China becomes Australia’s most open country: snapshot of the FTA - International Trade & Investment

Introduction

China is Australia's number one trading partner, with two-way flow of goods and services exceeding $150 billion last year. Australia and China came to a Free Trade Agreement (FTA) this week, which will ensure that 85% of all Australian exports will enter China tariff-free, such figure rising to 93% within four years, and to 95% when the FTA is in full force in the next decade. Australia is expected to benefit from the FTA to the amount of $18 billion over the next 10 years.

The FTA is an ambitious and bold document. However, Australian businesses will need to position themselves to look at and understand how the details of the FTA will be applied in practice. Notwithstanding this, the importance of the FTA is less in its detailed provisions and more in the signal that it sends that both China and Australia are prepared to break down barriers for business. China will become, in terms of tariff barriers, the most open market that Australia exports to. Australia, for its part, has stepped back from its negative approach to Chinese investment. It has raised the thresholds for private investors so that they are the same as those that apply to the US, and has relaxed restrictions upon senior Chinese workers. Invariably a key area that will disappoint will be around the liberalisation of services.

It is unlikely that Australia will be given a "leg up" over other countries as many commentators seem to imagine. Many of the concessions in the FTA around services are those that are already available to other foreign investors. Those that are not will probably be toned back so that they are consistent with the current liberalisation, or further liberalisations will be pushed through by China over the next year. Notwithstanding this, the fact remains that this is the most far reaching free trade agreement that China has signed with any country. Of itself, the signing of the FTA should signal a new era of engagement between Australia and China. Further, Australia has secured from China a "most favoured nation" status, which means that any future trade concessions granted by China to other countries will also be granted to Australia, but this will not apply to commodities that are not covered by the FTA (see below for a list of commodities that are not covered).

Snapshot of the FTA

We set out below the key takeaway points in relation to each of the key industry sectors affected by the FTA.

Agriculture

Dairy	All tariffs on dairy products are removed within 4 to 11 years. Tariff on infant milk formula is reduced from 15% to 0% over 4 years. Tariff on liquid milk is reduced from 15% to 0% over 9 years. Tariffs on ice cream, lactose, casein and milk albumins are reduced from 10-19% to 0% over 4 years. Tariffs on cheese, butter and yogurt are reduced from 10-15% to 0% over 9 years. Tariff on milk powders is reduced over 11 years.	NRF Takeaway The benefits for the Australian dairy sector are expected to reflect the increased dairy exports for New Zealand after their FTA with China. In line with New Zealand but without the quotas.
Beef	Tariffs on beef are reduced from 12-25% to 0% over 9 years. Tariff on beef offal is reduced from 12% to 0% over 4 to 7 years.	NRF Takeaway Beef exports to China are currently worth AU$722 million. Although the reduced tariff is important to our beef industry, the test will be in its implementation. China has a large domestic beef industry that it wants to protect (although herds have been depleted) and as a result we assume that in China non-tariff barriers will replace tariff barriers. In addition, Australian beef is almost double the cost of Chinese beef. As a result query whether there will be a significant increase in imports resulting from the FTA. Sheep and goat meat exports to China are currently worth AU385 million. Live cattle exports to China are currently worth AU$136 million. Exports to China of skins, hides and leather are currently worth AU$896 million. Taken together, the changes to these industries are expected to boost the sector by AU$11 billion.
Sheep and goat meat	Tariffs on sheep meat and goat meat are reduced from 12-23% to 0% over 8 years. Tariff on frozen sheep offal is reduced from 18% to 0% over 7 years.
Live animal exports	Tariff on live cattle is reduced from 10% to 0% over 4 years. More generally, all tariffs on live animal exports to be reduced from 10% to 0% over 4 years.
Skins, hides and leather	Tariff on sheep skins is reduced from 7% to 0% over 4 years. Tariffs on cow hides and skins are reduced from 5-8.4% to 0% over 2 to 7 years. Tariffs on kangaroo hides and skins are reduced from 14% to 0% over 4 years. Tariffs on other leather products are reduced from 5-14% over 4 years.
Barley and sorghum	Tariff on barley is reduced from 3% to 0% immediately. Tariff on sorghum is reduced from 2% to 0% immediately.	NRF Takeaway Barley and sorghum exports to China are currently worth almost AU$500 million, and this change is expected to give a real boost to this industry.
Horticulture	All tariffs reduced from up to 30% to 0% within 4 years. Tariffs on macadamia nuts, almonds, walnuts, pistachios and all other nuts are reduced from 10-25% over 4 years. Tariffs on various fruits are reduced from 10-30% over 4 years. Tariffs on all fresh vegetables are reduced from 10-13% over 4 years.	NRF Takeaway The change is expected to give a real boost to this industry.
Seafood	All tariffs, including tariffs of 15% and 10-14% respectively on rock lobster and abalone are reduced to 0% over 4 years	NRF Takeaway The change is expected to give a real boost to this industry.
Wine exports	Tariffs on wine are reduced from 14-20% to 0% within 4 years	NRF Takeaway Wine exports to China are currently worth $217 million, and the change is expected to give a boost to this local industry.
Wool	An Australia-only duty free quota for wool, in addition to continued access to China's WTO wool quota. The duty free quota will grow by 5% each year to 2024.

