Australia has made progress on various bilateral agreements in 2016, but Brexit and the possible collapse of the Trans-Pacific Partnership have thrown a spanner in the works.
The direction of trade agreements, and the rules that govern global commerce, have significantly changed over the past year. 2016 began positively for the free trade movement with the China-Australia Free Trade Agreement (ChAFTA) entering into force in December 2015. In contrast, the surprise Brexit decision, and the election of Donald Trump at the end of 2016 indicated a potential global shift towards protectionist policies.
Reviewing the progress of trade deals relevant to your businesses, and considering what is on the horizon, is an important part of positioning your business in the international marketplace. Since we last reviewed the impact of Free Trade Agreements (FTAs) in Australia and the changes to Australia's foreign investment regime in March, there have been a number of milestone events for trade agreements relevant to Australian businesses.
The ChAFTA has paved the way for increased trade with one of Australia's most significant trading partners. China is Australia's largest trading partner and has been responsible for more than a quarter of Australia's total exports. According to DFAT, more than 85% of Australia’s goods exports to China (by value) enter duty free or at preferential rates as a result of ChAFTA; this is expected to rise to 93% by January 2019 and to increase again to 97.9% when ChAFTA is fully implemented by January 2029.
MOU with Columbia
A Memorandum of Understanding on Bilateral Cooperation in the oil and gas sector was signed in January 2016. This is expected to enhance opportunities for Australia’s well-established oil and gas sectors and strengthen business ties between the two countries.
Following a referendum held in June 2016, the UK Government announced its intention to withdraw from the EU by invoking Article 50 of the Treaty on European Union by the end of 2017. Although this would put the UK on track to leave the EU by 2019, the terms of the withdrawal from the EU are yet to be negotiated.
Significant benefits to Australian business will flow from the agreement to update and modernise the Singapore-Australia FTA (SAFTA) that was announced in October 2016. Although the agreement is yet to be reflected in domestic law, the updated SAFTA represents an increased opportunity for Australian businesses to trade with Singapore with less regulation and greater certainty.
Trump and the TPP
It was expected that the Trans-Pacific Partnership (TPP) would create excellent opportunities for Australian commerce, including the energy and resources sector. Negotiations concluded in October 2015 and the agreement was signed in February 2016. The TPP will only enter into force 60 days after all original signatories have notified completion of their domestic legal procedures, or if at least six original signatories accounting for 85% of the combined gross domestic product of the original signatories have ratified the TPP.
The election of Donald Trump is seen as a significant obstacle for the TPP. President-elect Trump has announced that he intends to issue "a notification of intent to withdraw from the Trans-Pacific Partnership" - an agreement which he describes as a potential disaster for the United States of America.
Without the United States, it is unlikely that the required signatories (by number or GDP) will be achieved to allow the TPP to come into force. If the United States does withdraw, this would mean an end to the world's largest trade deal, made up of 12 countries representing around 40% of the global economy and a quarter of world trade.
Progress was made towards achieving a free trade agreement between Australia and Indonesia in the fifth round of negotiations held in November 2016. It is envisaged that this agreement will create opportunities for the Australian energy and resources sector in particular, and is also likely to benefit companies in the agriculture and food and beverages industries.
The Korea-Australia Free Trade Agreement (KAFTA) celebrated its second year anniversary in December 2016 with a list of strong trade results across a broad range of sectors. Under KAFTA, a fourth round of tariff cuts will occur on 1 January 2017, which is expected to deliver continued growth in this important relationship.
What Australian businesses should expect from trade agreements in the future
The Australian Government now has ten FTAs in force; the TPP which has concluded but is not yet in force; and seven FTAs that are formally under negotiation. As a result, there are three broad categories of changes that the Government will seek to implement going forward:
- keeping the existing FTAs up to date and relevant with the implementation of appropriate amendments (the SAFTA amendments are a good example of this);
- concluding FTAs that are currently in negotiation; and
- responding to the political and social environment with new trade agreements.
As earlier outlined, Brexit and the US election result have given rise to uncertainty in existing arrangements and disrupted market expectations.
As a result of the Brexit fallout, the Australian Government has announced that it has commenced work towards negotiations with the EU, and has established a bilateral Trade Working Group that is tasked with scoping the parameters of an Australia-UK FTA.
Given the potential collapse of the TPP, the significance of negotiations for the Regional Comprehensive Economic Partnership (RCEP), which involves 16 countries and almost half of the world's population, has increased. Notably for Australia, the RCEP includes China, which was not a party to the TPP negotiations.
Understand the rules and position your business accordingly
Australia is deeply integrated with international markets and changes to the rules of global commerce have significant implications for Australian businesses. Australian businesses should consider the opportunities that arise from trade agreements and proactively review their international strategies in light of these changes.