China-Australia relations: termination of free trade deal ahead of review unlikely despite tensions, experts say

·6-min read

Bilateral tensions between China and Australia are unlikely to jeopardise the China-Australia Free Trade Agreement (ChAfta) when it is up for its five-year review next month, trade experts say.

While the five-year anniversary of the historic treaty between the two countries has come in the middle of an unabating political conflict, international trade lawyers insist such reviews are designed to open up more trade and expand the treaty, and even if that does not happen, at the minimum, the trade deal will remain the same.

Despite the exchange of political blows that have ratcheted up over the past seven months, experts are hopeful of a reconciliation and still see interest from both countries to maintain a free-trade relationship with last month’s Asia-Pacific Economic Cooperation leaders’ meeting offering an indication.

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“President Xi [Jinping] explicitly declared that China will favourably consider joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Australia is an important CPTPP member. This shows China is still interested in connecting with Australia,” University of Sydney ChAFTA expert Jeanne Huang said.

CPTPP is an 11-nation free trade deal between Australia, Brunei, Canada Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam, and even before Xi’s comments last week, a series of high profile officials in Beijing had already voiced openness about China joining the trans-Pacific trade pact abandoned by Donald Trump in the early days of his presidency.

Down the track, however, the existence of larger multilateral free trade deals such as CPTPP or even the newly-signed Regional Comprehensive Economic Partnership (RCEP) could result in China or Australia using those deals to replace the smaller – and possibly superfluous – ChAfta as seen already with Canberra’s termination of bilateral investment treaties with fellow CPTPP members Mexico and Vietnam, Huang said.

This, however, was only possible because the CPTPP could exactly replace those treaties.

ChAfta took 10 years to complete and led to zero tariffs on many goods, but as RCEP is still in its infancy, it will be surprising for either country to terminate ChAFTA now, Huang added.

The issue we are facing now is not whether a review is possible, but how to prevent the parties retreating from the current commitments directly or indirectly

Weihuan Zhou

Huang said that neither country has a precedent for cancelling a bilateral deal. Over the past few decades, China has tended not to terminate existing treaties without first establishing a new one, while terminating deals was generally inconsistent with Australian practice.

ChAfta, which has given rise to a nearly US$240 billion two-way trade relationship, came into force on December 20, 2015, and aside from the five-year anniversary next month, the two countries pledged to start a three-year review in 2017, although it is understood this never take place.

“Whether the [five-year] review may actually take place depends on political will, just as with any trade negotiation. There seemed to be some political will in 2017, but it was not enough at the time,” said Weihuan Zhou, an international economic lawyer at the University of New South Wales.

“Now the political will is just not there. The issue we are facing now is not whether a review is possible, but how to prevent the parties retreating from the current commitments directly or indirectly.”

Despite the free-trade commitment between the two countries, China and Australia have not been getting on politically, at least not since 2017 when Canberra started to push for a closer alliance with the United States. This was exacerbated earlier this year when Australia pushed for an inquiry on the origins of the coronavirus without first consulting Beijing.

China has since issued Australian media with a list of 14 grievances that have “poisoned” bilateral relations, including Canberra blocking Chinese investments, Australian politicians slandering Beijing and alleged racist attacks on Chinese and Asian citizens.

While Australia’s actions, including banning 5G technology from Huawei Technologies Co., are viewed as reasonable by former diplomats, it is the lack of diplomacy in executing the decisions that led to China’s grievances, they say.

This has erupted into a series of Chinese trade bans against Australia exports including coal, cotton and lobsters and anti-dumping investigations and duties against barley and wine.

It would be very drastic and this has not been done before. In the past, when FTAs are terminated, it is usually for making way for a newer, better FTA

Henry Gao

“Frankly, I don‘t think they’d go down the route of terminating the [free trade agreement (FTA)],” said Singapore Management University associate professor of law Henry Gao.

“It would be very drastic and this has not been done before. In the past, when FTAs have been terminated, it is usually to make way for a newer, better FTA.”

Having previously insisted he would not compromise Australia’s values and position with China, Australian Prime Minister Scott Morrison said in a speech on Monday that the contest between the US and China had led to Beijing misunderstanding Canberra’s actions in that it had not sought to deliberately attack China.

“Our actions are wrongly seen and interpreted by some only through the lens of the strategic competition between China and the United States,” he said. “It’s as if Australia does not have its own unique interests or its own views as an independent sovereign state. This is just false. And worse, it needlessly deteriorates relationships.”

Whether or not the ChAFTA review goes ahead next month, the most likely outcome will be both countries keeping the status quo of the trade deal, trade experts say.

If either party wants to terminate the deal, however, all they would need to do is issue a six-month notice, which can be done at any time – not necessarily during a review.

“No one needs to wait for the five-year general review to take such a decision [to terminate the deal]. For these reasons, I would not be too concerned about the outcome of the five-year general review,” said Julien Chaisse, a trade professor at City University of Hong Kong.

“In the worst diplomatic scenario, parties will not agree on deepening liberalisation and further expanding market access. It will be status quo.”

Breaking the ChAFTA would be for show

Giovanni Di Lieto

Alternatively, either party could also call off the deal as an act of political point-scoring, knowing the trading relationship would be secured by RCEP, said Giovanni Di Lieto, a trade expert and commercial law fellow at the University of Bologna.

“So breaking the ChAFTA would be for show,” he said. “[Should it happen], in the medium to long-term we may see this as the beginning of the end, where the real Sino-Australian decoupling begins.”

But according to Huang from the University of Sydney, RCEP is not a like-for-like replacement for ChAFTA.

“For example, currently RCEP does not allow the investor-state arbitration mechanism, while this is provided under the ChAFTA,” she said.

However, University of New South Wales trade expert Heng Wang. said that RCEP will still be safe should China and Australia cancel their free trade agreement, as bilateral deals do not impinge on it.

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