The Hon. Warren Truss, MP
The Hon. Warren Truss, MP
FORMER MINISTER FOR TRADE

At the Australia China Business Council 2006 China Oration

China’s Economic Transition: Risks and Rewards for Australia

Tuesday, 5 December,2006

Introduction

Thank you very much, Ian McCubbin, Victorian President of the ACBC;

It is a great honour to be invited to here tonight to make the 2006 China Oration. This is an oration, not a friendly after-dinner speech but a discussion about some of the key issues associated with our relationship with China and the important issues which underpin our growing and strengthening relationship with this important trading partner.

It is now a very important annual event on the Australia-China business calendar.

I know that this year is even more special because it marks the 10th anniversary of the merger between the original Australia China Business Council and the Australia China Chamber of Commerce and Industry to form the modern ACBC.

So I congratulate you on your achievement. It has made a substantial contribution over that period raising the profile of the Australia/China business relationship and as a result, also brought our countries closer together.

I have had the privilege of visiting China on a number of occasions. Each time, I am enormously impressed. You cannot visit that country without being staggered, over recent times, about its enormous growth and prosperity.

Australia has had the privilege of playing a role in that growth over the years. You know, in years gone by, people could make excuses for Australian business and industry because we were a long way away from the fastest-growth and most important economies of the world. You know the time – when that was Europe and the United States. They are a long way away physically. Australian industry and exporters always had a disadvantage with other countries because of the freight cost of dealing with countries so far away.

But now, the strongest economies of the world are in our own region – close by. And so, instead of being at a disadvantage, Australia is able to participate in the growth and progress of our region. China has been at the heart of that over recent times.

Tonight, I want to talk about China’s remarkable economic growth and how that affects the world, our region and our country.

I want to ask, in other words, what are the risks and rewards for Australia in this enormous growth and development?

To start answering this question I would like to recount a battle fought by perhaps Australia’s best-known Trade Minister and leader of my own party, Sir John, nicknamed “Black Jack”, McEwen.

Back in 1958, at the height of the Cold War, Australian Government policy restricted trade with Communist China. But Black Jack McEwen argued hard to expand trade. He believed Australia should trade with any country that wanted to buy our goods.

He was, of course, the one who signed the economic agreement with Japan less than a decade after the end of World War II. It must have been an extraordinarily heroic and difficult thing for an Australian to sign an agreement with the vivid memories of prisoners of war and others who had such bitterness and anxiety about dealing with Japan.

Incidentally, the 50th anniversary of that agreement is next year so it has particular significance that we are talking about a Free Trade Agreement with Japan to modernise an economic agreement that has lasted five decades.

So indeed, Black Jack McEwen was prepared to take on the tough issues because he knew that trade was important to make Australia grow.

In those days, we were a vast country, with substantial resources with a small population and therefore, if we were going to have world-class industry we needed to sell our goods to other parts of the world.

He also, argued, in the context of trade with China that if we did not sell to China then other countries would.

Now, John McEwen was considered to be Government’s strongman. But opening up trade with China at that time was one of the few battles he actually lost.

But in spite on the Government’s unwillingness to formally embrace trade negotiations with China at the time, his defeat was short lived because Australian trade with China eventually did expand. What McEwen saw very clearly and early was that there were rewards from engaging China.

This lesson is so obvious today, especially to you, that we can’t ignore it.

China’s growth story

While Australia - and other countries - eventually started trading with China what probably mattered most of all was that China decided to engage with the world.

Whether or not Deng Xiaoping actually said “to be rich is glorious”, the market-based reforms that China unleashed over 20 years ago have had an extraordinary impact on China and the world economy.

In less than a generation, China’s economy has gone from being closed to the world to becoming one of the world economy’s main engines.

Last year, China’s growth accounted for a staggering one quarter of global growth. This has had a stunning effect.

A visitor to Shanghai a decade ago would not recognise the city today. The city’s soaring skyscrapers rival and perhaps surpass the skyline of cities like New York.

