AUSTRALIA: Tightening Trade Ties

Sino-Australian economic ties continue to be strong and solid, with reliance on each other’s economies and a recently announced Free Trade Agreement.

AUSTRALIA AND China have “wonderfully complementary economies”, according to Danny Armstrong, general manager for National Australia Bank, China Banking. The relationship has become increasingly cooperative, as the two nations enjoy strong trade relationships and are, at least globally, in relative close proximity. Investment into Australia from Chinese sources is high and continues to grow. Their economic relationship has blossomed in recent years, marked initially by favourable currency arrangements and reinforced by the recent announcement of the Sino-Australian Free Trade Agreement.

In addition to the trade which has fuelled most of the economic relationship in the past, Chinese demand for products is evolving through the growth of its middle-class, and Australia is seeing the benefits of this, particularly in education. Measures now in place confirm a commitment on both sides towards continuing and elevating the relationship, demonstrating that the potential in the Sino-Australian economic partnership for the future is strong.

Resourceful partners

“For the better part of the last 20 years, the China-Australia relationship has been characterised by supply and demand,” says Brett Evans, executive director for Atlas Wealth Management. China is Australia’s biggest trading partner in terms of both imports and exports, with the majority of this trade being in commodities. At the same time, Australia is China’s fifth-biggest supplier of imports and its tenth-biggest customer for exports. Iron ore is the biggest export from Australia to China, followed by other natural resources including coal, gold, petroleum and liquid natural gas.

Conversely, according to the Parliament of Australia, China currently supplies Australia with 99 per cent of its merchandise imports. Of those, 90 per cent are elaborately transformed goods such as engineering, office, and telecommunications products. “Australia’s relative geographic closeness to China has benefited both parties and elevated Australia above that of South America and Africa as a trading partner,” says Evans. Up to 10 per cent of the cost of natural resources comes from transportation, thereby promoting Australia’s competitiveness because of its proximity to the mainland.

China’s sustained demand for natural resources has buffered Australia from being harder hit by the global economic slowdown. China requires these resources in order to sustain its high rate of growth and development, which has become a more challenging aim in the past several years. As China develops and its middle class grows, it is believed that demand will shift from natural resources to more elaborately developed products and technology. In June 2013, a McKinsey report on the Chinese upper-middle class said business strategies needed to reflect China’s new rising incomes, shifting urban landscapes, and generational change, since “millions of Chinese are trading-up and becoming more picky in their tastes”. Australia has made a name for itself as a supplier of resources to China, but risks losing some of its competitive advantage as a supplier of manufactured goods as Chinese demand changes. There is scope for Australia to remain a priority trading partner because of a history of cooperation and geographical advantage, but Australian suppliers to China must be aware of these coming changes.

Food and the FTA

Food security and trade in food products is also emerging as a new trend in Sino-Australian commerce. With Chinese media overflowing with stories concerning food safety, Chinese citizens, especially those in the growing middle class, are starting to demand more from food and other products. “We have witnessed strong trade growth in food, wine and agricultural exports in recent years, and we have also seen growth in areas such as education, tourism and other services,” says Craig Aldous, general manager of Elders Fine Foods Limited. This trend is certainly likely to continue.

A 2011 KPMG study of Australia-China trade relations noted that “Chinese investors see the benefit in securing land assets, notably the source of food production” and that investors have also been looking to Australia as China’s closest Western trading partner for the supply of food products. “We will see demand for high quality food and agricultural items continue to rise in China, and more of this demand will be met by higher levels of Chinese investment upstream in the supply chain in Australia,” Aldous says. Additionally, ‘As the trade relationship in food and agriculture gets more interdependent, we will see higher levels of cooperation in the sharing of technology, production techniques and food safety management practices,” he adds.

A declaration of intent has been signed regarding an Australia-China Free Trade Agreement (FTA), with the actual agreement to be signed later this year coming into force when formalised by both countries’ parliaments. Though some are starting to question whether China is producing so many trade agreements that they are becoming less valuable, Australian Prime Minister Tony Abbott claimed it was “the most comprehensive agreement that China has concluded with anyone”. A significant area of benefit will be seen by the Australian dairy and beef industries, which will have tariffs removed. In the other direction, Chinese exports to China Australia including clothes, vehicles and electronics will be tariff free. Both countries will see freer access to service sectors such as education, tourism and healthcare, and according to Evans, the FTA will also have a “massive effect on the financial services industry”. Armstrong sums up the agreement by saying that “It won’t necessarily change volumes significantly overnight, but is a really important political signal between the two governments. They’re saying, ‘Here’s our intention for our economic relationship going forward, and this relationship is open for business.”

The investment scene

Although trade in goods has been a huge part of the Australia-China economic relationship, investment from China into Australia has also been important and influential. China is currently Australia’s thirteenth-biggest investor. Armstrong points to China allocating Australia a RQFII quota, involving “trialling a number of elements to enable qualified Australian institutional investments, once in China investors, to invest in China utilising renminbi”, thereby cementing greater scope for investment in the future. According to the Australian Treasury, Australian businesses have also invested in China, with a number of notable successes.

As China continues its economic liberalisation, and capital flows become easier, there will be further opportunities for Australian businesses to invest and expand operations on the mainland. Although growing investment levels benefit both countries, the level of Chinese investment into Australia has not been received well by many of the latter’s citizens. The annual Lowy Institute Poll has consistently shown that a majority of Australians (currently 58 per cent) believe that too much Chinese investment is being allowed into Australia, providing a potential source of tension in the relationship moving forward.

As developing human capital is a growing concern in the Chinese market, Chinese citizens are continuing to go to Australia for university studies, in order to gain skills and competitive advantage in the workforce. This has created a growing market for education and training, helped to cement the relationship culturally, and resulted in links between learning institutions in both countries. As levels of enrolment in higher education institutions in China continue to swell, the level of enrolment by Chinese students in foreign universities will reflect this surge.

Australia is a natural destination for middle-class Chinese looking to study abroad. Additionally, China is seeking knowledge from Australia outside of formal higher education: “There is an export of Australian intellectual property through the migration of skilled labour into China,” says Evans. “From automotive engineers assisting Chinese car manufacturers to enhance their product, to professional service providers in the accounting and legal professions, there is a massive transferral of skills and knowledge occurring at the moment.” The result is that the economic and business relationship between the two countries is becoming more nuanced and hard to define exactly, suggesting greater entwining of both economies.

With China claiming the title of “Australia’s best friend in Asia” and trade links continuing to grow, the two countries seem to have arrived at a sound and thriving partnership. All the measures have been put in place to ensure that this mutually beneficial, productive economic relationship will continue to flourish, with the Free Trade Agreement serving as official evidence. As the two countries approach another year of relatively solid cooperation, the stage is set for even closer and more diverse ties.

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