China and Australia sign FTA to boost bilateral trade

China and Australia have signed a bilateral free trade agreement known as ChAFTA. The agreement is set to open up the trading relationship between China and Australia, which was worth AU$159.6bn in the 2013-14 financial year. It should help to raise the volume of trade between the two countries and to make doing business between the two countries much easier.

ChAFTA still has to be ratified on a domestic level by both Australia and China but with both governments supportive this should be a formality, though it is notable that the agreement has faced criticism from the Australian Labour Party and trade unions. The criticism is mainly centred on fears that ChAFTA will damage employment prospects for Australians by hurting Australian manufacturing and by allowing Chinese citizens to work in Australia more easily. However looking at the trade figures it seems the overall effect for both economies will be positive and both governments suggest that the agreement could be implemented within six months.

China is Australia’s largest export partner, accounting for nearly a third of exported goods and services. The deal itself covers all of Australia’s major exports including almost all resources and energy products. On the first day of the agreement tariffs on 85% of all goods will be dropped, including those on aluminium oxide and coking coal. Tariffs on thermal coal will be phased out over two years. Expectations are that the deal will be fully implemented by 2020 at which point 95% of Australia’s exports will be tariff free.

The immediate benefit for Australian exporters is plain enough but the agreement will also buoy those involved in the burgeoning trade in LNG, expected to become one of Australia’s largest exports and one of China’s major imports.

Although the balance of trade between the two countries is weighted in Australia’s favour, with Australian exports accounting for AU$107.5bn and Chinese exports AU$52.1bn, the agreement is expected to be greatly beneficial to China. With coal and iron ore imports from Australia to China valued at AU$66.3bn last year abolishing tariffs should help to reduce the cost of energy, construction and manufacturing in the Chinese economy. What’s more it is anticipated that the agreement will boost exports for the Chinese automotive industry and high tech sector.

Apart from liberalising the flow of goods between the two regions the agreement will also make foreign investment by each of the interested parties in the other’s economies easier. Tony Abbott, Australia’s prime minister said, “For China, this agreement liberalises the screening threshold for Chinese private sector investment in Australia and it puts Chinese businesses in the same position as those of our other major trading partners.” These changes will help companies from both countries to benefit further from the high level of market access provided by ChAFTA.

In the context of wider intra-Asia Pacific trade, following on from the agreements concluded just a few months ago with Japan and South Korea, the agreement will further cement Australia’s position as one of the foremost trading nations of the region. Such liberalisation has already led to higher volumes on Australia’s trade lanes with Japan and South Korea, especially for agricultural goods, and we can expect a similar surge in the trade between Australia and China.

All this will be welcome news for logistics providers. Further increases in volumes will help to boost revenues and the liberalisation of regulations around investments by foreign companies will make taking advantage of these goods flows easier and more profitable.