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China & Iceland Free Trade Agreement has been adopted

12/02/2014 | By | Reply More

China has developed a strategic position when it comes to entering into Free Trade Agreements

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Chinese Premier Li Keqiang (3rd R back) and Iceland Prime Minister Jóhanna Sigurðardóttir (3rd L back) attend a signing ceremony of documents in Beijing, capital of China, April 15, 2013.

The Parliament of Iceland (Alþing) has adopted a Free Trade Agreement (FTA) between Iceland and China, the first FTA signed between China and a European country.

Foreign Minister Gunnar Bragi Sveinsson put the FTA before Parliament last October, following the signature of the agreement in April 15. 2013 in Beijing, capital of China. The Free Trade Agreement will enter into force when legal procedures of acceptance in both countries have been concluded later this year.

According to Foreign Minister Gunnar Bragi Sveinsson, the FTA will ensure the relationship between the two countries will have the chance to strengthen in a number of areas and will also create great business opportunities.

Finance Minister Bjarni Benediktsson said the new agreement, which covers trade facilitation, investment, competition, intellectual property rights and goods and services, will enable the North Atlantic nation to be part of a “booming market” for years to come. He urged Icelandic businesses to take full advantage of it.

Xie Guoxiang, from the Chinese Embassy in Iceland’s economic and commercial counsellor’s office, said the agreement proves the efforts the two countries are prepared to go to enhance their trade and economic ties, and described the FTA as a “milestone” for both China and Iceland.

The Free Trade Agreement covers the following issues.

  • Trade in Goods
  • Rules of Origin and Trade Faciliation
  • Intellectual Property Rights
  • Trade in Services
  • Investment
  • Competition
  • Cooperation
  • Institutional Provisions
  • Dispute Settlement

The agreement will see Iceland put zero tariff on fishery products and industrial products imported from China, which totaled 99.77 per cent of China’s exports to Iceland after the agreement was signed.

Meanwhile, China will put zero tariff on any goods under 7,380 tariff numbers that were imported from Iceland in the same time. That totaled 81.56 per cent of China’s imports from Iceland.

It is the first FTA between China and a European country and will not only boost bilateral trade, but also economic and trade cooperation between China and Europe, according to the statement.

Iceland is the first developed European country to recognize China as a full market economy, as well as the first European country to negotiate an FTA with China, according to a separate MOC (China’s Ministry of Commerce) statement.

Watch video – Courtesy: New Tang Dynasty (NTD) Television

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Trade between China and Iceland

China is the second biggest economy in the world with average growth rate of 8% in the past 3 decades. The growth rate was 7.8% in 2012 and the projected growth rate for 2013 is 7.5%.

China is the world’s biggest exporting country and the second biggest importing country. In 2012, China’s exports grew to about USD 2,050 billion and its imports USD 1,818 billion, with a trade surplus of USD 231 billion. In view of the 20.2% average growth of China’s international trade volume during 2001-2012, it is expected that China will have the world´s biggest international trade volume in the near future.

China-Iceland Trade has been growing constantly over the years in spite of its small scale. Icelandic exports reached ISK 7.65 billion (USD 61,2 million – EUR 47,6 million) in 2012, up by 40.81% from 2011, and Icelandic imports from China reached ISK 42.6 billion (USD 340,8 million – EUR 265 million) up from ISK 35.1 billion in 2011 (USD 287,7million – EUR 216,9 million).

China is now Iceland´s 4th biggest importing country and the biggest trading partner in Asia. Even though Icelandic exports to China have been growing fast, China still only ranks as Iceland´s no. 19 export market in 2012. It is expected that the China-Iceland Free Trade Agreement will give a great push to Icelandic exports to China in the near future.

Seafood has been the biggest growth factor of Icelandic exports to China, while the export variety and export value of other products such as electrical scales and ferrosilicon are also increasing. On the other hand, ever-improving quality and competitive prices of Chinese products are the major reasons for increased Icelandic imports from China.

New market by Tourism

Iceland has recorded an increase in the number of visitors from emerging markets such as China and Russia.

According to the Icelandic Tourist Board, between January and September 2013, the number of Chinese tourists through Keflavik International Airport increased at a rate of 24.4%, while the number of Russian visitors increased at a rate of 54.3%.

