Australia: Free trade with China - what does this mean for Australian services firms?


(Chinese proverb)

With the commodities boom fast becoming a distant memory, governments across Australia are looking to services industries to prop up flagging exports and put the economy on a more sustainable growth trajectory.

Last week the Federal Government announced a new Productivity Commission review to identify ways to boost Australia's services exports.

While it's good news, the time is also right for Australian services businesses to look deeply at the opportunities open to them under the China – Australia Free Trade Agreement (ChAFTA). The unprecedented market access China has offered to Australia puts our firms at a significant competitive advantage.

In 2013, services contributed around 70% to the Australian economy and around 20% to Australia's export performance. Australia's priority services sectors include "financial services, legal and professional services, education, telecommunications and electronic commerce", which are followed by "mining and energy services, environmental services and construction".

China is already the largest market for Australia's service exports although to date this has been dominated by travel and tourism. In 2013, travel and tourism exports to China constituted 58.3% of Australia's total services export. Australia's export of other services to China has been marginal, however ChAFTA lays the foundation for much faster export growth across many services.

China's commitments under the ChAFTA cover a wide range of service sectors including legal, financial, telecommunications, education, medical services, and construction and engineering services.

Although we have to wait for the agreement's details to be made public to fully understand China's service commitments, it appears Australia has obtained unprecedented market access beyond what China has agreed to in other FTAs.

In all service sectors, Australian firms can expect to have special market access in China. For example, Australian law firms will be the first foreign entrants that are able to establish commercial associations with PRC law firms in the Shanghai Free Trade Zone (SFTZ).

Australia will be the first country whose insurance providers are allowed to engage in (limited) statutory insurance business in China and its banks to engage in credit asset securitisation business.

Australian banks will also benefit from significantly relaxed prudential requirements in order to engage in RMB business.

In the fast growing Chinese healthcare sector, Australian hospitals and aged-care institutions will be the first to be allowed to establish wholly-owned businesses in China.

Although Australia's telecommunication services suppliers will still need to form a JV with Chinese counterparts, they will be entitled to a higher ownership levels than have ever been allowed for service suppliers from other countries. More significantly, Australia's telecommunication services firms will be able to establish wholly-owned businesses to engage in several designated types of telecommunication services and to obtain a majority ownership up to 55% in a JV with PRC firms that undertake online data and transaction processing services in the SFTZ.

Also unprecedentedly, Australia's construction and engineering services firms will be allowed to undertake joint construction projects with PRC companies in Shanghai without any restrictions on business scope.

The above does not cover all of China's services commitments under the ChAFTA but only those in the key sectors. Given the inclusiveness of the ChAFTA, similar exclusive or preferential market access is also to be available to other sectors, such as Australia's transport services firms, manufacturing services firms, architecture and urban planning services firms and mining-related services firms.

Despite the depth and width of China's commitments under the ChAFTA, most of the commitments are limited either to some selected types of services or to the SFTZ. In many sectors, limitations on the types of commercial presence still apply although higher foreign equity is granted.

This suggests China is taking an incremental approach in opening up its services sectors which are underdeveloped compared to those in countries like Australia.

This approach is in line with China's overall "opening-up and reform" policy, where greater trade liberalisation is helping to further develop China's services sectors, but not at the expense of exposing Chinese firms to too much foreign competition (see The drinker's heart is not in the cup).

As part of reform strategy, China recently announced an overhaul of its foreign investment regime. A consultation draft of a new Foreign Investment Law was released in January. The new law aims to streamline China's foreign investment regulation, removing red tape and making it more transparent and responsive.

For example, the law proposes to remove the requirement for case-by-case approval of each individual foreign investment into China such that only investment activities that are restricted or in sensitive sectors are to be regulated. The law will change the basis of China's foreign investment regulation, from the form of commercial presence, to the identity of investors and investment activities.

China's domestic reforms, including the reform of its foreign investment regime, combined with its negotiation of FTAs with major trading partners including Australia, is enhancing the openness of the Chinese market and its attractiveness to foreign investors.

For Australian services firms, they stand to benefit from both the exclusive and preferential market access granted under ChAFTA and also China's continuous domestic reforms.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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