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Will RCEP bring a thaw in Australia-China trade relations?

  • November 29, 2020 12:01 AM AEDT
  • Kunal Sawhney
    CEO Kunal Sawhney
    2212 Posts

    Kunal Sawhney is founder & CEO at Kalkine and is a richly experienced and accomplished financial professional with a wealth of knowledge in the Australian Equities Market. Kunal obtained a Master of Business Administration degree from University of T...

Will RCEP bring a thaw in Australia-China trade relations?

Summary

  • Ties between Australia and China have begun to sour because of political tensions between the two countries.
  • RCEP comes at a time when both countries need diplomatic reforms as well as policies aimed at improving economic growth.
  • Australia must negotiate with China to protect about a dozen of industries affected by the Chinese import restrictions.
  • China also needs a diversion in trade flow to fill in for its lost trading partner United States.
Gold MTF non-AMP

                                                                                                                                                                                                                                                                                      CChina forms a huge market for Australian exports. Up until 2019, a quarter of Australian exports went to China. These included iron ore, gas, and coal, all of which form the largest chunk of Australian goods sold overseas. However, now the ties between the two countries seem to be threatened.

With Australia asking for investigations into COVID-19 spread in China, Aussies had to face a series of trade-related hindrances including import restrictions on various Australian Goods, as media reports claim. About a dozen of Australian industries were affected by various Chinese restrictions on Australian imports. May 2020 witnessed China imposing 80% tariff on Australian barley imports and restrictions on Australian beef imports.

As per recent Chinese media reports, China intends to impose import restrictions on at least seven Australian products including Australian wine, copper, barley, coal, sugar, timber and lobster.

At this juncture, enters the RCEP.

The RCEP (Regional Comprehensive Economic Partnership) is the largest free-trade deal in the world, even bigger than the North American Trade Agreement. It accounts for 30% of the global GDP and 30% of the world’s population. It is uncertain whether the agreement would settle the dust on the dispute between China and Australia. Nonetheless, this deal is expected to improve Asia-Pacific ties and Australia should be able to benefit from it.

Source: Regional Comprehensive Economic Partnership

WHY IS RCEP IMPORTANT FOR AUSTRALIA?

The RCEP deal can be highly beneficial to Australia. The ASEAN is the second largest market for Australia, and can help Australia develop ties with the culturally-diverse nations.

The RCEP is expected to incentivise supply chains in the region. For example, An Indonesian made product using Australian parts may be subjected to tariffs elsewhere in the region. However. With RCEP, parts used from any member nation will get treated equally, providing RCEP countries-based companies an incentive to search for more apt suppliers within the trade region. RCEP could allow better access to the Chinese Belt and Road Initiative (BRI) funds as well.

Such gains from the deal would be received by domestic businesses and farmers in Australia as well.

At a time when the Australian economy is going through a slowdown and unemployment rates are  soaring, the RCEP would bring a much-needed boost to the domestic businesses.

The Australian government is promoting the policies that foster job growth. The RCEP deal could be one such channel that could augment the job creation in the country. As the foreign demand for the Australian goods increases, firms and domestic businesses must produce more. This means they would have to expand their production base and hire more workers. Thus, more jobs would be generated.

ALSO READ: Australia-China Trade Relations Worsen; Are the Aussies Staring Down the Barrel?

EFFECTIVENESS OF THE TRADE AGREEMENT

It can be argued that this trade deal would put pressure on both the countries to resolve their differences. Both the countries have a lot to gain from a trade deal of such large scale. Chinese exports have lost a major market due to the current ban on various product placed by the President of the United States, Donald Trump. Hence, China is looking for markets for a diversion of its trade flow to potential partners other than the United States.

Australia also has a lot to gain from improved political ties with China. Most of the revenue earned by the Australian universities comes from the Chinese students. Beijing authorities have asked the students to not travel to Australia. This can further damage the prospective gains from foreign admissions once international borders open.

The RCEP would provide a forum to both the countries to negotiate on matters that are of mutual interest. However, the deal is more likely to focus on policies aimed at opening of the markets rather than solving internal issues between the countries.

Hence, the effectiveness of the deal will depend on how well both the countries carry out the negotiations.

 


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