On the city’s streets, swarms of bicycles have given way to cars and traffic jams. And luxury cars jostle with taxis and buses in a scene that looks a lot like a typical day in a western metropolis.

Just remember that this is the first generation of Chinese to own motor vehicles. What will it be like when China’s motor vehicle ownership rate matches other parts of the world?

China’s economy as a whole has grown six-fold in the past 20 years, making it now the world’s fourth largest.

This remarkable growth has lifted living standards for hundreds of millions of Chinese people; incomes per person have doubled in the past five years, in what is probably the largest reduction in poverty in world history.

For the world, the title “Made in China” is now as common as commerce. China sews more clothing and produces more TVs, mobile phones and DVDs for the rest of the world than any other country. And the nation consumes energy at a rate second only to the United States.

I appreciate that all of you here tonight are very familiar with China’s impressive growth story. The impact of the “China story” is being talked about in corporate boardrooms and small businesses across Australia.

So what I would like to look at is whether those factors that have driven China’s remarkable growth to this stage are sustainable into the future.

Most observers of China have watched the country’s economic takeoff with awe. From 1992 to 2004, the country’s average economic growth rate was 9.9 per cent.

But from an historian’s view of China’s macro economy, this performance is arguably not as dramatic nor as unprecedented as many people might consider.

Indeed, economic history may well record that China is simply going through the same kind of growth that lifted the economies of Japan and the Asian tigers in the mid to late 20th Century.

As Mark Twain said, “Prediction is very difficult, especially if it’s about the future.” But all the attention on China’s growth echoes similar debates about Asia’s economic boom.

With all the spectacular descriptions about China’s unprecedented growth, we should remember the industrial revolution that transformed Asia in the second part of the 20th century.

Between 1950 and 1980, Japan grew at an average real rate of nearly eight per cent—more than twice the pace of industrialised countries over the same period.

Not long after, other East Asian economies also took off.

All impressive growth rates. And Thailand and Malaysia were not far behind. [1]

All that suggests is that what is happening in China is not without precedent. But more importantly, it is also sustainable and that countries can move on and get economically strong and stable even after their spectacular growth period may expire.

The rise of Asia’s economies led to lots of academic anguish. Put simply, one side heralded the new “Asian growth model” and the unique role of so-called “Asian values”.

Another side talked about the supposed policy of “new mercantilism”, a revival of the trade theory that Governments should suppress imports to drive growth.

The reality, however, is less colourful. What happened to Asia and what is driving China’s growth today comes more or less straight from the textbook. There is plenty of precedent.

So-called Asian “miracle growth” was simply driven by more investment in labour and capital and then an efficient use of both factors; what economists call productivity.

This has led to a couple of surprising findings. One is that Asian productivity has historically been fairly average - not much higher than for developed countries. This explains Asia’s comparatively low wages. The other is that almost all of Asia's growth performance can be attributed to its massive rates of capital investment.

And the reason that Asia invested more money is that it saved more. There’s no doubt that Asia focused on building up their exports. But many credible economists believe that a high domestic savings rate is the main factor linking the fast-growing Asian economies together.

In China’s case, the country combined high savings with massive investment in infrastructure and a huge shift of low-cost labour from the farm to more productive sectors of the economy.

If you add this to China’s market reforms and its openness to trade flowing from its accession to the WTO, we have a broad insight into the dynamic mix that has driven the country’s most remarkable growth.

Risks in China’s economic transition

So how is China’s economy positioned today? As I said earlier, economic growth has doubled per capita incomes in the past five years; an example, perhaps, of the idea that a rising tide lifts all ships.

But as impressive as this growth is, we need to keep it in some kind of relativity. China’s per capita income of US$1,944 in 2006 is still 18 times smaller than Japan’s and 23 times smaller than the per capita income of the United States.[2]

So China has still plenty of growing to do. Notwithstanding China’s impressive reforms so far, its economy still has a long way to go faces several systemic risks.

