Why the World’s Largest Trade Deal Won’t Help Australia
By: The China Guys
Tags: Trade, Australia, Economics, China, Business

Image via: Adobe Stock

Summary

At first viewed as an olive branch amidst a spiraling Sino-Australian trade war, the now finalized Regional Comprehensive Economic Partnership is unlikely to ease mounting tensions. The untested dispute settlement mechanisms within the deal and shallow provisions for reducing tariffs bode poorly for Sino-Australian relations and point to no end in sight for 2020’s series of new economic tariffs and sanctions.

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On November 15, 2020, a monumental achievement was penned into action as 15 member nations brought eight years of discussion to a close. As the world’s largest free-trade agreement, the Regional Comprehensive Economic Partnership (RCEP) is slated to reduce trade barriers and encourage economic collaboration. However, underscoring its inauguration are tensions between two of its largest participants, China and Australia, that pioneer new heights on a daily basis.

While the US-China trade war grabs most of the headlines, China and Australia remain engaged in an active trade war, perhaps equally as volatile, that is impacting a wide range of global industries. Through a combination of tariffs, export controls, and diplomatic reprisals, both adversaries are locked in battle to establish their political dominance through economic coercion. While onlookers have hoped that the RCEP deal would help alleviate tensions, the limited scope of the agreement’s ability to mediate conflicts between participants have left Sino-Australian tensions unresolved with no end in sight.

Not Playing by The Rules

Sino-Australian relations began to sour in 2018 when Australia became the first country to publicly ban Huawei from its 5G network. Tensions have since escalated quickly once the Australian government called for an international inquiry into the true origin of COVID-19 in the beginning of 2020, which later led to a motion for an unbiased investigation at the World Health Assembly in May. While Australia’s wish was granted as the motion passed, the nation was unprepared for the immense blowback that it was set to receive from China as a consequence of its accusation.

Adding flames to the fire, the Australian government has now become more vocal in expressing their disapproval of China’s actions. Standing alongside Western allies, Canberra has denounced Beijing’s handling of issues in Xinjiang and Hong Kong while also joining the debate over China’s territory claims in the South China Sea. In response, Beijing declared Australia’s actions invasive of Chinese sovereign affairs and turned to trade restrictions as punishment.

To reign in its “unruly” trade partner, Beijing has taken steps to halt purchases of at least seven categories of Australian commodities, such as: barring Australian beef imports, delaying seafood shipments from clearing customs, imposing tariffs of over 80% on barley, restricting timber from Queensland, and more. Key Australian industries have been threatened by China’s trade war tactics by cutting off access to their most valuable client: the Chinese market.

Happy Customer No More

China began imposing restrictions on Australian imports in February of 2019, when the Northeastern city of Dalian started banning coal imports and China capped coal imports nationwide. Continuing into 2020, the Chinese government initiated a series of investigations against Australian barley with anti-dumping and anti-subsidy duties totalling 80.5% in May, then proceeded to implement additional duties to halt beef imports from four of Australia’s largest meat processors.

In August, China began launching more anti-dumping and anti-subsidy probes, this time into Australian wines — an industry already in hot water. As the top export market for Australian wine, China had always offered steady demand for fine Australian wines. However, recent events have brought this demand to a grinding halt. First, the pandemic stymied the economies of both countries, organically slowing the supply and demand of Australian wine. Then, industry pressures from falling sales, overstock of inventory from previous seasons, and an ongoing drought worsened by Australia’s bushfires all contributed to tapering wine sales, which were further exacerbated by the anti-dumping restrictions. Ultimately, China’s probe culminated in a decision to levy tariffs of up to 210% on Australian wines, a serious blow to an already struggling industry.

Beginning in late August through early September, China suspended barley imports from Australia’s largest grain exporter, CBH Grain, after pests were discovered during an inspection. Beijing consequently ordered stricter inspections of Australian wheat and barley, dealing a major blow to the Australian grain export economy, of which over half-around 6 million tonnes of barley-go to China alone each year. Totaling an average of AU$1.5 billion to AU$2 billion a year, barley exports are worth more than half of Australia’s total trade exports — which severely exposes the Australian economy to any disruptions in normal trade.

Finally, in October, Australia began investigating reports that China was verbally instructing buyers to avoid Australian coal imports. At the same time, Beijing had also reportedly ordered cotton mills to stop buying Australian supplies or face the risk of a 40% tariff. As the largest purchaser of Australian cotton at an estimated trade worth of AU$900 million during the 2018–2019 year, the Chinese market and its unofficial boycott of Australian cotton irrevocably devastated the cotton economy in the Land Down Under.