The Free Trade Agreement (FTA) between China and Iceland is expected to further strengthen trade and tourism ties between the two countries.

Strengthening Iceland’s International Sector

Today, February 12th the Iceland Chamber of Commerce hosted its annual Business Forum under the heading of Open for Business – Strengthening Iceland’s International Sector.

According to this meeting, the Iceland’s Prime Minister, Mr. Sigmundur Davíð Gunnlaugsson held a speech and said the Icelandic government would pave the way for the business sector and build up a stronger economy – “a dynamic economy, entrepreneurship, investment, innovation and other value creation is a prerequisite for welfare in Iceland as and elsewhere. I am optimistic, I am very optimistic for the future of Iceland” said Mr. Gunnlaugsson.

In the end of his speech Mr. Gunnlaugsson highlight the main focus of his discussion. “In the title of this meeting is asked in English, whether Iceland is open for business – My answer is: Yes – Iceland is open for business, but the country is not for sale“.

China’s Strategy for Free Trade Agreements

Compared with Europe and America, East Asia is a latecomer in the new gold-rush of Free Trade Agreements (FTAs). In this process, China has played a significant role.

This is not only due to the growing economic clout of China, but also because China has taken a conscious strategy to push for economic integration in the region. Thus, for the benefits of the countries in the region, it is very important to understand China’s FTA strategy.

If we look around in the world, the FTAs can be broadly divided into two models. One is the EU model, which includes both economic and political integration. The other is the NAFTA model, which focuses on economic integration only.

Within the NAFTA model, again there are two different sub-categories. The first is the Economic Partnership Agreement (EPA) approach advocated by Japan, which seeks to conclude comprehensive agreements that include trade in goods, services, and sometimes even environment protection and intellectual property rights. The other approach is much narrower and focuses on trade in goods only.

China has chosen to take the narrower model. Normally, China would start with an agreement on trade in goods only and would only expand to trade in services and investment after the commitments on goods have been substantially implemented.

Take the FTA with Pakistan, for example, while the liberalization of trade in goods dates back to the signing of Agreement on the Early Harvest Program in April 2005, the Agreement on Trade in Services was only signed in February 2009.

Similarly, in the FTA with ASEAN (Association of Southeast Asian Nations), the agreement on trade in goods was signed in November 2004, while the agreement on services was only signed in January 2007.

A reverse example is the FTA negotiation with Australia, which has languished for years partly due to the fact that Australia insists on dealing with services liberalization first while China wishes to proceed with the usual “goods and then services” order.

With regard to the issues which are not traditionally trade-related, such as environment protection, competition policy, and labor standard, China has been reluctant to include them as part of the FTA package.

Recently, however, China has shown some willingness to include these issues as part of the FTA package. Nonetheless, in line with its cautious approach, China has largely chosen not to include these issues in the main agreement of the FTA, but preferred to address them in stand-alone side agreements or MOUs.

While initially reluctant to engage in FTA negotiations, China has gradually become an active player in the global rush to FTAs. While the number of China’s FTAs still lags behind other major players, it is rapidly growing.

As one of the most important trading nations in the world, China’s decision to pursue an active path of FTA negotiation will undoubtedly have implications for all countries in the world. In particular, countries in Southeast Asia would be affected most by China’s FTA move.

Why China chose Iceland as a partner

The tiny size of Iceland’s market and the fact that the Free Trade Agreement does not provide low-tariff entry for China’s products onto other European markets raises questions over China’s motives.

In particular, it is suggested that China is using this FTA with Iceland to promote its strategic goals, such as obtaining better access to shipping routes through the Arctic or to natural resources extracted in the region.

It is in essence similar to other FTAs concluded by Iceland. China is increasingly using FTAs to further its divergent trade policy aims in securing resources and markets. China does not follow a model FTA but instead tailors each FTA to the particular situation of the counterparty.

The FTA also includes rules on trade in goods and services, rules of origin, trade facilitation, intellectual property rights, competition and investment. The FTA includes a termination clause. This clause would become significant if Iceland should decide to join the EU in future.

Whilst Iceland has been negotiating EU accession, negotiations were halted, pending a referendum, following the April 2013 general election in Iceland. Iceland’s Foreign Ministry announced on 23 August 2013 that it was considering dissolving the committee responsible for negotiating its accession to the EU.

