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China Australia Free Trade Agreement

Andrew Mackenzie, Chief Executive Officer, BHP Billiton
Originally Run in The Australian, 8 August 2015

Amid volatility and uncertainty in global markets, domestic reforms and initiatives promoting open trade are absolutely necessary if we want to lift productivity and compete on the international stage.  A small, open economy, built on trade, Australia relies on access to foreign markets for goods, services and capital to invest in our future and on competitive, export-capable Australian businesses for continued prosperity.

Free trade agreements can play an important role in improving Australia’s access to new, developing and mature markets. And as a trading nation, emerging from the latest ‘mining boom’, we can’t labour under any misconceptions that customers in China will take our commodities at any price.  As supply continues to enter the market, our customers can and do increasingly exercise their ability, and right, to choose. Today, exporters in every industry have to give customers a compelling reason to buy Australia’s products – natural resources are no exception.

If companies like BHP Billiton can innovate and sustainably deliver high-quality products, Australia can continue to enjoy the significant benefits of trade with China. While China’s ‘new normal’ economic growth trajectory is moderate compared the last decade, their growth builds off a phenomenally large base today.  Ten years ago China’s economy was valued at around US$3.2 trillion, its annual growth rate was just over 10 per cent which boosted GDP by around US$292 billion.  Last year, China’s GDP was over US$8 trillion – meaning a lower growth rate of 7 per cent still drives significantly more absolute growth, around US$570 billion, for the Chinese economy.

The China Australia Free Trade Agreement (ChAFTA) will help Australian resource companies tap into this more mature, but incredibly important market, at a time when it’s needed most. The Minerals Council of Australia have outlined the benefits to the Australian industry from reducing resource tariffs, including gradually eliminating all coal tariffs, which currently increase the cost of bilateral energy and mineral trade by around A$600 million. Savings of this magnitude are crucial for Australia’s coal industry, where profit margins are squeezed by depressed prices and compounded by competition from countries enjoying zero tariffs from FTAs already secured with China.

ChAFTA puts the Australian resources sector back on a level playing field. The ‘most favoured nation’ provision will protect these gains – any fresh concession granted to a competitor nation must also be granted to Australia.  But as important as tariff reductions are, I believe the most significant achievement associated with finalising a trade agreement with China will be the creation of deeper links between Australian and Chinese officials.  As Australia’s lead negotiator Graham Fletcher has said, free trade doesn’t mean trouble-free trade. In a world of fewer and lower tariffs we will increasingly need Government mediation to resolve ‘hidden’, non-tariff barriers constraining trade and exports – and the creation of new jobs.

Winding back non-tariff barriers around the world and freeing up global supply chains was identified in the B20 Trade Taskforce last year as fundamentally important to improving and increasing trade which ultimately has the potential to create tens of millions of new jobs. These invisible barriers include at-the-border red tape, anti-competitive regulation and infrastructure bottlenecks that cause friction and wastage within a global supply chain. These barriers make trading inefficient, and in some cases impossible, and are a drag on competitiveness. Australian businesses can achieve a great deal through productivity improvements: but if our ships remain idle in international ports due to poor infrastructure or opaque regulations, then our efforts to lift productivity at home will mean little and our competitive position will be damaged.

A recent example of global supply chain inefficiency in the resource sector was the introduction of China’s new import restrictions for trace elements in coal. These new regulations, and the testing regime that has been put in place at the border, have caused delays and uncertainty for both Australian exporters and our customers. The Australian Government is already engaged on this and other technical trade issues faced by exporters. The diplomatic relations that have been strengthened by concluding the new Agreement will be vital in delivering free trade outcomes on the ground and quickly resolving issues that do arise.

These sorts of non-tariff trade barriers are likely to become more common as the global trading environment deepens and becomes more complex. Australia will need increasing diplomatic agility in order to work with our trading partners to identify solutions to problems ranging from coal testing to investment in carbon capture and storage.  But we are well placed to find these solutions: we have high quality commodities, strong institutions and a rigorous tradition of environmental protection and transparency.

If we redouble our commitment to building strong and meaningful relationships with our trading partners, Australia will be well prepared to embrace a world in which China, and its emerging-market peers, exercise increasing economic clout – starting with China’s G20 Presidency next year.