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China-Australia Free Trade Agreement: the latest

In the last month, the Australian Federal Parliament has passed implementing legislation in relation to the China-Australia Free Trade Agreement (CHAFTA). Luke Paterson and Tim Williams of Australian firm Jackson McDonald have the details.

David Carillet

The latest legislation, the Foreign Acquisitions and Takeovers Legislation Amendment Bill 2015, came into effect on 1 December and represents an important milestone in bilateral trade between the two countries.

China is Australia’s largest trading two-way trading partner, currently accounting for 27 per cent of Australia’s total exports and 24 per cent of total two-way trade (AU$159.6bn in 2013-14).

CHAFTA is the result of a decade of free-trade negotiations between the two countries. Many businesses from both countries will benefit from reductions in tariffs and other trade barriers, as well as improved visa arrangements and workforce mobility, when it comes into effect at the beginning of 2016.

Key outcomes

Trade in goods

CHAFTA sets out agreed tariff commitments that will result in significantly reduced tariffs on a large number of Australia’s major exports to China, including most agricultural products, energy and resources products, manufactured goods and pharmaceuticals. Most of the tariff cuts will come into force over the next four to nine years. Certain products, including beef and milk powder products, are the subject of safeguard measures that will allow China to impose additional customs duties if agreed threshold levels (above historic peak levels) are met.

Australian export products that have missed out on tariff reductions, including rice, wheat, cotton, wool and sugar, are identified by China as ‘significantly sensitive staples’. However, exports of Australian wool to China will benefit from a duty-free annual quota, commencing at 30,000 tonnes of clean wool in year one and increasing by five per cent each year until year nine.

Trade in services

Both countries make commitments granting improved market access and greater transparency in relation to trade in services. These modify and build on the commitments made by each country in the World Trade Organisation’s General Agreement on Trade in Services.

In addition, CHAFTA accords ‘most-favoured nation’ treatment to service providers in certain sectors, with China granting MFN status covering Australian services in environmental, construction, forestry, education, engineering, integrated engineering, tourism and travel, securities (financial), scientific and technical, and computer and related services. These services sectors have the assurance that any more favourable treatment that China grants to a non-party country in respect of those services will be extended to Australian service providers. The ten Australian services sectors that have been accorded MFN status are three more than China has committed to in any other free trade agreement.

Specific commitments on financial services in CHAFTA cover the streamlining of financial services licence applications, regulatory decision making and transparency and the establishment of a Financial Service Committee, which will regularly engage on financial services issues under CHAFTA.  

Investment

The Foreign Acquisitions and Takeovers Legislation Amendment Bill 2015 came into effect on 1 December and implements Australia’s foreign investment commitments under CHAFTA, placing Chinese private investors on a level playing field with investors from the US and other FTA partner countries, other than in respect of land and agribusiness investments. The threshold for Chinese investors being required to give notice and obtain Treasury approval has increased from AU$252 million to AU$1,094 million for all non-land and non-agribusiness investment.

In relation to agricultural land and agribusiness investments, the rules and conditions applicable to Chinese investors do not change as a result of CHAFTA. The rules applicable to Chinese state-owned investors are also unchanged, with all investments requiring Treasury approval regardless of type and size of the investment.  

Workforce mobility

China and Australia have committed to reduce barriers to labour market mobility between the two countries by processing visa applications expeditiously and improving visa eligibility criteria and terms, in order to guarantee access to citizens and permanent residents of the other country in certain categories. With regard to Chinese citizens visiting Australia, these categories include business visitors, intra-corporate transfers, independent executives, contractual service provider installers and spouses and dependents. Both countries have also committed to removing labour market testing for visas in the categories where they have made CHAFTA commitments.

Through a separate Memorandum of Understanding signed in conjunction with CHAFTA, Australia has committed to establishing a system of Investment Facilitation Agreements (IFA) for Chinese-owned companies undertaking wholly-owned or substantially-owned infrastructure projects in Australia with a value above AU$150 million. An IFA will allow the Chinese company to negotiate increased labour flexibilities for the relevant project and will operate in conjunction with Australia’s existing 457 (temporary work) visas, but may apply to more lower-skilled workers than traditional 457 visas and without labour market testing.

Dispute Settlement

The Investor-State Dispute Settlement (ISDS) mechanism in CHAFTA will allow investors from China and Australia to bring a claim against the other country in an international tribunal in the event that the investor suffers loss due to alleged breaches of CHAFTA commitments by the other country. The dispute settlement commitments include safeguards to protect legitimate government regulation in areas including health and the environment, though government decisions on investment proposals are excluded. 

Who will benefit?

CHAFTA will reduce trade barriers and improve market access for investors, exporters and service providers between Australia and China. In some cases, the commitments given in CHAFTA are the best commitments of that type that China has ever made in a free trade agreement and companies from both countries in a number of key sectors should benefit substantially from them.

Agriculture

The reduction in tariffs on a large number of Australia’s main agricultural exports will significantly benefit Australian agricultural exporters to China and the ‘most favoured nation’ status for certain goods and services should provide exporters with a long-term competitive advantage.

CHAFTA commitments on investment should also encourage greater investment in the Australian agricultural sector (whether from China or elsewhere) and provide opportunities for Australia’s agricultural services and technology providers to provide their goods and services in China, or invest in new enterprises there. 

Energy and resources

China is already by far the largest consumer of Australia’s energy and resources export products, and CHAFTA will see further reductions in the few remaining tariffs on Australian exports of resources products to China.

The biggest opportunity in the energy and resources sector may come from the changes to foreign investment approval requirements in Australia and the IFA commitments, which could encourage greater Chinese investment in an Australian energy and resources sector that is in need of new and greater financing options.

Services

The market access commitments and ‘most favoured nation’ status granted to certain Australian service industries may give service providers in those industries the best access ever granted to any foreign country to the Chinese market. 

The Australian financial services sector, including insurers, should be one of the biggest beneficiaries of CHAFTA, with unprecedented access to the enormous and rapidly growing Chinese financial sector. Telecommunications, technical services and tourism will also be hoping to benefit from market access commitments made by China.

Luke Paterson is a partner and Tim Williams a senior associate at Jackson McDonald, a Perth-based member firm of the Globalaw network.

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