TCS Daily

Two-Headed Dragon?

By Alan Oxley - April 10, 2006 12:00 AM

China has discovered the power of economic strength. It is enjoying more global influence than at any time for at least 500 years (when it decommissioned its blue water navy, probably then the largest in the world, and turned inward). Everybody, except maybe the US Congress, wants to cozy up.

Just how it will exercise this new power has us all intrigued. Will it be mercantilist or act in enlightened self-interest? Wen Jiabao, China's Premier has just visited Australia. If that visit is any guide, the signs are worrying.

Australia has good reason to like China. Last week the national newspaper, "The Australian" ran this front page headline "Tax cuts forged in China". Two of the world's biggest miners of iron ore and coal are giants on the Australian stock exchange. They have had record sales to meet China's burgeoning demand and are now forecast to inflate by a quarter an already record tax take by the Australian federal government. Tax payments by the companies expect to add another US $3.5 billion to federal tax coffers. Pressure is mounting on the Government to cut personal income tax rates.

Australia is rich in minerals. Gold, copper, nickel, lead, iron ore, alumina, coal, iron ore, you name it, Australia mines it. Australia last had a minerals boom in the sixties and seventies when Japan's industrial development took off and sucked in vast quantities of Australian minerals. Since then, minerals prices, excepting oil, have been flat.

Suddenly the demand is high and prices are up. While ships laden with Chinese goods clog ports in California, ships queue in Northern Queensland, eager to load coal to sate China's industrial appetite.

Chinese officials understand the impact. In August 2004, Chinese energy executives attended a conference in Sydney to promote the idea of a free trade agreement (FTA) with Australia. One related how he told an American investor who wanted to know how to invest in China's economic development to buy shares in Australia's resource companies.

But do officials in Beijing understand how this all works? The Chinese energy sector was an enthusiastic supporter of the FTA. In early 2005, executives from Australia's resources sector trooped to Beijing for a follow up conference on the idea of an FTA.

When they met their Chinese counterparts, they were floored. "An FTA is a great idea," the Chinese executives told them. "We can use it to control prices." The Australians wanted to talk about how to use commercial contracts to guarantee security of supply, not cap prices.

The idea seems ingrained among Chinese officials. A year later, the Chinese Ambassador in Australia engaged in a remarkable PR campaign to encourage the Australian Government to pressure the Australian companies to reduce their prices during negotiations between Australian iron ore suppliers and Chinese buyers.

Early this year, when another round of negotiations on iron ore contracts was due, the Chinese Ministry of Commerce attempted to organize a buying cartel and then direct its buying strategy. Australian officials protested and the influential National Reform and Development Commission in Beijing ultimately announced the prices would be set in negotiations between commercial parties (that is, not by government officials).

That seemed well and good until the visit to Australia by Wen Jiabao, the Premier of China, which has just concluded. A new agreement to supply uranium (another energy mineral abundant in Australia) to China was announced. To the dismay of Australian officials, Wen also told the media that under this agreement, both countries would collaborate to regulate prices. This was not what the Australians expected.

It is little wonder, therefore, that the pace of negotiations over the Free Trade Agreement is flagging. Australia is the largest Western economy with which China has decided to negotiate an FTA.

Australia's trade Minister, Mark Vaile, has insisted that the FTA with China must cover all issues. However, the attitude in Beijing towards trade liberalization appears to have an increasingly mercantilist flavor. Beijing wants to exclude investment and services and not to have agriculture fully addressed.

China has negotiated an FTA with Thailand but it is only FTA in name. It was an agreement to open trade in some agricultural products. It has begun to negotiate an FTA with the ten ASEAN countries, but wants services and investment excluded.

In the WTO, China is insisting that it should not liberalize further, having just completed accession to the WTO. In that process it did make serious commitments. It included major concessions to cut tariffs and to open up and reform its financial sector. It has delivered on the former and appears determined to see financial sector reform through. However Rob Portman, the US Special Trade Representative has a long list of failures by China to comply with WTO commitments.

One wonders if the view in Beijing now is that accession to the WTO was not a down payment to participate in the world market economy and join in progressive liberalization with the rest of the global community, but payment in full. The message: China need not liberalize further; and those wanting to trade with China will do so on its terms. And that would include setting prices.

Those negotiating FTAs with China, Australia included, are about to find out.

Alan Oxley is a former Ambassador of Australia to the GATT, then predecessor of the WTO and is Host of the Asia Pacific page of TCSDaily.


1 Comment

Our FTA with the US is just as one sided.
Did our sugar farmers get anything out of the FTA with the US?
China is doing what every Gov does trying to get the best deal for it's companies whether gov owned or private.

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