In celebration of the 40th anniversary of the commencement of our diplomatic relationship with China I was asked to reflect on the trade and investment dimension of the relationship, and identify any opportunities and challenges. In my contemplation I was drawn back to the 1850s and the Victorian gold rush which saw Australia producing 40 percent of the world’s gold. This historic boom also had the effect of attracting adventurers, entrepreneurs and people seeking a better life from Europe and China. The Australia-China resource partnership referred to by President Xi Jinping, at an ACBC event in Canberra in 2010, is indeed long-standing and eclipses our diplomatic relationship.

In more recent times, the 1980s investments by Chinese companies Sinosteel and CITIC in the Pilbara Channar mining joint venture and Victorian Portland aluminium smelter respectively, were also bold and without precedent at the time. The contemporary trade numbers are even more staggering (over $125 billion in two-way trade) with a considerable surplus in Australia’s favour, and with a seeming concentration in resources on one side and manufactured goods on the other. Far from balanced one might say.

Two-way investment is similarly unbalanced though in China’s favour. In the last few years Australia has been China’s largest FDI destination outside Hong Kong, whilst China receives only three percent of Australia’s FDI.

This perhaps says something about the difficulty that Australian services companies experience in entering and navigating the Chinese market through central, provincial and local levels of Government law, policy and regulation. The regulatory and jurisdictional uncertainty arises from the fact that laws and regulations are drafted so as to allow considerable discretion in implementation at the local level. It also says something about Australia’s preference for investing in countries with similar cultures as evidenced by the fact that over 65 percent of our FDI is directed towards the US, UK, Canada and NZ. These countries can hardly, however, be accused of stellar growth in recent years.

In summary, and using the economic descriptors of Premier Wen Jiabao, I would therefore conclude that Australia’s bilateral economic relationship with China is unbalanced (lacks diversity across products and services) and uncoordinated (lacks support from an umbrella FTA), but is nevertheless steady and sustainable. In other words, it’s not as good as it could be. Taking the benefits that would be derived from a fully comprehensive FTA as a proxy for the value of the opportunity cost it’s conceivable that each side is leaving $150 billion on the table over a 20-year period. (Refer the ACBC’s 2009 report on the benefits of an FTA).

Let me make some observations in respect to the resources/infrastructure, services, agriculture and R&D sectors specifically. The Australia-China resource partnership has moved from trade in resources to direct investment in projects. This is both natural as the relationships initially built through trade provide the confidence and trust required to underpin significant offshore investment commitments, and is welcomed given that Australia’s investment requirements have exceeded its domestic savings capacity throughout most of its history. China’s investment has progressively moved upstream into Australian projects but has neither significantly moved into supporting infrastructure (ie ports, rail, energy and other utilities) nor into the domain of economic and social infrastructure required to support the regional towns/cities associated with natural resource development in Australia. Herein lies a “win-win” opportunity because China has expressed an interest in infrastructure development in Australia, and because there is an enormous infrastructure deficit across Australian resource projects and regional communities. I would also venture to say that China is almost uniquely placed to provide the capacity to deliver major infrastructure projects and price the relevant supply chain risks (as both a developer and offtaker) associated with their development.

As regional communities have traditionally struggled to attract funding and services the opportunity for long-term Chinese investors to effectively engage with local communities would engender enormous goodwill and build considerable support at a grass roots level. Any such endeavours would therefore generate a positive externality on the public perception of all Chinese investments and provide a tangible counter to the often unjustified xenophobic sentiment peddled by some of the popular press in respect to foreign investment.

In respect to services it is important to note that Australia undertook significant macro/micro economic reform throughout the 1980s–1990s (well before China joined the WTO)  to open up the domestic economy to international trade (significantly reduced tariffs on imports, floated the dollar, removed restrictions on foreign bank entry…), and overhauled the internal workings of the economy in the areas of industrial policy, wage bargaining, reserve bank independence and financial sector liberalisation.

As protectionism reduced under these reforms manufacturing declined – from employing 25 percent to 10 percent of the Australian workforce. Concurrently, with an increase in workforce mobility, services increased to represent about 80 percent of Australian employment and GDP in today’s economy. In recent times the high real exchange rate has put further pressure on the non-resources tradeable sector (manufacturing) of the economy.

China’s export led business model which delivered unrivalled year-on-year growth over the last four decades has seen it develop a huge manufacturing capacity. This has drawn input factors from across the Chinese economy and has arguably been done at the expense of its services sector. Hence, as China drives towards quality in growth and encourages domestic consumption, its demand for services promises to be huge and well in excess of its current capacity. Hence, the opportunity for Australian firms to service this demand represents an opportunity without precedent. To quote from the Australian Government’s White Paper “an increasingly wealthy and mobile middle class is emerging in the region, creating new opportunities. They are demanding a diverse range of goods and services, from health and aged care to education to household goods, tourism, banking and financial services, as well as high-quality food products.”

