Australian Parliamentary Committee Discusses China Joining the CPTPP

On August 26, the Trade Subcommittee of the Australian Parliament's Joint Standing Committee on Foreign Affairs, Defence and Trade met with industry representatives to discuss "Expanding membership of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership."

Senator Sheldon of the Labor Party and Representative Drum of the National Party both asked a number of questions about China. Those responding to the questions on China were: Bryan Clark of the Australian Chamber of Commerce and Industry; Demus King of the Minerals Council of Australia; Sid Marris of the Minerals Council of Australia; and Ash Salardini of the National Farmers Federation.

Senator Sheldon asked the witnesses about China's willingness to follow the trading rules and market access commitments to secure CPTPP membership; "the effectiveness of dispute resolutions with China"; whether any request by China to join the CPTPP "should be considered on strength of its offer for more market access, with a commitment to transparency, an even playing field and compliance for businesses competing against state-owned enterprises"; and issues of transparency.

In response, the witnesses tried to navigate these issues carefully. Marris noted that "[w]e don't offer a commentary on geopolitical or diplomatic relations between Australia and China," and then said, "we will concentrate on those elements of trade and building a relationship between businesses here and businesses in China, and leave it to governments to deal with those other issues."

Clark called possible Chinese membership in the CPTPP a "very interesting proposition," and said it would "be terribly interesting if China becomes a CPTPP member before the United States, and where that might place the United States."

After stating that "I won't stray into the geopolitics and will stick to trade," Salardini said that "one of the things that China have demonstrated is that they have a vested interest in the rules based system." He also noted that "how seriously they take the WTO and WTO dispute processes demonstrates that they do have a vested interest and abide by the rules based system."

Representative Drum then noted China's "sheer, blatant disregard for a rules-based trading system" and said he was "very surprised this morning to hear [the witnesses'] relative positivity about getting further involved with China"; he also asked how reliant China is on Australia to provide high-quality iron ore.

Salardini responded that Drum's comments on China's disregard for a rules-based system was "an important concern," but noted that "I think technically they are abiding by a lot of the rules in prosecuting their case, but maybe the spirit of the rules is missing there." While agreeing with Drum that Australia should expand trade with countries other than China, Salardini said it "doesn't mean closing off existing markets." Instead, "it's more about opening up those opportunities to trade with others—growing the pie, and, by doing so, the share and concentration will dilute over time."

The full exchange on the issues is below.

Senator SHELDON: Thanks for joining us all. In a number of the reports you're saying collectively we should include China in the CPTPP. How would you view their willingness to follow the trading rules and market access commitments to secure membership? Sid, I will go to you first.

Mr Marris : We don't offer a commentary on geopolitical or diplomatic relations between Australia and China. Overall, there has been a significant effort by China to appreciate and [inaudible] the World Trade Organization rules since its accession 10 years ago. From their own submission to this committee, there is a demonstrated willingness to follow those rules. Ultimately, of course, the test is in the behaviour, but one of the advantages of agreements is that it does create a reputational issue for all participants to live up to what they say. We think broadly that countries and economies should be taken on face value of their commitment, and they will be held accountable to those. Trade with China has been disrupted but is still continuing in some areas. From our perspective, we will concentrate on those elements of trade and building a relationship between businesses here and businesses in China, and leave it to governments to deal with those other issues.

Senator SHELDON: If I could go to Mr Clark: the same question, but are the trading rules and market access conditions to secure membership critically—how much confidence do you have that that will occur with China?

Mr Clark : I think it's a very interesting proposition. China publicly expressed interest in joining the CPTPP. The original TPP, of course, was designed to allow the United States to have a fairly prominent role. It will be terribly interesting if China becomes a CPTPP member before the United States, and where that might place the United States. You also have to remember that Australia is trying to ratify through our parliament and a number of other nations the accession and entry into force of the RCEP agreement, which also includes China. Of course, we also have our own bilateral with them as well, which is possibly being a bit tested at the moment. One of the fundamental things around the accession process is that it's not up to Australia. Australia is part of a team and there are many others who do this. The whole process of accession doesn't appear to be terribly clear, despite there being a formulaic process which can be followed on the formal website for the agreement, hosted by New Zealand. So we're curious around what is stopping other nations from approaching [inaudible] the UK has with [inaudible] formal agreement, be it Taiwan or China or anyone else. I think there are a number of steps that need to be sorted out, and the process for accession needs to be very clear and understood so that the members collectively express a view of which nations they find appealing to join and which they don't. What if the application comes from, right now, a nation like Iran, for example? I think there's some serious thinking to be done around this so that we get it right.

Senator SHELDON: Mr Salardini, I just want to highlight the trading rules and market access commitments to secure membership and ask whether you have confidence that China will stick by its commitments in light of what's been occurring for a number of months now with China and trade.

