ALP DELEGATION VISIT TO CHINA

20 February to 1 March 2005

Federal Labor Trade Delegation to China:  (Left to Right) Simon Crean, Shadow Minister for Trade, Warren Snowdon MP, Gavan O'Connor Shadow Minister for Agriculture and Senator Kate Lundy, Shadow Minister for Manufacturing and Consumer Affairs at the Shanghai Stock Exchange

The purpose of this visit to China was twofold:

The visit provided an excellent opportunity to build on the initiative put in place by Simon Crean during his visit in April 2002 to establish closer political links between Australia and China at a range of official levels.

There is an enthusiasm within China to establish closer political links with Australia reflecting the rapid developments in the trade and economic relationship. 

Itinerary

Sunday, 20 February - Arrive Beijing

Monday , 21 February:

Tuesday, 22 February:

Wednesday, 23 February:

Thursday, 24 February:

Qingdao port facilities: 40% of the iron ore unloaded a this port comes from Australia.

Friday, 25 February:

Saturday, 26 February:

Sunday, 27 February

Monday, 28 February

Tuesday, 1 March

Findings

The focal point of discussions was the prospect of a Free Trade Agreement between Australia and China.

The bilateral trade and economic relationship continues to be underpinned by China’s growing appetite for Australian energy resources.  Australia is also well regarded within China as a reliable supplier of quality products. 

There is interest in China to access Australian expertise in education, middle management (methodology and human resources), financial and other professional services. Occupational Health and Safety expertise is one example of a professional service in demand. 

There is high level official support within China for beginning formal FTA talks with Australia. This sentiment was expressed consistently during meeting with officials. 

Federal Labor Trade Delegation meeting with Mr Zhang Zhijun Vice Minister (second from right) Liou Dong, Deputy Director General  (right) of the International Department on the Chinese Communist Party (CPC)  and officials :  (starting from left) Senator Kate Lundy Shadow Minister for Manufacturing and Consumer Affairs , Australian Embassy representative, Simon Crean Shadow Minister for Trade, Gavan O'Connor Shadow Minister for Agriculture and Warren Snowdon MP.

It is anticipated that, given the feasibility (scoping) study on a FTA between our two countries has been completed, the Australian and Chinese Governments will release the study publicly only when the Prime Minister visits China in April.  It is also anticipated that at this point a joint announcement will be made to begin formal negotiations.

Since the visit it has become clear from statements by the Prime Minister that the Australian Government has conceded the granting of market Economy Status as a condition for beginning formal FTA negotiations. This is despite earlier denials by both Embassy officials in Beijing during our visit and earlier comments by the Prime Minister

China is sensitive about the potential impact of an FTA on their agriculture sector, noting that 900 million people live in rural and regional areas.  Officials made it clear that this sector is critical for China’s social (and therefore political) stability.

The delegation took those comments on board but noted the relatively small size of Australia’s agriculture exports[1] when compared to Chinese production and demand and also the sensitivity of agriculture in Australia.  Particularly, the need to open new export markets to ensure that Australian regional communities continue to have strong international demand for their products.

Chinese officials highlighted its request for greater access to Australia’s textile clothing and footwear market in light of Australia’s tariffs on those products.  The Delegation noted the significant structural reform that has occurred in Australia’s TCF industry and the need to ensure it remains a competitive supplier of products.  The opportunity for closer cooperation and investment in this sector was discussed. It is an area that, according to Chinese officials, will be highlighted as a vulnerability for Australia in the feasibility (scoping) study.

Australia’s sensitivities relate primarily to the threat to manufacturing.   Both the Union Movement, particular the Australian Metal Workers Union (AMWU) and Australian Industry Group have been active in highlighting the threat and demanding a transparent process for the negotiations.

The Free Trade Agreement does present an opportunity to lessen or remove China’s tariffs on value-added manufacturing from Australian companies to improve market access. However any benefit from increased exports to China from Australia will need to be accompanied by policies that both support strategic sectors in Australia and improve the ability of Austrade and Australian Business Groups In China to identify and facilitate specific opportunities fro Australian products.

Beyond manufactures, China’s access to Australia’s unique research, development and practical application of expertise in agriculture, such as dairy and animal husbandry can assist China in the modernisation of the vast majority of China’s domestic economy: farming.

