Both sides to benefit from China free-trade deal

ALTHOUGH China is already Australia’s largest trading partner, a free trade agreement is expected to help both countries.

ALTHOUGH China is already Australia’s largest trading partner, with $150 billion of bilateral trade last year, a free trade agreement between the two nations is expected to increase trade and financial opportunities for both.

With over one-third of all Australia’s exports already going to China and one-fifth of its imports coming from China, trade ties between the two countries are already well-developed.

Australia’s exports to China are heavily dominated by minerals, especially iron ore and coal. A free trade agreement is expected to assist in increasing Australia’s exports of other items, with a particular focus on exports of agricultural products and services.

Other exports to China have also been growing, and despite running at a much more modest pace than mining exports, have still averaged growth of 10 per cent a year over the past decade.

Of Australia’s non-mining goods exports to China, agricultural products dominate, with food and wool making up about half of total non-mining exports to China. These areas have shown some growth in recent years, although Australia remains a relatively small contributor to China’s food imports, especially when compared to New Zealand.

Other similar nations that have signed FTAs with China in recent years have typically seen their trade with China significantly boosted following agreements. For example, New Zealand’s exports to China — which are dominated by food products — rose more than fivefold following the signing of a free trade agreement with China in 2008.

China is also emerging as an increasingly important customer for Australia’s services exporters. The past four years have seen Chinese visitor arrivals to Australia more than double, rising from around 450,000 people a year in 2010 to around 800,000 people in the past year, making China by far the fastest-growing market for Australian tourism.

China is also an important market for Australian education exports, providing over one-quarter of Australia’s international student enrolments, and for financial services, albeit off a low base.

Another focus for the FTA is expected to be support for greater cross-border investment flows between Australia and China. At this stage, these linkages are small, although they are growing quickly. In 2013, only 3.4 per cent of all foreign investment in Australia was from China (including Hong Kong), while 3.7 per cent of Australia’s investment abroad went to China.

Lifting the current limits on China’s investment to levels similar to other countries that have FTAs with Australia, as is likely to be done as part of an FTA, and the possible reduction of current restrictions of Chinese government investment, is expected to see a big rise in China’s foreign investment in Australia, supporting local growth.

China could benefit as Australia is a high-yielding and stable financial environment to increase overseas direct investment, which is a key goal of China’s authorities. Australia could benefit from greater flows of foreign finance, with foreign capital inflows having supported Australia’s growth in every decade of its history.

Paul Bloxham is HSBC’s chief economist of Australia and New Zealand. This is an extract from a recent report on a free trade agreement.