This week the Australian Government and China executed a Declaration of Intent for a Free Trade Agreement (FTA) between the two countries. The agreement comes after more than 10 years and 22 rounds of negotiations.

The Declaration of Intent covers all industries important to the Australia-Chine trade relationship, including the key ones of mining, agriculture and foreign investment into Australia. It aims to stimulate an even greater growth in trade and investment between the two countries.

In this Client Alert we outline:

  • some key aspects of the FTA; and

  • the steps required for its implementation.

Businesses interested in trade between Australia and China should review the potential benefits available under FTA and, importantly, when those benefits will be available.

FTA at a glance

China is Australia's largest trading partner with two way trade between the nations in excess of A$150 billion, with over A$100 billion of exports of goods and services into China.

It is expected that more than 85% of Australian goods exports will be tariff free upon entry into the FTA, rising to 93% in four years. The FTA is expected to represent an increase of approximately A$20 billion dollars to the Australian economy.

Energy and Resources

In 2013, Australia exported over A$85 billion worth of resources, energy and manufactured products to China.

The key benefits unlocked by the FTA relating to the trade of energy and resources include:

  • the removal of tariffs on all resources and energy products including on coking coal (metallurgical coal for steel making) (3%) upon commencement of the FTA and non-coking coal (thermal/steam coal for power generation) (6%) within two years; and

  • the removal of tariffs on transformed resources and energy products, such as refined copper and alloys, alumina, nickel, zinc, copper, aluminium (1-10%). Many of these tariffs will be removed upon commencement of the FTA.

These measures provide greater competitiveness and certainty for Australian exporters by locking-in zero tariffs on major exports such as iron ore, gold, crude petroleum oils, and liquefied natural gas (LNG).

Agriculture

China is Australia's largest export market for agricultural produce with approximately A$9 billion in exports in 2013. China is also the world's largest growing agricultural sector and is projected to account for almost half of global agricultural growth over the next few decades.

The FTA provides Australia with an advantage over its major agricultural competitors such as the United States, Canada and the European Union. It also aligns Australia with the competitive advantage enjoyed by countries such as Chile and New Zealand over the past few years.

The key benefits unlocked by the FTA relating to the trade of agricultural products include:

  • the removal of all tariffs on major Australian exports such as dairy products (20%) within four to 11 years and on beef and sheep meat exports (12-25%) over nine years;

  • the removal of tariffs on live animal exports (10%) within four years; and

  • the removal of tariffs on wine (14-20%) over four years.

In addition to these benefits Australia has secured the removal of tariffs over a wide variety of agricultural exports including horticulture products (30%), barley (3%), wool and seafood (14-15%), processed foods and hides, skins and leather (5-14%).

As with its other FTA negotiations, China did not allow further liberalisation of tariffs on rice, wheat, cotton and sugar, however since joining the World Trade Organization (WTO) in 2001, China has permitted generous import quotas of these products.

Foreign investment into Australia

Foreign Investment into Australia has been a highly politicised issue in both nations recently. Chinese investment in Australia has increased dramatically over the last 10 years to $32 billion.

The FTA aims to promote further growth of Chinese investment into Australia, in particular by raising the investment threshold for foreign investment approval by the Foreign Investment Review Board (FIRB).

Under the FTA:

  • the investment threshold for investment by Chinese private entities (non-SOEs) in non-sensitive sectors has been increased from $248 million to $1,078 million;

  • the investment approval limit for acquisitions of developed commercial real estate by Chinese private investors will be lifted to $1,078 million; and

  • a new investment threshold has been created for FIRB review of Chinese private investment in agricultural land valued at A$15 million or more, and in agribusinesses valued at A$53 million or more (which is less than the current A$248 million).

Investments from SOEs (that is entities with more than 15% ownership held by the Chinese Government) will continue to require FIRB approval for all investments (other than portfolio investments).

The investment obligations in the FTA can be enforced directly by Australian and Chinese investors through an Investor-State Dispute Settlement (ISDS) mechanism, to promote investor confidence.

Implementing the FTA

Investors should note that the execution of the Declaration of Intent was the first formal step in the execution process. The two countries will now advance to draft a legal text of the FTA for execution in 2015. The terms of what has been agreed will not take effect until the FTA is formally ratified, which is likely to be late in 2015 or early 2016. There is also a built-in review process three years after entry into force to review the FTA.