According to the Australian Government, the FTA could increase trade with Korea by 23% by 2030, with most of that rise coming from energy and resources products.
Korea is Australia's fourth-largest trading partner, and Australia is Korea's seventh largest trading-partner, with trade volumes of approximately $30 billion in 2013, so it's not surprising that both countries are trying to conclude a Korea-Australia Free Trade Agreement (FTA).
Given the fact that the energy and resources sector accounts for nearly half of that, it will be particularly important for industry participants to understand the main opportunities that will arise once the FTA is finalised.
The existing Korea-Australia resources relationship – and where it could go
Australian exports to Korea last year included approximately $5 billion of coal, $5 billion of iron ore and concentrates, $1.5 billion of crude petroleum and $700 million of liquefied natural gas. Korea's largest export to Australia was refined petroleum, coming in at approximately $3 billion.
The significance of this resources relationship is also shown in another set of numbers – official estimates are that Australia provides approximately 75% of Korea's iron ore and around 40% of its coal.
According to the Australian Government, the FTA could increase trade between the two countries by 23% by 2030, with 17% attributable to an increase in the trade of energy and resources products.
Once the FTA is in force, approximately 88% of Australia's manufacturing, resources and energy exports will enter Korea duty free, with all remaining tariffs to be phased out within 10 years. The FTA will particularly benefit Australian exports of:
liquefied natural gas, as the existing 3% Korean tariff will be removed once the FTA is effective. The removal of the tariff is expected to occur before the delivery of gas from major Australian liquefied natural gas projects in 2015 which will result in Australia providing an estimated 25% of Korea's liquefied natural gas;
crude petroleum, with the 3% Korean tariff reducing in five equal annual stages, commencing on the operation of the FTA, and being abolished from 1 January of the fifth year. This is expected to build on the significant export of Australia crude petroleum discussed above; and
unwrought aluminium, with the 1-3% Korean tariff being removed once the FTA is effective. Korea is already Australia's second largest market for unwrought aluminium, with $677 million of exports in 2012-2013.
Approximately 86% of Korea's manufacturing, resources and energy exports will enter Australia duty free from the date that the FTA is in force. From a Korean export perspective, the most significant aspects are:
- the 5% Australian tariff on steel, iron and related products will either be removed on the commencement of the FTA or will gradually reduce over five years; and
- the removal of the 5% Australian tariff on copper and copper and aluminium related products on and from the commencement of the FTA.
Increasing Australian investment screening thresholds
The FTA will also increase the screening threshold for Korean investments in Australia to $1,078 million, matching the threshold currently afforded to US and New Zealand investors. While this sends a positive message to Korean investors generally, from a resources perspective, it is important to note that it will not affect the existing foreign investment notification requirements for:
- acquisitions of interests in Australian urban land or Australian urban land corporations or trusts, where notification is required irrespective of value; and
- Korean foreign government investors – notification will still be required where a foreign government investor makes a "direct investment" in Australia (essentially, any investment ultimately made by a foreign government investor that provides it with potential influence or control over the target entity or asset), starts a new business or acquires any interest in land, irrespective of value.
Finally, the FTA contains a number of provisions that are designed to:
- simplify customs procedures; and
- ensure predictability, consistency and transparency in the application of customs laws and regulations.
In particular, participants should take advantage of:
- the publicly available "enquiry points" which will be set up in each country to respond to customs queries; and
- advance rulings regarding tariff classifications and customs valuation criteria,
which will be made available pursuant to the FTA.
The FTA still has some way to go before it becomes operational. After the agreement is translated into Korean and executed, both countries will need to complete their respective legal processes with the hope that the FTA will come into force by the conclusion of 2014.
Energy and resources participants should consider whether or not the FTA:
- will facilitate the export of their products; and
- can assist in attracting capital investment to their projects,
and review their marketing arrangements in light of the FTA.
Looking forward, there has also been the suggestion that the Japan-Australia free trade agreement, which the Australian Government is hoping to finalise mid-2014, may adopt some aspects of the FTA and so energy and resources participants may also benefit from those arrangements.