October 27, 2016    3 minute read

ChAFTA: Understanding The New Relationship Between China And Australia

Does China Always Win?    October 27, 2016    3 minute read

ChAFTA: Understanding The New Relationship Between China And Australia

As the leading economies in the APAC area, Australia and China have had a long tradition of commercial relationships, dating back to the 19th century and first mass colonisation of the island. The countries are members of a number of international agreements, including the ASEAN Free Trade Area (AFTA), the Trade Promotion Organization in Asia (ATPF), the G20 and the WTO.

New Horizons

Furthermore, the two countries have recently signed the ChAFTA agreement of Free Trade Area, which determines the removal of duties and taxes for most frequently-traded products. The deal, signed on December 20th, 2015 and effective from 2016, comes seven years after New Zealand negotiated the first Free Trade Area agreement with China in 2008. Since then, New Zealand has benefited from preferential trade routes with China and outcompeted Australia in many economic sectors.

Given the reciprocal strategic importance of the two partners, the huge flow of goods exchanged yearly and the recent developments in commercial relationships, an analysis of the past trade flows can reveal a number of powerful insights concerning opportunities in China for Australian firms, risks of increased competition and possible evolutions of Australian-Chinese political relationships.

From Australia’s standpoint, China is the main export destination and most important trading partner, accounting for more than one-third of total exports. As the figure is expected to grow abruptly, increased reliance on Chinese economic development might lock-in Australian firms and lead to political controversy. Australia will be in a difficult position if politicians persist in their Filo-US policies, as the country will become vulnerable to Chinese commercial threats and economic fluctuations.

China Wins

On the other hand, China might be the big winner out of the agreement. With a world-leading and fastest-growing economy, most Chinese exporters have little to fear from Australian firms entering their market. The Chinese economy is currently seven times as big as the Australian one, and it is predicted to keep growing at a rate of 7% yearly.

According to these forecasts, every 17 months the Chinese economy will increase by a value as big as Australia’s GDP. It is apparent how Australia can barely tap into the Chinese market, without completely fulfilling its demand or significantly eroding local competitors’ shares.

Conversely, Australian firms are likely to suffer competition from cost-efficient Chinese exporters, whose productive capacity significantly outweighs local demand. To make matters worse, under ChAFTA, China will not only get preferential access to a high-end developed market but will also benefit from a dedicated safety regulation committees to improve product quality and comply with Australian standards.

Conclusion

Although in the short term Australian exporters might benefit from increased trade flows and fewer taxes, the risk of Chinese integration in the Australian market might be too high to bear. Long-term advantages for Chinese firms will reinforce the country’s political hegemony and pose a serious threat to Australian economic development.

What are the other short-term and long-term implications of ChAFTA? Who will benefit most from the deal? And to what extent can Australian firms exploit the opportunities of the Free Trade Area without incurring the risks of substitution and increased competition by Chinese exporters?

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