Friday, December 26, 2014

Aussie FTA and Chinese Dairy Imports

The China-Australia free trade agreement will gradually reduce tariffs to zero on Chinese dairy imports from Australia. This follows a 2008 China-New Zealand FTA that contributed to a New Zealand dairy-export boom. A November article in a Chinese publication, Economic and Nation Weekly, asked whether the competition from imports would pressure the Chinese dairy industry.

China's current tariffs on dairy products are mostly 10-to-15-percent, so the tariff reductions in theory could increase imports that would reduce the market share of Chinese companies. The low price of imports is expected to put downward pressure on domestic prices for Chinese companies.
Source: China customs data analyzed by dimsums.blogspot.com

In fact, China's dairy imports from New Zealand began their explosive growth immediately after its FTA with New Zealand took effect in October 2008. Interestingly, the FTA coincided with China's melamine adulteration crisis (test results showing infant formula was adulterated were released by Chinese authorities in September 2008). Dairy imports from other countries have also risen since 2008, but the dramatic growth of imports from New Zealand suggest that the FTA was a driving factor.

Industry experts point out that Australia still has a small share of China's dairy imports--about 10 percent for milk powder. They also point out that there are a diversity of products. European countries tend to sell finished products like cheese to China, while New Zealand mostly sells milk powder used to manufacture dairy products in China. One industry expert asserts that prices of final products in the Chinese dairy markets are still set by a few large domestic companies.

Could Chinese investment lead to growth in Australia's share of China's dairy imports? After the Australian FTA's announcement, China's New Hope Group announced plans to invest AU$ 500 million in Australia's food and agriculture with initial plans including a large dairy farming project. A New Zealand trade office representative told Economic and Nation Weekly that Chinese companies have been investing in New Zealand dairy for five years. In November, China's largest dairy company, Yili Industrial Group, announced a RMB 2 billion (NZ$ 400 million) investment in New Zealand, said to be the largest China-NZ investment ever and the world's largest integrated dairy production base.

Both New Hope Group and Yili Group say they have strategies to invest in a global supply network to meet Chinese consumers' growing demand for dairy products. An official from another Chinese dairy company, Flying Crane, said Chinese companies are preparing for the future by developing partnerships with foreign companies to gain access to technology, develop international brands, and cut costs.

The expansion is not limited to Oceania. Also in November, Yili announced a plan to invest in a US$ 100-million dairy processing facility in Kansas in partnership with Dairy Farmers of America, Inc.

An official from the Chinese dairy industry association worries about China's exposure to global price fluctuations. He calls for establishing a national milk powder reserve that he thinks could be used to stabilize Chinese prices.

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