SYDNEY, Australia (Reuters) — A trade deal signed with great fanfare between China and Australia has been touted as a major step toward Australia shifting its economy from a “mining boom” to a “dining boom.”
However, the reality is likely to be more sobering.
Australia is looking to replace its reliance on mineral exports as mining investment wanes and demand dwindles.
The government would prefer to expand its food and agricultural exports to capitalize on a rapidly growing Asian middle class.
It has high hopes that a recent free trade agreement signed by prime minister Tony Abbott and Chinese president Xi Jinping will help meet that goal, but the more likely winner from the deal is the services sector.
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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 US$147 billion last year.
Several major agricultural foodstuffs, including sugar, rice and cotton, are excluded from the agreement, and Australia’s frequent severe droughts impose a natural production ceiling on the 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. They warn that the devil may yet be in the detail.
“Labour 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.
Iron ore accounted for more than half of Australia’s total exports to China last year, according to the Department of Foreign Affairs and Trade. Wool was the top agricultural export.
Boosting agriculture also requires big investment in isolated, dry and volatile areas with limited water supply. Large swaths of eastern Australia are currently in drought.
Australian farms’ return on capital has seldom topped two percent a year during the past decade, excluding changes in land values, according to the Australian Bureau of Agricultural and Resource Economics and Sciences, a government agency.
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 the Foreign Investment Review Board scrutinize all investment proposals by Chinese state-owned entities.
“In this day and age, sugar being excluded in what looks like a political trade-off is an absolutely unacceptable outcome,” said Paul Schembri, chair 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.
The financial sector is cautious, noting the dominance of its Asian peers in China. It means Australian businesses will probably dabble in niche projects rather than trying to compete in core banking services.
Health care is one sector where the road seems clearer. 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 from hospital-based to cut costs and ensure universal access.