If these risks are unmet, they could undermine China’s long-term growth and the livelihoods of its 1.3 billion-strong population.

Let me talk about a few of those risks.

The first is sustaining the trade reforms. According to the World Economic Forum, China still retains significant trade and investment barriers that undermine its overall competitiveness.

Last year, China ranked 48th out of 117 countries in the WEF’s global competitiveness index. More trade reforms are necessary to complement reforms elsewhere in China’s economy.

I appreciate that maintaining momentum on reform is hard and obstacles often lie in the way. Political imperatives and local pressures can hamper reform. In a country like China having 800 million farmers, it’s easy to consider their interests when seeking to protect agriculture from imports from other parts of the world.

In reality, when you have an industry being built on low-cost labour and the reforms appearing in the industrial sector, why is it necessary to have 800 million people engaged in producing food when in some instances, it is barely sustaining a population of 1.3 billion.

The reality is that the whole Chinese economy would benefit from being opened up to access to food and fibre from the best producers in the world. Now, just as China is dominating world markets with its industry and manufactured goods because it’s the best in the world, Chinese people in the Chinese economy would benefit from accepting from those countries that can do agriculture better than China and by taking their products into their market place.

That has been Australia’s experience. We have benefited from exports from across the world. We cannot expect, despite our pride in our country, to be the best in everything. We do some things very well. We sell things effectively to the world but in other areas, we rely on the ingenuity, the imagination, the inventiveness and the scale of other parts of the world to ensure that we have access to the best-available products from the rest of the world.

So I encourage the Chinese Government to keep implementing its WTO reforms, particularly in areas such as: agriculture, intellectual property protection, trade in services and equality of treatment for domestic and foreign businesses.

I know that the Australia China Business Council strongly endorses this view.

The second risk facing China’s policymakers is managing its growth. One thing that I find remarkable about international trade is its endless dynamism.

For instance, even China is now facing competition in low value-added manufacturing from even lower-cost emerging markets.

Remember Japan, South Korea and Taiwan built their industry on the basis of their low-labour costs. In fact, industry moved to those countries because labour was cheap. Industry has moved massively to China because labour was low but there are lots of low-labour cost countries that can do what China can do, and in time, perhaps even better.

China cannot exclusively rely on its low-labour costs to guarantee its economic future. It will need to diversify its economy in the same way that Japan has diversified its economy as other countries did to secure its growth and progress to stop labour industries moving to other places.

For instance, China will have to face the challenge to rebalance its growth by encouraging private spending – by building a much-stronger consumer and services economy.

The fact is that China’s growth has been uneven. Its coastal cities and China’s emerging middle class have clearly benefited from growth. While there is even rising evidence of skilled labour shortages in the cities.

Yet the agriculture sector remains weak and farm wages very low. China still has a vast pool of rural labour to deploy to more productive sectors of the economy. I understand the World Bank recently found evidence that rural incomes actually fell during the latest boom years.

So I appreciate that managing the income gap between rural and urban groups and overseeing the steady transition of the economy will be very difficult. Other countries have done it and I’m confident China will too.

China’s future growth will rely on how well it can maintain the political and social stability while it is addressing these transitions.

I believe that one of the ways to secure continued growth is through further structural reforms. In the broadest sense, it is about having confidence in market dynamics.

So I encourage reforms to improve the commercial orientation of China’s banks and state-owned enterprises. I encourage greater use of price signals in China’s property and construction sectors.

There have been some announcements in recent days, as you are aware, about banking reform and those announcements are welcome, although I suspect the ANZ and other Australian banks interested in involvement in China will regard them as not having gone far enough and have provided limited opportunities for banks on a scale of Australian business.

There is evidence of movement to China’s regulatory system and we need to encourage and support that and demonstrate to the people of China and the government of China, that opening up brings rewards – not just for foreign countries but for most importantly, to China, its trade and its people.

