Bridges Weekly Trade News Digest • Volume 14 • Number 23 • 23rd June 2010

Australia, China Strengthen Trade Ties

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A free trade agreement could be on the horizon for Australia and China, given the positive outcome of Monday’s talks between Australian Prime Minister Kevin Rudd and Chinese Vice President Xi Jinping. The two officials met in the Australian capital of Canberra during Xi’s 11-day tour of Australia, Bangladesh, Laos, and New Zealand.

Despite recent concerns over political tensions between the two countries - brought on by British-Australian mining company Rio Tinto’s rejection of a major deal with Chinese aluminium company Chinalco, among other incidents - the two countries are now expressing their commitment to strengthening their relationship, at least in economic terms.

The two countries have been entertaining the idea of establishing an FTA since 2005; the talks are now about to enter their fifteenth round of negotiations, which will be held in Beijing at the end of this month. Xi mentioned during his visit to Canberra that the FTA would be of “strategic interest to both countries,” according to The Australian newspaper.

A study commissioned by the Australian Department of Foreign Affairs and Trade, which the Australian-based Centre of Policy Studies conducted with the help of Chinese experts, found that both countries would benefit strongly from an FTA. Their results also found that the FTA would also increase trade volume for the world as a whole.

The study suggested that the FTA would boost inflation-adjusted GDP by US$18,000 million in Australia and US$64,000 million in China. The study, which was published in 2005, focused on the effects of implementing the FTA in 2006, and then modelled the effects for the years 2006-2015.

Rudd announced at Monday’s Australia-China Economic Trade and Co-operation Forum that the talks with Xi have already yielded a series of ten new trade pacts worth US$8.8 billion. Many of those deals are focused on natural resources, notably Australia’s minerals.

China is already Australia’s largest trading partner; bilateral trade totalled US$75,167 million in 2009 alone. Much of this trade comes from Australia’s mining resources; however, Australian Trade Minister Simon Crean promised that Australia’s “economic relationship with China is becoming so much more than just trade in resources,” according to BusinessWeek.

Xi is viewed as the likely successor to President Hu Jintao. Meanwhile, Rudd is working to build support for his Labor Party in the upcoming Australian national election, which must be called by April 2011 and could be held within the next few months.

Should Labor win the election, the party would likely implement a 40 percent tax on mining industry prices as part of a larger overhaul of the Australian economy. Given that iron ore for China’s steel mills comprises half of Australian exports to that country, the implications of the tax for Chinese investors had been cause for concern prior to this meeting.

However, China’s willingness to ink resource-focused trade pacts - despite the potential tax - could help assuage fears within Australia over the levy’s effects on foreign investment.

The proposed tax has already garnered substantial opposition in what promises to be a difficult election for the Australian Prime Minister. Given Australians’ 55 percent dissatisfaction rate with Rudd, some speculate that the Labor Party could ask him to step down before the election, allowing Deputy Prime Minister Julia Gillard to run in his stead against Liberal leader Tony Abbott.

ICTSD reporting; “Australia, China sign major deals, push free trade,” AGENCE FRANCE-PRESSE, 21 June 2010; “China’s Xi visits Australia amid mining tax spat,” AGENCE FRANCE-PRESSE, 19 June 2010; “Rudd forges closer ties with China’s vice president Xi Jinping,” THE AUSTRALIAN, 21 June 2010; “Abbott Narrows Gap on Australia’s Rudd in Newspoll,” BUSINESSWEEK, 20 June 2010; “Australia, China Sign Trade Pacts Worth $8.8 Billion,” BUSINESSWEEK, 21 June 2010; “China Official Pushes Australia Ties,” WALL STREET JOURNAL, 21 June 2010.