Mr Salardini : Much like my colleagues, I won't stray into the geopolitics and will stick to trade. But one of the things that China have demonstrated is that they have a vested interest in the rules based system. Regardless of what we see now, they do have an interest in it. I'm not going to say how confident I am or not, but, for example, how seriously they take the WTO and WTO dispute processes demonstrates that they do have a vested interest and abide by the rules based system.

I will come back to a few issues that were raised by our colleagues from ACCI. One of the few areas where we might be a little bit different from ACCI is that we believe that having different multilateral agreements is somewhat of a benefit. If there are issues with accession to the CPTPP, the Chinese are already part of the RCEP, as an example, and, when you expand that out to other countries and other jurisdictions that we might want to open up bilateral or multilateral trade agreements and economic relations with, this becomes very important. For example, India is very unlikely, in the near, medium or even probably long term, for political and domestic reasons, to sign up to a CPTPP. It is much more likely to sign up to an RCEP. I understand the complexities of having bilaterals and different multilaterals, but there are also some benefits to having basically different horses for different courses.

Senator SHELDON: Mr Marris, I want to go to the question about the effectiveness of dispute resolutions with China, for example, and whether there is a better or fairer way of us dealing with disputes, whether there is another, more rigorous way of actually trying to ensure that we don't have the same sorts of issues that we've had over many months now.

Mr Marris : The investor-state dispute resolution is slightly different to what might be considered a decision by a government to unilaterally change trading relationships. The ISDS provisions have evolved over time. There is no doubt about that. We generally see them as good in the form that they are because they do provide a level of protection in the normal commercial sphere for Australian investments into the region, and regional investments into Australia, which for mining is extremely important. So it builds confidence. Whether you can build a system that absolutely guarantees against a country making a unilateral decision—I don't think you can do that. I don't think that is possible, but, in terms of having a device that raises confidence, it is very important. The investment story is the other half of the equation that we haven't talked a lot about in this proceedings. In 2018, the Reserve Bank said that Australian mining needed $100 billion of investment just to keep existing capital stock going—the existing mines that we have operating. That's a large investment requirement in a world where investment is always tight. Building up confidence through agreements like this is vital to ensure that investment comes in and that jobs are sustained and can indeed grow.

Senator SHELDON: Thank you for that. Mr Salardini, is there anything that you'd like to add to that? Next I'll come to you, Mr Clark.

Mr Salardini : Thank you, Senator. I'm potentially in agreement with the Minerals Council. Their agricultural sector has a general shortfall, or gap, of capital of around $5 billion to $10 billion, and foreign investment is part of the story. If that mechanism does create more certainty in investors, that's a benefit, because we do have that shortfall, and, also, people will attach risk premiums where they feel that the risk is adequately addressed. It's not our main concern, but I can see the benefits of it if it does facilitate certainty in investments for foreign investors in agriculture.

Senator SHELDON: Thank you. Mr Clark, do you want to add anything?

Mr Clark : In terms of the dispute processes, we have no issues with the dispute processes being embedded inside our range of trade agreements, which includes having ISDS, and sometimes does not. We're open to where that goes, but we're also very alive to the issues inside the WTO dispute mechanism. Where do we go when the WTO mechanism is failing, as it currently is? There are a few options. We have some disputes with some of our trading partners. They're being heard and we hope will be resolved. I think that we have a good suite of dispute mechanisms available to us. On the investment front, I agree Australia is a recipient of foreign investment, and we need to set the rules that make sure that Australian industry is getting what it needs. That's done unilaterally, much more so than it is inside trade agreements. Again, we encourage Australia to take the fullest advantage of whatever we can around attracting foreign investment without it necessarily being tied to our trade agreements, although they can assist as well.

Senator SHELDON: Thanks, Mr Clark. I want to ask a follow-up question on China, and to you first. Do you believe any request by China to join the CPTPP should be considered on strength of its offer for more market access, with a commitment to transparency, an even playing field and compliance for businesses competing against state-owned enterprises?

Mr Clark : More generically, accession doesn't seem very clear. We assume that nations have to buy it off the shelf the way that it is. It should be a take-it-or-leave-it deal. Beyond that, you have nations who have to deal with their own particular market access schedules. If China were to come in, you would certainly not want anything less than the current agreements, and you would probably seek more, but, if they match what's there, then what would be the reason for rejecting or not supporting an extension? There are some threshold questions that need to be considered by the existing members around the terms we actually meet. As I indicated, there is a form sheet that's available to countries seeking accession. If they meet that and then, through the stated committee process, the membership are happy for them to come in, then, of course, bring them in.

Senator SHELDON: Thanks for that. Mr Salardini, there's the question of China coming to join the CPTPP and the important issue about market access to include a commitment around transparency, and obviously there's tension about transparency at this point. What views do you have on that?

