06 October 2016

Exploring the business opportunity in free trade

Australian businesses, both large and small, are becoming more nimble and recalibrating the way they do business, especially those that want to compete amid a world of globalisation and increased productivity.

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Since the 1980s, Australia has pursued policies aimed at promoting market openness, both domestically and globally. Currently, 10 free trade agreements (FTA) are in place between Australia and its counterparts both in Asia and America. The emergence of FTAs has further supported Australia's uninterrupted economic growth over the past 25 years and is helping the economy transition from one focussed on exports of iron ore and other commodities, to services and technology.

Trade in goods and services is fundamental to the Australian economy and is equivalent to more than 40% of the nation's GDP, with one in five jobs deemed trade related, according to the Australian Department of Foreign Affairs and Trade (DFAT).

Robert Koopman, Chief Economist for the World Trade Organisation (WTO), said nations that entered FTAs did so as the agreements tended to enhance economic efficiencies, improve economic output and give consumers greater choice.

“The basic concept of free trade is to make best use of your resources and allow consumers to have more variety and lower prices,” Dr Koopman said.

“Countries often embrace free trade when they feel that their export interests dominate their import concerns,” he said.

Analysis by the World Bank found countries that liberalised their trade regimes experienced average annual growth rates that were around 1.5 percentage points higher than before liberalisation.

The proportion of Australia's trade covered by FTAs has grown dramatically in the last decade to almost 72% of Australia's total goods and services exports by value ($227.45 billion of $316.6 billion in 2015), according to DFAT.

Looking inward for outward expansion

In order to grow their respective businesses, and diversify against unique market risks, domestic enterprises are starting to think about catering to international markets much earlier on in their expansion.

Rohit Garg, Head of Global Trade and Receivables Finance Australia, HSBC explains: “Companies are widening their focus to see how they can broaden their reach, lift profit margins or monetise their intellectual capital through different markets.”

As Australian companies internationalise, they are increasingly looking to work with offshore partners who have local market knowledge to complement their own expertise in fields such as services or technology.

“Free trade is critical to allow free movement of goods and services across borders, and is also critical from the perspective of governments providing the right level of direction and incentives for bilateral and multilateral trade to grow,” Mr Garg said.

Nonetheless, companies should be mindful of their forward-looking strategy on international trade, according to Garg. While the opportunity in offshore markets is recognised, the companies that have benefited the most from international trade are those which prepared themselves for “competitive advantage” and did their homework - cleaned out their balance sheet, lowered working capital and improved their supply chain. “Inward focus and preparedness are very important.”

Companies are widening their focus to see how they can broaden their reach, lift profit margins or monetise their intellectual capital through different markets.

Rohit Garg, Head of Global Trade and Receivables Finance Australia at HSBC

Accessing the vast Asia opportunity

Mr Garg said the scale of the potential offshore market could not be ignored with the combined population of the world's two most populous nations, China and India, standing at more than 2.5 billion people compared with Australia's population of 24 million.

“If you had relatively free access to the markets of India and China combined, you could then, as an Australian business, reach out to a market that is more than 100 times your domestic market,” Mr Garg said. “That's the reality and why FTAs are important for Australia.”

The recently established China-Australia Free Trade Agreement (ChAFTA) was considered a historic agreement to secure greater ties with Australia's largest trading partner with total trade valued at around $150 billion, accounting for almost one-quarter of Australia's total trade with the world.

The bilateral FTA with China means Australian producers and exporters are no longer disadvantaged by significant tariffs, putting them on a level playing field with others who have an FTA with China such as New Zealand, Chile and ASEAN countries.

“Australia has managed to negotiate a pretty impressive deal for itself,” Mr Garg said, referring to ChAFTA. Australia also stood to benefit from the large amount of capital in China seeking investment opportunities offshore.

He said the terms of ChAFTA were favourable for Australian companies and the agreement played to their strengths, especially those in agriculture and in services where there was proven expertise such as healthcare, education, hospitality and tourism.

“Australia also has an advantage as its meat and dairy products are of a high quality,” he said, adding that Chinese consumers were prepared to pay a premium for goods of a superior quality as they grew increasingly sceptical of some of their domestic products.

“It's important that we do anything we can to facilitate and grow trade with China.”

While it is still early days, as ChAFTA only came into effect in December 2015, the agreement aims to provide greater access for Australian goods and services to China, which is not only Australia's largest export market, but also its number one import supplier and largest market for exports of agriculture, resources and services sectors. It is also a growing source of foreign investment.

