An Overview Of The China And Australia Free Trade Agreement (ChAFTA)

Background

In this essay, the China and Australia Free Trade Agreement (ChAFTA) will be evaluated to understand why this agreement has formed between the two nations along with various aspects of this agreement. Australia is one of only a handful of developed countries which have entered into a Free Trade Agreement (FTA) with China. This agreement has formed between the two nations in 2015 which has created new trading opportunities for Australian businesses in China. This essay will analyse the background of ChAFTA to understand why this agreement was formed between the two nations. This essay will evaluate the key objectives based on which ChAFTA was signed by the government of Australia and China. The overview of ChAFTA will be evaluated in this essay to determine the outcomes of this agreement. Both positive and negative impacts of ChAFTA on the countries, businesses and individuals will be assessed in this essay. The impact of ChAFTA on Australian goods exporters and service suppliers will be analysed in this essay to understand the influence of this agreement on Australian businesses. Various policies and concessions provided by ChAFTA will be evaluated in this essay to determine key opportunities for investors and impact on consumers. Lastly, this essay will analyse how businesses can effectively manage this agreement, and a conclusion will be drawn.

ChAFTA is a bilateral free trade agreement which is formed between the government of China and Australia. This agreement was signed on 17^th June 2015, and it was enforced with effect from 20^th December 2015. This agreement comes into effect 10 years after its proposal which was made in 2005. The government of Australia and China signed a Declaration in which they specified their intention to enter into ChAFTA on 17^th November 2014. This declaration marked the conclusion of negotiations on a landmark bilateral trade agreement which benefit both nations. The announcement made regarding ChAFTA was warmly received by China because the domestic demand of agricultural products in the country is substantially high. This agreement will result in improving opportunities for direct investment in both countries. At that time, it was also expected that the businesses in Australia would be benefited by this agreement. They will receive foreign investment which resulted in providing new business opportunities for them, and it makes it easier for them to expand their operations in China.

In 2014, it was told by the Department of Foreign Affairs and Trade (DFAT) that the objective of introducing ChAFTA is to ensure that the treaty adoption process is properly followed by both nations which resulted in increasing the chances of effective implementation of ChAFTA. The objective of this agreement was to further strengthen the trade position of Australia in East Asia. The success of this agreement was determined based on other free trade agreements which are formed by Australian government with other nations. The Japan Australia Economic Partnership Agreement (JAEPA) and the Korea Australia Free Trade Agreement (KAFTA) are some examples of free trade agreements which are formed by Australian government which resulted in benefiting the country. The ChAFTA was the next step which is taken by the Australia government to build trade relationship with China in order to increase its economic growth.

Objectives of ChAFTA

The key reason for introduction of ChAFTA was to build new trading ties with China which resulted in supporting the economy of both nations. In order to achieve this objective, the DFAT set various key outcomes which are targeted to be achieved by introducing this agreement. This agreement was focused on encouraging Chinese foreign direct investment in Australia by approving private entities to invest in non-sensitive sectors. Before the implementation of ChAFTA, New Zealand, Japan, Korea, Chile and the United States were the main investors in Australia which invest foreign investments in the country. However, after introduction of ChAFTA, China is expected to overcome these countries in terms of foreign investment in Australia. The Australian government wanted to attract private Chinese businesses to invest in Australian market which resulted in supporting the economy of both nations. Reducing the trading barriers between the two nations is another key objective of ChAFTA.

This agreement provides major concessions to businesses operating in both nations by removing all import tariffs on agricultural products in Australia. Tariffs on a wide range of Australian energy and resources products which are exported to China have also been reduced and removed under this agreement. Pharmaceutical and manufacturing is the third sector which has gained advantage of ChAFTA. To protect trading relationships and avoid barriers, the government has removed all tariffs from health, vitamins and pharmaceutical products which provide new business opportunities to Australia corporations to expand their operations into Chinese market. Moreover, barriers have been removed in the service sector by the government which has benefited key industries which include financial service, telecommunications and technical services. To underline the main objective, ChAFTA is focused on supporting and promoting the economic growth of both nations by removing trade barriers which provide new business opportunities to organisations which allow them to expand their operations in other markets easily.

