Introduction to the China Australia Free Trade Agreement (ChAFTA)

Introduction to the China Australia Free Trade Agreement (ChAFTA)

WHAT YOU NEED TO KNOW

• Australia and China have signed the China Australia Free Trade Agreement and entered into several ancillary agreements, including in relation to increased labour flexibility in infrastructure projects and work and holiday visa arrangements.
• ChAFTA is not yet effective - further processes must be completed in each of China and Australia. At this stage it is expected that ChAFTA will take effect from 1 January 2016.
• Australian exporters and service providers will have greater access to Chinese markets and should consider capitalising on the benefits of the free trade agreement while a "first-mover" advantage exists.
• There are greater opportunities for Chinese investment in Australia, with increased FIRB thresholds and changes to workforce mobility arrangements when ChAFTA takes effect.

Background

On 17 June 2015, Australia and China signed the China Australia Free Trade Agreement (ChAFTA), exactly seven months after the Declaration of Intent was entered into in November 2014.¹ The terms of ChAFTA are consistent with the terms of the Declaration of Intent.

Australia's economy is expected to benefit greatly from ChAFTA, given that China is Australia's largest trading partner with two way trade valued at over $160 billion.

Under ChAFTA, over 85% of Australia’s goods exported to China will enter duty free when ChAFTA enters into force, rising to 93% after four years and 95% when ChAFTA is fully implemented. ChAFTA also greatly increases access to China for Australian services businesses in specific industries and improves investment facilitation between Australia and China.

Benefits for Australian exporters

While China is already Australia's largest export market, buying almost a third of all Australian exports, Australia ranks as China's 6th largest import source with just 4.6% of China's imports originating from Australia.²

Until now, the absence of a bilateral FTA with China has meant that Australian producers and exporters have faced significant tariffs on agricultural products and have been at a competitive disadvantage to countries that have a FTA with China, eg New Zealand, Chile and the ASEAN nations. ChAFTA generally removes these tariffs, thereby giving Australia a significant advantage over other large trade partners with China, such as the US, EU and Canada.

Specific tariff measures under ChAFTA are as follows: 

• Agricultural products and processed foods: rapid reduction and elimination of tariffs on all major Australian agricultural products and processed foods other than sugar and rice (although this can be revisited in 3 years) as follows: 

Product	Tariff elimination period
Beef	within 9 years
Dairy	within 4 to 11 years (including rapid elimination of the tariffs on infant formula, ice cream, lactose and casein, all within 4 years)
Sheep and goat meat	within 8 years
Pork	within 4 years
Hides and Skins	within 2 to 7 years
Wine and Spirits	within 4 years
Horticulture	tariffs on all fruit, vegetables and nuts will be eliminated, most within 4 years
Barley and Sorghum	immediate elimination after entry into force
Seafood	within 4 years (including elimination of tariffs on fresh abalone and rock lobster)
Processed foods	orange juice: within 7 years; other juices: within 4 years; natural honey: within 4 years; pasta: within 4 years; chocolate: within 4 years; canned fruits and vegetables: within 4 years; biscuits and cakes: within 4 years

• Mineral commodities: mostly immediate elimination of tariffs of up to 10% on mineral commodities such as alumina, zinc, nickel, copper and uranium. Existing zero tariffs on iron ore, gold, crude oil and LNG locked in;
• Coal: immediate removal of the 3% coking coal tariff. The 6% tariff on thermal coal to be phased out within 2 years; and
• Manufactured goods: removal of tariffs within 4 years on a wide range of Australian manufactured goods, including pharmaceutical products, medical devices and car engines.

Industry-specific measures

• Beef and milk powder: If imports exceed certain trigger levels, China can apply additional customs duties. Trigger levels are currently set at 170,000 tonnes for beef and 17,500 tonnes for milk powder products. Importantly, review mechanisms have been established to allow for the removal of these thresholds if it is concluded that imports from Australia have not caused serious injury to the Chinese domestic industry.
• Wool: Australian wool exporters have been granted duty-free treatment for up to 30,000 tonnes of clean wool each year, increasing by 5% per year. Note that this is offered in addition to the 287,000 tonne existing WTO wool quota (which imposes a tariff of 1%). 

Benefits for Australian service providers

ChAFTA delivers China’s best ever services commitments to Australian service providers, including the provision of new or significantly improved market access not included in any of China’s other FTAs (other than China’s equivalent agreements with Hong Kong and Macau).

ChAFTA also includes a Most Favoured Nation (MFN) clause which protects Australia’s future competitive position. Under this clause, if China extends greater beneficial treatment to other trade partners in the sectors of education, tourism and travel, construction, engineering, securities, environmental, forestry, computer and certain scientific and consulting services, Australian service providers will also receive the same benefit.

Specific benefits include: 

• Education: Australian higher education providers will gain a greater profile in China through being listed on a key Ministry of Education website.
• Financial services: Australian financial service providers will be allowed to establish joint venture futures companies with up to 49% Australian ownership. Australian insurance providers will be given more liberal access to China’s statutory third-party liability motor vehicle insurance market.
• Tourism and travel-related services: Australian service providers will be able to construct, renovate and operate wholly-Australian-owned hotels and restaurants in China. Australian travel agencies/tour operators will be able to establish wholly-Australian-owned subsidiaries in China, providing travel and hotel accommodation for domestic and foreign travellers and tours within China for both domestic and foreign travellers.
• Health and aged care services: Australian service providers will be able to establish profitmaking aged care institutions throughout China and establish wholly-Australian-owned hospitals in Beijing, Tianjin and Shanghai as well as the provinces of Jiangsu, Fujian, Guangdong and Hainan.

