Australia and China conclude free trade agreement

On 17 November 2014, Chinese President Xi Jinping and Australian Prime Minister Tony Abbott announced that Australia and China had concluded a free trade agreement that has been under negotiation since April 2005.

The agreement will now be prepared in both English and Chinese for signature by the parties, after which the agreement will go through domestic ratification processes in both Australia and China.

On 17 November 2014, Chinese President Xi Jinping and Australian Prime Minister, Tony Abbott, announced that Australia and China had concluded a historic free trade agreement (FTA). The FTA will reduce tariffs on Australian dairy, beef, wine and horticultural products, improve market-access for Australian providers of services in the health, education and financial sectors in China and phase out Australian tariffs on 95% of Chinese goods within four years.

The China Australia FTA is the latest of a series of FTAs concluded by the Australian Coalition Government since coming into power in September 2013, reflecting the Government’s policy of promoting 'freer trade, economic infrastructure and private-sector-led growth'. In total those agreements with Australia’s three largest export markets account for more than 61% of Australia’s exports of goods.

China has similarly entered into a number of bilateral FTAs over the past five years, including with New Zealand, Switzerland and most recently South Korea on 10 November 2014, during the APEC summit in Beijing.

The FTA has been under negotiation since 18 April 2005, following a joint FTA Feasibility Study, which concluded there would be significant economic benefits for both Australia and China through the negotiation of an FTA.

The key benefits

Key benefits of the FTA for Australian businesses include:

• the phasing out of dairy tariffs within four to 11 years and beef tariffs over nine years,
• the phasing out of tariffs of between 14 and 20% on Australian wine exports within four years,
• the removal of tariffs on all resources and energy products, including the immediate removal of the current 3% tariff on Australian coking coal, and the removal of the current 6% tariff on non-coking coal within two years,
• the removal of tariffs for other manufactured products including car engines, plastic products and pharmaceuticals within four years,
• the provision of services by wholly-Australian owned hospitals and aged care institutions throughout China,
• guaranteed access for Australian companies investing in value-added telecommunications services in the Shanghai Free Trade Zone,
• the listing of all Australian private higher education institutions on the official Chinese Ministry of Education website for overseas students, and
• Australian law firms will be able to establish commercial operations in cooperation with Chinese law firms in the Shanghai free-trade zone that will be allowed to service the whole of China.

In the FTA, China is said to offer Australia its best ever services commitments in an FTA (other than in China’s agreements with Hong Kong and Macau), including new or significantly improved market access for Australian banks, insurers, securities and futures companies, law firms and professional services suppliers, and education services exporters, as well as health, aged care, construction, manufacturing and telecommunications services in China. On full implementation of the FTA, 95 per cent of Australian goods exported to China will be  tariff free.

Key benefits of the FTA for Chinese businesses and investors include:

• the phasing out of tariffs on 95% of all Chinese goods imported to Australia such as clothing, footwear, household electronics and cars within four years,
• increasing the screening threshold for investments in Australia by Chinese private sector entities from A$248 million to A$1.078 billion (though all investment proposals by Chinese State Owned Entities (SOE) remain subject to scrutiny by the Australian Foreign Investment Review Board (FIRB) regardless of transaction size),
• FIRB screening threshold lowered to A$15 million for farm land and A$53 million for Chinese private entities purchasing an Australian agribusiness,
• the reduction of barriers to labour mobility which will grant skilled Chinese workers temporary entry into Australia for the purpose of providing labour on large infrastructure projects above A$150 million, and
• the addition of 5,000 working holiday visas provided to Chinese for entry to Australia on an annual basis.

Other features

Further features of the FTA include:

• a built-in review mechanism of the FTA after three years that will allow for further liberalisation, including expansion of market access over time.  It is anticipated that the main items to be deferred to the second stage of the FTA are Australia’s decision regarding investment liberalisation for Chinese SOEs and China’s decision on the reduction of tariffs and entry barriers for Australian rice, sugar, cotton and canola,
• an Investor State Dispute Resolution (ISDS) mechanism that will enable foreign investors to invest with greater confidence and will also include safeguards to protect each Government’s ability to regulate in the public interest,
• Australia and China have also agreed to review their bilateral taxation arrangements, including relief from double taxation, and

In addition to the conclusion of the FTA, China and Australia signed a Memorandum of Understanding (MOU) on 17 November 2014, designating an official RMB clearing bank in Sydney.  This will allow overseas trading of up to RMB 50 billion in Australia for the first time, improving the efficiency of cross-border transactions.

Following the conclusion of the FTA, the legal texts of the agreement will be prepared in both English and Chinese for signature by the parties, after which the FTA will need to go through domestic ratification processes in both Australia and China.

Other developments involving China

Chinese trading relations with the rest of the world are at an important and delicate stage. At the recent G20 conference in Brisbane and APEC summit in Beijing, three further developments were announced.

• China announced that it will promote a Free Trade Area of the Asia Pacific (FTAAP) as a rival to the Trans-Pacific Partnership (TPP) of which China is not currently a member. However talks regarding any FTAAP were in the very early stages of discussion.
• The China-South Korea FTA negotiations were completed on 10 November 2014 on the sidelines of the APEC summit in Beijing.  Reports suggest that this will put additional pressure on Japan to revitalise its relationship with both countries.  A trilateral FTA between China, Japan and South Korea was proposed in 2012, but has since been sidelined following the recent deadlock in China-Japan relations.
• China announced the launch of the Asian Infrastructure Investment Bank (AIIB) with an initial Chinese investment of $50 billion. At this stage, Australia and South Korea have declined to join the AIIB and Japan is also noticeably absent from the 21 founding members.

For further information, please contact Donald Robertson, Partner, Leon Chung, Partner, Edwina Kwan, Senior Associate or your usual Herbert Smith Freehills contact.