Australia: Chinese tariffs on coal imports are being imposed to Australian chagrin, but is this a question of throwing stones in glass houses?

China has announced it will reinstate tariffs of 3% - 6% on coal imports commencing 15 October 2014. Media reports have suggested the tariff is aimed at bolstering China's domestic coal producers and may have a significant impact on Australian miners. The Treasurer, Joe Hockey, has labelled the tariffs as spiralling protectionism.

We believe China's motivations behind the tariff are broader than an attempt to protect its domestic coal producers. Quite possibly this is a politically astute move to motivate the Australian government to reconsider its treatment of Chinese imports before the end of the Australia-China Free Trade Agreement negotiation process.

No doubt the Treasurer will raise these new tariffs when he is in Beijing next week. Like the Prime Minister and the Trade Minister, he will want to get to the bottom of this "hiccup in our biggest and most important trading relationship".

It's hard to see the timing of the announcement as coincidental; particularly in the context of the countdown to signing the FTA with China at the upcoming G20 summit. While there are some outstanding issues on the FTA itself, we believe the tariff issue could also be part of China's long-standing concerns about the way Australia treats China's economy in anti-dumping investigations.

Anti-dumping and countervailing measures, which are typically in the form of import tariffs, are one of the few forms of protectionism allowed under the WTO rules. While Australia and China have both been committed to lifting trade barriers via an FTA, at the same time the Australian government has also been imposing more and higher anti-dumping and countervailing measures against Chinese exports.

Typically, Australia imposes higher dumping duties on Chinese exporters by treating China as having a "particular market situation". This implies that alleged Chinese government intervention in its markets makes China's domestic selling price of goods "unreliable". This assessment justifies a higher benchmark price and means Chinese imports are often subjected to a higher dumping margin, even though Australia (unlike the US) recognises that China has a "market economy".

China has repeatedly contended that this treatment is contrary to Australia's recognition of China as a "full market economy". However, thus far its arguments have not had any material effect. Australia has persisted in treating China as having a "particular market situation" (which China does not have) in even the most recent anti-dumping and countervailing investigations.

It is irrational for Australia to look for enhanced market access for Chinese exports via an FTA and simultaneously impose tougher anti-dumping and countervailing duties on Chinese imports.

China's reintroduction of the tariffs on coal imports may alter the political calculus. The move will most strongly impact Australia and Russia, the top coal exporters to China. But Indonesia, the second-biggest coal exporter to China, will be exempt from the tariffs since a free trade agreement between China and ASEAN means China has committed to zero import tariffs for ASEAN countries.

Coal is Australia's second largest export after iron ore and China is one of its major markets. With heavyweights like Glencore, BHP, Rio Tinto and Whitehaven Coal involved, it's clear the industry will lobby hard for China to eliminate the tariffs on coal imports. The Abbott government has also committed itself to pushing China to remove the coal tariffs during the final negotiations of the FTA.

This provides a golden opportunity for China to push the Australian government to reconsider its stance on the issue of "particular market situation" towards the conclusion of the FTA.

Instead of being motivated by any protectionist intent, it is just as likely that China's move on tariffs is a response to Australia imposing higher dumping duties on Chinese exports. In other words, a response to Australia's protectionist stance on Chinese exports.

Why is the protection of China's coal industry not the predominant purpose of the coal tariffs? Firstly, despite the deteriorating economic condition of China's coal industry, China will remain coal dependent given its total energy consumption and will remain reliant on coal imports

Secondly, at the same time as reinstating the coal tariffs, China has introduced measures that will effectively impose additional financial and administrative burdens on its domestic coal industry with an aim to combat pollution.

In addition, like Australian coal producers and exporters, the overseas subsidiaries of Chinese coal producers such as Shenhua Group (China's biggest coal producer) and Yancoal (China's fourth-largest coal company) will also be subject to the tariffs.

Finally, the tariffs are set at levels that are far below a protectionist tariff rate and are in fact below China's committed bound tariff rates within the framework of the WTO and hence not inconsistent with WTO rules.

Australia's continuous treatment of China as having a "particular market situation" with an aim to impose higher dumping duties on Chinese exports is inconsistent with the desire for an FTA with China that eliminates all tariffs between Australia and China.

Reinstating tariffs on coal provides China with a strong bargaining chip to push Australia to compromise on the issue of "particular market situation" during the final negotiations of the FTA. It also raises the question of whether a "particular market situation" exists in Australia given the Australian government's provision of assistance to domestic industries and hence influence on relevant markets. Should they be subject to the same disciplines that are imposed on Chinese imports? Throwing stones in glass houses comes to mind!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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