The third area that I would like to talk about that I think offers a substantial challenge for China in the years ahead is the environment. For ordinary Chinese households, businesses and the economy as a whole, serious water shortages are not a theoretical problem.

I am told that China has one-seventh of the world’s fresh water but China has about one-quarter of the average per capita water supply in the world. 136 of its cities have been identified as facing water shortages.

The 43 million people of the cities of Beijing, Tianjin and Shanghai each have access to less water per person than the people in Yemen, Jordan or Israel.[3] And certainly, access to much less water than any city in Australia.

Water scarcity and pollution holds back industrial and agricultural output. Chinese authorities recognise these problems and are working hard improve water capacity.

The effect of these efforts on business is that you are likely to see large investments in water infrastructure and tougher restrictions on waste water.

A real issue for China is also the level of air pollution. Those who visit China are always amazed at the greyness of the skies. The World Bank says that 16 of the 20 most-polluted cities on earth are in China. In recent months, China has been focusing on controlling sulphur-dioxide emissions which cause acid rain. In 2005, China discharged 25.5 million tonnes of sulphur-dioxide - the most in the world, according to China’s own State Environmental Protection Administration.

China’s carbon dioxide emissions are projected to grow, on average4.2 % between 2003 and 2030, the largest average annual percentage change in the world.

Quite simply, China must do more to clean up its environment. As you are aware, no obligations were placed on China in the Kyoto Accord. When Kyoto expires and negotiations are in place for a new agreement, and Australia is leading in those negotiations, it is incomprehensible that the major growing emitters such as India, Indonesia and China can be excluded from the arrangements.

It is inevitable that there’ll be an expectation, and countries like China will need to play a role in Kyoto 2 or whatever agreement replaces the current arrangements. It’s not just enough to expect western countries which have made contributions, like Australia which is responsible for less than 1.5 per cent of the world’s emissions, to carry all the load on greenhouse gases when countries like China, which will soon be responsible for 25 per cent of the world’s greenhouse emissions are asked to do nothing.

So these will be real challenges but they’re also systemic risks to growth that I’ve talked about and so are issues that need to be taken into account when considering the risks associated with dealing with China.

But I wanted to highlight them because I see them as challenges. The Chinese authorities are aware of these problems. As people travel around the world and see the skies in cities can be blue and that other countries prize their pristine environments highly, consumers in China and the ordinary people in China are also going to demand environmental standards for their industry.

So I think it’s important that we look at the issues and seek ways to resolve them.

A Chinese proverb says: “He who recognises the signs of the times is a true hero.” And these are some of the signs of the times which I think China will need to address in the years ahead.

Extending the rewards for Australia

Australia and Australian business have a real stake in how well China manages these risks. We have done pretty well so far.

And we are well positioned as an important and reliable partner in China’s economic growth. The faith and confidence between our two countries has certainly added to the trust of the business relationship and helped us to rely on confidence in one another.

China’s demand for our resources has helped to feed Chinese production. The increased supply of goods from China and other low-cost economies has led to lower import prices in countries like Australia and been a significant contributor to the low inflation rate at a time of economic growth.

As a result, our terms of trade are at record highs and inflation pressures have been contained.

We can be proud of the $45 billion in our two-way merchandise trade. And we can take comfort from the complementary nature of our trade.

We should not depend totally on a handful of sectors to sustain our trade. China’s booming construction sector, for example, remains a critical factor driving demand for Australia’s commodities. But booms, even building booms, in countries like China do not last forever.

So I think we ought to be focusing on the long term by bringing down wider barriers to trade and investment between our countries to extend the rewards from commerce.

Trade and investment barriers are expensive. They limit competition and stifle innovation. They are a tax on trade paid mainly by consumers through higher prices.

The negotiation of a Free Trade Agreement with China is a way to break down some of China’s trade restrictions, particularly in agriculture and in services and investment.

I know that the ACBC is interested in what an FTA could do because there are still many hurdles in doing day-to-day business in China.

