What the new free trade deal with India means for Australia
A huge increase in business between India and Australia is expected over the next decade under a new trade agreement signed with the world’s fastest-growing economy over the weekend.
A huge increase in business between India and Australia is expected over the next decade under a new trade agreement signed with the world’s fastest-growing economy over the weekend.
As Australia looks to reduce its reliance on trade with China, Prime Minister Scott Morrison has outlined plans to triple exports to India by 2035, with restrictions lifted on key exports like coal and education.
Mr Morrison said the deal, which still needs approval from the World Trade Organisation and Australian Parliament, could deliver a $14.8 billion annual boost in revenue for Australian exporters.
But experts said although the deal would strengthen trade and diplomatic relations with India, it was too small to make up for the devastating trade sanctions imposed on Australia by China.
And in key commodity markets like coal, Australia has already found new buyers and has little room to export more to India.
Tariffs slashed under trade deal
Australia’s two-way trade with India is valued at $24.8 billion annually, making the nation our seventh-largest trading partner.
For context, the China trade is valued at more than $246 billion a year.
Coal and educational services account for the majority of our trade with India, with smaller industries like gas, tourism and other metal ores making up the remainder.
The Coalition wants India to become our third-largest trading partner by 2035, which would mean at least a tripling of exports within 12 years to rival that of Japan.
With that in mind, the deal will eliminate tariffs on 85% of Australian exports to India, including:
- Eliminating tariffs on coal (2.5%); alumina; metallic ores such as manganese, copper and nickel; and critical minerals like titanium and zirconium;
- Eliminating a 2.5% tariff on wool and a 30% tariff on sheep meat;
- Eliminating tariffs up to 30% on a range of food exports like avocados, onions, cherries, berries and nuts over seven years;
- Reducing tariffs on wine from up to 150% to 50% over 10 years; and
- Cutting LNG (natural gas) tariffs to zero but keeping in place the policy infrastructure to lift them again.
The most significant of these goods is coal which was a $7 billion business during 2020, as the table below demonstrates.
As for services, the deal has focused largely on expanding education and training exports. It includes:
- A new work and holiday visa program for young Indians, starting at 1000 places per year;
- An additional year to stay in Australia for Indian graduates in STEM and IT workforces;
- Guaranteed “best treatment” by India across the higher and adult education sectors; and
- Joint recognition of professional qualifications, licensing and registration procedures between professional services bodies in both countries.
Indians spend $6 billion a year on education-related travel to Australia, making it Australia’s second-largest export to India after coal.
Expanding access for Indian students could therefore deliver a major revenue boost for Australia, which has also agreed to eliminate 96% of its tariffs on imports from India, while considering more than $1 billion in foreign investment proposals.
What the deal means for Australia
Experts said the deal would boost Australia’s trade with India but fail to offset the full effects of its frosty relations with China.
China slapped trade restrictions on more than $20 billion of Australian exports in 2019 amid growing diplomatic tensions between Canberra and Beijing.
Goods like coal, timber and foods were hit, costing affected industries about $5.4 billion in just 12 months, according to recent Treasury estimates.
Despite this, Lowy Institute analysis suggests local firms quickly found new markets to replace China. India played a key role, particularly for Australian coal producers.
A slashing of tariffs on Australian trade to India is therefore good news for industries hit by trade sanctions, but Griffith University’s Professor Ian Hall said India would never replace China’s role in propping up the national terms of trade.
“I don’t think it [the deal] will boost Australia-India trade anything like Australia-China trade, simply because India doesn’t need as much of what Australia produces,” Professor Hall said.
Crucially, India’s demand for Australia’s largest commodity export, iron ore, is dwarfed by China, which relies on Australia to feed its big steel mills.
Commonwealth Bank commodities analyst Vivek Dhar said the removal of a 2.5%t tariff on Australian coal exports to India would make trade more lucrative for miners, with about 70% of India’s coking coal demand already coming from Australia.
But he said the scope for increases in this trade is limited because the market is already near capacity amid a boom in prices internationally.
India’s coking coal demand will rise from 68 million tonnes a year to 90 million tonnes by 2027, Mr Dhar said, but new government figures show Australia’s total production will only rise by 18 million tonnes in that time.
“Australia is going to struggle to supply those incremental tonnes unless we start to see coking coal demand from some of the other major buyers move away,” Mr Dhar said.
Economist Saul Eslake said Australia’s trade with India has been fairly small historically and the free trade deal is unlikely to raise its significance to anything like the levels of that with China.
“I suspect whatever benefits do come out of this ‘interim’ deal or out of the ‘final’ one, if it’s ever reached, will be pretty small beer,” he said.
But Professor Hall said the deal is still significant, not least because it’s only the second trade deal agreed to by the government of Indian Prime Minister Narendra Modi, which has been in power since 2014.
“It should be noted that this is meant to be the first of two deals and so it addresses areas that are relatively unproblematic,” Professor Hall said.
“Other issues — including access to India’s market for Australian dairy and wheat producers, as well as service industries — have been left for more negotiations in coming months and years.
“It’s a sign of diplomatic goodwill, of how strong the bilateral relationship has become over the past decade.”
In terms of the benefit for Australian consumers, Mr Eslake said cheaper imports from India should flow from the deal, though these industries are fairly small.
This article was first published by The New Daily.
