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FTA - good or bad news?

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In theory Free Trade Agreements (FTAs) result in a win-win for both countries involved. But it seems politicians are far more excited about them than industry. Alan Johnson reports.

Tony Abbott and his team made a lot of noise recently about the signing of FTAs (Free Trade Agreements) with Japan and South Korea. But are they such good news for manufacturers? And then there’s the proposed FTA with China - how will that work?

It all sounds good on paper, but our car industry’s experience with Australia’s FTA with Thailand should send warning bells to exporters to these countries.

While Thailand does reciprocate in having no import tariff on Australian-built cars, our vehicles attract an engine size duty, which for our vehicles can be as high as 80%.

Other countries use other slightly more subtle ways to keep foreign cars out. For example, while Japan has a 10% tariff and a 5% consumer tax on imported cars, the country has numerous technical roadblocks that make it virtually impossible for foreign cars to get regulatory approval for Japanese cars.

It’s a similar story in South Korea. While Australian cars face a 10% tariff, there is also an arduous registration process to get through, and then there is an unwritten rule that says the new owner will be subjected to a tax audit.

It’s all academic now, with the Australian car industry set for the history books. But it offers an insight into the extremes some foreign countries go to protect their industries.

In another ironic twist comes the news that General Motors’ operation in South Korea is likely to start making Holden vehicles for the Australian market once Holden stops domestic car manufacturing here.

General Motors’ new international operations chief Stefan Jacoby told reporters recently that there is a “good likelihood” South Korea will ship more cars to Australia.

He pointed to Australia’s FTA with South Korea as a factor in the decision, as it will cut tariffs even further on Korean cars coming into the country.

The FTA with South Korea, which is still to be signed, highlights the difference between industry winners and losers.

The proposed agreement will see tariffs on beef of 40% to 72% and a 35% tariff on white sugar phased out over 15 years. Other positives for the food industry include the phasing out over three years of the 500% plus tarrif on Bluefin tuna. And the 300% trade barrier on chipping potatoes will be lifted immediately, along with the 15% tarrif on Australian wine. However rice and honey were excluded from the deal, with the Australian honey industry continuing to face tariffs of up to 250% as a result.

Manufacturers say

The headlines suggest everyone is happy with the FTA agreements, but talking to Australian manufacturers that is obviously not the case.

Nicole Allmann, operations manager with horse safety stirrup manufacturer SmartRider, is very wary of FTAs.

“While I agree with the FTA concept, I still believe the agreements have damaged Australia’s manufacturing industry,” she told Manufacturers’ Monthly.

Allmann explained that the company designs, develops and manufactures horse safety stirrups, with around 40% of its Breakaway stirrups exported around the world.

“While products coming out of China used to be of a poor standard, today the quality is right up there.

“I’m not looking forward to a FTA with China. With the cost of manufacturing here in Australia, it is very difficult to compete with Asia,” she said.

Brent Baxter, director of Baxter Laboratories, a leading TGA licensed developer and manufacturer (OEM) of pharmaceutical, sun care and skin care products, is also not convinced of FTAs merits.

“Basically if you can’t compete now then having a FTA will probably mean you can’t compete then.”

He explained that Baxter Laboratories exports a high number of its products all around the world, but has a strong reputation as an Australian company trading in Asia, with a branch office in Hong Kong.

“If a FTA with China does go ahead, that’s fantastic, but we are not letting that dictate what we do in regards to marketing and growing the business into those markets.

“We also export to the US, but the FTA with them made little difference,” Baxter told Manufacturers’ Monthly.

While the FTA with Japan pleased the cattle, wine and seafood industries, it’s not the case with Australia’s dairy industry.

Rakesh Aggarwal, MD of Longwary Food Park based in the Gippsland region of Victoria, said the FTA with Japan does not auger well for Australia’s dairy industry.

“We were hoping there would be more for us in the FTA,” Aggarwal said.

Longwary Food Park, which converts fresh milk from the region into various dairy products, exports over 80% of its products to over 30 different countries, with a strong focus on the Asian region.

“Japan has always been a good market for us, but in recent times we are getting more and more price disadvantage with the American producers, after Japan and the US came to a trade agreement.

“We don’t expect this FTA to reverse this trend; it hasn’t done much for the dairy industry at all,” Aggarwal said.

A China FTA

Tony Abbott has made it clear he is expecting to sign an FTA with China by year’s end, yet some hurdles remain. China is pushing for Australia to allow Chinese workers to come to Australia to work on projects backed by Chinese investors. However, the Australian Government is resisting the demand.

The government could potentially avoid the problem by targeting 457 visas towards projects that the Chinese want to build that require skills that cannot be obtained in Australia. Therefore, the workers could be accommodated under existing visa arrangements.

The other main obstacle has been the Foreign Investment Review Board. China will probably receive the same offer as Japan and South Korea, where the FIRB threshold will rise from $248m to $1bn for investment by a private company.

Innes Willox, Chief Executive Australian Industry Group, compares FTAs with mine fields; saying they can be a risky business.

“The touted free trade nirvana with our partners never eventuates due to a myriad of behind-the-border barriers and protectionist measures including subsidies, licensing changes, regulatory amendments, and demands from customs...,” Willox told Manufacturers’ Monthly.

“Australian industry doesn’t always compete against other companies. We also compete against countries. So excuse industry’s wariness – even often from those sectors who logic tells you will be big winners.”

If negotiated properly, a comprehensive FTA would not only promote trade and investment but also advance economic engagement with China, which is now Australia’s leading trading partner. Dominated by minerals and resources, 31% of our exports go to China, while 18% of our imports are from there.

Increasingly, even without an FTA, China is also playing the major role in terms of Australian business activity. Only the US outranks China as the major destination for Australian businesses operating overseas. This includes exporters of manufactured goods and services suppliers. Surveys show the majority of Australian international businesses intend to increase their future involvement with China.

“Agriculture and agri-business will clearly be the biggest potential winners from any FTA. China’s growing middle class with its changing diets and habits will ensure that. The astounding growth in New Zealand’s agricultural access to China markets since its FTA was signed shows how that sector can benefit,” Willox said.

But Willox points out a well-negotiated FTA should go beyond the agricultural sector and secure benefits for the full range of Australian industry.

“Around a quarter of Australian international businesses are involved in international supply chains and China figures large in the majority of these,” Willox said.

“Many of the manufactures imported from China are components for goods ultimately produced in Australia. For a ready supply of components, fast, easy and cost-effective procedures are needed at the export end, as much as at the receiving end.

“Business services, transport and logistics also play important roles in supply chains. The FTA must progress and foster the interests of the variety of industries contributing Australian value-added along global supply chains.”

With the abolition of tariffs, many Chinese imports will become 5% cheaper in the domestic market and further challenge the competitiveness of locally produced goods. For businesses operating on an already small margin, this will mean further potential erosion of their local market.

Willox said, if not negotiated with sensitivity, the FTA could spell the end for many Australian businesses already stretched by Australia’s high costs.

“The abolition of tariffs should not be too fast, giving business time to adapt and transform their products and processes. Abolition of tariffs should be progressive, in particular in the more sensitive sectors of our national economy.”

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