China Free Trade Agreement
AWI is proactively lobbying to broker new trade agreements between Australia and China that could see huge benefits to Australian woolgrowers.
About the China Free Trade Agreement
Background to China FTA and involvement of AWI
Australia is currently in discussions with China regarding a Free Trade Agreement (FTA). The trade between the two countries continues to grow, but these discussions could pave the way for a further increase of up to 20 per cent in Australian wool exports to China, as well as significant benefits for the Chinese domestic wool and textile industry.
When it comes to wool, Australia and China are perfect trade partners. Australia currently exports more than 50 per cent of this country's wool to China, and China imports up to 75 per cent of its wool needs from Australia.
If current barriers to trade are removed, there would be significant benefits to Australian woolgrowers' farm incomes and an increase in employment in the sector in Australia.
Trade barriers are stifling the growth of the Australia-China trade in wool. A tariff system operating in China puts a duty of up to 38 per cent on wool that is imported over and above Australia's allowable quota. When this is reached, it has the effect of increasing the price of wool to Chinese buyers and stifling demand.
China's wool textile industry is expanding and demand for wool is forecast to almost double over the next five years. China will command a staggering 62 per cent of global apparel wool demand.
If Australia is to benefit from this expansion, the restrictions to trade must be removed.
The FTA provides a one-off opportunity to develop and expand the wool industry in China and Australia which we cannot ignore.
Australian Wool Innovation Ltd (AWI) has formed a China Free Trade Committee to assist the industry to focus on this issue. This independent Committee represents all stakeholders across the Australian wool industry.
This website aims to provide some background information that will assist the industry understand the importance of this issue. We invite you to download and read the summary document "Chinese and Australian wool : A globally integrated industry" (PDF 270Kb) about how an FTA can expand the industry to the benefit of China and Australia.
The website will also be a source of information about the developments of negotiations between Australia and China through it's AWI FTA Update. The negotiations are expected to extend for many months, and this newsletter will be updated monthly to enable the industry to stay across developments.
Top of page
What a China-Australia FTA could mean for the wool industry - The Facts
Wool is an important trade commodity for both countries (almost 50 per cent of Australia's wool exports by volume go to China; currently 75 per cent of China's wool needs are sourced from Australia).
By 2010 China's demand for wool will almost double to command 62 per cent of all global demand for apparel wool.
The Australian and Chinese wool industries are highly complementary. China has a domestic wool industry that produces wool suitable for furnishings and carpets, while Australia produces the wool China requires for the manufacture of garments for domestic use and export.
Full liberalisation of the trade will bring significant benefits to the Australian industry namely:
- Sheep industry farm cash income would increase by up to 7 per cent
- Employment in the wool industry would increase by up to 13 per cent
- The value of greasy wool exports would increase by US$600m over and above the expected increase in the trade without an FTA.
- The volume of greasy wool exports to China would increase by up to 20 per cent over and above the expected increase in the trade without a FTA.
Full liberalisation will also bring significant benefits to the Chinese industry namely:
- China's textile and clothing industry would increase the level of value added production by nearly US$400 million
- China's textile and clothing exports would rise by US$1.3 billion with its textile and apparel exports increasing by over US$800million.
- Wool production in China would continue to grow, as Chinese and Australian wools are overwhelmingly complementary.
- Real gross domestic product in China would increase by US$457 million
Top of page
The benefits of Australia and China working together
The wool industries of Australia and China are highly complementary and form a globally integrated industry. China is Australia's most important wool customer by volume, and production of wool textile products in China relies overwhelmingly on an efficient supply of wool from Australia. As China's wool textile industry expands, Australia's exports increase.
Australia and China are both important wool producers. Australia produces between 350,000 and 450,000 tonnes of wool (clean equivalent) annually and China around 160,000 tonnes ( clean equivalent). Competition between the two is very small. Most Australian wool is Merino, which makes up no more than 10 per cent of Chinese wool production. Most Chinese wool is broader and shorter, greater than 25 micron and appropriate for use in a different and broader range of apparel and textile products.
China's wool textile industry is expanding, with growing domestic sales and exports. China's annual imports of greasy, scoured and lightly processed wool reached 224 million kilograms (clean) in 2004, or A$1.2 billion (Figure 1). This is more than double that of Italy, the world's next largest importer.
China's wool textile needs are also becoming more sophisticated. The industry is producing a wider range of finished wool products, many of which require Merino-style wool. Australia provides the bulk of China's fine wool and the wool Australia sells to China is becoming finer. In 1994 less than three per cent of the raw wool Australia exported to China was fine wool less than 19 microns. The figure is now over 30 per cent.
Projections show China's demand for wool will continue to grow. The Woolmark Company estimates China's demand for apparel wool could rise from 256 million kilograms clean in 2004 (equivalent to around 35 per cent of global apparel wool demand) to 473 million kilograms clean (around 62 per cent of global wool apparel demand) in 2010.
Meanwhile, China is becoming more important to Australia as a wool customer. In the mid-1990s, around 20 per cent of Australia's wool exports, by volume, were going to China. In 2004, the figure had risen to nearly 50 per cent.
The trade relationship is becoming more important to both countries as the Chinese economy expands.
Top of page
The barriers to growth in trade between Australia and China?
Tariff Rate Quotas
The most costly feature of Chinese barriers to imports of Australian wool is that they penalise Australian producers more as demand increases; and Chinese demand for wool is growing.
A global "tariff rate quota" (TRQ) system, operating on greasy and lightly processed wool, means that wool imported below a certain volume attracts a low tariff (called "the in-quota" rate) while wool imported after the specified volume has been filled attracts a higher tariff (called the "out of quota" rate).
In the case of greasy wool, this represents a huge increase in duty from one per cent to 38 per cent.
The cost of the TRQ on greasy wool is not just the duty itself, but the way it stifles demand for imports once the "in quota" volume is full. It is clear that if wool import demand continues growing, then the cost of the TRQ will continue to mount, unless the TRQ is abolished or the "in-quota" volumes grow in line with demand.
Testing
A proportion of wool is re-tested in China to confirm whether the wool is of the quality claimed in export documents. A fee is charged for re-testing on all imports and collected at the provincial level.
Research suggests that while all wool imports are being charged for re-testing, only 20 precent of the wool is actually tested. The charge is being levied on the importer who passes it back to the exporter. The charge is estimated to be around 0.15 per cent on average.
Better protocols in place on wool quality, standards, and cooperative testing procedures could eliminate the need for re-testing.
Top of page