Resources

Resources and energy products

Immediate removal of 3% coking coal (i.e. metallurgical coal for steel making) tariff.

Thermal/steam coal tariff is reduced from 6% to 0% within 2 years.

Tariffs on non-coking coal are reduced from 6% to 0% over 2 years.

NRF Takeaway
In relation to the resources and energy sector as a whole, upon full implementation of the FTA, almost all of Australia's current resources and energy exports will benefit from duty-free entry into China. The FTA will provide greater certainty for Australian exporters by locking in zero tariffs on major exports such as gold, crude petroleum oils and liquefied natural gas. This will cement the mining and energy sector relationship that is the cornerstone of trade between China and Australia.

Transformed resources and energy products

Tariffs removed on minerals commodities (many immediately), including refined copper and alloys (unwrought) (currently 1-2%), aluminium oxide (alumina) (currently 8%), nickel mattes and oxides (currently 3%), unwrought zinc (currently 3%), copper waste and scrap (currently 1.5%), unwrought aluminium (currently 5-7%), aluminium waste and scrap (currently 1.5%), unwrought nickel (currently 3%), other mineral substances (currently 3-5%) and titanium dioxide (currently 6.5-10%).

Manufacturing Exports

Processed foods	Removal of all tariffs across a range of processed foods, including fruit juice and honey.	NRF Takeaway The manufacturing sector as a whole, upon full implementation of the FTA, will receive a real boost as almost all of Australia's manufactured products exported to China will benefit from duty-free entry into China.
Pharmaceuticals	Tariffs on pharmaceutical products are reduced from 3-10% to 0% either immediately or within 4 years, including vitamins and health products.
Other manufactured products	Tariffs are removed on various manufactured products within 4 years, including car engines (currently 10%), plastic products (6.5-14%), diamonds and other precious stones (currently 3-8%), orthopaedic appliances (currently 4%), aluminium plates and sheets (currently 6-10%), make-up and hair products (currently 6.5-15%), centrifuges (currently 10%) and pearls (currently 21%).

Financial Services

General

Australian financial service providers will be given unprecedented access to the Chinese market and will be able to do business in China more easily. This will provide a significant boost to Australia's financial services exports.

Some specific examples of the changes to the financial services sector include the following:

Australian fund managers will be able to invest on behalf of Chinese institutions, and Australian insurers will be able to write Chinese third-party motor vehicle insurance contracts. This is in fact already open to foreign investors.
Prior to the FTA, banks had to work in foreign currency for 3 years and make profits in China for 2 years before being allowed to work in Renminbi. The waiting period for local currency business will now be cut to 1 year.
Australian banks will be able to enter futures markets for the first time through joint ventures that can be 49% Australian-owned, where such foreign ownership was previously banned. Private equity firms will also have the opportunity to do business in China. This is in fact already open to foreign investors.
Australian fund managers will be able to provide advice and services to Chinese institutional investors who can invest outside China.
Australian insurance providers will be given access to China's third-party liability motor vehicle insurance market. This is in fact already open to foreign investors.

NRF Takeaway
These concessions to the Australian financial services sector are significant in that it should give Australia access to China's financial markets. Some of the concessions in the FTA already exist, whereas some are new and not already available.

In particular, these concessions will provide opportunities for the Australian funds management industry.

Combined with the Renminbi Qualified Institutional Investor scheme, the FTA delivers a new level of access to the Chinese market for Australian funds managers.

Worker Mobility

Workforce

The FTA will reduce barriers to labour mobility between the Australian and Chinese labour markets, and will improve temporary access within the framework of each country's existing immigration and employment safeguards.

Chinese companies will be permitted to bring management level individuals (i.e. skilled service providers, investors and business visitors) to Australia.

Further, new Investment Facilitation Arrangements, which will operate within the framework of Australia's existing visa system and which will be available to large infrastructure projects worth more than $150 million, will provide more flexibility for companies to respond to economic and labour market challenges

NRF Takeaway
These changes are important for their symbolism and are not as extensive as was agreed between China and the USA.

The current procedures for Chinese workers to enter Australia are extremely convoluted to the point where projects are often delayed because project terms often prevent foreign workers from entering the Australian labour market. These changes will mainly apply to senior management individuals who are currently not able to get into Australia.

