Looking forward to Australia-China Free Trade?

Australia has shown great enthusiasm for entering into free trade agreements and strengthening economic ties. Australia currently has seven FTAs currently in force,[1] and is engaged in nine FTA negotiations.[2] 

Australia’s Foreign Minister Julie Bishop recently expressed hope that a Australia/China FTA could be concluded in the near future.[4]  Negotiations have proved particularly complex and lengthy since Australia and China first agreed to negotiate a bilateral FTA in April 2005.[5]

Australia’s largest FTA, the ASEAN-Australia New Zealand FTA (AANZAFTA)[3] was concluded on 27 February 2009, and in December 2013 Australia reached a free trade agreement with Korea (KAFTA). Interestingly, the KAFTA delivers firsts in the treatment of law firms and television industries. It will permit Australian law firms to set up South Korean offices to access the legal consulting services market and allow “new commercial opportunities” for film and television under an Audiovisual Co-production Agreement.

China is reported to be pushing for fewer restrictions on Chinese investment in Australia, on par with the treatment Australia grants to the USA and NZ.[6] Under Australia's foreign investment screening process, US and NZ firms can invest in businesses and developed commercial real estate up to a value of $1bn before being required to notify the Foreign Investment Review Board (FIRB).

However, in certain sectors, there is public antipathy towards foreign investment (particularly from China) and pushes for Australia to tighten scrutiny over investment in agricultural and rural land, where foreign investment is often opposed as leading to a loss of national control [7] or being harmful to food security. [8] But recent research by the Rural Industries Research and Development Corporation revealed that foreign investment in Australian agriculture is relatively low, and has a net positive impact on food security, although it remains unclear whether that will sufficiently allay such community concerns. (For further analysis of Australia's current foreign investment screening rules, see my earlier blog).

The recent introduction by an individual Senate cross-bencher of draft legislation raising labour force issues is thought by some to risk slowing negotiations yet again.  Named the Fair Trade (Workers' Rights) Bill 2013, if enacted it would prohibit Australia from concluding an agreement with any country which does not meet minimum standards of workers’ rights. (Senator Madigan, who introduced the bill, is one of seven crossbenchers who will hold the balance of power in the Australian Senate from July 2014).  With opposition from the Business Council of Australia (but support from the Australian Council of Trade Unions), it seems unlikely to win Government support. The draft bill has been referred to committee for investigation and report, so watch this space.

Before passing from this topic, it is worth noting the limits of the FTA success story in New Zealand- which has been enjoyed largely by the meat, timber and dairy sectors. New Zealand businesses have enjoyed windfall profits in the five years since the FTA was signed. According to NZ PM John Key, the country has done more business in five years than in every year prior to that combined. However, the trade relationship has a narrow base, with most gains largely felt by dairy giant Fonterra - up to half of all dairy products coming into China are from New Zealand and 86 percent of milk powder comes from there. Extending the trade relationship to small and medium-sized enterprise level is something that reportedly needs real work.

Shanghai Pilot Free Trade Zone

In the meantime, the 3 month old Shanghai Pilot Free Trade Zone may offer an early foothold for Australian companies seeking genuine access to Chinese markets.

Operators in the FTZ will have the ability to access:

    liberalised interest rates,

    RMB convertibility, and

    more liberal foreign investment criteria.

The Shanghai Pilot FTZ will likely provide an important glimpse into the possible future direction of PRC-wide investment rules. Potential reform areas include:

    shifting the focus from pre-approval to in-process and post-supervision,

    establishing united, concentrated and comprehensive market supervision and law enforcement systems, and

    extending the field of foreign investment by establishing a negative list management system (granting national treatment to the foreign investments not falling under the negative list).

Outside the FTZ in China, generally speaking enterprises must obtain pre-approval and permission and then apply for a business license. The adoption of a "one stop shop" approval system within the FTZ system will apply a registration system of "license first, permit second" in the FTZ.

The Shanghai FTZ, which covers an area of nearly 29 sq km on the eastern outskirts of Shanghai, will permit primarily services based industries (mainly financial, shipping, business, professional, cultural and social). The areas are based on the Special Administrative Measures on the Entry of Foreign Investment in China (Shanghai) Pilot Free Trade Zone (Negative List) issued by the Shanghai Municipal Government, which is composed of categories according to the National Economic Industrial Classification and Codes (2011), containing 18 industrial sectors. Only 2 sectors - S (public administration, social security and social organisations) and T (international organisations) are not subject to the negative list.

Since the announcement in April last year of the direct convertibility of the Australian Dollar, trading in the Shanghai FTZ will be particularly attractive for Australian operators. Australia New Zealand Banking Group Ltd (ANZ) has already announced preparatory approval from the China Banking Regulatory Commission (CBRC) for its establishment of a sub-branch. [9]  Other Australian banks are following ANZ's lead. Foreign companies in the FTZ will also be empowered to issue yuan-denominated bonds for repatriation, making it easier for them to raise funds, such as through derivatives trading or private share placements.

9 January 2014

Dominique Hogan-Doran is in Hong Kong this week as part of International Financial Week and will present at the Australasian Financial Forum on the challenges for Chinese investment in Australia.

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Endnotes

[1] With New Zealand, Singapore, Thailand, US, Chile, ASEAN and Malaysia.

[2] Bilateral negotiations are occurring with Korea (recently concluded, but yet to enter into force), China, Japan, India, Indonesia. Plurilateral negotiations are occurring to conclude the Trans-Pacific Partnership Agreement (TPP), the Gulf Cooperation Council (GCC), the Pacific Trade and Economic Agreement (PACER Plus), and the Regional Comprehensive Economic Partnership Agreement (RCEP). See DFAT, Australia’s Trade Agreements, available at http://www.dfat.gov.au/fta/.

[3] Between Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Phillipines, Singapore, Thailand, Vietnam, New Zealand and Australia.

[4] ‘Australia close to FTA with China: Bishop’, The Australian, 8 December 2013, available athttp://www.theaustralian.com.au/news/latest-news/australia-close-to-fta-with-china-bishop/story-fn3dxix6-1226777940039.

[5] Department of Foreign Affairs and Trade, Australia-China Free Trade Agreement negotiations, available at http://www.dfat.gov.au/fta/acfta/.

[6] Toh Han Shih, ‘China to push Australia on “fairer” FTA terms’ (5 December 2013) South China Morning Post, available at http://www.scmp.com/business/economy/article/1373497/china-push-australia-fairer-fta-terms.

[7] See e.g. http://australianpolity.com/feature/guarding-food-security-in-the-national-interest

[8] See eg http://www.greens.org.au/land-ownership

[9] http://www.reuters.com/article/2013/11/17/us-china-economy-freetradezone-anz-idUSBRE9AG01N20131117