Your friendly neighbourhood trade agreement

In financial circles, you hear a lot of talk about ‘China and India’ – or even sometimes ‘Chindia’ – to describe the rising economic superpowers of emerging Asia. This is particularly important in Australia, where China and India have moved up the ranks quickly, as leading export destinations for Australia.

In cricket terminology, Australia’s exports to China have been growing steadily and consistently over a reasonable period of time, like a test match innings, while exports to India have shot up quickly like a 20/20 game. But with all the attention on China and India, there’s been a third force to be reckoned with – ASEAN – the Association of South East Asian Nations (ASEAN). The local neighbourhood to our near north is becoming an important economic region to Australia, accounting for 10% of our trade and with nearly 45% of Australia’s 44,000 strong exporter community selling goods alone to the ASEAN market.

Furthermore, ASEAN is becoming important for small business too, with 21% of exporting small and medium sized enterprises (SMEs) now selling into the region. They used to talk about Australia’s ‘Tyranny of Distance’ from the rest of the world, well now we can talk about the ‘Power of Proximity’ with ASEAN joining China and India, as well as our traditional North East Asian markets of Japan and Korea and the like. At a time when this time has been dubbed, ‘The Asia Pacific century’ in Australia finds itself in the right place at the right time.

In fact, there’s going to even more action in the neighbourhood, as there’s a new trade agreement, the ASEAN, Australia, New Zealand Free Trade Agreement (AANZFTA) that was negotiated by Trade Minister Simon Crean and came into force at the beginning of the year. The AANZFTA agreement links the 12 nations of ASEAN, Australia and New Zealand into a trade community of 600 million people with a combined GDP of A$ 3.1 trillion.

AANZFTA is Australia’s most comprehensive agreement and given that it covers 12 nations it took considerable skill to negotiate. It follows on from agreements that Australia with Chile, USA, Singapore, Thailand and New Zealand, with a further nine on the table for negotiation and/or consideration including potential pacts with China, Japan, Korea and the Pacific island nations. Those deals coupled, with the Doha Round in the WTO, APEC and the G20 means a gruelling schedule is ahead of the Trade Minister, who will draw on all his negotiating skills and experience as ACTU President and general secretary of the Federated Storeman and Packers Union.

What measures are in AANZFTA? The pact will immediately reduce tariffs to a range of agricultural exports, such as wheat and lamb to the Philippines, and cheese and grapes to Malaysia. In fact, by 2020, 96% of all tariffs on current Australian exports to ASEAN are expected to be removed under AANZFTA. Australian exporters of dairy, horticulture, metals and automotive components are some of the key winners in the deal.

However, that’s just the trade side. Australia’s ties to ASEAN are increasingly in the investment column as well. Accordingly, AANZFTA also includes measures covering issues important to investors such as intellectual property, eCommerce, business travel, competition policy and capacity building. This will help investment both ways, as ASEAN itself looks to invest in Australia too.

These measures are timely because we’ve seen a shift in economic momentum to the Asia Pacific region, particularly in the aftermath of the GFC, which has had an influence on Australia’s sources of foreign direct investment (FDI). For example, according to the Australian Bureau of Statistics (ABS) inward FDI stock from ASEAN grew 109% from 2003-2008 compared with 52.6% growth from the European Union (EU) during the same period, so ASEAN will increasingly be a player in the investment space in Australia.

In conclusion, there are strong signs now that ASEAN is joining China and India as a major economic partner for Australia and with the opportunities that will abound in AANZFTA, there will be even more reasons for Australian exporters and investors to ‘love thy neighbour’.

Tim Harcourt is Chief Economist with the Australian Trade Commission and the author of The Airport Economist.