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By: Tony Hogarth, Esq.
Mullins Lawyers
Brisbane, Australia

Australia’s trade with foreign investors has changed and evolved significantly over the past few decades, from the traditional trade Nations of the United Kingdom, United States and Europe to a stronger focus on Asia.  China is now by far Australia’s largest trading partner, accounting for nearly a quarter (23.9%) of Australian bilateral trade in terms of goods and services, valued at A$160 billion[1].  This is followed by Japan taking the lead behind China at second place with (10.8% or A$72 billion), and then the United States with (8.7% or A$58 billion).  Securing fourth place is Korea with (5.2% or A$35 billion).

For most Nations, the key driver of growth is export. The Australian government has been actively encouraging and facilitating the promotion of Australia goods and services by entering into free trade agreements with various key trading partners. This paper examines the latest status of the free trade or partnership agreements with Australia’s leading trade partners, which between them account for nearly 50% of Australia’s total bilateral trade.

United States

Australia and the Unites States, are currently celebrating the 10th anniversary of the Australia-US Free Trade Agreement (AUSFTA). This agreement came into effect on 1 January 2005.

Two thirds of all agricultural tariffs (including lamb, sheep meat and horticultural products) were eliminated, with a further 9% of tariffs cut to zero in 2008.  More than 97% of non-agricultural tariff lines are now duty free and all agricultural tariffs are expected to be removed altogether by 2022.

The following further changes took effect on 1 January 2015:

  1. Remaining US tariffs on wine, textile and apparel were removed;
  2. Remaining Australian tariffs on textiles and apparel, surgical materials, and articles of bedding and similar furnishings were removed;
  3. There has been an increase in the duty free tariff rate quotas for Australian export of beef, dairy, tobacco, cotton, peanuts and avocados; and
  4. There has been a reduction in the over-quota tariffs for Australian export of beef, goya cheese, tobacco, cotton, peanuts and avocados.

The AUSFTA has enhanced the attractiveness of Australia to US as an investment destination while, at the same time, has made the United States the most popular destination for outbound investment from Australia.

In terms of tariff reduction, there has been a consistent increase in the volume of exports from Australia entering the US, tariff-free, from 46% in 2004 to 90% of exports in 2014.

Australia is now in the process of negotiating what could be the world’s largest regional agreement, the Trans-Pacific Partnership Agreement (TPP). The TPP will generate stronger economic links between economies in the Asia Pacific region.  The 12 countries in negotiation are the United States, Australia, New Zealand, Canada, Japan, Singapore, Malaysia, Vietnam, Brunei, Mexico, Peru and Chile.  These countries account for around 40% of the global economy and will become the largest free trade zone, if it can be negotiated. TPP would refine and solidify existing World Trade Organisation (WTO) rules relating to copyright and patent laws and formulate new rules that would reflect modern economic development in the region.

Australia's participation in the TPP negotiations will strengthen the working partnership with existing key trade nations and provide Australian exporters with access to new markets.

As the United States and China compete for market domination in Asia, the TPP may provide an edge in favour of the United States over China in global trade.  It’s anticipated that the TPP may have a negative impact on the income of non-participating nations.

China

In an economic sense, China has evolved enormously since the 1990s. China is now a major player in shaping the new world for international economics and trade through participation in various bilateral arrangements, regional economic partnerships and free trade agreements with nations in the Asia Pacific region. The negotiations for the China-Australia Free Trade Agreement (ChAFTA) were concluded on 17 November 2014, after a decade of negotiation. The CHAFTA was finally signed on 17 June 2015.  The Australia Federal Government is now navigating the precarious passage of the enabling legislation through Federal Parliament.

Based on 2014 statistics, the volume of bilateral trade between Australia and China was approximately A$160 billion.  Once the ChAFTA enters into full force, further growth is expected based upon the implementation of the initial tariff cuts. Key outcomes for Australia include, Beef tariffs of 12% to 25% eliminated over nine years; Dairy tariffs up to 20% eliminated within four to eleven years; Wine tariffs of 14% to 20% eliminated over four years resources, Energy and Manufactured Products (92.9% of China’s current imports of these products) will be duty free with the remaining tariffs removed within four years; and Improved China market access for Australian service suppliers such as banks, insurers, securities and futures companies, professional service firms, educational service exporters, telecommunication services, tourism, travel-related services and health and aged care services.

Australia has committed to eliminate its remaining tariffs on imports from China.  This will mean cheaper goods for Australian consumers and has the potential to improve profitability for Australian business.

China granted Australia ‘most favoured nation’ status in the ChAFTA.  This allows Australia to receive certain preferential treatment from China, similar to other countries granted this much sought after status.

To counteract the impact from the TPP (that is, reduction of exports and Chinese outbound investment), China has been actively involved in trade negotiations for the Regional Comprehensive Economic Partnership (RCEP) since its launch in November 2012.  Fifteen countries, namely the ten member countries of the ASEAN nations plus India, Japan, South Korea, Australia and New Zealand form the RCEP countries. RCEP accounts for approximately 30% of world economic output. For Australia, the RCEP will assist in expanding Australia’s existing free trade agreement with ASEAN and New Zealand. About half of the countries involved in the TPP negotiations are also involved in the negotiations for the RCEP.  For Australia to further secure its foothold in the Asian region, it has to become a member state of both strategic trade agreements.