It is important to understand the various implications that these trade restrictions have for both economies. With Australia barely squeezing in the top 15 of China’s largest trading partners, the Chinese market has a certain amount of buffer to protect it against falling quantities of Australian imports. Despite a large consumer market for Australian products within China, it is clear that Chinese consumers are only mildly fazed by the implications of a Sino-Australian trade war.

On the other hand, China has been Australia’s top trading partner for a long time, surpassing all other trading partners by a far margin. With 32.7% of its total exports going to China, Australia’s degree of reliance on the Chinese market is undeniable. Should Canberra hope to restore its economy to the former status quo, it may have to consider “playing ball” with China to mend the two countries’ broken relationship.

The RCEP: Olive Branch or Fool’s Gold?

Amid spiraling trade and diplomatic relations, the future of the Sino-Australian trade partnership appeared anything but certain. The RCEP, by contrast, was seen as a potential olive branch between these two nations, as well as a possible means of dispute resolution.

Poignantly, the RCEP provides pre-established channels of communication for member nations to engage openly with one another. Experts claim that the RCEP is the first step in organizing additional methods by which China and Australia can begin to resolve their disputes. According to Williams Trade Law, an Australian law firm, the institutional structures in the RCEP that act as mediums for dispute negotiation, along with its liberalization commitments, will provide supplementary forums to negotiate matters of common interest between the two nations and assist in resolving the inevitable disagreements about technical trade issues. With additional shared interests in trade, Williams Trade Law theorizes that this will encourage both parties to seek peaceful settlements instead of imposing fines and tariffs upon one another.

Pragmatically speaking, the RCEP is unlikely to facilitate negotiations, bring significant change to the Sino-Australian relationship, nor resolve the two nations’ pre-existing conflicts. Mediation through the RCEP is unrealistic, as its own dispute mechanism is untested. Given that the agreement’s main function is to stimulate new trade between the member nations, it does not contain sufficiently detailed rules to deal with any new trade tensions that arise.

In theory, it makes sense for both parties to use a larger and more established FTA for its dispute mechanisms. While the RCEP is a larger FTA than the ChAfta (pre-existing FTA between China and Australia) and is also the only mega FTA involving China; however, the RCEP is unique from other trade agreements. It was constructed to emphasise market-opening strategies per tariff cuts rather than regulatory issues, which makes it unlikely that this precedent can be applied to remedy trade disputes. Additionally, the dispute settlement chapters of most FTAs are notoriously hard to use, and as a result, are rarely accessed. ChAfta is a prime example, as it already has a pre-existing settlement that remains unused.

Beyond dispute settlement mechanisms, the RCEP will not entirely eliminate the tariffs and restrictions imposed by China. According to Article 7.2, Section 1 of the agreement:

“If this Agreement causes an increase in production of a good through the elimination of customs charges that ends up threatening the economy of one partner, then the other partner has free reign to suspend the further reduction of any tariffs and even increase the rate of customs duty on the good.”

If this is the case, then the RCEP will only remove 92% of outstanding tariffs on Australian exports to China. In addition to this, this agreement will also allow for anti-dumping duties like China’s wine duties recently put into place, as the Chinese government can claim that they are protecting their own market at any time. Furthermore, the RCEP will not prevent any of China’s recently displayed tactics done in poor faith, with a current example being the holding up of lobster and other fresh ingredient imports in Chinese ports while they begin to rot. Therefore, it is unlikely that RCEP will not help resolve the conflict between these two countries, and even may allow China to continue imposing more restrictions upon the two nations’ trade relationship.

No End in Sight for the Sino-Australian Dispute

Instead of relying on ineffective settlement mechanisms through large or small FTAs, China and Australia must instead find alternative ways to resolve their ongoing trade war. Experts on both sides of the conflict agree that dispute settlement mechanisms ultimately do little to resolve political differences, while the political willingness of the nations involved has the most significant influence. While it is possible for third-party members in the RCEP to seek a settlement through RCEP adjudicators, there is a higher probability of success should the parties in question initiate the process. However, given that both sides currently believe that ‘the ball is in the other’s court,’ it may be some time before such a settlement is reached.

Nevertheless, the fact that both countries have still committed to the RCEP shows that there is the possibility for mending the broken relationship and open negotiations in the future. The signing of the RCEP should send a signal to the world that both China and Australia remain committed to trading and engaging with each other on equal terms.