ChAFTA is here — are you ready?

The China Australia Free Trade Agreement (ChAFTA) has been signed and tabled in the Australian Parliament following a decade of negotiations and seven months of document review and finalisation. Good things come to those who wait (and persevere). This historic milestone will boost trade and economic growth in both countries for years to come.

The formal agreement and ancillary arrangements are consistent with the summary material released by DFAT in November. The key issues are now well-traversed: investment protections and facilitation, reduction or removal of tariffs, and increased access for services businesses. We set out below some headline thoughts on where the biggest opportunities are.

Key benefits

A number of fundamental investment protection mechanisms have been included which will safeguard and facilitate cross-border investment between Australia and China, including changes to:

Foreign Investment Review Board (FIRB)

Chinese investors into Australia can be confident they will be placed on a level playing field with investors from USA, Japan and Korea through the increase of the general FIRB monetary threshold from AU$252m to AU$1094m.

Lower investment thresholds for agricultural land and agribusiness will be applied. An AU$15m threshold for rural land (calculated on a cumulative basis including existing rural landholdings) was already in force from 1 March 2015 and an AU$55m threshold for agribusiness is expected to come into force from 1 December 2015.

Australia will also consider further the position of Chinese government investors — State Owned Enterprises (SOEs) and Sovereign Wealth Funds (SWFs) — in the initial 3-year revision period. The Australian business community has suggested options for reform to encourage foreign investment.

Workforce mobility

Under ChAFTA, certain infrastructure development projects which are majority or substantially owned by a Chinese enterprise will be able to operate under an Investment Facilitation Agreement (IFA). IFAs streamline and relax Australia’s immigration law requirements. IFAs will be permitted where a project has expected capital expenditure of AU$150m.

IFAs will also apply to projects in a broader range of sectors including food and agribusiness, resources and energy, transport, telecommunications, power supply and generation, environment and tourism sectors.

IFAs will operate within the framework of Australia’s existing 457 visas and applicable laws, including work health and safety law and relevant Australian licensing, regulation and certification standards. However, the IFA will allow a departure from skill requirements (to allow lower skilled workers foreign workers to work in Australia) and labour market testing requirements. IFAs are designed to make it easier for foreign labour to be utilised on Chinese sponsored infrastructure projects while maintaining compliance with the safety net of minimum employment conditions provided for Australian employees.

ChAFTA commitments to reduce labour mobility barriers between China and Australia will also provide improved access for a range of Chinese and Australian skilled service providers, investors and business visitors. In turn, this is intended to facilitate Chinese investment into Australia and contribute to economic opportunities for Australian communities. In particular, China will guarantee access to Australian citizens and permanent residents who are categorised as intra-corporate transferees, contractual service suppliers, installers and maintainers, and business visitors (including, if over 12 months, accompanying spouses and dependents). In return, Australia will provide guaranteed access to Chinese citizens who fall into the same categories.

Investor State Dispute Settlement (ISDS)

The ISDS mechanism will allow investors to bring a claim in an international tribunal if a change in regulation unduly disrupts the FTA’s promises to investors. This protects both Chinese and Australian investors against perceived sovereign risk. The receiving government promises to ensure the investment will be treated at least as well as domestic investors.

The ISDS regime already exists in some of Australia’s other FTAs and treaties, but to date only one case has been brought against Australia. As more countries adopt ISDS (for example, it is planned to be part of the Trans Pacific Partnership) it may become a more mainstream way of protecting investments.

The inclusion of the ISDS is expected to be debated in the Senate because these provisions have permitted claims against the Australian Government for its tobacco plain paper packaging legislation, and would have permitted claims in response to the mooted carbon tax reforms. For the Australian public, this is controversial because it could restrict regulation in the public interest. However, the ISDS provisions will not impact legitimate government regulation (for example, necessary to protect human life or health, and conservation of the environment).

The ISDS doesn’t substitute the need for clients to take sensible precautions to mitigate for ordinary trade risks, which will be the lion’s share of capital flows between both nations. Traders must think about whether their contracts protect them against recovery risk if disputes arise, usually through the use of international arbitration.