Mr Salardini : I would mirror what Mr Clark said. He said it quite eloquently. Another benefit to a country like China perhaps joining the CPTPP is that we would get another chance to look at the market access issue and it would create other forums to have government-to-government dialogue as well. Even in the current situation, that could only be a good thing.

Senator SHELDON: I might finish off my line of questioning with you, Mr Marris. Do you want to add anything to the previous comments?

Mr Marris : I agree with Mr Salardini's comments about the opportunity for dialogue, which is important. We still have a free trade agreement with China. Yes, there are tensions at the moment, but we remain confident, certainly from a business-to-business point of view, that the trading relationship can be sustained and improved over time.

The other thing to bear in mind is that it's probably not only about us. For China to gain accession would mean that their relationship with the other members, particularly in the Asian region, would require the transparency that you've outlined. For Australia, that's important because the supply chains that operate across Asia mean that, increasingly, we might be supplying to a producer in Vietnam who then provides a finished product into China. It's about the grouping, as a whole, rather than just about us.

Mr DRUM: Thank you very much, Chair. I would like to go back and re-prosecute Senator Sheldon's questions. As a government, we've spent an awful amount of effort and money on encouraging Australians to pivot away from trade with China, due to the fact that—and I think we all acknowledge this—we're a little bit too far in. I understand it might be different with our resource sector, where we still seem to be trading mutually. But there appears to be a sheer, blatant disregard for a rules-based trading system. I have been very surprised this morning to hear your relative positivity about getting further involved with China. Ash, would you like to start with that one—especially as so many of our agricultural commodities are effectively having their relationships with China dropped at the eleventh hour, leaving our wine industry, our barley industry and our abattoirs exposed with a whole range of deals effectively dropped at the whim of the Chinese government.

Mr Salardini : You do raise an important concern, Mr Drum. On the flipside of that concern, there is still significant agricultural trade with China as we speak, so we have to balance those two positions. But you are right; there have been a lot of disruptions in the past 12 to 18 months. While I wouldn't say it's a blatant disregard of the rules—in fact, I think technically they are abiding by a lot of the rules in prosecuting their case, but maybe the spirit of the rules is missing there.

I think your point is around market diversification. The government has spent a lot of money, time and resources to start that market diversification agenda, and I think the agricultural industry is very much for it, but that doesn't mean closing off existing markets. I think I'm in agreement, but the focus is a little bit different. It's not to say you shouldn't trade with someone; it's more about opening up those opportunities to trade with others—growing the pie, and, by doing so, the share and concentration will dilute over time.

Mr DRUM: I'm interested also in hearing from the Minerals Council. I'm not sure who would be the best to answer this. Obviously, we are very strong exporters of iron ore into China. What are the other markets around the world? How reliant are China on Australia to provide them with high-quality iron ore? Is that an arrangement that exists purely because China doesn't have any other options, or is it that they have many options but they just prefer to deal with Australia? I wonder if someone could talk to me about the nuances associated with the iron ore import-export arrangements between Australia and China.

Mr King : The situation with iron ore and China: yes, we are the major exporter of iron ore to China. Australia is a low-cost producer of iron ore and has been for a long time. China does have more potential options—and I stress the word 'potential'—than Australia has alternative markets for its production. The other areas of production around the world are certainly in Latin America and South America but also, increasingly, in Africa. While the production costs associated with African iron ore are higher than Australia's, they would provide a potential alternative in the medium to long term if China were to focus on developing a more diversified supply of iron ore. Could they give up or set aside Australia in total? Certainly we don't think so, but they could increase alternative supplies from other parts of the world. There are a number of potential sources of iron ore in Africa—the continent—that could potentially be a part of that swing.

Mr DRUM: Thanks very much. It's a fantastic answer. That is exactly the background I was looking for. Mr Clark, how concerned are you about your band of industry participants that rely on a certain widget here or component there that has to come from China for the company to be competitive with whatever it is that they make?

Mr Clark : We're certainly concerned about vulnerable supply chains, and the current situations, both COVID and the tensions with our major trading partner, aren't helpful. As you rightly point out, Australia relies on a lot of imports in order to conduct our own business in order to then trade with the rest of the world. So there are two sides to this coin, and we need to make sure that we are concentrating on that. The efforts from the government have been welcomed, but, of course, we have closed borders, and the ability for traders to actually trade and form the relationships they need to secure those benefits are severely curtailed. We've certainly been encouraging the government to look at ways in which it can reopen the border in a safe way and at ways in which we can address some of the issues with freight constraints and supply chain constraints et cetera. Some of those things are outside the control of the Australian government. But you need to remember that virtually every export from Australia relies on an import already, and so we need both sides of this to be in focus. The more liberal that we can be, the better off we're going to be.