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Real deal is in the fine print

08 March, 2006

For Australian manufacturing companies the key concessions of any FTA with China are only half the battle - the devil is in the detail, writes Ian Porter.

The Age

There is growing recognition that striking a free trade agreement with China might be a more difficult challenge than it was with Singapore, the US or Thailand. Which is not to say those initial agreements were easy - far from it.

The paucity of concessions granted by the US, especially in pastoral and agricultural areas, shows how important protectionism still is for the richest nation in the world.

In the case of China, it is not the negotiations that are of concern, although China has already flexed its muscles on the issue of being declared a market economy. The fear is that the Chinese Government will not be able to enforce the clauses of an agreement at ground level, whether it is at the ports, in regional areas or in the attitudes of regional authorities.

For example, Australian companies are watching the exchange with China over Australian oranges with growing dismay. The Chinese reportedly are trying to barter access to China for Australian orange growers in exchange for Australia granting access for ya pears grown in two provinces that have not yet cleared quarantine hurdles. Australia already imports ya pears from two other Chinese provinces.

The barter approach is a clear breach of World Trade Organisation rules and indicates that, as in other areas, China believes it can use the "might is right" approach regardless of the rules it signed up to when it joined the WTO.

The cavalier approach of the Chinese to the rules has caught the eye of Australian manufacturers, which are suffering as Chinese textiles and industrial products flood into Australia.

It is important, because the policing and interpretation of any bilateral agreement will be crucial for any Australian company wanting to invest in China or, less likely, any exporter thinking of attacking the Chinese market from here. "Tariffs are not the issue," said Peter Upton of the Federation of Automotive Products Manufacturers. "It’s the protection of intellectual property and how the FTA will deal with a number of dicey non-tariff barriers."

Upton says it is crucial the Australian Government has a complete picture of the assistance being extended to Chinese manufacturers, both by the central government and provincial governments. "We would need to know whether we were operating on a level playing field when we got there."

There are also issues such as government policies on licences and quotas. "They have various export licensing and quota systems and we need to know how they will work."

He pointed to the recent imposition by European countries of import quotas on Chinese textiles, which forced the Chinese Government to license exporters.

Another issue of importance, which will affect any company exporting to or importing from China, will be the way goods are valued by the respective customs agencies for the purposes of determining where the goods originated.

The rules of origin are a major issue in any FTA. Governments want to protect against subversion of FTAs by making sure that the goods imported come from the country with which the FTA was signed. This requires systems for determining the value of the local content of the goods or the value added, and also determining the value of the content from other countries, if any.

Australia has hit a snag in the form of Chinese insistence that any FTA with Australia should use the value-added approach. This would increase the regulatory workload and employment levels for Australia, something the Commonwealth Government is trying to avoid.

"The Chinese want a value-added approach and Australia has already signed up with various rules-based systems with America and others," Upton said.

Australia abandoned the system it struck with New Zealand, under the Closer Economic Relations deal, when it negotiated an FTA with Thailand. "We don’t want 20 different valuation methods just because Australia has 20 different FTAs."

Upton says many non-tariff areas are important, such as product standards and testing regimes. He highlights the car industry. "Will Australian standards for quality control be recognised in China? Will we have to recognise the Chinese standards? That is a serious issue. It comes down to consumer safety. You cannot make alloy wheels from melted down cooking pots.

"The whole standard-setting, and testing infrastructure, has to be credible, and we’re not sure the Chinese one is."

Like the automotive sector, the textiles, clothing and footwear (TCF) sector is about to join the the unprotected playing field. The industry recognises that no amount of tariffs will turn back the China flood. However, the industry is keen for the Strategic Investment Plan to see out its 10-year time frame without any acceleration of tariff reductions.

When Australia struck deals with the US and with Thailand, the car industry found its well-planned wind-down of assistance was shortened drastically, with all tariffs coming off on the first day of each FTA.

The TCF sector has been fortunate, with tariffs under its SIP program being cut by 5 percentage points (to 12.5 per cent for clothing) for the US and Thailand, says Ashley Van Krieken, the executive director of the Council of Textile and Fashion Industries of Australia.

This time around, however, the TFIA is pushing for no preference to be shown to Chinese goods. "We are very concerned about the potential impact of the (China) agreement."

What worries the TFIA is China’s record on stamping out counterfeiting. "We have a lot of designers producing stuff onshore and offshore. They want iron-clad undertakings their designs won’t be copied."

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