Japan

Following the conclusion of negotiations, the Japan-Australia Economic Partnership Agreement (JAEPA) was signed in April 2014, and came into force on 15 January 2015.  This agreement is regarded as the best trade deal Japan has signed with another country. Now, customs duty free or preferential access will be granted to 97% of Australian exports to Japan and bilateral trade is likely to surpass the A$72 billion achieved in the 2013/2014 financial year. Benefits include the elimination of tariffs on 99.7% of Australian resources, energy and manufacturing exports.  A range of Australian agricultural exports will now be able to enter Japan duty free, including macadamia nuts, almonds, asparagus, cherries, grapes, prawns and lobsters.

Australian consumers will be major beneficiaries under the JAEPA as the price of imported cars from Japan should fall due to the removal of tariffs (by around 3.5% to 5%).   Japan exports around $6.7 billion worth of motor vehicles to Australia each year.

Korea

The Korea-Australia Free Trade Agreement (KAFTA) was entered into on 12 December 2014. Tariffs have already undergone two cuts.  A zero tariff now applies to 84% of Australian exports to Korea, and for 90% of Korean imports into Australia. Bilateral trade between Australia and Korea stood at A$35 billion in 2013/2014 and again, the likely trajectory for this trade figure is upwards, as the KAFTA progresses through the implementation stages.

Foreign Investment Review Board

The Australian Foreign Investment Review Board (FIRB) examines investment applications by foreign persons (including foreign governments) in land and commercial enterprises.  The Foreign Acquisitions and Takeovers Act 1975 and Australia's foreign investment policy regulates foreign investment into Australia.

The AUSFTA modified Australia’s foreign investment policy, simplifying the way in which the Australian government screens investment from investors from the United States. Direct investment from the US has largely focused on the Australian resources sector, however, American companies have also invested in Australian high-tech and service industries.

All foreign government investors must notify FIRB and must seek prior approval before making any direct investment in any class of assets in Australia.

Business

Currently, foreign companies or investors (non-government) can acquire a business or a substantial interest in an Australian business valued under $252 million without having to seek prior FIRB approval.  If the business is valued above $252 million prior approval is required.

A beneficial higher (non-prior approval) threshold of $1,094 million applies under the free trade agreements with United States, New Zealand, Japanese, Chilean and South Korean investors.  In prescribed sensitive business sectors, like media, lower thresholds requiring prior approval still apply.

Agricultural land

Foreign Investors must seek prior approval for a proposed acquisition of an interest in rural land, where the foreign property (and the cumulative value of other rural land interests already held) by the investor exceeds, or is likely to exceed, after the acquisition, $15 million dollars.  Below that threshold FIRB approval is not required.  This threshold does not apply to investors from the United States, New Zealand, Chile, Singapore and Thailand.  Higher thresholds apply to these countries being $50 million for investors from Singapore and Thailand and $1,094 million to investors from the United States, New Zealand and Chile.

Real Estate

Residential

Unless an investor has at least temporary residency rights in Australia, foreign investors usually cannot purchase established residential housing interests in Australia or vacant residential land.  This restriction does not apply to acquisitions of residential land for development, which requires prior approval from FIRB and is usually granted with conditions.  For new dwellings and certain off the plan purchases, foreign buyers need to apply for approval however such proposals are usually granted without conditions.  There are some exemptions to these rules, including, among others, purchases from developers with pre-approval to sell to foreign persons.

Developed commercial property

Generally foreign investors do not have to apply for prior approval to buy developed commercial real estate valued at less than $55 million in Australia.  A lower threshold of $5 million applies, if the real estate is heritage listed.  Developed commercial property includes assets such as shopping centres, hotels, motels and other tourist accommodation.  Mining interests require prior approval, whether for prospecting, exploration, production or other mining tenements.  Forestry land is treated as for agricultural property.

Australia’s FIRB rules are under review and changes are imminent (likely before the end of 2015).

Summary

Since the Australia-US Free Trade Agreement (AUSFTA) came into effect on 1 January 2005, Australia has signed ten bilateral agreements with New Zealand, Singapore, ASEAN, Thailand, Chile, Malaysia and most recently Korea, Japan and China. Australia’s trade agreements with these nations have helped generate greater exports and to create more jobs within the Australian economy.

Japan Post’s recent $8 billion acquisition of Australian freight and logistics giant, Toll Holdings, is a compelling sign demonstrating that the JAEPA is encouraging new investment in the Australian economy and based upon deepening trade relations.

As trade prospers and grows between Australia and the economic powerhouses of Asia, it’s only natural we will see a massive increase in bilateral trade and investment. Either way, more Australian jobs will be created by export and incoming investment growth.  To reap the full benefit of the Free Trade Agreements, business needs to explore the opportunities for business potential in the Asian markets. It’s up to business to take advantage of a less costly basis of trade and generate more and new business in a low, or zero, tariff environment created by the Free Trade Agreements.

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[1] based on 2013/14 statistics issued by the Department of Foreign Affairs and Trade