1. Skip to content
  2. Skip to main menu
  3. Skip to more DW sites

'Modest effect'

Interview: Gabriel DomínguezNovember 18, 2014

Canberra has sealed a free trade pact with Beijing to give farmers and the services sector unprecedented access to China's market. But some measures will take over a decade to implement, says Leon Berkelmans.

https://p.dw.com/p/1DpAz
Australien Rinderherde Cowboy auf Stockhorse
Image: imago/blickwinkel

Australian Prime Minister Tony Abbott and Chinese President Xi Jinping signed a memorandum of understanding clinching the agreement during a ceremony in parliament in Canberra on Monday, November 17. The free trade agreement (FTA), which concludes a decade of negotiations, is expected to provide the biggest opportunities to the agriculture and service sectors. Tariffs will be abolished for Australia's 13 billion USD dairy industry. Australia's beef and sheep farmers will also gain from the removal of tariffs ranging from 12-25 percent and all tariffs on Australian horticulture will be eliminated.

According to the Australian government, more than 85 percent of Australian goods exports will be tariff-free upon entry into force, rising to 93 percent in four years. On full implementation of the FTA 95 percent of Australia's exports to China will be tariff-free. China is already Australia's top trading partner, with bilateral trade of around 130 billion USD last year. In return, Canberra will ease curbs on Chinese investment in resource-rich Australia.

In a DW interview, Dr Leon Berkelmans, Director of the International Economy Program at the Sydney-based Lowy Institute, says while Australia stands to benefit most from the deal, the effects will likely be modest as the FTA is expected to boost growth in Australia only by 0.04 percent annually over 10 years.

Dr. Leon Berkelmans
Berkelmans: 'Australia is not so important to China economically'Image: Lowy Institute

DW: What exactly does the China-Australia free trade agreement entail?

Leon Berkelmans: The agreement appears to be quite broad ranging. It covers free trade in goods, services, investment, and labor. However, it is not all inclusive. For example, sugar and rice are two items left out of it. What happened on November 17 was the signing of a Declaration of Intent.

Now China and Australia have to prepare the legal texts of the agreement. It's somewhat unclear when the actual agreement will be signed, but my expectation would be some time in the first half of next year. Some barriers will come down immediately. Some measures will take over a decade to be fully implemented.

How important is the FTA for both countries and who stands to benefit the most?

The modeling of the agreement is nearly 10 years old. A lot has changed since then, and the agreement will be different to the agreement that was modeled. As a proportion of the size of the economy, Australia will be most affected. However, the effects will be modest. The modeling done previously suggested that it would boost growth in Australia only by 0.04 percent per year over 10 years.

How important is this deal for both countries?

China is now Australia's largest trading partner. Over one third of our exports go to China. A large part of that is iron ore. China's boom has had a profound impact on Australia's terms of trade, which at one point hit its highest level in around 150 years.

This in turn has affected our exchange rate, which has changed the prices of tradable goods in Australia relative to non-tradables, and our industrial structure. The increase in commodity prices also boosted company profits, which increased tax revenues for the government. China has been a big deal for Australia.

Australia, on the other hand, is not so important to China economically. Only around five percent of China's imports come from Australia. Nonetheless, Australia does play a large role in China's iron ore market. Only around two percent of China's exports go to Australia.

Why is China interested in such a trade pact with Australia?

I think that political considerations are important to this agreement, but that's a good thing. It is an expression of the further evolution in the relationship between the two countries.

Is there any opposition to the deal in Australia?

China und Australien schließen Freihandelsabkommen 17.11.2014
Berkelmans: 'Political considerations are important to this agreement'Image: Reuters/D. Gray

There is some. There are elements that are concerned about the ability of Chinese workers to come to Australia and displace local workers. Also, the prospect of further Chinese investment in Australia has agitated some, especially in regard to agricultural land.

This is the third FTA signed by Canberra this year, following similar agreements with South Korea and Japan. Is this deal expected to trigger any political reactions from China's regional rivals Japan, South Korea or the US?

I would be surprised if it did. Again, the economic effects of this agreement are not especially large.

Dr. Leon Berkelmans is the Director of the International Economy Program at the Lowy Institute.