Coal Tariffs to be Waived in China-Australia Free Trade Agreement

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China-CoalSHANGHAI – China has indicated that a recently instituted tariff on Australian coal will be waived once a long awaited free trade agreement (FTA) between the two countries is struck.  News of this reversal was released after Australian Treasurer Joe Hockey met with Chinese Finance Minister Lou Jiwei ahead of the APEC Finance Ministers’ meeting in Beijing.

It was announced earlier this month that there would be a three percent tariff on cooking coal used for coking coal and a six percent tariff on thermal coal used for in power stations.  This decision was particularly surprising at the time because chief competitor Indonesia was exempt from the tariff through a separate FTA, putting Australia and Russia at a disadvantage.  The tariffs would also have been especially harmful to Australia because they are China’s largest international coal supplier with $9 billion of coking and thermal coal exported per year.

The tariffs were purportedly aimed at helping Chinese domestic coal producers, and the waiving of them means 70 percent of imported coal from Australia will no longer be taxed.  This makes it unlikely that the original tariffs will have their intended effect since the majority of imported coal is not subject to the tariffs.

It raises the question of why the tariffs were introduced in the first place.  One possibility is that they were a negotiating ploy in the nearly ten year-long free trade talks between Canberra and Beijing.

RELATED: With Reboot of Import Tariffs, A Sooty Future Awaits for Foreign Coal in China

Australian Prime Minister Tony Abbot has indicated that he would like to finish the Free Trade deal before the G20 summit in Brisbane in November.  This short time-frame may have encouraged China to get some last minute concessions from the negotiations.  Indeed, China has a history of imposing regulatory burdens instead of raising tariffs to control trade; a lower profile method of protecting domestic production.

As for the trade agreement itself, talks have been hampered by Beijing’s concerns over opening its market to Australian food and its worries about Australia’s tough approval process for foreign investment by China’s state owned enterprises.  On the Australian side, Canberra wants China to give Australian businesses access to industries where foreign investment is currently restricted.

One of the more specific policies China is pushing to change is Australia’s use of Anti-Dumping measures, especially in the form of import tariffs.  They have been used to prevent the flooding of particular markets of certain Chinese goods.  Anti-Dumping measures are allowed by the WTO and are meant to avoid a product being sold at a price lower than in the manufacturer’s home market.  However, a trade agreement could decrease how often this is used against Chinese goods.

Abbot was recently questioned in a party room meeting on the government’s approach to foreign investment and replied that they should expect changes to foreign investment rules for agricultural land and agribusinesses.  The changes include dropping the threshold for approvals and easing the rules for state owned enterprises such as those from China.  This should increase access of Chinese investment into these industries, and is possibly in response to the dropping of coal tariffs.

RELATED: New Zealand’s Business Sector Pushes for a Slew of New FTAs in Asia

One of the concessions Australia is looking for in the trade agreement is for China to open up access to Australian beef, lamb, horticulture, wine, and other farm products.  Concessions similar to this were recently granted to New Zealand but prior to the issue with coal tariffs China was worried about an influx from a larger economy like Australia.

Despite the hitch created by the coal tariffs, the Australia-China FTA is still likely to be implemented by the end of the year, and likely before the G20 Summit this November if Prime Minister Abbot can push it through in time.  However, the ability of the Chinese government to get better terms even without the coal tariffs shows that it wields a significant amount of power in the trade agreements it is trying to make.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email asia@dezshira.com or visit www.dezshira.com.

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