Services can be delivered either domestically or offshore. In the case of services delivered domestically the enormous growth in tourism (some 500,000 Chinese visit Australia last year) and education (some 130,000 Chinese students are enrolled in Australian tertiary institutions) is enormously profitable in respect to dollars received and increased cultural understanding. This will no doubt challenge Australia’s capacity to ensure that the collective experiences of Chinese tourists and students alike are rewarding and transform Australia’s economy and society to better fit the Asian century. A proportionately higher number of Australian tourists are also discovering China.

Services can also be delivered from abroad. There is perhaps no better example than the build up in China’s banking presence in Australia over the last five years. China has capital, and the rest of the world wants it – so it is hardly surprising that the number of Chinese banks operating in Australia has increased from two to nine over this period. This is a welcome development. The ICBC in Australia has moved beyond servicing SOEs to being involved in the syndication of bank loans for Australian companies including Santos, Woodside and Woolworths. The Bank of China in Australia counts Telstra, Origin and Investa amongst its local clients.

From an Australian point of view it is fair to say that Australian firms view the opportunity to service China’s rising middle income group as attractive a proposition as do Chinese firms view the opportunity to service Australian clients or the opportunity to develop and buy Australian resources.

The perception of reciprocity and balance in the bilateral trade and investment relationship is paramount. Hence, whilst China has done much to reform its financial sector the equal treatment of foreign and domestic financial service providers in respect to licensing, corporate form, regulation and permitted service offerings across the country would be welcome in the next phase of reform or as part of a negotiated FTA.

On the subject of agriculture it unquestionably occupies a very special place in both the Australian and Chinese psyches. Early pastoral growth in beef, lamb, wool, dairy, grains…accelerated Australia’s early development – Australia was said to have developed on the sheep’s back. In the case of China it was the emergence of the rural based Town Village Enterprises (TVEs) in the 1970s-1980s that liberated the Chinese entrepreneurial spirit and drove early growth in the Chinese economy. In recent times the rural parts of China have not fared as well in the development process, and the rural communities of Australia have struggled to attract investment and retain services. This is important context to bear in mind as both sides consider further cooperation in agriculture.

With the push towards modernising Chinese agriculture through the 12th 5-year plan there is huge potential for trade and technology exchanges with the Australian agricultural industry. Australian agriculture is run to the highest world standards of health (eg never any cases of BSE – mad cow disease), and uses innovative farm management practices closely supported by university based R&D across the country.

With the advent of Chinese FDI in Australian agricultural enterprises there is a real opportunity to breathe life back into rural communities and cooperatively engage with local stakeholders. Proposals which demonstrate long-term commitment to local, often remote, communities, which provide access to new markets (eg  Cubbie cotton for premium Chinese suits targeted at business people) and foster links to universities and R&D must surely be welcomed. Again, the positive perception that is created in rural Australia through carefully prosecuted deals, by good corporate citizens, that bring the community along cannot be overestimated.

In respect to R&D there is great scope for cooperation given our mutual focus on health, sustainability, agriculture, resources and clean energy. The Group of 8 universities from Australia and the Group of 9 from China (ie leading clusters of research universities from both countries) have had an established formal relationship that goes back five years and has become a benchmark that the Europeans are keen to emulate.

CSIRO and the Chinese of Academy of Sciences have an excellent relationship which is both deep and broad across many fields of study.  This is indeed important because both countries have much to contribute to one another – and both countries must innovate to stay ahead of the relentless competition unleashed by globalisation that will drive global convergence over the long-term but create enormous dislocation (and therefore winners and losers) over the medium-term.

Finally, let me turn back to the Australia-China FTA: is it all worth it? $150 billion to each side over 20 years says that it is. But I would also argue that its symbolism (ie friendly nations compromising and navigating sensitivities to deliver a welcome economic outcome for their people and businesses) is equally powerful. Does our 40-year diplomatic relationship not deserve an FTA? Finally, I would argue as did Deng Xiaoping that one must cross the river by feeling the stones one at a time. As in river crossings so it goes in liberating world trade – one bilateral or multilateral FTA at a time (in the absence of early success in the big bang approach anticipated through the Doha trade negotiations) taken collectively, brings the world closer to the WTO aspiration of an open global trading and investment regime in a very pragmatic and real sense. ■

*For more information about the ACBC, visit: www.acbc.com.au