ChAFTA is an important topic because this agreement brings new opportunities for Australian businesses in China which resulted in supporting the economy of the nation. This agreement is significant because it lowers trade barriers between the two countries which resulted in unlocking vast opportunities for Australian businesses. After the introduction of this agreement, China has become the largest trading partner of Australia by taking over Japan. Due to this agreement, the annual two-way trade between the two nations reached around $152 billion in 2014-15. This agreement was a major milestone in Australian trade policy which created the single largest trade deal which Australia has ever achieved. Currently, the exports made to China by Australian businesses account for up to 6 percent of the GDP of the nation which highlights the significance of China in the Australian economy. More than one-third of Australian exports are made to China, and this agreement made almost 95 percent of those exports tariff free. Agricultural products are included in these exports as well which include beef and dairy. Iron ore and coal makes up most of the Australian exports which are made to China (more than $49 billion), however, this agreement is enabling Australian service industry to grow substantially which is led by education and tourism promoted by the government of Australia. Currently, China is the largest foreign buyer of Australia that purchases agricultural and fisheries products from the country. These products bring more than $9 billion in foreign currency in 2014-15.

Overview of policies and outcomes of ChAFTA

On the other hand, the main imports from China in Australia include manufactured goods which are worth over $17 billion in 2014. These products are led by telecommunication equipment, furniture, home appliance and IT products. The key reason for success of this agreement is that China is populated with more than $1.4 billion people that prefer to purchase imported products because of their quality. The agreement has created new job opportunities in both nations which resulted in increasing the living standards of citizens in both nations by increasing goods and services. In 2017, China brought Australian exports worth of $116 billion which is more than the quarter of Australia’s total exports which are made in other nations across the globe. Moreover, the investments which Chinese organisations made in the country have increased as well. The investments made by Chinese businesses in Australia reached $65 billion at the end of 2017. China buys more agricultural products from Australia than compared to any other countries. The agriculture market in Australia was worth more than $13 billion in 2017 which resulted in broadening the agricultural sector. The new opportunities provided by ChAFTA resulted in providing a competitive advantage to Australia over its other agricultural competitors that include countries such as the United States, Canada and the European Union. This agreement provides more advantages to Australia than other nations with free trade agreements with China which include Chile and New Zealand.

The introduction of ChAFTA has provided various benefits to businesses, customers and the country by opening new trading opportunities in China. One of the key benefits is that consumers in Australia see lower prices on Chinese products. This outcome has been achieved because the government has removed 5 percent tariff on products which are manufactured in China such as electronics and white goods. Another benefit of this FTA is that the tariff which is imposed on various Australian commodities which include coal and alumina and gemstones of between 3-10 percent have been eliminated by the government either immediately or within a period of two and four years. The government has also terminated the imposition of tariff on various Australian manufactured exports of 3-14 percent within four years. The corporations offering products such as beef, hides, live animals, sheep, pork, horticulture, seafood, wine, skins and leather did not have to pay tariff up to 30 percent of these products while exporting them to Chine.

These tariffs are eliminated within 2-9 years period. Since the demand of Australian grown and manufactured products is high in China, the tariff which is imposed on many processed foods in Australia including natural honey, orange juice and canned fruits have been reduced or eliminated by the government. Various rights of Australian firms which are operating their business in China have been recognised under ChAFTA based on which they have the right to sue Chinese government if they implement policies or take any actions which adversely affect their interest. The government has improved access to partnership between Chinese and Australia legal and financial services firmed. Due to these benefits, these businesses are able to expand their products into Chinese markets and reach a wider audience which resulted in increasing their profitability.

