Iceland's FTA with China set to benefit local industry

Alison Semple
- Leadership - Jan 14, 2016

A recent flurry of state visits by China and the leaders of France, Germany and the UK is a sign of the current level of diplomatic and business activity between East and West, as European countries jostle to secure their relationships with Beijing and to cement multi-billion-dollar trading relationships. And the results are self-evident: during the Chinese President’s state visit to the UK in October, economic, trade and cultural agreements were signed to the value of roughly $62 billion.

But one country has gone a step further, becoming the first European state to sign a free trade agreement with China – and it isn’t one of the major players. In fact, it’s Iceland, with a population of just 330,000 and a GDP only a quarter as big as those trade deals with the UK last month.

It’s certainly an unlikely alliance, but it’s one that appears to make sense for both sides. Iceland has been working hard for the past few years to strengthen its economy after the 2008 economic collapse, which saw its three biggest banks default on debts of $85 billion, by resuscitating its more traditional industries of energy, fishing and (increasingly) tourism. 

With an eye on economic diversification, Iceland hopes to sell its expertise in clean energy to China. It boasts 100 percent green energy, with about 25 percent coming from geothermal sources and the rest from hydropower. China is already benefiting from Iceland’s skills in this area, with 80 Chinese students having graduated from the United Nations University Geothermal Program in Reykjavik.

But the main and most immediate impact for Iceland is likely to be in the fish industry: marine products make up 90 percent of Iceland’s exports to the country. Previously, fish exports to China incurred a wide range of tariffs, depending on fish species, and Iceland’s fish industry naturally sees great opportunities resulting from the new agreement.

Ingvi Þór Georgsson, of the Icelandic Fisheries Association, has recently returned from a trip to China and a string of meetings with officials and companies in the fishing industry. “We think there are great opportunities, particularly for pelagic species, especially given the fact that Chinese consumers are familiar with mackerel, for instance. “

At the same time, Georgsson concedes that there is a learning curve to be overcome on both sides. “It’s a matter of different tastes – For instance we invest in technology to remove the bones from fish like cod and haddock, but the Chinese prefer to have the bones left in. I’ve also seen that in some instances fish heads can sell for more in China than the fish themselves. So in some areas there’s a bit of a misalignment between our production and the local needs in China, but that can also be an opportunity: There is a big market in China for species that we don’t currently fish, so there’s an incentive for us to increase production in new areas.

“And looking at the reverse side of the Trade Agreement, there are also areas where we could seek more investment from China- We have growing investment demand for new ships and equipment for instance – an area where China excels and could complement the supply already coming from countries like Turkey.”

Other sectors set to benefit from the elimination of trade tariffs include carbon fibre (tariffs of 17.5 percent), silicon (10 percent), polysilicon (4 percent), beverages such as water (20 percent), fermented beverages (40 percent) and chicken meat (20 percent). Iceland also believes the agreement with Beijing will be a magnet for foreign companies that trade with China and see the significant advantage of avoiding these tariffs.

One such US company, that took the decision to locate in Iceland because of its wider offering – not least, according to CEO Terry Jester, the local skills in the metals industry, and the low price of power -- now also stands ready to benefit from the FTA.

Silicor Materials cleans silicon for use in solar cells, and, when looking for a location for a major new plant, was introduced to the idea of Iceland by investors. In 2013 the company visited Iceland and was immediately impressed by the local support network. “Now we have plans under way for a plant that will employ around 440 staff, which should be fully operational by 2019,” says Jester. In 2013 the company hadn’t even been aware of the possibility of a trade agreement.  Now it stands to benefit more than most -- 90 percent of its customers are in China.

One of Iceland’s other attractions for Silicor, operating as it does in the clean energy space, was the country’s attitude towards growing its economy in an environmentally-responsible way.  But while Iceland is set to reap the advantages of its new trade deal, and is attracting companies like Silicor that underscore its commitment to environmentally friendly industry, there may be challenges ahead in the relationship with Beijing.

For China, the benefits of an alliance with Iceland are likely to be driven more by geopolitics than by economics. China sees a range of opportunities in the Arctic – not least the logistical advantages that could open up with the shrinking of the ice cap and improved shipping routes through the Arctic. An increasing number of Chinese researchers have been visiting the Arctic area, and it’s been estimated that a trans-Arctic route would cut about two weeks off the journey between northern Europe and Shanghai. With that improved access, a rush to extract natural resources is also expected, that could sit uneasily alongside Iceland’s reputation as a leading exponent of green industry.

But it’s a budding relationship that both sides will want to see work, and are keen to promote. While concerns over Beijing’s motivations may persist, China’s attempts to improve relations with the West will be boosted by deals like this one. And with the promise of access to the huge Chinese market for companies based in Iceland, and the positioning of the country as one that is keen to be a frontrunner in international trade, the alliance could play a key part in Iceland’s wider recovery.

Alison Semple is a UK-based international business and media consultant.

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