On 17 June 2015, Australian Trade and Investment Minister Andrew Robb and Chinese Commerce Minister Gao Hucheng signed the China-Australia Free Trade Agreement (ChAFTA). This follows the signing of the Declaration of Intent on 17 November 2014, which formalised the conclusion of the ChAFTA negotiations.

Implementation

The ChAFTA will now need to go through Australia’s and China’s treaty-making processes. In Australia, this will include review by the Joint Standing Committee on Treaties (JSCOT) as well as an inquiry established by the Senate References Committee on Foreign Affairs, Defence and Trade into whether the ChAFTA is in the nation’s interests. It is the executive arm of the Australian government that is responsible for completing the treaty-making process, so - assuming there is no change of government and there are no delays on the China side - the ChAFTA is expected to come into effect by 1 January 2016.

Unlocking billions of dollars of trade and investment

The ChAFTA sets a platform for unlocking billions of dollars of trade and investment opportunities with Australia’s leading trading partner. In respect of trade, currently only about 8% of China’s 8,000-plus tariff lines are duty free. More than 85% of Australian goods exports to China will be tariff-free when the agreement comes into effect, and this will rise to 93% within four years. Then eventually, on full implementation of the FTA, 95% of Australian goods exports to China will be tariff-free.

Tariff reductions on Australia’s exports to China

Below is a snapshot of some of the tariff phase-outs that will occur in regard to key Australian exports to China:

Facilitating increased exports of Australian services to China

In terms of exporting services, China is Australia’s largest market, with services exports to China valued at around $7 billion in 2013. The ChAFTA will result in greater access for Australian services firms seeking to operate in China. We have described the impact of the ChAFTA on market access for Australian financial services providers in an earlier summary. In addition to financial services, a large number of services sectors are subject to changed rules in the ChAFTA. We focus on a few below:

1. Transport and logistics

Under the ChAFTA, Australian maritime transport service suppliers will be allowed to establish wholly-owned subsidiaries in the Shanghai Free Trade Zone (without the need for approval from China’s Ministry of Commerce). Also, cooperation in air transport services will be enhanced.

Traditionally, China’s transport and logistics sector has been closely regulated. Even so, certain international transportation companies have been able to obtain “Class A licences” from the relevant Chinese authorities, allowing them to operate directly in the Chinese market. That said, many foreign transport companies have complained about non-transparent barriers to operating successfully in China. Outside of the above-mentioned licensing regime, foreign transport companies have also established “foreign-invested commercial enterprises” (trading companies) in China. These companies can generally distribute imported and locally sourced products through their own wholesale, retail and franchise system, as well as provide a host of related services, including warehousing and storage services inventory management, training and delivery, among other things. The true impact of the liberalisations contemplated under the ChAFTA is, of course, yet to be seen.

2. Healthcare

Under the ChAFTA, Australian-owned hospitals and aged care institutions will be allowed to establish healthcare facilities in China. China is in desperate need of an improved healthcare system and facilities, but this sector is also tightly regulated. In addition to approval by the Chinese healthcare regulator, the National Health and Family Planning Commission (the successor to the previous Ministry of Health), foreign investment in the healthcare sector is also subject to approval by the Ministry of Commerce and registration of the State Administration of Industry and Commerce, or their respective local counterparts. For wholly foreign-owned hospital projects, approval by the central level government is required. For foreign investment in traditional Chinese medical services, more approval authorities will be involved. Other than for projects in seven cities and provinces specified by the Chinese government, foreign investors still have to find a Chinese partner and set up a Sino-foreign joint venture medical institution. We are yet to see how the ChAFTA will reduce such regulatory restrictions on Australian investment in hospitals and aged care institutions in China.

3. Construction and engineering

Australian construction companies that establish a subsidiary in the Shanghai Free Trade Zone will be permitted to undertake joint construction projects with Chinese partners in Shanghai. Business scope restrictions will not apply to these arrangements, allowing for a wider range of projects. Construction and engineering related consultancy services are heavily regulated in China and require special qualifications. Companies providing this type of services are required by law to obtain the relevant construction qualification and/or engineering consultancy qualification from the relevant Chinese regulatory authorities. Whether the ChAFTA will have any practical effect of reducing such a high degree of regulatory control over foreign-invested construction and engineering services in China in unclear.

Increased imports from China

In respect of Chinese imports to Australia, tariffs of up to 5% on certain automotive, steel, aluminium, plastics, canned fruit, carpets, clothing, footwear and electronic goods will be phased out within 2-4 years, which is likely to reduce the costs of such items for Australian consumers. Australian producers will have full access to trade remedies under the World Trade Organisation, such as anti-dumping and countervailing measures, and temporary bilateral safeguard measures will be put in place to protect against surges in imports.

Rising tide of cross-border investment

On the investment side, the ChAFTA will reduce the regulatory barriers to Chinese investment in Australia and facilitate greater Australian investment into China, giving further momentum to a growing trend. According to the Australian Bureau of Statistics, in 2013 and 2014, two-way investment with China leapt by $71.3 billion (just under the $75.6 billion recorded with the US and 30% of the increase with all countries).

Foreign investment review thresholds

The screening threshold for Foreign Investments Review Board (FIRB) approval of private Chinese investments in non-sensitive sectors will be raised under the ChAFTA from $248 million to $1,078 million (which is the same as the thresholds under FTAs with the US, Japan and South Korea). However, investments in Australia by Chinese state-owned enterprises and sovereign wealth funds will require FIRB approval regardless of size, and all Chinese investments in Australia in sensitive sectors (defence, communications, transport, media, most land, uranium and plutonium extraction) will require FIRB approval regardless of size.

The ChAFTA upholds the new FIRB investment screening thresholds of $15 million for all Chinese investments in Australian agricultural land and $53 million for all Chinese investments in Australian agribusiness interests.

Points of conjecture

The ChAFTA is not free from controversy. For example, the fact that Chinese-owned companies registered in Australia undertaking infrastructure projects above $150 million will be able to negotiate increased labour flexibilities (Investment Facilitation Arrangements) has been a cause for concern. Further, the Investor-state dispute settlement (ISDS) provision which allows Chinese corporations to sue the Australian government if the government introduces laws or regulations that damage the profits of Chinese companies (and vice versa) is viewed by some as a potential threat to sovereignty.

Nonetheless, there can be little doubt that the ChAFTA will result in increased exports from Australia to China and increased investment across borders. In 2013-14, China bought $108 billion worth of Australia’s exports and over past 5 years the average annual growth rate of exports to China has been nearly 20%. It will be interesting to observe these figures in another 5 years, especially in light of the evolving two-way investment statistics.

Author: Carl Hinze (Partner at Holding Redlich)

Disclaimer：The informationin this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

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