Trade and Prosperity | Briefing | October 2021

October 7, 2021

USTR talks more about China, less about trade

In a much anticipated speech before the Center for Strategic and International Studies, United States Trade Representative Katherine Tai was expected to detail how the US plans to redefine its trade policy relationship with China. A significant policy change would have profound changes for Australia and the region.

In the end, the Ambassador barely mentioned trade at all. The focus of the speech was how the Biden administration plans to stimulate its industries, and how China’s policies hurt the prospects of US workers.

Biden time on Phase 2. One question on the minds of many is whether the Biden administration intends to maintain the punitive tariffs put in place by President Trump. Ambassador Tai’s speech hints that the tariffs will remain in place, and additional products will be considered for inclusion. China is to be held to its Phase 1 Agreement commitments to purchase American goods. Although there was a reference to raising broader policy concerns with Beijing, the speech did not mention the prospect of a second phase agreement.

Call for collaboration. As well as referring repeatedly to China’s damaging effects on the prosperity of US workers and others around the world, the USTR ended her speech with the goal of reaching shared prosperity that is “good for our workers, producers, and businesses; good for our allies; and good for the global economy.” In what is a significant break from the Trump era, the Biden administration is actively recruiting a coalition of those willing to stand up to China.

Spot the difference. A key part of the speech was the approach to industrial policy – on both sides of the Pacific: “China’s government continues to pour billions of dollars into targeted industries and continues to shape its economy to the will of the state”, whereas “[the US government] ha[s] to make smart domestic investments to increase our own competitiveness. We must invest in research and development and clean energy technology, strengthen our manufacturing base, and incentivize companies to Buy American.” Hint: apparently, one is good and the other is bad.

All in all, the USTR speech reads less like a comprehensive plan to guide US-China trade relations, and more like the launch of President Biden’s mid-term election campaign.

CPTPP gets expansive 

A bigger CPTPP. China’s application to join the CPTPP in September was met with mixed reactions from across the region. Commentators generally point out that China would find it difficult to meet CPTPP standards under its current policy settings, particularly on labour, digital trade and state-owned enterprises. Taiwan’s application – submitted just one week later – was generally welcomed, including by Japan. The UK’s accession process also got underway with a meeting of the Working Group set up to progress its membership.

All existing CPTPP members must approve new members (signatories Malaysia, Brunei and Chile are yet to ratify). Malaysia has publicly welcomed China’s application. Australia however has stated that it will not support China’s bid until there is engagement on China’s compliance with its existing trade arrangements with Australia.

Notably Canada and Mexico are bound by a non-market economy provision in the USMCA, which requires parties to consult with other FTA partners on negotiations to enter an FTA with an non market economy, including China. This means the US would factor into any decision of Canada and Mexico on China’s participation.

These issues won’t be resolved quickly. Should China be admitted to join, the process will be long. Taiwan’s application may move more smoothly – it has been preparing for accession for the last three years – provided China doesn’t get admitted first. The UK, which applied in June, will likely be first off the rank. The process will provide a guide to members’ expectations and flexibilities.

Even bigger ambitions. The CPTPP’s 11 members cover around 13 per cent of global GDP; adding China would more than double that. More action on the FTA track is always welcome, provided it is running in the right direction, i.e. toward more open and certain frameworks for trade. Potential new members that are committed to meet the CPTPP’s high standards should be welcome. The greater the coverage of the agreement, the greater the benefits. Recall the ambitions of the CPTPP agreement itself, wherein the parties expressed their intention to ‘expand the partnership by encouraging the accession of other States or separate customs territories in order to further enhance regional economic integration and create the foundation of a Free Trade Area of the Asia Pacific.’

Note: Article Three directors have previously undertaken an analysis of Taiwan joining RCEP. Although some of the findings are outdated, it still has relevance to regional integration and FTAs.

