of action with the delays on shipments of Australian coal in Dalian early last year. In 2017, China also executed a soft block on South Korean tourism after Seoul agreed to let the US deploy a controversial antimissile system within its borders.

Following the deployment of the Terminal High Altitude Area Defence (THAAD) system, South Korean retailer Lotte also experienced an unofficial boycott that eventually resulted in its exiting the Chinese market.

With its commitment to the WTO, China has reduced a lot of its softer measures which were commonly used before its accession to the global trade body, but they have not been completely eliminated, Gao added.

“I wouldn’t say this is becoming the main approach. I think the main method is still formal action. There are many ways China could do this such as through trade remedies actions,” he said.

Weihuan Zhou, a trade lawyer at the University of New South Wales, also agreed, but said the WTO should remain the active arbitrator against any rule breaches.

China has become more active in utilising the flexibilities in trade rules, but not necessarily more creative

Weihuan Zhou

“China has become more active in utilising the flexibilities in trade rules, but not necessarily more creative. All of the actions China took recently had been used before,” he said.

“The trade rules have imposed considerable constraints on the use of protectionist measures. This is why the WTO remains important for trading nations.”

Two-way trade between the countries was worth about A$240 billion (US$172 billion) from July 2019 to June 2020, according to the Australian Bureau of Statistics, with China the top destination for Australian exports.

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