On 17 June 2015, Australia signed a Free Trade Agreement with the Peoples Republic of China (ChAFTA). China is Australia’s largest trading partner with total two-way trade worth almost AUD 160 billion in 2013-14. The ChAFTA has been under negotiation since April 2005.
We set out in this update a brief summary of some of the key features of the ChAFTA.
Although the ChAFTA has now been signed by both countries, it will not take effect until both governments have completed their domestic processes and confirm that they are ready for the agreement to come into force. As part of this process, enabling legislation will need to be enacted by the Australian Parliament, as well as changes to various regulations.
This process may take around 12 months. By way of example, the Korea-Australia Free Trade Agreement was signed in December 2013, and came into force on 12 December 2014.
Changes to Australia’s foreign investment rules
The ChAFTA includes the same more lenient foreign investment screening threshold for Chinese investors as those offered to US, New Zealand, Japanese and Korean investors. Investments by private Chinese investors in non-sensitive industries in Australia will no longer require prior approval or notification under Australia’s Foreign Investment Review Board (FIRB) rules if the investment is less than AUD1,094 million (indexed annually). However, this more lenient treatment only applies to direct investments from private Chinese investors into Australia. hence a Chinese investor that utilises a special purpose acquisition vehicle out of Hong Kong will be subject to the stricter screening threshold of A$252 million.
Similar to the free trade agreement negotiated with Japan and Korea, the Australian government has retained the right to apply a stricter foreign investment screening threshold of:
- A$15 million (cumulative) for acquisition of agricultural land; and
- A$53 million for acquisition of interest in agricultural business.
One of the key negotiation points in the ChAFTA is the request from the Chinese government to treat Chinese state-owned enterprises (SOEs) or sovereign wealth funds (SWFs) as private investors for the purposes of Australia’s foreign investment rules, so that they are not subject to FIRB’s policy on “foreign government investors”. To put this issue into context, more than two-thirds of investments from China over the past five years have been from Chinese SOEs and SWFs. The Australian government has not agreed to including an exemption for Chinese SOEs and SWFs, and therefore the current FIRB policy requiring all investments from “foreign government investors” (other than certain passive investments of less than 10%) to seek prior approval from FIRB will continue to apply. Under the ChAFTA, the Australian government has agreed to review this position after 3 years.
Tariff reduction for Australia’s agricultural exports into China was one of the most important aspects of the ChAFTA from Australia’s perspective. In this regard, there are some substantial wins for Australian producers. Tariff cuts will occur to beef, dairy, lamb, seafood and fruit and will be phased in over the next 4 to 9 years. However, key exports on sugar, cotton, wheat and canola have not yet been included in the tariff-reduction regime – this will be reviewed by the Chinese government in three years’ times.
A summary table of the tariff reduction / quota for agricultural exports is set out below:
Click here to view table.
Energy & resources
The Australian government reported that on ChAFTA entering into force, 92.9% of Australia’s energy and resource exports will be tariff-free, increasing to 99.9% in four years.
Of particular interest in the current market climate, the 3% tariff on coking coal introduced by the Chinese government in October last year will be eliminated as from that date. However, the 6% tariff on thermal coal introduced at the same time will only be removed after 2 years.
A summary table of the tariff reduction for energy and resource exports is set out below:
Click here to view table.
The ChAFTA locks in tariff-free exports on major exports from Australia to China such as iron ore, gold, crude petroleum oils and liquefied natural gas.
Under the ChAFTA, China has agreed to grant Australia superior access for Australian service providers to the level that is either equivalent or better than those enjoyed by other nations – only Hong Kong and Macau will have better access. Combined with the “most favourable nation” clause under the ChAFA (discussed further below), this will provide a real opportunity for Australian businesses to access the benefits of the continued growth of China, as one of the world’s largest economies.
A summary table of the increased access for Australian service providers is set out below:
Click here to view table.
Mobility of workers for large infrastructure projects
Majority Chinese-owned companies registered in Australia undertaking large infrastructure development projects above AUD 150 million will be able to negotiate an Investment Facilitation Agreement (IFA). The IFA is expected to operate in a similar manner to the existing Enterprise Migration Agreements, i.e. it is an agreement between the Australian government and a single employer allowing for the recruitment of an agreed number of overseas workers. The IFA will operate within the framework of Australia’s existing 457 visas and applicable laws (e.g., compliance with minimum employment conditions).
Most favoured nation
Australia and China has each agreed to a standard “most favoured nation” clause under the ChAFTA, meaning that Australia will automatically receive the same treatment provided by China to any other country in the future including the EU and the United States. This is especially important in the context of China’s negotiation with United States. For example, Australian fund managers could potentially gain majority ownership rights in Chinese counterpart firms, up from a ceiling of 49% in the ChAFTA, if the US succeeds in its negotiation.
Investor-state Dispute Settlement
One of the more controversial aspects of the ChAFTA is the inclusion of an Investor-state Dispute Settlement (ISDS) clause. The ISDS clause allows Chinese corporations to sue the Australian Government (and vice-versa) if a change in Australian law can be claimed to have harmed their investments in Australia. There are certain exceptions to the ISDS clause under the ChAFTA, including regulations in areas such as public health and the environment, and government decisions on investment proposals including those made under Australia’s foreign investment rules.
It estimated that there have been more than 550 ISDS claims made against governments worldwide. In 2011, for example, a claim was brought by tobacco company Philip Morris against the Australian Government’s plain packaging legislation under an ISDS provision in a Hong Kong-Australia investment agreement. The ISDS clause under the ChAFTA may provide benefits to investors from both countries by providing a greater level of protection from potential actions of government in the other country.