During our visit, many Australian companies operating in China expressed their concern about MES being conceded as a pre-condition to formal negotiations, a position strongly advocated by Federal Labor.

Market Economy Status has implications for Australia as it evokes the WTO remedies against dumping.  This represents a change from the current anti-dumping remedies under Australian law.   Any increase in China’s ability to ‘dump’ excess product at unreasonably cheap prices in the Australian market is seen as a threat to fair competition in both domestic and international markets.

Labor’s view is that MES status is a legitimate issue to bargain with during formal negotiations and to concede it sooner undermines the negotiating strength of Australia and therefore has the potential to weaken the possible outcomes in the deal.

Recognition of MES by Australia represents to China an important political acknowledgement of their success in creating open market.  The political symmetry of Australia as a developed economy supporting MES having previously strongly advocated China’s accession to the WTO, should not be underestimated.

In any analysis of the potential positive outcomes for Australia in a Free Trade Agreement with China, the importance of MES to China is an obvious and important bargaining chip.

Correspondingly, Australia has a substantial ‘ask’.  An important goal prior to the beginning of formal negotiations ought to be to ascertain what tangible barriers exist for Australians wishing to access the Chinese domestic market. Another factor is how  access to Chinese production capacity can be used to facilitate the global reach of Australian manufactures while minimising the impact on Australian production capacity and maintaining Australian capability.

It is important to note at this point that Chinese officials are very eager to describe the potential outcomes of the FTA as ‘Doha round - plus’, meaning that the potential for an Agreement is motivated by willingness to deliver ahead of schedule the outcomes of that round of WTO trade talks.  Labor welcomes this continued commitment to multilateral trade outcomes.

There are many areas of complementarity that China is keen to develop with Australia too that makes the most of our inherent strengths. Identifying mutual opportunities as well as understanding respective sensitivities.

For Australia, the relative smallness of our economy having strong linkages with an economy as large as China’s can potentially assist Australia to improve our dismal export performance and help Australian businesses achieve the scale of production necessary to access other large overseas exports markets.

Therefore Chinese market access for Australia’s exports and access by Australian businesses to do business in China are the priority issues. China’s growth is extraordinary and while there is a push to take the heat out fo the growth it will continue to be very strong.

This graph is source from the “China Facts and Figures 2004” Publication.[2]

China is subject to a WTO time-frame which requires the opening of domestic markets to foreign competition. However the practical experience of many businesses is that many non-specific, non-tariff trade barriers remain. Therefore any other mechanism available to the Chinese Government to give expression to progress in opening their economy becomes very important. Granting of MES is one such way.

There is a well organised group of Australian Businesses operating in Beijing. The China-Australia Chamber of Commerce (Austcham) was founded in 1996 and operates as a not-for-profit private sector organisation. Austcham Beijing is part of a wider network in China, with Chambers operation in Shanghai, and Hong Kong.

Austcham Beijing published their ‘2004 Business Issues Paper’ in August of 2004. This document outlines the Chambers’ views and opinions about the operation of Australian business in China.

This document was brought to the ALP delegation’s attention during the meeting in Beijing. “Austcham Beijing intends that the Business Issues Paper becomes a resource relied on by Australian political and public service leaders in their negotiations and advocacy with their Chinese counterparts.”[3]

To this end the paper represent an important analysis of experiences of Australian business in China. For example, the effect on the limitations imposed on business scope at establishment present a clear barrier to expansion. The approval process of business scope is described as inconsistent across regions and not transparent, making it difficult for business to accurately assess their risk.

This issue of scope was described to me by an Australian business operator in Shanghai as a symptom of Municipal Governments’ ‘quota’ system for the establishment of new businesses.  Apparently (not confirmed by government officials) there are defined numbers of new business registrations that have to be met to achieve policy goals.  Therefore a business registration that is really for the purpose of expanding an existing business still counts in achieving this goal. Hence the limitations on business scope may be at least partially explained by this local application of Chinese industry development policy.

Another issue that was brought to the forefront of discussion was the protection of intellectual property. Many business representatives believe that the loss of IP and the inability to pursue effective legal remedies in the Chinese judicial system is a major inhibitor to investment in China. The AIG have also raised this issue as one that the Howard Government need to address in the context of negotiations.

The Austcham Business Issues 2004  paper goes into great detail about this and other issues. It would serve as a practical guide for the Howard Government to address barriers to business if they choose to use it.

