Australia Pushes Ahead with Free Trade

By Ari Charney • November 1, 2013 • Pacific Digest

As the Liberal-National Coalition pitched itself to Australia’s electorate during the past election season, one of its vows was to forge stronger bonds with regional Asian economies. In particular, they pledged to revive stalled bilateral free-trade agreements with countries such as China and South Korea. And so far at least, the newly ascendant government appears to be doing just that.

Of course, these negotiations have been underway for so long that it’s premature to celebrate any progress until a deal is finalized. For instance, Australia and China have been negotiating a free-trade agreement (FTA) since 2005. Since then, China has become Australia’s largest trading partner, with trade totaling AUD125.2 billion in 2012, so the economy’s prospects for future growth are closely aligned with the Middle Kingdom.

As such, Prime Minister Tony Abbott has placed a 12-month deadline for the two countries to put together an FTA. Beyond that, Trade Minister Andrew Robb hopes to sign FTAs with Japan and South Korea before the end of the Abbott government’s first term.

In the negotiations with China, one of the sticking points has been whether Australia is willing to allow foreign investment in agricultural land by individual Chinese firms of up to AUD1 billion without triggering scrutiny by the Foreign Investment Review Board. That’s essentially the same treatment China has in its deal with the US.

To that end, Treasurer Joe Hockey has attempted to nudge China toward a deal by reducing the threshold that causes an automatic review of foreign investment to AUD15 million from AUD248 million. This would apply solely to countries that don’t already have an FTA with Australia. However, this could lead to internecine squabbling within the Coalition, as the Nationals are opposed to lowering this threshold as part of a trade deal with China.

Australia is dependent upon foreign inflows of capital to finance its persistent current account deficit. At the same time, some rural constituencies are concerned that China will simply buy large swathes of agricultural land without the sort of reinvestment that supports the surrounding rural communities.

Meanwhile, the free flow of the country’s exports is largely limited to natural resources, with agricultural exports bogged down by red tape and other restrictions. An FTA would facilitate trade in food and agriculture by streamlining administrative hurdles and removing tariffs and other market barriers.

Given the potential demand from China’s burgeoning middle class, this could be a decades-long growth story for Australia’s agriculture sector. Still, it’s entirely possible that the benefits of an FTA won’t be realized across the entire sector, as Beijing could seek to continue protecting certain agricultural industries of its own.

Australia has also been negotiating an FTA with South Korea since 2009. The country is Australia’s third-largest export market. While some pundits have speculated that a deal might not emerge between the two countries until an FTA is sealed with China, The Australian newspaper just reported that Seoul’s lead negotiator says Australia and South Korea are “exceedingly close” to a deal.

In the past, the primary obstacle to a deal had been Australia’s refusal to include an international arbitration clause, which grants investors the right to sue a foreign government if a trade agreement is breached. But the Abbott government said it’s agreed to address such issues on a case-by-case basis, which has essentially removed the impediment to an FTA. Indeed, a final round of negotiations is expected to take place in the near future.

These deals are never without controversy, but they are key for ensuring Australia’s future growth.

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