Australia: Details of the China Australia FTA release: Start preparing now!

Last Updated: 23 June 2015
Article by Russell Wiese, Lynne Grant and Fran Smyth

The terms of the China Australia Free Trade Agreement (FTA) have been finalised and released. The full text of the agreement provides importers and exporters with the details of exactly what duty rates their goods will receive and how to qualify for preferential rates. Below we set out the key details of the FTA and what you can do now to prepare for the FTA's implementation.

NOW IT IS SIGNED, WHEN WILL IT START?

In short, there is still not a definite start date. It's expected that the agreement will officially commence before the end of the year. This will allow one duty rate reduction on implementation and another on 1 January 2016. However, before commencement the following has to occur:

  • The agreement will be tabled in parliament and put before a Senate committee
  • The Senate committee will report back to parliament
  • The parliament will introduce legislation and regulations necessary to implement the agreement
  • Once enabling legislation is passed, and assuming China has undertaken its own domestic processes, the countries will exchange diplomatic notes and the agreement will commence 30 days later (or sooner if agreed).

IMPORTS – WHAT IS NOT DUTY FREE IMMEDIATELY?

Almost all Chinese qualifying goods will be duty free on introduction of the FTA. Key exceptions and their reduction timetable are set out below.

Product Existing rate Rate on introduction of the FTA Year duty rate will be zero assuming 2015 implementation
Textiles, clothing and footwear 5% 3.3-8% Most by 2017
Some plastics 5% 3.3 – 4% Most by 2017
Certain steel and aluminium 5%   3.3 – 4% Most by 2017
Vehicle components 5% 3.3 – 4% Most by 2017
Buses and certain passenger motor vehicles 5% 3.3% Most by 2017
Canned fruit 5% 3.3% 2017
Ground nuts in shells, pineapples, peaches 5% 3.3% 2017
Herbicides 5% 3.3% 2017
Toilet paper 5% 4% 2019
Nappies 5% 6.7-8% 2017
Carpets 5% 4% 2019

The most surprising outcome is clothing and textiles where the general duty rate of 5% is less than the year one rate under the FTA. The duty reduction timetable seems based on 2014 general rates of 10% which were reduced for all countries to 5% on 1 January 2015.

There is a large variety of other products that will still attract duty such as some paper, values, pumps, motors, generators, transformers and hot water systems. Importers should check the rate of the specific tariff classification of their goods.

EXPORTS – TIMEFRAME FOR DUTY REDUCTIONS

There is a wide range of different rates and reduction timetables for Australian exports. Reduction timeframes applying to some key exports are:

Product Existing rate Rate on introduction of the FTA Year duty rate will be zero assuming 2015 implementation
Wine 14%-30% 11.2-24% 2019
Beef 12% 10.8% 2024
Powdered milk 10% 9.2% 2026
Fresh milk 15% 13.5 2024
Cheese 12% 10.8% 2024
Sheep meat 12% - 23% 9.3 – 20.4% 2023

DOCUMENTATION NEEDED TO QUALIFY

Qualification for preferential rates under the FTA will not be automatic. Even if the goods are of Australian origin, without the required certification documentation the goods will be treated by Chinese Customs as the same as a goods from any other country. Origin claims will need to be supported by either a certificate of origin or declaration of origin.

Certificates of origin

This will be documents issued by an official Government body or other approved body. A certificate will be required for each consignment.

Declaration of origin

Manufacturers or exporters will be able to prepare a declaration instead of a certificate of origin, provided that the relevant goods have been the subject of an origin ruling issued by the Customs Department in the importing country. So exports to China will require an origin ruling issued by Chinese Customs and Chinese imports will need to obtain a ruling from Australian Customs.

These seem a very cumbersome requirement. If you are going to require a ruling in addition to a declaration of origin, surely the Customs authority in the exporting country is best placed to provide it. That Customs authority can audit the claims made by the manufacturer or exporter. Further, it is much easier for Australian manufacturers and exporters to deal with their own Customs authority than to have to lodge a ruling request with Chinese Customs.

