SYDNEY (Reuters) - A trade deal signed with great fanfare between China and Australia has been touted as a major step towards Australia shifting its economy from a “mining boom” to a “dining boom,” but the reality is likely to be more sobering.
Australia is looking to replace its reliance on exports of minerals such as coal and iron ore as mining investment wanes and demand begins to dwindle. The government would prefer to expand its food and agricultural exports to capitalize on a rapidly growing Asian middle class.
It has high hopes for the proposal for a free trade agreement (FTA) signed on Monday by Prime Minister Tony Abbott and Chinese President Xi, but the more likely winner from the deal is the services sector.
The deal is designed to open up Chinese markets to Australian farm exporters and the services sector, while easing curbs on Chinese investment in Australia. China is already Australia’s top trading partner, with two-way trade of around A$150 billion ($130 billion) in 2013.
Several major agricultural foodstuffs, including sugar, rice and cotton, are currently excluded from the FTA, and Australia’s frequent severe droughts impose a natural production ceiling on those sectors that are part of the pact.
Experts are waiting for the full text of the pact, which Australia called the best ever between Beijing and a Western country, warning the devil may yet be in the detail.
“Labor is deeply concerned that key export sectors like sugar have been told to expect nothing from the deal,” said opposition Labor Party leader Penny Wong. “Mr Abbott has talked about a two-step FTA. The fact is Australia can’t afford a second-rate FTA with China.”
HSBC chief economist Paul Bloxham said the deal would support Australia’s “great rebalancing act”, but others warned the agricultural sector is comparatively tiny.
Of Australia’s total exports to China of A$94.7 billion in 2013, iron ore accounted for A$52.7 billion, according to the Department of Foreign Affairs and Trade. Wool, the top agricultural export, made up just A$1.9 billion.
Boosting agriculture also requires big investment in isolated, dry and volatile areas with limited water supply. Large swathes of eastern Australia are currently in drought.
Australian farms’ return on capital has seldom topped 2 percent in a year on average during the past decade, excluding changes in land values, according to government research bureau ABARES. The unpredictability of earnings is greater than in the United States, Africa and Brazil.
Meanwhile, the sugar, rice, wheat and cotton sectors will have to wait three years for a review of their tariffs. Even then, any changes are likely to be contingent on Australia relaxing its existing requirement that all investment proposals by Chinese state-owned entities be scrutinized by the Foreign Investment Review Board.
“In this day and age, sugar being excluded in what looks like a political trade-off is an absolutely unacceptable outcome,” said Paul Schembri, chairman of industry group Canegrowers.
At the other end of the deal, China faces a supply glut as economic growth falters. Inventories of iron ore, coal and cotton are bulging at ports across the country and state granaries are overflowing. The Australian dairy industry’s hopes of a “white gold” rush have been dashed.
Businesses last week complained about Beijing’s response, using non-tariff barriers from customs clearance to quality restrictions, which would skirt the FTA, to curb raw material imports.
The financial sector is also cautious, noting the dominance of its Asian peers in China. That means Australian businesses will probably dabble in niche projects, rather than trying to compete in core banking services.
Andrew Whitford, Westpac Banking Corp’s (WBC.AX) head of Greater China, said it was still early days, and Westpac was “certainly not going to be opening more branches.”
One sector where the road seems clearer is healthcare.
Chinese per capita health spending is growing the fastest in Asia, having quadrupled to $321 a year in 2012 from $80 in 2005, according to the World Bank.
China wants to shift to a community-based health system, as opposed to hospital-based, to cut costs and ensure universal access, leaving it with a shortage of providers in out-of-hospital health sectors like aged care and pharmacy.
An advanced aged care industry is “one of Australia’s great comparative advantages”, said Business Council of Australia CEO Jennifer Westacott.
Peter Hope, who runs a pharmacy in the small Australian state of Tasmania, said the new rules would allow him to quickly expand beyond his already planned Beijing store in April next year to 1,000 franchises around China.
Additional reporting by Byron Kaye and Sue-Lin Wong; Editing by Ian Geoghegan