As published in CK Momentum Issue 5 (Click here to download)
It took a decade of negotiations spanning three governments, but in late 2014, Australia and China finally concluded a Free Trade Agreement (“FTA”).
Corporate & Commercial Lawyer, Sam Bassingthwaighte, looks at the likely impact of the FTA.
WHAT HAPPENS NOW?
For the FTA to take effect, the two governments need to go through their respective domestic treaty making processes, including converting the terms of the FTA into legal text and passing the legislation through parliament. This ratifying process is likely to be completed towards the end of 2015. The FTA with China, on the back of the recent FTAs with South Korea and Japan, means that significant trade barriers, covering more than 61% of Australia’s export of goods, will be removed immediately or incrementally over a number of years.
WHAT DOES FTA MEAN?
Until the full details and substance of the Australia-China FTA are finalised and released to the public, it is difficult to accurately assess the impact it will have on our economy. Initial forecasts suggest the FTA will increase Australia’s economy by $18 billion over the next decade – although there is some debate as to whether this is too conservative or optimistic. According to Trade Minister, Andrew Robb, the overwhelming majority of Australian exports to China will eventually become tariff free, and there is no doubt that trade with China, our largest export market in both goods and services, will increase once the FTA commences.
With the resources industry presently accounting for the majority of Australia’s exports to China, the removal of tariffs on some resource commodities will clearly benefit many Australian resource companies.
Some cost of living expenses for Australians should decrease, as consumers will have access to cheaper household goods, electronics, vehicles and clothing from Chinese companies.
Service providers, manufacturers and agricultural producers who already export to China will be allowed greater access to the markets in which they operate; and with fewer trade barriers in place, companies that do not currently export to China may now have reason to do so.
The agriculture industry, in particular, stands to benefit significantly from the reduction in trade barriers. China currently buys more of Australia’s agricultural produce than any other market, and this trend is set to continue with the implementation of the FTA creating competitive advantages over our major agricultural competitors such as the United States and Canada. The National Farmer’s Federation has said that the industry could conceivably see a tripling in agricultural exports to China within the decade.
Trade Minister, Andrew Robb, has described the FTA as the “dairy deal”, highlighting the widely held view that the Australian dairy sector and its $13 billion annual value is at the core of the agreement. Interestingly, all dairy products, except whole milk powder, will not have the tariff safeguards that were implemented in the 2008 FTA between China and New Zealand. Those safeguards ensure that once a certain trade quota is reached, the tariffs on that particular product will once again apply. This is a great outcome for the Australian dairy industry and the benefits of an absent tariff safeguard should be substantial.
CHINESE INVESTMENT INTO AUSTRALIA
While Chinese investment in previous years has largely been confined to resources, sectors such as agribusiness, health, aged care, tourism and infrastructure will start to command greater interest from investors. The FTA will facilitate increased investment by allowing privately owned Chinese entities to invest in non sensitive sectors in amounts up to $1,078 million (up from $248 million) without review by the Foreign Investment Review Board (“FIRB”). However, while the FTA in general provides Chinese investors with greater access to Australia projects, agricultural land over $15 million, agribusinesses over $53 million and all investment proposals by Chinese state owned enterprises (regardless of the transaction size) will still be subject to foreign investment review scrutiny by the FIRB.
SOMETHING TO REMEMBER
The removal of tariffs and the opening up of the trade lines with China, a country that already accounts for nearly a third of our total exports, will have a positive effect on Australia’s domestic market and should promote even greater Chinese investment in Australia.