DO GOODS HAVE TO BE SHIPPED DIRECTLY?

Most trade between Australian and China will be direct. However, it is not uncommon for companies to use a distribution centre in South East Asia, such as in Singapore or Malaysia. Indirect shipment is permitted, provided that the goods are not entered for customs purposes in the third country. This can be avoided through the use of a bonded warehouse. If goods will be entered into a third country, importers will need to weigh up the logistical benefits of this approach against the lost duty saving.

IS IT AS GOOD AS NEW ZEALAND'S DEAL?

In the lead up to the announcement of the FTA the talk was of achieving a deal that put us on par with New Zealand. Comparing the rates applying to New Zealand dairy products to those of Australian exports, it is clear that our farmers will be at a disadvantage until 2024.

  Australia New Zealand
Product Rate on introduction of the FTA Year duty rate will be zero Current Rate Year duty rate will be zero
Wine 11.2-24% 2019 Free NA
Beef 10.8% 2024 1.3% – 2.8 % 2016
Powdered milk 9.2% 2026 3.3% 2019
Fresh milk 13.5% 2024 Free – 3.3% 2017
Cheese 10.8% 2024 Free - 2.4% 2017
Sheep meat 12-23% 2023 1.7% - 2.6% 2016

SOME OTHER KEY PROVISIONS

  • Most favoured nation clause – It was hoped that the tariff commitments would be subject to a most favoured nation clause, meaning Australia would be on equal footing with countries that enter into FTAs with China in the future. A most favoured nation clause is included in respect of services and investment, but not trade in goods.
  • Notable exceptions – As expected, there was no joy for Australian exporters of wheat, maize, rice, rice flour, corn flower, soya beans, most vegetable and seed oils, cane sugar, newsprint and cotton.
  • Anti-dumping – The FTA will not alter the level of existing dumping duties imposed on Chinese exports nor will it prevent or limit future applications for dumping duties.
  • Trusted Trader – Neither the provisions relating to certificates of origin nor Customs cooperation made allowances for recognition of Authorised Economic Operators (AEOs). This may limit the extent to which the requirements of the FTA may be relaxed for Trusted Traders.

WHAT SHOULD YOU BE DOING NOW?

Importers and exporters are now in a position to precisely determine how beneficial the China FTA will be for them and what they need to do to qualify.

Importers

Importers can review their past imports and determine how much duty they have previously paid on Chinese goods. It may be the case that the goods are already duty free. If you import goods that are subject to duty you can now determine the future rate. If the saving will be significant you can contact your key Chinese supplier to discuss the extent to which the goods are of Chinese origin. You will need to have this conversation now to allow your supplier time to assess origin and arrange the required documentation prior to the FTA commencing.

Exporters

The benefits under the China FTA are deep and narrow. Your product will either benefit significantly or not at all. You are now in a position to assess where your good falls. Where qualifying for the FTA makes sense, you need to assess your goods against the relevant rules of origin. If the rule relates to a local content level and you don't meet the requirement, you can now look at boosting local content. You can also start organising the relevant origin documents.

Rulings and contracts

If there is doubt as to the origin of the goods, or you wish to use declarations of origin, you can obtain an origin ruling from Australian or Chinese Customs. There will be a lot of interest in the China FTA, so we recommend getting in early with a ruling request to avoid delays.

If you wish to utilise the China FTA you should ensure your supply/purchase contracts are adjusted accordingly. We recommend considering the following:

  • Do you require your Chinese supplier to provide origin documentation?
  • Which party will be liable for duty if preferential status is rejected by the relevant customs authority?
  • Can you reject orders if preferential status under the FTA is denied?
  • Is there an obligation on your Chinese supplier to cooperate with Australian Customs if there is an audit into the origin of the goods?
  • Will the importer assist the exporter with obtaining an origin ruling from the Customs authority of the importing country?

FTAs are traditionally underutilised. Importers and exporters now have 4-6 months before the FTA is implemented to prepare. Those who do not prepare will find it difficult to use the FTA from day one and will be at a competitive disadvantage.

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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Authors
Russell Wiese
 
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