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Chinese Freetrade Deals are No Guarantee Against Protectionism

John Lee

Does June’s official signing of the China-Australia Free Trade Agreement, which lifts tariffs on an estimated 97 per cent of Australian exports, mean blue skies ahead for our firms in China? I doubt it.The really hard work begins with navigating through domestic hurdles imposed often arbitrarily by China’s opaque and labyrinthine political economy. As the unexpected import quality restrictions levied against Australian coal demonstrates, sectors dominated by state-owned-enterprises such as energy will demand protection from the Chinese government when the going gets tough. And with the slowing Chinese economy causing more domestic pain than Beijing is letting on, party-controlled regulators will heed that call with increased frequency.

First, some comment on the latest restrictions imposed on Australian coal. The restrictions cover lower-grade coal with more than 16 per cent ash and 3 per cent sulphur and are being applied to some of China’s most polluted regions, such as the Pearl and Yangtze deltas, which also happen to be among the most prosperous and dynamic regions.

The rationale appears reasonable enough: to reduce terrible levels of air pollution in these areas. The problem is the emerging evidence these regulations are not being imposed uniformly on Chinese low-grade coal producers struggling to survive in a market where thermal coal has dropped to less than $US60 ($78.49) a tonne, from highs of more than double that in 2011. In fact, moves to protect Chinese miners from Australian and Indonesia competition began in October 2014, when regulations imposed more stringent guidelines on imports than it did on Chinese miners with respect to sulphur content.

Optimists might be right that Beijing will eventually agree to demands by the Australian resources representatives that a consistent standard be applied, but only if Beijing can cobble together a plan to ensure local miners can survive the double whammy of a domestic slowdown and external competition. After all, Beijing has partially liberalised the energy sector in China and transferred the ownership of many coal mines from central to local government to improve the operation and efficiency of the mines rather than to oversee their closure at the hands of better-run mines in countries such as Australia.

Broader lessons

But there are broader lessons largely ignored because of the bubbling excitement about the trade agreement with China. Beijing has signed more FTAs in the past two decades than any other country in the world – all of these deal almost entirely with reducing or eliminating tariffs. At the same time, China has refused to discuss meaningful agreements dealing with reducing or eliminating regulatory and other domestic burdens to restrict the import of goods and services on the basis that such conditions go to the heart of the government’s capacity to retain and protect Chinese sovereignty. And despite such high-sounding principles, the track record is that Beijing has frequently resorted to such ad hoc and arbitrary regulatory hurdles on importers when the government, or representatives from SOE-dominated sectors, believe that they are not “winning” from the agreement.

As examples, consider the banning of American beef in 2003 at the request of Chinese beef producers, after authorities discovered the existence of mad cow disease that was traced to just one cow in Washington State. In 2014, China banned American pork on the basis that such products contain small amounts of growth-inducing chemicals, even though Chinese farmers use the same or similar hormones. Both bans remain in place and have been only partially relaxed. It is no coincidence that such bans emerged alongside reaffirmation of Chinese policy that the country aims to become self-sufficient in beef and pork by 2025. Australian farmers should take note that the self-sufficiency policy also applies to poultry, wheat and rice.

Then there are other more generic forms of protectionist strains emerging in China that circumvent tariff reduction agreements. One big one is the increased use of antitrust laws passed in 2008 against overseas companies outperforming or dominating in sectors deemed important by the government, and which are generally targeted by SOEs. The list of companies that have fallen foul of Chinese antitrust provisions with little warning is long and expanding: Microsoft, Symantec, Bausch & Lomb, Johnson & Johnson, Nikon, Carl Zeiss, TAG Heuer, Samsung and LG to name just a few. All operate in sectors with ambitious Chinese SOEs – with the urging of the government – trying to establish firm footholds in the domestic market.

Extensive list

Note that Beijing has identified an extensive list of sectors in which SOEs are to dominate over domestic private and foreign firms into the future. This includes automobiles, information technology, petrochemicals, aviation, energy, agriculture and staple foods, insurance and finance, railways, media, shipping, construction, metals, telecommunications, industrial chemicals, alternative energies, new-generation IT such as cloud computing, new manufacturing technologies such as robotics and 3D printing, and biotechnology.This does not leave much room for Australian and other firms to thrive in sectors not subject to the mercantilist interventions of Chinese regulatory bodies and officials.

Whereas antitrust laws are normally designed to prevent market power from being used to reduce competition, Chinese authorities are using such provisions against foreign and even its own domestic private firms to help SOEs emerge as the winners of the country’s self-titled “capitalism with socialist characteristics”. Given the deliberately intimate institutional and interpersonal links between Communist Party members and SOEs, preserving the continued presence and influence of the party in a modernising Chinese economy depends on it.

A rising tide lifts all boats. When growth slows, inefficient and less-savvy SOEs will run to state authorities for relief from competition. As China’s other FTA partners have discovered, and Australia will learn soon, anti-tariff agreements are no guarantee of success or even fair opportunity.

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