TCS Daily

Is the Free Market Glass Half Empty or Half Full?

By Alan Oxley - April 22, 2005 12:00 AM

Hu Jintao and John Howard, Australia's Prime Minister, have announced during Howard's visit to China that Australia and China will negotiate a free trade agreement (FTA). On the surface China's expanding embrace of free trade looks good news. However the message for Australia from the preliminaries with China is "not so fast". China has other interests. Australia wants real results for business from the FTA. To get them, it must prepare for a long negotiation.

If public pronouncements are any guide, China is right into free trade. It has announced FTAs with Thailand and ASEAN and is negotiating FTAs with Chile and New Zealand. Mussolini taught us to be wary of pronouncements. He used a series of rapid fire announcements about expansion of Italy's armed forces to boost impressions of Italy's global power.

There are those who point to steady progress in market reform in China. Stock markets have been established. The finance sector is being reformed. Intellectual property law and enforcement are improving.

Then there are those who warn Beijing doesn't mean it. Cheating on patents is rife. Under Jiang Zemin, the leadership announced it would follow the chaebol and kereitsu models of Korea and Japan where protected industries agglomerated into massive enterprises. And in China's incoherent blend of capitalism and socialism, every company, including those foreign-owned, must have a communist party cell.

Is the free market glass half empty or half full? Australia has a robust point of reference. Twenty years ago it embarked on program to remove tariffs on manufacturing, reduce limited protection of farming and open its services sector. It reaped the benefit. It has maintained the highest average growth of any OECD country for nearly 15 years.

Australia has also been a consistent, even pugnacious, advocate of free trade reform in the WTO, particularly of highly protected trade in agriculture. Australia has negotiated FTAs with Singapore, Thailand and the US. It has not gotten all that it wanted, but it has pushed the envelope and secured commitment in those FTAs to reduce barriers.

China was an obvious FTA candidate for Australia. China's booming growth has created a boom in Australia's mineral sector, one of the world's most competitive producers and exporters. For the first time in 30 years Australia's terms of trade have turned positive. Australia is the world's biggest wool producer and China the biggest consumer. China's demand for food is increasing (another Australian export strength) and it is developing a modern services sector.

Once discussions began, it became clear to the Australians that the idea the market should shape business was not universal, or even widely held, in China. China's minerals industry is the keenest supporter of an FTA (unlike nervous agricultural officials in Beijing). But what did China's energy and minerals enterprises want from an FTA? Security of supply and lower commodity prices, possibly securing the latter through licence controls in an FTA. Australian executives were bemused. FTA s were supposed to outlaw such models, not impose them.

On the eve of Howard's visit to Beijing, Chinese government officials even mounted an unprecedented public lobbying campaign in Australia against BHP Billiton, one of the world's leading mineral companies, based in Australia, over negotiations over prices in long term contracts to supply mineral commodities to Chinese buyers. Hill and Knowlton could not have done better. It was clear Chinese Government officials did not seem to appreciate this was not their business.

If Chinese officials don't see the beauty of FTAs -- the idea is to foster mutual growth in a free market -- why are they promoting all these FTAs? Chinese diplomacy suggests Beijing has grasped how sitting atop the world's biggest markets for nearly everything provides an avenue for regional, if not global leadership. Germany and Japan became global leaders without arms and because of their economic strength.

China hasn't had to face uncomfortable free trade sharp edges in its negotiations for FTAs with others. The Agreement with Thailand is interim and provides some opening in some products. The agreement with ASEAN excludes services, investment and a long list of troublesome products. This is friendly dealing to build political linkages.

It appears the leading supporter in Beijing for an FTA with Australia was the Foreign Ministry. It had elevated Australia to a "tier one" relationship -- countries with which it wanted closer relationships. Why Australia? If you want to establish leadership in East Asia, why not try to cajole one of the US's most loyal supporters more into your camp?

Australian business considers an FTA of little value unless it buttresses free markets and improves conditions for business in China. It has mentally settled in for a long haul. But will Government officials hold the line in an environment of political blandishments? A new Summit process of East Asian Leaders is about to begin. This was another Chinese initiative. It is clear John Howard wants to be there.

Will China suggest Australia compromise its hard line free trade position to attend the Summit? It might. It is unlikely to succeed. The connection would not work politically in Canberra. But if Beijing tries, Washington should be paying close attention.

Alan Oxley is a former Ambassador of Australia to the GATT and host of the Asia Pacific page of Tech Central Station


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