Background to the Korea-Australia Free Trade Agreement

As we have discussed in previous articles,1 negotiations in respect of the Korea-Australia Free Trade Agreement (KAFTA) concluded in December 2013, with the final text of the agreement being finalised on 10 February 2014 and released to the public on 17 February 2014.

Signing of the KAFTA is expected to take place in the first half of 2014, and there is some speculation that this will occur during Prime Minister Abbot's visit on 8 April. Entry into force of the KAFTA is then expected by the end of 2014,after both the Australian and Korean governments have completed their respective domestic treaty processes. This includes the passing of legislation by the Parliaments of Korea and Australia to adopt the KAFTA into the domestic laws of Korea and Australia.

Korea and Australia have maintained a robust and complementary trading relationship in the Asia-Pacific region as demonstrated by the total trade value of approximately AUD$30.5 billion in 2012-2013 between the two states. In 2013, Korea was Australia's fourth largest overall trading partner, behind only China, Japan and the United States, with Korea being Australia's third largest market for exports totalling approximately AUD$20.8 billion in 2012-2013. Major Australian exports include coal, iron ore, crude petroleum as well as beef. In addition, Australia was Korea's seventh largest trading partner in 2013. 

Given such a significant trading relationship between the two states, particularly in the energy and resources sector, the bilateral liberalisation of trade and increased market access across the two economies to be afforded by the KAFTA will be welcomed by participants in both Korea and Australia, particularly in energy and resources sectors.

The main impacts on the energy and resources sectors of the two countries include:

  • elimination or phasing out of existing tariffs on Australian energy and minerals exports into Korea, and a commitment not to impose new tariffs,
  • reductions and restrictions on non-tariff trade barriers,
  • investor protections in the form of substantive measures of protection and investor-state dispute settlement mechanism, and
  • facilitation of bilateral cooperation in the energy and mineral resources sector.

Effects on tariffs and non-tariff barriers

Elimination or phasing out of tariffs

Chapter 2 of the KAFTA prohibits the parties from raising any existing tariff or impose any new tariffs, and obliges the parties to progressively reduce or eliminate tariffs in accordance with their respective schedules of tariff commitments set forth in the annex to Chapter 2 of the KAFTA. The schedule of Korean customs duty with respect to energy and mineral resources is set out in the table below. As shown in the table, many energy and mineral resources have already gained duty-free access to the Korean market. Nonetheless, for those that are still charged with customs duties, such duties are set to be eliminated or progressively phased out in five or ten years following the entry into force of the KAFTA. 

Korean tariff schedule for energy and mineral resources

The end result will be the elimination of tariffs on 88% of Australia’s energy and resources exports to Korea upon the date of the KAFTA taking effect, with tariffs on the remaining 12% of exports to be removed over a period of 10 years.

Restrictions on non-tariff barriers to trade

The KAFTA also addresses non-tariff trade barriers as follows:

  • prohibits either party from adopting or maintaining any restriction on the importation of any good of the other party or on the exportation or sale for export of any good destined for the other party, except in accordance with Article XI of GATT 1994,
  • prohibits any duty, tax or other charge on the export of any good to the other party, unless such duty, tax or other charge is also levied on the same goods when consumed domestically,
  • limits administrative fees and formalities imposed on or in connection with importation or exportation, and
  • ensures transparency of non-tariff measures by establishing a Committee on Trade in Goods to review any such measure, among other functions.

Whilst the KAFTA does allow the parties to adopt export prohibitions or restrictions on energy and mineral resources in accordance with Article XI of GATT 1994, it provides that the parties must limit such prohibition or restriction as far as possible, and consult with the other party in relation to such prohibition or restriction on request.

Effects on Investment

Chapter 11 contains a number of provisions designed to give Korean and Australian investors greater substantive and procedural protections where they invest in Australia and Korea respectively. The substantive protections comprise a number of investment standards including:

  • equal treatment with domestic investors: each party must accord investors from the other country treatment which is no less favourable than that it accords to its own domestic investors in like circumstances,
  • equal treatment with investors from other countries: each party must accord investors from the other country ‘most-favoured-nation’ treatment in relation to investment protections,
  • a minimum standard of treatment for investments which is in accordance with the customary international law minimum standard of treatment of aliens, including fair and equitable treatment and full protection and security,
  • protections against expropriation: neither party may expropriate or nationalise a covered investment, except for a public purpose in a non-discriminatory manner on payment of prompt, adequate and effective compensation and in accordance with the principle of due process of law, and
  • free transfers: each party must permit all transfers relating to a covered investment to be made freely and without delay into and out of its territory. This includes transfers of contributions to capital, profits, dividends, interest, management fees and payments made under a contract, among others.

In addition, the KAFTA is expected to raise the threshold, beyond which Korean investments will be subject to the notification requirement and review by the Australian government’s Foreign Investment Review Board (FIRB), from AUD$248 million to AUD$1,078 million. This is in line with the treatment afforded to U.S. and New Zealand investors, and therefore accords Korean investors 'most favoured nation' status. This means that any investment in the energy and mineral resources sector below the AUD$1,078 million threshold will no longer be subject to scrutiny by the FIRB. Please note that the FIRB will still scrutinise investments below such threshold:

  1. if they are in sensitive sectors such as nuclear power,
  2. in case of direct investments by Korean government investors, or
  3. for investments in 'Australian urban land' as defined in the Foreign Acquisitions and Takeovers Act 1975.

Investment dispute resolution

Chapter 11 of the KAFTA also sets out procedural protections for investors in the form of an investor-state dispute settlement (ISDS) regime under which investors may bring a claim against a party state for a breach of:

  1. its investment-related obligations in set forth in Section A of Chapter 11,
  2. an investment authorisation, or
  3.  an investment agreement if the subject matter of the claim directly relates to the covered investment that was established or acquired in reliance on such investment agreement. Investors may submit such claim to arbitration in accordance with the arbitral procedure as set forth in Section B of Chapter 11. 

It is relevant to note that the ISDS provisions contain a number of reservations designed to limit the potential scope of the ISDS protection and ensure that the governments can continue to regulate in the public interest, including protecting public health, public safety and the environment.

Bilateral Cooperation in Energy and Mineral Resources

The KAFTA seeks to promote bilateral cooperation between Korea and Australia in energy and mineral resources.

Under the KAFTA as set forth in Section B of Chapter 16, the parties agree to undertake cooperative activities in the field of energy and mineral resources including joint research and development, information exchange and academic and scientific exchanges in relation to exploration, extraction, processing, transportation and use of energy and mineral resources. The KAFTA also requires the parties to make efforts to promote mutually beneficial trade and investment activities in the energy and mineral resources sector by discussing ways to encourage investment, promote the provision and exchange of investment information and foster favourable and transparent conditions for investors. 

Furthermore, the Committee on Energy and Mineral Resources Cooperation will be established with officials in the relevant sector from both parties, which will be empowered to review and assess the cooperative relationship between the parties in the energy and mineral resources sector as well as make recommendations regarding cooperative activities in furtherance of the strategic priorities of each party. Through such commitment of the parties, we expect to see greater opportunities for investments in the energy and mineral resources sector in furtherance of mutual economic growth and development for Korea and Australia.