Abbott’s free trade deal with China needs a rethink

The China-Australia Free Trade Agreement celebrated its five-year anniversary at the end of 2020. What are the odds it will survive another five years?

It is notable that even those responsible for negotiating the deal now say it should be torn up or at least drastically revised. Tony Abbott, our former prime minister and current UK trade adviser, recently argued that Australia’s trade and investment relationship with China should be dealt with “on the basis of strict reciprocity”. Only “where our investors can go … and where our technology is allowed in China; that should be open for them here”.

The problem with this newly articulated position is that it is clearly inconsistent with the agreement his government signed. To cite one obvious example, China’s leading technology firms are free to operate here (Alibaba, WeChat, TikTok, Didi and so on) in a way it is not possible for Australian companies, or indeed any foreign company, to do in mainland China. Chinese firms are also free to invest in a range of other sectors in this country that are out of bounds for Australian investors in China.

The reality is you can insist on “strict reciprocity” in trade and investment with China, or you can support ChAFTA. You can’t do both. Others accept that while the rules may not be reciprocal, this does not really matter. The traditional argument is that we have “complementary economies” (one of the most overused phrases in this area) and thus ChAFTA naturally reflects that. However, what this means in practice is that we sell China predominantly primary produce and they sell us predominantly manufactured goods.

There has long been an attitude in the federal government that we should not worry about this — that there is nothing particularly special about manufacturing. I recall former treasurer Peter Costello once telling an Australia Day lunch in Hong Kong that he did not even see a problem if China produced all of America’s automobiles. I would be surprised if he still believes that. Many still do.

Manufacturing now makes up a lower percentage of our economy than before Federation. There is new political enthusiasm to change this: “We want to be a country that makes things again,” goes the refrain. But this will not occur in any meaningful way as long as we have a trade agreement that allows nearly all Chinese-manufactured goods to enter our country duty-free. Those who think that anything other than marginal improvements in the sector are possible through other means (for example, lowering energy prices, improving industrial relations, a stronger anti-dumping regime, direct subsidies, growth centres) are simply deluding themselves and the public.

You can have a real revival in Australian manufacturing, or you can have ChAFTA. You can’t have both.

There is a similar incoherent approach when it comes to our foreign policy more broadly.

On the one hand, we see politicians keen to say they are “standing up” to China and support increases to our military spending (like our glorious French submarines). On the other hand, the attitude persists in DFAT that it is nevertheless desirable to have closer “engagement”, an “ever closer union” with China economically.

This makes no sense. It would be like politicians in Ancient Athens demanding new ships be built to guard against the rising threat of Persia while at the same time insisting on free trade with that rising power. Thucydides would have thought that nuts. Pre-WWI Britain built Dreadnoughts, yet continued to engage in unilateral free trade with Imperial Germany (its most important trading partner at the time). Close trading relationships, sadly, do not automatically produce peace. Lest we forget.

You can be a realist in foreign policy when it comes to China. You can even be a self-styled “Wolverine” (as some of our backbenchers like to label themselves). But you can’t at the same time support ChAFTA in its current form.

The trade and investment regime between Australia and China today is now arguably worse than before the agreement was signed. Beijing thinks of bogus reasons to indiscriminately raise tariffs on our goods. We in turn impose greater de facto restrictions on all sorts of Chinese investment.

The core problem is the agreement raised expectations of higher levels of mutual trade and investment that were never in the long run going to be geopolitically wise or politically palatable given the nature of our two societies. Rather than bringing our countries together, the agreement has actually served to antagonise bilateral ties.

The good news is that the agreement can be terminated by either party giving 180 days’ notice. No drawn-out Brexit-style process is required. Each country then would be much freer to adjust their trade and investment policies on their own terms. Some more modest trade arrangement would then come into place. Deals could still be done, trade could still occur, but in a more modest and better structured, balanced way.

China would likely continue to cut tariffs on primary produce to feed its population. We would be able to rebuild our manufacturing sector and regain economic sovereignty. Fancy-pants analysts (sounding a bit like Gwyneth Paltrow) like to use the term “decoupling”. Call it whatever you like. But it is clear some strategic distance between the two countries would be good for us both. To adapt that overused COVID-19 line: Staying a bit further apart (from China) is what will allow us to live (peacefully) together.

Dan Ryan is a former board member of the Australia-China Council and a lawyer with more than 20 years’ experience working in Greater China.