Generally, Australian companies will be allowed to establish wholly-owned subsidiaries in China, enabling them to provide a range of services such as R&D, software implementation, services incidental to manufacturing, building and cleaning services, printing of packaging materials, translation and interpretation services, real estate and environmental services.

It is worth noting that China is currently negotiating FTAs with a number of other countries, while negotiations on the Regional Comprehensive Economic Partnership also continue. Consequently, Australian service providers should be aware that many of the benefits offered under ChAFTA may soon become the norm under China's trading arrangements with other nations. In many cases, a quick and effective deployment of resources into China by Australian service providers will be essential to establish a foothold for their businesses in China.

Chinese investment in Australia

FIRB

As a result of ChAFTA, the monetary threshold for screening by the Foreign Investment Review Board (FIRB) for Chinese investors in Australia will increase from A$252m to A$1094m for investments in nonsensitive sectors. In relation to investment in residential real estate, Chinese investors are subject to the existing arrangements – ie all foreign investors are required to notify FIRB of any proposed acquisition of residential real estate.

As noted in our Foreign Investment Update dated 16 February 2015, lower screening thresholds have been introduced for foreign investment in agricultural land (A$15m) and agribusiness (A$55m).³ These lower thresholds will apply for Chinese investors in Australian agriculture. The existing restrictions for foreign investors in sensitive sectors, including media, telecommunications and defence-related industries will also continue to apply to Chinese investors.

FIRB will continue to screen all investment by Chinese state-owned enterprises, regardless of the transaction size. However, as part of the ChAFTA negotiations, Australia agreed to review the current limitations placed on Chinese state-owned enterprises and sovereign wealth funds over the next three years.

Given Chinese investment in the resources sector has fallen to the lowest level in 10 years,⁴ it is hoped that the favourable treatment of Chinese investors under ChAFTA will contribute to an increase in Chinese investment in Australia's resources sector and also encourage greater interest in other sectors such as agribusiness and infrastructure.

Workforce mobility

In addition to ChAFTA, on 17 June 2015, Australia and China signed a Memorandum of Understanding in relation to labour mobility, which will take effect on a date yet to be determined.

Under this MOU, it is proposed that infrastructure projects that are majority or substantially backed by Chinese companies with expected expenditure above $150 million will be eligible to establish an Investment Facilitation Agreement (IFA). An IFA will allow an infrastructure project that meets the above requirements to introduce foreign labour within the framework of Australia's existing visa system. IFAs can be established without labour market testing and allow for negotiation between the Department of Immigration and Border Protection and the project company on the qualifications and experience requirements of workers.

Investor-State dispute settlement

Obligations under the Investment Chapter of ChAFTA can be enforced directly by Australian and Chinese investors under an Investor-State Dispute Settlement (ISDS) mechanism which is included in the agreement.

An ISDS claim under ChAFTA can only be made on the basis of a breach of either party’s obligation to provide non-discriminatory ("national") treatment to established investments of the other party. An ISDS claim cannot be based on a breach of commitment in another chapter. Government decisions on investment proposals, such as those considered by FIRB, cannot be challenged using the ISDS mechanism.

Further details on the ISDS mechanism in ChAFTA can be found in Ashurst's Arbitration Alert "Bull in a China Shop? The investor-State dispute settlement provisions of the China-Australia Free Trade Agreement" which can be accessed here.

Other investment benefits

• Competition policy: Under ChAFTA, Australia and China's competition authorities have agreed to cooperate through the exchange of information, consultation and the notification and coordination of enforcement activities. Such cooperation will assist in addressing any anti-competitive activities which could undermine the trade and investment liberalisation achieved through ChAFTA.
• Tax arrangements: China and Australia have also agreed to review their bilateral taxation arrangements, including relief from double taxation, with a view to maximising the benefits of ChAFTA for business.

Future opportunities

ChAFTA represents extensive opportunities for a wide range of Australian businesses. In particular, businesses involved in sectors including health and aged care, tourism, R&D, financial services, education, agricultural products, telecommunications and processed foods have been given unprecedented access to China's markets and are now in a stronger position to expand their operations in China. However, as previously noted, the advantages offered to Australian businesses might soon be available more broadly.

Australian businesses with operations in China should also note that a draft of China's 13th Five Year Plan (2016-2020) will be released in October of this year, with the final report expected in March 2016. ⁵ As has always been the case, businesses should ensure that their China strategies are aligned with the upcoming Five Year Plan to ensure the greatest possible success of their operations in China.

Next steps

Both countries must now complete their domestic treaty making processes to bring ChAFTA into force. In Australia, treaties are tabled in Parliament with a National Interest Analysis which explains the impact of the proposed treaty. To allow scrutiny they are tabled for 15-20 joint parliamentary sitting days (depending on the treaty).

The next step is for the Joint Standing Committee on Treaties to review the treaty and report back to Parliament within this 15-20 day period. Following this, legislation effecting ChAFTA will then be reviewed and introduced into Parliament using the normal legislative processes. It is then expected that ChAFTA will come into effect from 1 January 2016.

The Chinese government will also go through their own internal processes to bring ChAFTA into effect.

After 21 rounds of negotiations over nearly a decade, an FTA between Australia and China is now a reality. Australian businesses should get ready for the opportunities that should flow.

<sub>1. Further details in relation to the Declaration of Intent are set out in our Foreign Investment Update dated 16 February 2015.
2. Australian Department of Foreign Affairs and Trade website.
3. Ashurst Australia, Foreign Investment Update – "Lower threshold for acquisitions of agricultural land", 16 February 2015.
4. The Australian "Chinese investments in Australian resources lowest in decade", 22 June 2015.
5. Haacke, Owen "Understanding China’s 13th Five-Year Plan”, 12th February 2015, , (accessed on or around 24 June 2015)</sub>