It is expected that these changes will strengthen investment in large infrastructure projects, leading to the creation of new jobs and increased economic activity in Australia.

Services

Transport	China will permit Australian maritime transport service suppliers to establish wholly Australian-owned ship management enterprises in the Shanghai Free Trade Zone (SFTZ).	NRF Takeaway These concessions are generally already available to foreign investors.
Legal	Australian law firms will be able to establish commercial associations with Chinese law firms in the SFTZ. Within such commercial associations, foreign lawyers qualified in foreign countries will be able to practice relevant foreign countries' law international law; Chinese qualified lawyers will be able to practice Chinese law and international law without suspension of their Chinese practicing certificates.	NRF Takeaway This will allow for the provision of international legal services without restrictions on the geographic location of clients. We will need to see the detail to understand whether this expands upon what is already open to foreign law firms in the SFTZ.
Education	Within 1 year, China will list on an official Ministry of Education website all Australian private higher education institutions registered on the Commonwealth Register of Institutions and Courses for Overseas Students.	NRF Takeaway This will add 77 institutions to the existing 105 Australian institutions on the website. Chinese students currently make up 29% of Australia's international student market, contributing AU$4 billion into the Australian economy. This will add 77 institutions to the existing 105 Australian institutions on the website, providing a trusted source of information to potential Chinese students.
Telecommunications	China will guarantee new access for Australian companies investing in value-added telecommunications services in the SFTZ with improved foreign equity limits.	NRF Takeaway This will enable wholly Australian-owned companies to supply domestic multi-party communication services, application store services, store and forward services and call-center services to the Chinese market. We need to see the detail on this concession to understand whether it is a new concession. However, based on the information provided, it would appear to be an important concession for Australian companies.
Tourism	Tourism operators will be able to construct, renovate and operate wholly Australian-owned hotels and restaurants in China, and Australian travel agencies and tour operators will be able to establish wholly-owned subsidiaries in China.	NRF Takeaway These changes are important for their symbolism. The construction and operation of high-ranking hotels fall with the restricted sector of the current version of Catalogue for the Guidance of Foreign Investment Industries.
Healthcare	Health care operators will now be able to establish wholly Australian-owned hospitals and aged care institutions in China.	NRF Takeaway This should be a significant relaxation for the construction and operation of hospitals. Currently, foreign investors are only permitted to establish hospitals in seven cities. This should allow Australian investors to move beyond those seven cities. It is less significant for the construction and operation of aged care institutions. This should greatly expand the Australian private health sector's ability to provide healthcare services throughout China. However, the thought is that China may be slow in implementing the domestic regulations necessary to implement the concession.
Manufacturing	Wholly Australian-owned companies will be able to provide contract manufacturing services in China covering a range of manufactured products.	NRF Takeaway This is a unique concession, as it marks China's first ever free trade commitment to manufacturing.

Chinese Investment into Australia

Foreign investment in Australia

Threshold for screening by the Foreign Investment Review Board (FIRB) increased from AU$248 million to AU$1.078 billion for private Chinese companies buying in Australia in non-sensitive sectors.

For agricultural land, FIRB scrutiny threshold lowered to AU$15 million for farm land, and AU$53 million for buying an Australian agribusiness.

The Australian government has retained the ability to screen Chinese investments at lower thresholds for sensitive sectors, such as media, telecommunications and defence-related industries.

FIRB will continue to screen all investments by Chinese State-Owned Enterprises

NRF Takeaway
It is expected that, due to the increase in the FIRB threshold, bilateral investment between China and Australia will increase considerably. The Chinese government estimates an increase in outbound investment of $1.44 trillion over the next 10 years.

However, on the new lower thresholds for agriculture, uncertainty will exist as to the effect of the changes and on properly understanding the differences between farm land and agribusiness.
These changes are important for their symbolism. China has viewed FIRB as discriminating against Chinese companies. Accordingly, this change is important for China. And the result of this change means that Australia should be more attractive for Chinese investors than Canada and the US, but still behind the UK.

However, the changes do not apply to Chinese State-Owned Enterprises (i.e. government enterprises).

Tax

China and Australia have agreed to review bilateral taxation arrangements, including relief from double-taxation.

NRF Takeaway
This will greatly benefit parties doing business between China and Australia.

Industries that miss out

Australian rice, sugar, wheat, oil seeds and cotton industries will miss out on benefits at this time, so if China agrees anything with the USA or Europe in respect of these industries, Australia will be at a disadvantage. However, the FTA is subject to review in 3 years. There will be no changes to Australia's risk-based quarantine measures as a result of the FTA.

Australia: China becomes Australia’s most open country: snapshot of the FTA