On November 17, 2014, the governments of Australia and the People’s Republic of China signed a declaration of intent on the China-Australia Free Trade Agreement (ChAFTA), bringing to a close 24 rounds of negotiations conducted over 10 years. While text of the ChAFTA is not public pending legal review and translation, official announcements make clear that China has granted Australia surprisingly broad access to both its goods and its developing services markets. There are important lessons for Canada as a result.

Canada, like Australia, has a developed economy with an abundance of natural resources (The service sectors of both countries are around 70 percent of GDP. Sources: The World Bank and Statistics Canada). While there are important differences between Canada and Australia (e.g., proximity to China) the ChAFTA contains important lessons for Canada as it pursues deepened trading relationships in Asia and China in particular. The message for Canada in the ChAFTA is clear: Canada is falling behind in securing market access for goods, services, and investment in China.

Summary of ChAFTA

The ChAFTA is broadly based and covers access in goods, services and investment. On implementation of the ChAFTA, 85 percent of Australian goods will enter China tariff free, rising to 95 percent when the agreement takes full effect. It is reported that on full implementation of the ChAFTA, Australia will eliminate all tariffs on Chinese goods (see “MFN Will Bring More Chinese Investment to Australia: Minister”, ChinaDaily USA, March 13, 2015).

China, somewhat surprisingly, granted Australia “best ever” commitments in access for services and investments. Australian providers of services in an impressive range of sectors will benefit from the ChAFTA: legal, financial, educational, telecommunications, tourism/travel, health/aged care, construction/engineering, manufacturing, mining/extractive sectors, architecture/urban planning, transport and others.

On investment matters, the ChAFTA contains an investor-state dispute resolution procedure, not without controversy in Australia. The Australian government increased its threshold for review of Chinese investments in Australia from AUD$252 million to AUD$1,094 million with carve-outs for investments by Chinese state-owned enterprises and certain sensitive industries: agriculture, media, telecommunications and defence. Chinese investment in these sensitive industries is subject to lower thresholds for review by the Australian government. For example, in the agricultural sector, the review threshold for Chinese investment in agricultural land is AUD$15 million and for agri-business AUD$53 million (see “China-Australia Free Trade Agreement Fact Sheet: Investment” from the Australian Government, Department of Foreign Affairs and Trade).

The notable prize in the ChAFTA for Australia, not announced until early March 2015, was the inclusion of a Most-Favoured Nation (MFN) provision for services and investment. The ChAFTA MFN ensures that any service and investment access China makes in successive trade agreements, will be granted to Australia. The importance of this preferential treatment gives Australian service firms significant first-mover advantage in China’s vast market.

The Future of Canada’s Trade with China

Canada, by contrast has taken a much more cautious approach to trade agreements with its second largest trading partner. In September 2014, Canada finally ratified a Foreign Investment and Promotion and Protection agreement (FIPPA) with China which, like the ChAFTA, provides an investor-state dispute procedure. Unlike the ChAFTA, the FIPPA adds no clarity to Canadian government’s review of foreign investments under the Investment Canada Act.

Canada and China are not currently engaged in any formal exploratory or scoping exercises to study the merits of and obstacles to a potential FTA. China has been much more strongly in favour of a potential FTA with Canada than vice versa, reflecting gaining Chinese confidence on one hand, and divisions with Canadian politicians and business on the other hand. However the reality of the ChAFTA may now intervene to prompt Canadian enthusiasm, given the significant stakes involved. Canadian exports, including many key commodities, complete directly with Australian goods for Chinese customers. Without equivalent market access, Canada risks falling far behind in a country where business relationships both take a long time to establish and are difficult to change once established.

Apart from incrementally increased pressure on Canada to at least preserve its relative position with China, the ChAFTA should cause Canada to reconsider its ambitions in a FTA negotiation with China down the road. The scope of China’s market access concessions to Australia in the ChAFTA is significant and unexpectedly generous. Combined with the best market access provided to any country on services, the potential for a Canada-China FTA has now been given a boost, and will give a push to Canadian business to advocate that the Government of Canada send positive signals to China about a future China-Canada FTA.