Some of these hurdles that you have identified are non-tariff barriers. Hurdles that are legal, regulatory and administrative systems, contractual integrity and intellectual property protection.

Now some of these things cannot be resolved even through a comprehensive FTA. These issues touch on more fundamental reforms to China’s domestic systems.

But what an FTA does offer is a chance to set the terms for future trade and create new opportunity for Australian exporters to gain better access to China’s markets.

We are seeking a comprehensive agreement that will create benefits for both countries. In any negotiation, there will always be sensitivities.

But we will address them through talks not by ruling them out before the talks we even begin.

Our approach is to encourage China to come forward with a credible market access offer in agriculture, manufacturing and services.

Now I am aware that there are some critics who say that an FTA with China is not in Australia’s interests in spite of the fact that China has become our second most important trading partner.

There, of course, will be extensive consultation with industry before the Government takes any decisions.

Secondly, regardless of any FTA, some Australian industries already face challenges from China’s emergence and the rise of even lower-cost producers. This is a reality of the times; and as times change, we must change with them.

Australian companies have already shown an ability to develop billions of dollars in trade despite substantial Chinese tariffs on our agricultural and manufactured products. So an FTA that cuts these tariffs would be an enormous plus.

Now, nobody thinks these negotiations will be easy. They will take time. I’ve only been in this job a couple of months but on my second day, I had a full-day ministerial commission with Bo Xilai – my opposite number in China. It was a tough day. Some people said around me that they thought the negotiations went quite well. Well, my response was, ‘does it get worse than this?’ We certainly had a tough series of negotiations.

Any of you who do business with China know they are tough negotiators. We have had six rounds of negotiations already for this free trade agreement and progress has been slow. There’s another round next week and we hope that a magic breakthrough might be little closer. But certainly, the task will be difficult.

Let me say that I want industry to be involved closely in those negotiations. I appreciated the participation by the ACBC in negotiations in Sydney and your willingness to participate in delegations to China. I believe there is mutual benefit from having business groups associated with our discussions on FTAs. It helps provide an immediate input from people who are directly concerned about issues which are raised. More importantly, it helps to bridge the gaps about industry and with industry, we can make some headway in identifying the key issues and finding solutions.

So we will be certainly looking forward to those negotiations as they proceed.

I do not believe setting an arbitrary deadline will help. I simply say that we will take as long as we need to get a good agreement. We will not settle for a second-class deal that fails to benefit the Australian or Chinese industry. No deal is a good deal unless both parties benefit. We trade off one thing for another and I believe there are such complementarities.

There is no doubt that both countries will learn along the way and we will try to break new ground. We need to remember that China has never negotiated a FTA or completed negotiations with a developed country like Australia.

We should recognise China’s progress on economic reform and the goodwill of the Chinese leadership to take further steps to opening their markets. We have come a long way and I believe that the FTA negotiations will take a substantial further step forward.

Conclusion

Finally, can I conclude by saying that our engagement with China has been immensely rewarding.

People like “Black Jack” McEwen understood we had to break new ground and go into new trading relationships, no matter how difficult the options might be. Now McEwen’s beliefs still ring true today. His views reflect our approach to world trade. It’s an approach that has served us well in the past. It’s been driven by Australian industry, the determination of our leaders and captains our resource, agriculture, investment and other sectors. Increasingly, also our education sector is looking for new ideas and new opportunities.

I am looking to a FTA between Australia and China to secure the future prosperity and economic growth in both countries and to cement the framework for a positive working relationship and a stronger Australia.

I wish your Business Council every success for the year ahead. Thank you for your contribution to building that relationship and I know that you are as committed as we are to taking that relationship to a new level.

Thank you.


[1] Development: China's True Growth: No Myth or Miracle, 1 September 2006, Far Eastern Economic Review.

[2] IMF World Economic Outlook Database, September 2006.

[3] “Thirsty China”. CLSA Emerging Markets, Summer 2006.

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