The recent free trade agreements with China, Japan and Korea form a powerful trifecta for trade in North Asia. But what do they mean for Australian business?
Free trade agreements (FTAs)—they send politicians hunting for a press conference, business strategists into analysis overload, and the media into a general tailspin. But what do they actually mean for Australian companies, small and large? Moreover, just how important is the recent North Asia trifecta of agreements?
Outside media coverage and far more strategically, FTAs send astute business leaders into action. It’s not that FTAs change how business is done, rather they open the door to new markets and greater opportunities within existing ones.
Australia currently has 10 FTAs, and is negotiating another two bilateral agreements, with India and Indonesia. The most recent, the China-Australia Free Trade Agreement (ChAFTA), was signed in June this year. Together with the Japan-Australia Economic Partnership Agreement (JAEPA) and the Korea- Australia Free Trade Agreement (KAFTA), this landmark trifecta is helping Australia break important new ground in North Asia trading arrangements.
Over the past few years, intense negotiation between governments has set the foundation for unprecedented trade growth in the North Asia region. With the mining boom behind us and the inevitable ‘slow down’ of the Chinese economy, the recent FTAs broaden our trading potential. Essentially, the FTAs have redistributed our eggs across a few more baskets, and herein lies their strength.
Australia now has trading arrangements with its three largest export destinations, allowing the trade diversification desperately needed to sustainably build our economy. China is our largest trading partner, with over $98.3 billion in exports. The next largest export recipient is Japan which buys $50.3 billion in goods and services from Australia, followed by Korea at just over $22 billion.
Trade diversification brings new markets, not just for goods, but services as well. The ChAFTA offers access to service sectors in China that we have not seen before. This means new and improved access to provide services, such as health care and financial services, to the expanding and ageing Chinese population. Our agreement with Japan will accelerate the growth of food exports to a discerning population, and Korea offers new territory for law firms and telecommunications providers.
CHINA is the world’s 2nd largest economy and Australia’s largest trading partner. The growing affluence of China’s middle class and a redefining of prestige culture to consumer behaviour, helped our two-way trade reach $152.5 billion.
With ChAFTA, 95% of Australian goods will enter China duty-free. Tariffs on meat, dairy and wine will be eliminated. A phasing out of duty paid on resources, energy and manufacturing has commenced and will benefit iron ore, coal, and gold exports which rank in our top five exports to China. Our education services are Australia’s 4th largest export to China. These will benefit from easier access to China’s official overseas education provider list
CHINA is Australia’s largest trading partner, with two-way trade between Australia and China worth $152.5 BILLION
TOP 5 EXPORTS TO CHINA
- Iron ores and concentrates: $50.6b
- Coal: $8.3b • Gold: $7.0b
- Education-related services: $4.4b
- Crude petroleum: $2.3b
TOP 5 IMPORTS FROM CHINA
- Telecommunications equipment and parts: $5.6b
- Clothing: $5.0b
- Computers: $4.9b
- Furniture, mattresses and cushions: $2.3b
- Prams, toys, games and sporting goods: $2.0b
JAPAN is Australia’s 2nd largest trading partner and through the JAEPA, Australia has unprecedented market access and drastically reduced tariffs on agriculture products such as beef, wine, dairy and seafood. Japan’s discerning population value high-quality food, grown and prepared in a clean environment; Australia ticks all these boxes, which is why Japan continues to be our largest food market. Liquefied natural gas, coal, iron and copper ores, will also see an elimination of tariffs. New rules around intellectual property protection will make life more predictable for all trading partners.
JAPAN is Australia’s 2nd largest trading partner, with two-way trade between Australia and Japan worth $70.3 BILLION.
TOP 5 EXPORTS TO JAPAN
- Liquefied natural gas: $16.66b • Coal: $11.87b
- Iron ores and concentrates: $8.41b
- Beef: $1.65b
- Copper ores and concentrates: $1.56b
TOP 5 IMPORTS FROM JAPAN
- Passenger motor vehicles: $5.89b
- Refined petroleum: $2.64b
- Goods vehicles: $1.29b
- Transport services: $1.15b
- Tubes and pipes of iron or steel: $861m
KOREA is Australia’s 3rd largest export market and our 4th largest trading partner, with two-way trade between our countries now $34.5 billion. Under KAFTA, 99.8% of Australian goods will enter Korea duty-free once the agreement has been phased in. Within short time frames, tariffs of up to 550 percent will be eliminated on many agricultural products.
