(Chinese proverb)

There has been a breakthrough in the latest round of negotiations between Australia and China on a Free Trade Agreement (FTA). With Australia’s offer to lift regulatory hurdles to Chinese investment into Australia, the time has come to conclude the negotiations.

Australia-China free trade talks have been revived with the recent visit to Beijing of Australia’s new Trade Minister, Richard Marles. The Minister’s trip was chiefly aimed at ramping up negotiations and pushing for an early conclusion of an Australia–China FTA.

Both countries have much to gain from the FTA. China is already Australia’s largest trading partner while China counts Australia in its top ten trading destinations. Trade between the two nations has reached around $120 billion, a figure that could grow exponentially with further liberalisation via an FTA.

Trade and investment growth will bring positive economic spin-offs. For example, when FTA negotiations started in 2005 DFAT projected that an agreement could boost Australia’s real GDP by US$18 billion (A$24.4 billion) and China’s by US$64 billion (RMB529.7 billion) over the period 2006-2015.

Despite all the promise, the free trade talks have dragged on for almost a decade. The  concerns of both countries have been widely reported – while Australia has sought greater market access for its exports, especially agricultural products, China has expected lower regulatory scrutiny for its investment and freer movement of its service providers or workers into Australia.

Australia wants to secure the same levels of market access for agricultural exports that New Zealand has obtained under its FTA with China. Australia’s political will in securing a deal similar to that of New Zealand was made clear when the Trade Minister noted the dramatic increase in New Zealand’s dairy exports to China after the conclusion of their FTA.

In the latest and 19th round of negotiations last month, Australia took a significant step in offering to soften regulatory scrutiny of Chinese investment into Australia.

Currently Foreign Investment Review Board approval is required for all investments by Chinese state-owned enterprises (SOEs) and investments over $248 million by Chinese private entities. It is believed China wants removal of the automatic-approval requirement on its SOEs and the threshold of $248 million to be increased to $1,078 million, the level that currently applies to New Zealand and US investors.

Although the details of Australia’s offer have yet to be disclosed, there have been indications that the offer may provide the levels of liberalisation expected by China.

If Australia does grant Chinese investors the same treatment as that accorded to New Zealand and US investors, then it will be an ice-breaker in the negotiations despite other outstanding issues. At the very least, the proposal demonstrates Australia’s preparedness to make concessions in a politically sensitive area.

Leaving SOEs to one side and devising a new “fast track” model based on an agreed set of base case behavioural undertakings for Chinese SOEs is a step that the new government in Canberra should be prepared to offer.

We propose that the FTA enshrine a template for fast tracking non-sensitive investments by Chinese SOEs below $750 million, many of the features would reflect existing undertakings like those set out below.

Australia’s offer to soften its regulatory scrutiny of Chinese investment to the satisfaction of China is a significant breakthrough and may by itself break the deadlock in negotiations. There are still other outstanding issues on the table, but this is a golden opportunity to put an end to the protracted negotiations.

Suggested behaviour undertakings required to be given to ensure fast track review of Chinese SOE applications

  • Market production on arm’s-length terms with reference to international benchmarks and in line with market practices.
  • Operate acquired businesses as an Australian incorporated and headquartered company that is managed in Australia using a predominately Australian management and sales team.
  • Ensure the Australian business and any of its operating subsidiaries, have at least two directors whose principal place of residence is in Australia, one of whom will be independent of the SOE and its related entities.
  • Comply with Australian industrial relations laws and honour employee commitments.
  • Ensure that the Chief Executive Officer and Chief Financial Officer of the Australian business have their principal place of residence in Australia and that the majority of board meetings in any calendar year are held in Australia.

The process would not apply to:

  • acquisitions above $750 million.
  • investments in
    • urban land (including residential properties);
    • the media;
    • farmland and agribusiness of more than $100 million;
    • transport; and
    • defence related industries.
  • investment limits relating to the media, Telstra, CSL, Qantas and other Australian international airlines, federal leased airports and shipping.