Learning from past Chinese protectionism can help future trade negotiations

Alan Oxley, Managing Director 

What is to be made of the warnings from Chinese quarters during the Prime Minister's visit to Beijing that Australia's trade interests may be jeopardised if it continues to call for all parties to settle the territorial dispute in the South China Sea? Recent history may be a guide.

In 2005, a large delegation of Australian officials and business leaders trooped to Beijing to inaugurate negotiation of the Free Trade Agreement (FTA). After the usual diplomatic speeches, comments were invited from the floor. The last intervention was from an official from the Chinese Agricultural Ministry. He basically said "Don't you Australians think we will let our markets be flooded with Australian farm products".

Chinese restrictions on imports of wool were significant. A review a couple of years later by ITS Global showed Chinese authorities adjusted the rate of imports as it suited. Australian woolgrowers could not plan to expand production. Chinese agricultural officials argued the controls were necessary to protect Uighur sheep farmers in Northern China. Yet they were not competitors. They produced coarse wool (for carpets) not the fine wool (for clothing) produced by Australian farmers.

The matter became academic. Obdurate agricultural officials were not the only problem. Canberra had also pressed for access to services markets. That had not been Chinese policy in the FTAs it had negotiated to that point. Negotiations of the China FTA stalled.

Ten years later, Andrew Robb had the good luck to become Trade Minister when China was ready to change. The Chinese leadership realised their farmers couldn't meet demand from its rapidly expanding middle class and that the services sector needed reform to maintain growth. The FTA was concluded with better terms than China had negotiated with others. It opened agriculture significantly for beef and dairy – it expanded the annual wool quota by ten percent – and opened some services markets.

Free Trade Agreements drive reform of economies. They enable government to buttress that reform by exposing markets to efficient foreign competitors. Reform of the Chinese economy is still a work in progress. It has major problems – huge debt and state dominance of markets. Analysts warn that if there is a GFC Mark II, China no longer has the reserves to buttress its economy the way it did with the GFC. US investment analysts assess the that the yuan is 40 per cent overvalued.

Until private property rights are more secure in China, it would be wiser for foreign businesses, particularly those which require fixed assets, to focus on trading and limit investment in fixed assets until foreign ownership is protected in law. There is plenty of opportunity, even within that restraint.

Two other sectors which China is opening are tourism and education. This is great business for Australia since most expenditure occurs in Australia, yet they generate foreign earnings like sales in foreign markets.

There is growing opportunity in other services. China is steadily, but surely, seeking to reform and open its financial services sector as well as sectors meeting the needs of an aging population. ANZ bank and QBE insurance for example, are seeking business bases to exploit the opportunities as China adjusts.

Like the agricultural sector a decade ago, there are other interests in the Chinese government today who view controls on foreign trade and investment as potential political tools to advance other interests. Chinese diplomatic and security authorities have not been backward in warning other nations to steer clear of military and shipping installations built by China in the South China Sea. Journalists now opine about China's threat to Australian trade.

Is the People's Liberation Army (PLA) another anti-growth, anti-trade interest in today's China, like agricultural officials a decade ago? The PLA would be a tougher nut than the Agriculture Ministry for the government to deal with. It is a key institution in the Chinese communist political structure, one which sharp leaders keep close to their side, not just to preserve national security but preserve national order. China's rapid economic development has generated unrest.

So what matters more to China in the long run? It is now in a position where what it does has bearing on the global economy. Maintaining growth, meeting the needs of an aging society and enlarging the contribution of services to the national economy would seem – on the surface – to be a greater political imperative in the long run than staking out a strategic military interest in the South China Sea.

Those military installations will not resolve China's huge debt or assist in the building of a more productive services sector, a loosening of the control of major businesses or the playing of a larger role in global economic affairs.

I know where I would put my money.

Alan Oxley is Principal of ITS Global and Chair of the APEC Study Centre at RMIT University.

This article originally appeared in The Australian Financial Review