Trade negotiators are working long hours these days. The United States’ initiatives in Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP) have attracted broad attention, especially as the negotiations draw closer.
Although entrenched protectionist forces such as Japanese farmers, European filmmakers and U.S. labour unions are still active, the efforts made to kick off the ambitious negotiations are admirable indeed. Contrary to the lofty TPP and TTIP, recently China secured two free trade agreements (FTAs) with Iceland and Switzerland: a swift and low-key move towards liberalisation, which deserves coverage. Specifically, how will the two new FTAs affect industries in signatory parties? And, to put the recent development into a broader context, what will happen to China’s FTA strategies next?
On April 15th 2013, China signed a FTA with Iceland after six rounds of negotiations, covering trade in goods and services, intellectual property rights, competition and investment. The agreement will enter into force when the legal ratification procedures in both countries conclude. According to the FTA, Chinese exports of industrial and fisheries products, which accounts for 99.77 percent of Chinese exports to Iceland, will be duty-free. China will remove tariffs on 81.56 percent of Icelandic exports, including fisheries. Despite its coverage of intellectual property rights, trade in services, investment and competition, the agreement on these issue areas does not go far beyond the parties’ previous agreements and WTO obligations. In light of this, Iceland’s fishing industry, which exports significant quantities to China, benefits most from the deal, facing reduced tariffs of 10 percent. On the other hand, China’s fishing sector is expecting tougher competition. But given Icelandic exports to China were only $61.2 million in 2012, China is making a minor sacrifice. In return, Chinese exports of machinery products, textile and light industrial goods will face reduced tariffs of around 3 percent.
Given the limited trade volume and no workarounds in the EU, the deal’s net impact is not very impressive. Analysts have suggested China’s real intention for the FTA with a small trading partner lies in the rich Arctic energy resources and profitable new shipping routes, which the Chinese Ministry of Commerce denied in April 2013. Putting that statement aside, here are a few facts. When signing the FTA, the Prime Ministers issued a joint statement on deepening bilateral cooperation in Arctic affairs and geothermal development. In May 2013, China acquired Observer State status in the Arctic Council, gaining greater input in distributing the region’s oil supplies and developing shipping routes. Iceland had supported China’s application. Additionally, SinoPec and CNOOC are currently negotiating for oil and gas drilling rights in Iceland, suggesting China’s shipping and energy sectors may benefit from the recent developments.
A China-Switzerland FTA followed soon after. On 24th May 2013, the two parties signed a memo to conclude the FTA negotiation and start the national ratification processes. Switzerland promised to remove tariffs for 99.7 percent of Chinese exports while China promised 84 percent in return. The deal is expected to strengthen various Chinese industries including textiles, clothing, auto parts and tourism. Swiss precision machinery will face lower tariffs with a transition period: an acceptable compromise for both parties. Switzerland may also gain access to China’s financial services market from the deal.
The two agreements have nurtured optimism about China starting FTA negotiations with the EU. However, the European countries remain divided over China’s Market Economy Status (MES) in the European Council. Since China regards MES as a prerequisite for negotiating FTAs with other countries, an EU-China FTA discussion will be a long shot. This seems particularly unlikely after the recent anti-dumping wars between the two and considering to EU’s sluggish economy.
In fact, China has not clarified its FTA development strategy. It signs FTAs with diverse concerns based on the character of its counterparts, as was the case with Iceland. Judging by its impending negotiations, China’s focus in the next few years will be on its close neighbours and natural trading partners, partly to counterbalance the TPP. But since major negotiations, including those with South Korea and Japan, have been stalled for a long time, the current optimism should include caution. China’s move to open trade relations with European countries is selectively beneficial, but it is still too early to read a single and coherent trade strategy too much into it.