Australia is hoping ChAFTA will ease any economic pain by boosting exports of agricultural goods and various services to China to help offset the end of the mining boom and decline in commodity prices.

ChAFTA includes improved access to China for banking, health and aged care, and professional services. For instance, in health care, Australian medical service suppliers will be able to establish wholly Australian-owned hospitals throughout many parts of the country. China will also allow Australian medical suppliers to establish aged care institutions throughout the country which is the first time this has been allowed in a China FTA.

The DFAT said ChAFTA would help strengthen bilateral trade and investment relations as China transitioned to a services and consumption-led growth model and as Australia diversified its exports.

“As China's services sector develops, ChAFTA will allow Australian firms to supply the expertise and high standards that China seeks in areas such as health, education, aged care and tourism. These developments in services bring significant second-order benefits, for example people-to-people links as Chinese students and tourists become more familiar with Australia,” a DFAT spokesman said.

In recent quarters China has been reporting a falling value of total imports, largely due to a substantial reduction in global commodity prices and iron ore trade. “As a consequence, China's imports from Australia have also been falling, highlighting further the need for a further diversification of Australian exports to China. For certain other products, including coal, Australia has increased its market share against a general decline in China's imports,” the DFAT spokesperson said.

Chinese tariffs have been cut on a range of Australian exports including dairy, beef, lamb, wine, seafood, fruit and vegetables, processed foods, vitamins and health products.

DFAT said some Australian export volumes to China following tariff cuts under ChAFTA had increased significantly.

However, trade agreements are not without their critics and opponents.

There has been some opposition to ChAFTA with trade unions claiming the agreement will make it easier for companies to employ cheaper and unskilled Chinese workers on lower salaries which will cost Australian employees their jobs. The peak union body, the Australian Council of Trade Unions, said ChAFTA had also made it possible for companies to employ Chinese workers on construction sites without adequate training or knowledge of safety procedures.

Deciphering the (in)famous TPP

Another trade agreement which has not been without controversy is the Trans Pacific Partnership (TPP) - an FTA between countries in the Pacific region that would eliminate 98% of all tariffs between 12 nations including Australia. It addresses a number of new and emerging trade-related issues such as rules on state-owned enterprises, regulatory coherence, labour and the environment.

The TPP agreement is significant due to its size and depth as it encompasses around 40% of the global economy, 25% of world trade and because it comprises a number of areas that go well beyond traditional WTO commitments.

However, critics of the TPP including politicians, academics, public health advocates and environmental groups say there are too many unknowns about the impact on the Australian economy, and that the agreement is very technical and complex. Some are questioning provisions surrounding intellectual property, health, environmental law and labour rights.

The Australian Chamber of Commerce and Industry (ACCI) released a survey of its domestic businesses in June 2016 which found a lack of understanding of free trade agreements was a concern. “The use and understanding of Australia's multiple free trade agreements is very low, with the majority of businesses surveyed struggling to navigate complex rules and regulations,” the ACCI said.

The ACCI's National Trade Survey said China continued to dominate the Australian export and import market, with more than 60% of businesses surveyed trading with China over the previous 12 months. Among other trading partners, Indonesia and India were popular among large firms. The survey also found a majority of respondents considered potential free trade agreements with India and Indonesia to be key government priorities.

DFAT said Australia was currently engaged in bilateral FTA negotiations with India and Indonesia, and multilateral negotiations for the Regional Comprehensive Economic Partnership (RCEP) covering ASEAN and its six regional trading partners (China, Japan, Republic of Korea, India, Australia and New Zealand). Discussions are also underway for a renewed Pacific Agreement on Closer Economic Relations (PACER Plus). RCEP has the potential to combine with the Trans-Pacific Partnership Agreement in a future Free Trade Area of the Asia-Pacific region (FTAAP). Formal FTA negotiations with the European Union are tipped to begin in 2017 and there are also expectations for Australia to strike a post-Brexit FTA deal with Great Britain.

“HSBC, as the world's biggest trade bank, is a natural proponent of free trade. Anything at all that makes bilateral or multilateral trade easier is a good thing,” Mr Garg said.

“The devil is in the detail. People should keep their expectations realistic, but at the same time find ways to grow their business,” Mr Garg said.

Business across borders: Reaping the benefits of free trade

Business across borders: Reaping the benefits of free trade

Issued by The Hongkong and Shanghai Banking Corporation Limited, incorporated in the Hong Kong SAR, acting through its New Zealand branch ("HSBC").

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