Australia and India re-engage

A nice cup of Tehan. An India/Australia trade agreement could be realised by end of 2022, with an ‘early harvest’ or ‘interim’ deal to be agreed by December this year. Trade Minister Dan Tehan recently met in New Delhi with his Indian counterpart Piyush Goyal.

The interim deal will cover ‘goods, services, investment, energy and resources, logistics and transport, standards, rules of origin, and sanitary and phytosanitary measures’. It’s not likely to be ambitious; Goyal indicated it would cover the ‘low hanging fruits’ where both sides have an interest in expanding trade. Offers will be exchanged by the end of the year.

Sources have reported that more difficult issues that have been proposed for inclusion in the final agreement include e-commerce, global value chains and government procurement. Agricultural services and the regulatory environment faced by Indian software firms in Australia have also been mooted.

Aligning strategic goals. A trade agreement with India has eluded Australia for more than a decade, despite efforts at both the bilateral and regional level. It is likely that the conditions that have led to a warmer approach from New Delhi this time around include the desire of both economies to reduce their dependence on China. Recent upgraded strategic cooperation between Australia and India – along with Quad allies the US and Japan – seems to have helped pave the way for closer economic cooperation as well.

A comprehensive challenge. As pointed out by a former Australian trade negotiator, while the outlook for an early harvest deal is promising, the challenge will be to develop a package that is commercially meaningful, and does not reduce the prospects for a comprehensive deal further down the path. A high-standard FTA with India would be a significant benefit for Australia, improving access for exports to one of the world’s fastest-growing economies and helping to diversify our export markets and import sources.

Will AANZFTA move beyond an upgrade?

Calling AANZFTA from across the Pacific. In September Chile’s trade ministry expressed interest in joining the AANZFTA – a move that was welcomed by ASEAN, Australia and New Zealand Ministers. Officials have been instructed to ‘undertake necessary follow up actions.’

Expansion of the agreement to include Chile, and perhaps other economies in the region, would be interesting: could it pave the way for a larger regional agreement linking ASEAN, Latin American and Australia and New Zealand economies?

In this context the upgrade of the AANZFTA currently underway takes on a new importance, as newly agreed disciplines could have a broader reach. Chile has existing FTA commitments with CPTPP members (Australia, NZ, Singapore, Vietnam, Malaysia, Brunei), and with some ASEAN and Asia Pacific economies under bilateral agreements (with Australia, New Zealand, Singapore, Indonesia, Thailand, Malaysia, Vietnam).

In brief

No thaw in China-Australia trade relations. Beijing has expressed displeasure at the increasing profile of the US-led Quad dialogue, and disdain at Australia and India’s efforts at cooperation. Australia remains the target of a range of Chinese trade sanctions. Treasurer Josh Frydenberg has indicated that these measures have largely failed to inflict damage on the Australian economy; however, recent falls in iron ore prices and Chinese curbs on steel production may change that picture.

Korea proposes digital trade pact with ASEAN. Korea has indicated it wants to negotiate a digital trade agreement with ASEAN countries, similar to the Digital Economy Partnership Agreement (DEPA), which currently comprises Singapore, New Zealand and Chile. Korea has also expressed recent interest in joining the DEPA. A digital economy agreement could build on e-commerce provisions in the RCEP.

Article Three in the News

Article Three Director Jon Berry appeared at the Joint Standing Committee on Foreign Affairs, Defence And Trade’s Inquiry into expanding membership of the CPTPP on behalf of Article Three. He stated:

“The greater the coverage of the agreement, the greater the benefits. These benefits include better market access for Australian exporters, and increased participation in expanded regional value chains. The agreement’s commitments on government procurement, SOEs, technical barriers to trade, labour standards and the environment, and accompanying dispute settlement mechanisms, provide improved avenues for Australia to pursue its ambitions and address trade irritants. Increasing the membership of the agreement would extend these benefits.It’s important to note that CPTPP’s aim is to liberalise trade and raise standards. But it cannot completely prevent trade disputes from arising between any of its parties. Nor can it prevent foreign policy disputes. That is not what it was designed for