For Australian business, the ability to tap into China’s manufacturing capability combined with access to the Chinese domestic market for Australian manufactures represents to of the most important opportunities to secure Australia’s growth during the next 30 years when the Chinese economy asserts its presence.

This opportunity exists because China’s imports are also increasing significantly.  So the Australian Government has a responsibility to vigorously pursue the interests of Australian businesses’ in this regard, primarily because the identification and expansion of these export opportunities may give the Australian manufacturing sector the boost it needs to not only maintain current employment but expand operations in Australia

This graph is sourced from the “China Facts and Figures 2004” Publication.[4]

Competing with China on price is already very difficult and the most recent study into comparative labour costs shows that the hourly cost of production in China is less than 5% than Australia (reference).

However, manufacturing in Australia has been subject to these competitive pressures for some time and a combination of public policy that supported restructuring and innovation under the previous Labor Government and the continuation of strategic industry support has seen sectors like the automotive sector continue to perform beyond expectation. 

In the context of continuing investment in manufacturing infrastructure in China and their policy of creating the whole supply chain capability in a common geographic cluster, timely and targeted action to secure Australian suppliers a place in these supply chains is required. This ‘local’ or micro approach to facilitate business in China is necessary to create meaningful export opportunities for Australian companies. This approach also addresses the general complaint of many foreign businesses: that they have to deal with different rules or different interpretations of laws in different cities and provinces.

This local approach also sits comfortably with Chinese business culture, where in the absence of robust and enforceable contract law, a very high status is placed on personal relationships, honour and trust. 

This highlights existing Australian policy bottlenecks and limitations.  For example, Austrade are well established in China but are typically under resourced for this kind of approach.  Further, unless their business networks with both Australian and Chinese companies are up to date and paid regular attention any they value they add is undermined anyway.

In conclusion, China is set to ascend to the number two position behind the US as a global economic power. Australia’s best interests are served by maximising the opportunities that exist right now for a closer trade and political relationship. This means a strategic policy emphasis for value-add manufactures made in Australia to be exported to China as their consumer market continues to grow.

China has enormous and growing capability and massive scale of operations.  However imports are growing too and careful analysis of these trends in the context of the negotiation of a Free Trade Agreement could benefit Australian workers and companies in the long term.

Observations

The celebration of the Chinese Lunar New Year gives a glamorous impression to a first-time visitor to China such as myself.  Beyond the visual impact this visit has confirmed to me that China is a truly enigmatic nation, with its cultural mystique and growing economic power. 

As more and more Chinese cultural content makes its way into the western mainstream media, interest from Australia will continue to grow in the people, their lives and their history. Long standing cultural exports such as Chinese herbal remedies have helped open our minds to a more holistic way thinking about the challenges of life.

I have been struck by the sublime symbolism that pervades all aspects of Chinese etiquette, social mores and physical environment. It makes one’s immediate environment and personal interactions a book to be read. I think being able to read this ‘ book’ and drawing its meaning will help me to understand how things work in China.  The challenge is applying this knowledge to one’s conduct and participation in Chinese culture and business.

This challenge is very real for many Australian businesses operating in China, Many administrative processes defy foreign de-codification yet the same administration continues to facilitate the fastest economic growth of the times.  Labor welcomed the initiatives of the Australian Chamber of Commerce in Beijing in preparing a comprehensive analysis of the constraints on foreign businesses and some useful recommendation on how political leaders in Australia can help.

China’s outward focus in the 21^st century is an invitation to explore more deeply the Chinese culture and way of life.  More than any other event the Beijing Olympics in 2008 is being used to great effect as a platform for engagement. My meeting with the Beijing Olympic Committee for the Olympic Games (BOCOG) Sailing Committee in Qingdao highlight how focussed this effort is. 

Qingdao is a substantial city in Chinese terms, with a population of seven million people. It faces the Yellow Sea to the east and south and the urban area covers 1,102 square kilometres.

The city of Qingdao, as host to the Olympic regatta, moved their port from the city to across the bay to make room for the Olympic sailing facilities. This required a massive investment and has resulted in one of the largest single port facilities in the world. The far sighted nature of this major investment stretches across Qingdao’s ambitions to be a centre for leisure and recreation, hence building their tourism potential as well as continuing to break records in the efficiency of port facilities.

Senator Kate Lundy

29^th March 2005