Given these statistics, it is not surprising that Australia and China want to strengthen their trade and investment relationship by negotiating a free trade agreement. In fact, these negotiations have been ongoing for nine years, with Australia’s foreign investment processes proving a sticking point.

The slow progress of the negotiations has been partly attributed to Chinese demands for relaxation of Australia’s foreign investment rules, including the existing arrangements under which the Foreign Investment Review Board (FIRB) must review every ‘direct investment’ by a state-owned enterprise. State-owned enterprises make up a large proportion of Chinese investors.

The Chinese government has requested that FIRB increase its screening threshold, which is currently $248 million for private investors, to $1,078 million (the threshold that currently applies to New Zealand and US investors) for investments by both private and stateowned Chinese investors.

Since taking office in the September 2013 Australian Federal election, Prime Minister Tony Abbott has wasted no time in signalling to foreign investors that Australia is “open for business”. However, despite these pronouncements, the new government has also indicated that it intends to increase scrutiny on the level of foreign ownership of agricultural land and agribusiness.

In June last year, the Coalition members of the Senate’s Rural and Regional Affairs and Transport References Committee tabled a report on Australia’s foreign investment framework. This report made a number of recommendations, including that the following thresholds should be implemented:

  1. a lower threshold of $15 million (from $248 million) for private foreign investment in agricultural land;
  2. once cumulative purchases of $15 million of private investment in agricultural land has been reached by a foreign investor (or associated entities), any further investment will require FIRB approval, regardless of value;
  3. any proposed foreign acquisition of an agribusiness would require approval where investment exceeds 15% or more in an agribusiness valued at $248 million (indexed annually) or exceeds $54 million, and
  4. the requirement for SOEs to obtain FIRB approval for all acquisitions of agricultural land or an agribusiness, regardless of value, continue to apply.

By proposing these lower thresholds, it is clear that the Coalition is prepared to address growing public concern regarding foreign ownership in the agricultural sector. In fact, the government’s intention to implement these lower thresholds is confirmed by the terms of the recent FTA between Australia and South Korea. The thresholds for acquisitions of agricultural land under that FTA were decreased to the $15 million levels suggested by the Senate Committee.

However, many commentators, including Labor trade spokesman Richard Marles, have expressed concerns that the introduction of lower thresholds (even if for the benefit of food security) may pose significant hurdles in securing the FTA with China. In October 2013, Mr Marles told the ABC that “it will be impossible for the Abbott Government to conclude a free trade agreement with China, so long as they take a position of reducing the threshold in relation to the Foreign Investment Review Board”.

The decision on whether or not to decrease the thresholds for foreign investment in Australia raises a difficult problem for the Coalition, particularly in relation to its negotiations of the FTA with China. Decreasing the thresholds would serve the Coalition’s goal of securing Australian agricultural land and agribusiness, as well as soothe public concerns over foreign ownership.

On the other hand, if the Coalition does increase the thresholds for private and state-owned Chinese investors, then this would likely increase Chinese investment in Australia. That could potentially bring significant benefits such as improved agricultural infrastructure, additional research and development expenditure to improve efficiencies, greater employment opportunities in the agricultural sector and increased State and Commonwealth tax revenue. We also expect that this increase would be an ice-breaker in the negotiations of the FTA with China despite other outstanding issues.

The Government continues to keep us guessing about how its position on foreign investment, particularly investments in the agriculture sector by SOEs, will evolve in 2014. Watch this space.