Most favoured nation

A “most favoured nation” provision is included in the agreement. This is intended to ensure that Australia’s competitive position is futureproofed against more beneficial treatment granted to other trade partners for certain services. We think that beneficial treatment is more likely to follow from China’s rapid pace of deregulation, particularly in relation to foreign investment. For example, since ChAFTA was announced in November, a number of the key “concessions” in the financial services and telecommunications sectors have already been superseded.

Opportunities for agribusiness and processed foods

ChAFTA means that in some sectors, Australia has been granted “best ever access”. This means Australian businesses can either operate wholly owned subsidiaries or operate with fewer restrictions relative to companies from other countries. The agreement facilitates a virtuous circle when trade leads to greater investment and investment leads to increased trade. However, this window of opportunity will not remain open indefinitely. Businesses will need to act now to ensure that they are prepared to take advantage of developments in key areas while Australia still holds a competitive advantage.

The agribusiness sector is set to be one of the key beneficiaries of the ChAFTA. The agreement covers a range of measures in this area which will facilitate opportunities in the sector, including:

Significantly reduced tariffs over the next 4–9 years: Tariff cuts have been agreed for beef, dairy, sheep, live animals, hides, skins and leather, horticulture, wine and seafood. Reductions have also been agreed for a number of processed foods, including orange juice, natural honey and canned fruits (tomatoes, peaches, pears and apricots). Most of these tariff cuts will only come into force in the next 4–9 years. These tariff cuts will make relevant Australian products as competitive as, or even more competitive than, equivalent New Zealand and Chilean products.

But other major Australian exports have missed out: There are no tariff reductions for sugar, rice, wool, cotton, wheat, maize or canola. However, Australia will receive an exclusive Australia-only duty-free annual quota of 30,000 tonnes of clean wool (equivalent to approximately 43,000 tonnes of greasy wool), which will grow by 5% each year to almost 45,000 tonnes of clean wool (equivalent to approximately 64,300 tonnes of greasy wool) by 2024.

Discretionary safeguard measures retained for beef and milk powder products: If Chinese imports of these products from Australia exceed the specified “trigger” levels for any given calendar year, China may apply additional customs duties. The trigger starts at 170,000 tonnes for beef (10% above the historic peak export levels) and 17,500 tonnes for milk powder products (40% above the amount of whole milk powder exported to China over 2012/13). There is a review mechanism in place that provides for removal of these safeguards if it is concluded that Chinese imports of these Australian products do not cause serious injury to the corresponding Chinese domestic industry.

Incentives for increased investment in Australian agriculture: Australia’s more competitive position will provide incentives for Chinese investors (and Australian and other foreign investors) to invest in Australian agriculture to build capacity. Chinese investors may be preferred by Australian businesses if they can also provide Chinese import and market development assistance.

Promise of increased transparency and collaboration: No specific non-tariff barriers have been eliminated. However, there are consultative and notification measures, which are aimed at minimising the burden of customs procedures, sanitary and phytosanitary measures and other technical barriers to trade.

Don’t forget about Australia’s highly regarded agricultural technology and services: Australian businesses will be permitted to take a majority stake in joint ventures that provide services incidental to agriculture, forestry, hunting and fishing in China. Australian R&D providers will be allowed to offer R&D services in China through wholly owned subsidiaries. They will be treated no less favourably than corresponding Chinese service providers.

Next steps

Across the spectrum, the work is clearly not yet complete. However, the signing of ChAFTA means that businesses can assess with certainty what the opportunities are for them. Across a range of sectors, this planning can and should begin now. ChAFTA means that Australian businesses will be in a better position than competitor nations when they enter or do business with one of the world’s fastest growing economies. However, China is currently negotiating FTAs with a number other countries and the concessions given to Australian businesses under ChAFTA will likely very soon become the norm under China’s other agreements. It will be important for Australian businesses to quickly and effectively take their first mover advantage before it is eroded.

Image credit: ©iStockphoto.com/Sjoerd van der Wal