It is noteworthy that on 6 July 2013, China also signed a bilateral FTA with Switzerland and is negotiating one with Norway, another Arctic country. The FTA with Iceland, together with that with Switzerland, could help China on its way to negotiating a potential FTA with the EU in the future. The EU is China’s largest economic partner.

However, while China has occasionally mentioned a possible FTA with the EU, it is stressed that China would first have to open up its market to foreign companies. Currently many sectors, such as telecoms, are limited to Chinese companies only.

It is expected that the FTA will facilitate the export of seafood from Iceland, and could give China a foothold in the resource-rich Arctic region.

The Arctic Region

In the past few years, the Chinese Government has become more assertive in its Arctic policy. China is focusing on its capacity to respond to the effects of Arctic climate change on food production and extreme weather in China.

It is also endeavoring to secure access to Arctic shipping routes at reasonable cost as well as to strengthen China’s access to Arctic resources and fishing waters.

China, along with five other states, became a permanent observer on the Arctic Council in May 2013, bringing the total number of observer states to 32. The Arctic Council is an inter-governmental advisory body which promotes cooperation in the region, and issues formal, but non-binding declarations.

However, the creation of the Arctic Circle – a separate organisation devoted to Arctic issues – was announced by Iceland’s President on 15 April 2013, the same day as the signature of the FTA.

As it will accept all state-and non-state entities interested, the Arctic Circle is seen as a more open and inclusive forum. Chinese organisations participated in the inaugural session in October 2013.

As an active Arctic Council member, Iceland is of great importance to China, which is attempting to develop its position in the Arctic.

It is banking on melting ice facilitating extraction of resources such as gas, oil, and mineral deposits. China’s national Offshore Oil Corporation (CNOOC) recently applied for a licence to explore and produce oil and gas in Arctic waters off Iceland, together with Iceland’s Eykon Energy.

Given the amount of goods which China ships to Europe each year, alternative shipping routes are of great interest. Opening the Northern Sea Route (NSR) could cut about 6 400 kilometres and two weeks off the journey between northern Europe and Shanghai.

The distance from Shanghai to Rotterdam via the North Sea Route is about two-thirds that of the southern alternative. In addition, many vessels carrying Chinese goods have to pass through waters with regular pirate activity. As a result, ship-insurance premiums are very high.

Chinese interests are also interested in harvesting northern fish stocks. It is stressed that Iceland could provide China with techniques for harnessing geothermal energy, which, although abundant in China, is not generated there.

Icelanders view Chinese investment with suspicion, fearing hidden geopolitical interests from China.

In 2011 a billionaire Chinese businessman, Huang Nubo, sought to purchase a very large plot of land (some 0.3% of Iceland’s land mass) on the country’s east coast, for the development of a leisure resort.

The government rejected his request, as Icelandic law does not allow entities from outside the EEA to purchase land. Huang leased the land instead.

The newly elected coalition (April 2013) has demonstrated some willingness to ease the restrictions on foreign land ownership. So far, however, this issue remains unresolved.

Watch video – Courtesy: RT TV

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Conclusion

In this article, the author provides a critical analysis on this issue from economic, geo-political and legal perspectives.

While economic considerations might be an important factor in China’s decision to pursue FTAs, the main motivation seems to have been political considerations so far.

In essence, China has been trying to use its FTA network to foster and reward strategic allies as part of its strategy to build an international environment conducive to China’s goal of “peaceful rise”.

This presents challenges and opportunities for different countries. While some countries could be chosen as an FTA partner due to its strategic importance, other countries might be left out for lack of strategic value.

Thus, paradoxically, it seems that the best way to jump on China’s FTA bandwagon is to enhance a country’s political significance rather than strengthening economic ties with China.

In a way, this is another tale of how politics has gone global with the help of trade, and hijacked trade into becoming its hand maiden during the process.

The future only will tell how this Free Trade Agreement will be in real between China and Iceland, but it will for sure open many doors for free trade for both countries.

Watch video – Interview with the Icelandic Ambassador in China – Kristín Árnadóttir.

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For further information on the China-Iceland Free Trade Agreement, please click here.

 

Category: Iceland

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