Tony Abbott with Chinese President Xi Jinping at the APEC opening banquet

Trade Minister Andrew Robb, who along with Prime Minister Tony Abbott is in Beijing for the Asia-Pacific Economic Co-operation summit, was everywhere yesterday talking up the prospect of a free trade agreement with China, despite his admission that it will fall short in the critical area of agriculture — Australia’s biggest single growth opportunity in the near term.

Robb has been admirably focused on his portfolio since taking the job last year, although arguably a bit too obsessive on the political wins of FTAs versus the nitty-gritty of real deals. Treasurer Joe Hockey, a man rarely accused of original thought, joined in the chorus recently, predicting a “golden era of trade” for Australia.

But with whom, Joe? Right now the economies of most of Australia’s top trading partners are looking somewhere between wan and downright sickly.

In first place, China, with a two-way trade of $160 billion last year, has an economy that is slowing even more quickly than its leaders had envisaged. Reasonably anemic trade figures at the weekend — exports rose 11.6% in October from a year earlier, slowing from a 15.3% rise in September.

Imports rose an annual 4.6% in October, pulling back from a 7% rise in September, and were weaker than expected. These were followed by inflation figures yesterday that pointed to a period of dis-inflation signifying an economy below capacity. The country’s economy will grow at its slowest pace for 24 years in 2014, and Chinese leaders took pains at the weekend to tell the APEC business summit to prepare for a “new normal” of growth at 7%, a figure most economists now see as optimistic.

The sickly trade figures have hit Australia’s mining industry in the neck — especially when combined with the manic expansion of iron ore projects by the big miners in the vain hope of rubbing out Chinese domestic production and junior miners — and in the process destroying their own margins and shareholder value. Listen to the people who continue to say this is not the case at your peril. They are the same voices who said that iron ore would stabilise at about US$100 per tonne, then US$90 per tonne and so on.

Last night the nation’s single biggest export closed at US$75.50, unmoved for the day, but still at its lowest mark for five-and-a-half years. At that price the world’s largest iron ore miner, Fortescue Metals Group, is losing money with every tonne of iron ore it sells.

Tim Murray, managing partner of China-focused research house J Capital Research, has been in China for the past two weeks touring the provinces.  He doesn’t like what he sees. Last night he spoke to Crikey from Hefei, the capital of the central province of Anhui, a second-tier Chinese city of about 8 million people. Murray says house prices there are down about 20% compared to the same time last year. “Housing inventory is about 12 months of stock — if you count houses/apartments under construction, it’s about four to five years,” he said.

“… The TPP, as many sharp observers have noted, is as much about security and containing China as it is about trade.”

That’s an awful lot of inventory to clear before developers start buying significant shipments of new steel, and housing accounts for about 50% of Chinese steel. Murray says Hefei is by no means the worst hit of China’s second-and third-tier cities.

Last week the Chinese government released more stimulus into the economy — it’s been doing this in bursts since April while saying it won’t prime the pump.

And it’s not just China.

Japan’s economy  (No. 2 in two-way trade and exports) has been in a rut for so long that the “lost decade” is starting to sound hopeful. Last week, its central bank flummoxed financial markets by unleashing further stimulus — a sign, economists say, that its government is struggling to win its increasingly expensive battle against deflation.

South Korea, our No. 4 trade partner and No. 3 export destination, is doing OK, with year-on-year growth of 3.2% in the third quarter, but it is heavily linked to China and Japan. In fact, between them the three north Asian nations, increasingly interlinked, took about $170 billion of Australia’s $316 billion in exports last year.

Others on Australia’s top 10 list are struggling too: No. 6 trade partner Thailand is heading for 1% or so growth this year, six months after the May 22 coup d’etat. A year ago the central bank had predicted 4% growth for the year, but next year’s forecast has also been wound back to low single digits.

And the two European nations on the list, the United Kingdom and Germany, have stuck their hands deeper into their pockets as they both pledge further austerity. The United States is the only even vaguely bright spot, but as economist Nouriel Roubini noted recently, the world’s jumbo jet economy will struggle to fly on one engine.

So, to return to the Chinese FTA that will likely do very little to boost Australian trade anytime soon, in reality, it is also likely to be only window dressing compared to what is quickly emerging as the main game: the 12-nation — so far — Trans-Pacific Partnership (TPP). This is being led by the US and is designed, in a substantial part, to protect the interests of America’s biggest corporations.

As Robb was spruiking a Chinese FTA to any media outlet that would listen yesterday, US President Barack Obama was hosting the heads of the 12 nations signed up to the TPP, including our very own Tony Abbott, at the US embassy in Beijing.

Just over a year ago, in Jakarta, Robb was openly and justifiably wary about the pact; now the Abbott government is positively gung ho about it.

That suggests that the TPP, as many sharp observers have noted, is as much about security and containing China as it is about trade. So it’s little wonder there’s been increasing talk of a new cold war lately — and a Chinese FTA or not, there’s little doubt about which side Australia will be on.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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