Since 2005 Australia has been working on a free trade agreement with China to reduce trade barriers between the two countries. No less than 18 rounds of negotiations have happened since that time.
It is inexplicable then why Chinese exporters are being targeted in a ramped up campaign to impose higher anti-dumping measures.
Australia must take care it doesn't jeopardise its higher goal of free trade with China for the sake of short term protectionism.
The purpose of a free trade agreement between China and Australia is to encourage trade and investment flows by eliminating trade barriers in each country and lifting restrictions on foreign investment.
Much progress has been made on the FTA since 2005 however recent reports suggest negotiations between the two countries have stalled due to some 'politically sensitive issues'. The Chinese are concerned about Australia's foreign investment rules for state-owned enterprises and the movement of Chinese people in and out of Australia, while Australia wants greater access to China's agricultural and services markets.
Despite this hitch, both nations are committed to opening up access to their markets. Both are participating in negations on the new Regional Comprehensive Economic Partnership (RCEP) which was announced in Phnom Penh last month. The RCEP proposes a regional free trade area covering 16 countries including ASEAN members and countries that have FTAs with ASEAN, which includes China.
In sum Australia's trade policy with China remains firmly directed towards reducing barriers and further opening access to each others' markets. The recent white paper 'Australia in the Asian Century' is supportive of such an approach.
However, this policy contrasts sharply with what appears to be attempts to increase duties on Chinese imports.
Anti-dumping and countervailing duty measures are one of the few forms of protectionism allowed under WTO rules. Australia has recently changed its approach to dumping and subsidy investigations involving China in a way that aims to impose higher anti-dumping measures on products coming from our largest trading partner.
Australia recognises China as a 'full market economy'. This means that when Australia's Customs and Border Protection Agency investigates dumping allegations involving Chinese imports they typically compare the export price of the good with the domestic price of an equivalent product in China to determine whether dumping has occurred. The difference between the two prices is the dumping margin.
The 'political problem' for the Australian government is that not all countries use domestic prices in China as the benchmark for calculating dumping margins. Countries that do not recognise China as a market economy (e.g. US, Canada and the EU) compare Chinese export prices with domestic prices in other, so-called surrogate, countries to determine dumping margins.
The different methods often cause dumping margins calculated in Australia to be much lower than the margins calculated (for the same Chinese products) by the USA, Canada and the EU.
This means Australia is restricted to imposing lower anti-dumping measures. In one example, Canada and the USA imposed a tariff of more than 30% on aluminium extrusions from China whereas Australian anti-dumping measures were less than 10% for the same products.
The Australian government is under pressure to support the nation's manufacturing sector which is reeling from the continuing effects of the global financial crisis and the high Australian dollar.
This pressure is manifesting in attempts to find new ways to impose tougher anti-dumping measures on, primarily, Chinese imports.
The main change has been a shift away from using Chinese domestic prices as the benchmark for calculating dumping margins. While this seems inconsistent with Australia's recognition of China as a market economy, the WTO Anti-Dumping Agreement does allow surrogate nations to be used as benchmarks for margin calculations where sales in the home country (i.e. China) 'do not permit a proper comparison'.
In recent investigations Customs concluded that sales in China for particular products are unsuitable for dumping calculations because prices of raw materials and inputs (e.g. aluminium) are allegedly artificially low in China. Customs claims government policy in China influences aluminium prices, although it acknowledges China has not passed any laws to implement such policies.
Using this argument Customs has replaced the cost of the allegedly artificially low raw material with what it considers to be a market price for that raw material. For example, in the aluminium extrusion investigation, Customs replaced Shanghai Futures Exchange based aluminium prices with the price for aluminium on the London Metal Exchange, but only when London Metal Exchange prices were lower than Shanghai Futures Exchange prices.
If it was hoped this new practice of replacing Chinese domestic prices with other benchmarks would result in larger dumping margins being calculated and higher anti-dumping measures being imposed, then it has surely disappointed. Margins in Australia are still well below those in the USA, Canada and the EU.
Despite failing in its intended effect, this practice reveals a disconnect in Australia's trade policy. While the government is publicly espousing its commitment to negotiating a free trade agreement with China, on the ground there appears to be a push to impose higher dumping measures on Chinese imports – truly irrational.
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