KAFTA provides Australian services exporters with treatment equal to the best Korea has agreed with any trading partner. In services, it opens new markets for accounting, law and telecommunications, as well as opportunities for the Australian film and television industry through the Annex on Audio visual Co-production.
KOREA is Australia’s 3rd largest trading partner with two-way trade between Australia and Korea worth $34.5 BILLION.
TOP 5 EXPORTS TO KOREA
- Iron ores and concentrates: $5.19b
- Coal: $5.14b
- Crude petroleum: $2.41b
- Beef: $942m
- Education-related travel services: $759m
TOP 5 IMPORTS FROM KOREA
- Refined petroleum: $4.54b
- Passenger motor vehicles: $1.86b
- Pumps (excluding liquid pumps and parts): $881m
- Heating and cooling equipment and parts: $670m
- Iron, steel, aluminium structures: $272m
Across all three agreements, the Foreign Investment Review Board screening threshold has been raised for private companies in non-sensitive sectors, to promote investment in Australia. At the end of 2014, the total value (stock) of foreign investment in Australia stood at $2.8 trillion. Japan was the 4th largest source of investment with $174.7 billion. China was the 7th largest, investing $64.5 billion and Korea ranked 15th investing $22.9 billion. It’s expected that the level of foreign investment will diversify and grow considerably as a result of the North Asia trifecta agreements.
Access to new markets brightens the eyes of many Australian businesses. Experienced exporters will have been preparing for the FTAs and are poised to take advantage immediately. There will also be plenty of Australian businesses thinking about extending their trade across the oceans. For all traders, however, the key to international business remains the same: connection.
“These high-quality, comprehensive FTAs offer real opportunities,” says Professor Ying Zhu, Director of UniSA Business School’s Australian Centre for Asian Business (ACAB), “It is up to us to make authentic connections with businesses in China, Japan and South Korea.”
Professor Zhu works closely with government, helping businesses prepare to connect with the Chinese economy. ACAB, on invitation of the South Australian state government, has delivered workshops on business environments and changing political and economic situations in China.
“We are working with the business community on how to really benefit from the FTAs,” says Zhu, “But it’s not just about business. It’s also important to understand the relationships and cross-cultural challenges of doing business in China, Japan, Korea and ASEAN countries.”
According to Zhu, the key to doing business with China is to pull together. “We have so many small businesses, especially in South Australia with dairy, wine and organic fruit and vegetables. We need to create cooperatives to establish effective partnerships with Chinese business.”
Most recently, Professor Zhu partnered with the City of Charles Sturt to develop its Western Adelaide China Business Engagement Strategy. Here, Professor Zhu and his ACAB colleagues worked with the City of Charles Sturt to create the China Ready program. The program helped prepare a delegation of 10 western suburbs companies to attend the state government’s 2015 Business Mission to Shandong, China.
“This was the first program of its kind,” says Chris Hannaford, Economic Development Coordinator for the City of Charles Sturt. “Over 160 western suburbs businesses were surveyed about the type of export help they needed. China Ready is built from this research. It is the only Australian evidence-based local government program on SME engagement with China.”
China Ready is a five-step program. It includes cultural training, preparing a business case, Chinese business conditions, developing a business pitch, business matching, and export advice.
“This well-researched and considered support contributed to the success of the Shandong mission. Each of the ten companies made significant business contacts, and the City of Charles Sturt made five major Chinese private sector contacts across the property, health, wine and food sectors,” says Hannaford. “The next step is to establish an Innovation and Export Network to keep the momentum going.”
There is no doubt that North Asian economies offer tremendous opportunity for Australia, but like all business opportunities it takes strategy and hard work to deliver the benefits. International business and cultural mentors will be in high demand as an increasing number of Australian organisations learn how to embrace cross-cultural trade.
The key, it would seem, is connection. For new exporters, it’s about connecting with mentors and expertise here in Australia, as well as connecting with established Chinese companies. For small companies, the focus should be to connect with others in the industry, banding together to expand offerings and negotiating power.
Yet for all companies, the importance of connecting with culture cannot be underestimated—respect the culture of your new trading market and be clear about the heart of your own business culture. FTAs most definitely open the door, but you need to do your homework before you step through.