Along with numerous benefits, there are some negative implications of ChAFTA as well. One of the key issues is related with businesses which offer products such as wool, sugar, wheat, maize, canola, rice or cotton because the government has not reduced the tariff on export of these products. Moreover, the Chinese government has the option to apply additional customs duties on Australian businesses which export beef or milk powder if they exceed certain limits. Various rights of Chinese firms are recognised in ChAFTA which gives them right to sue Australian governments for policy changes that adversely affect their interests. Another key disadvantage is that Chinese investors that invest in projects which are valued more than $150 million have additional rights under the ChAFTA based on which they can temporarily migrate workers to Australia from China without testing the local labour market of Australia.

ChAFTA has significant impact on different industries in Australia because it increased the number of exports and foreign investment in these sectors. This agreement has brought new business opportunities for organisations operating in different sectors of Australia based on which they are able to attract foreign investments, increase their exports in China and expand their business as well. Following is an industry based analysis of impact of ChAFTA on different sectors of the Australian market.

After complete implementation of ChAFTA, almost all goods which are produced in Australia and exported to China enjoy duty-free entry. Due to removal of this duty-free, China purchases more agricultural products from Australia than compared to other nations in which Australian businesses export their products. In 2017, the exports made by Australian businesses relating to agricultural products in China were worth around $13 billion. In the agricultural sector, ChAFTA has removed remaining tariffs which are imposed on Australian barley and sorghum after 20^th December 2015. After this agreement, Australian businesses have seen a rapid tariff reduction on other agricultural exports which include sheep meat, seafood, and a large variety of horticulture. Moreover, tariff imposed on other agricultural products have also been removed by the government for certain period. The tariff imposed on dairy products has been eliminated by the government up to 1^st January 2026. 12 to 25 percent of tariff imposed on beef have been removed by 1^st January 2024. The tariff on wine has been reduced by 14 to 20 percent by 1^st January 2019. Wool and other Australia-only related products have been duty-free quota which provides access to China’s WTO wool quota.

Currently, China is the largest market for Australia for resources and energy products. The Australian businesses which operate in this sector and exports their products and services to China generated over $85 billion from energy and manufactured products. After complete implementation of ChAFTA which will be completed by 1^st January 2029, Australian businesses which exports resources, energy and manufacturing products in China will enjoy duty-free entry in the market. The key outcomes of ChAFTA are that it has locked-in existed zero tariffs on major exports of this industry which include iron ore, gold, liquefied natural gas and crude petroleum oils. This provides greater certainty for Australian exports which provides these products in Chinese markets. The tariff of 3 percent which is imposed on coke coal has been eliminated after 20^th December 2015. From 1^st January 2017, the tariff of 6 percent which is imposed on thermal coal has been completely eliminated in ChAFTA. The tariff of 10 percent and pharmaceutical and vitamins and other tariffs imposed on car parts such as plastic products, engines and others will be eliminated by ChAFTA by 1^st January 2019. The tariff of 10 percent which is imposed on refined copper and alloys, unwrought aluminium, titanium dioxide, aluminium oxide, unwrought zinc and others have been eliminated immediately on 20^th December 2015.

China is the largest service market for Australia along with goods exports. The service exports of Australia are valued over $15.8 billion in 2017. Based on the free trade agreement between the two countries, China provides best ever services commitments to Australia than compared to other nations. These commitments include new and significantly improve commitments for Australian bankers, insurance, securities and futures companies, education service exports, aged care, construction, manufacturing and telecommunication, law firms and professional service suppliers and others to get access to Chinese market. The agreement has included a Most-Favoured-Nation (MFN) clause which provides a competitive position to Australia in services market. This clause provides various beneficial treatments to Australia than compared to other trade partners in ten specific sectors which include tourism and travel related services, education, environmental services, construction, engineering, securities, computer and related services, services relating to forestry, certain scientific and consulting services.

Based on this agreement, the key outcome received by Australian businesses include guaranteed market access for law firms operating in Australia in China by establishing commercial associations with Chinese law firms in the Shanghai Free Trade Zone (SFTZ). The health and aged care services providers in Australia have the option to establish profit-making aged care institutions throughout China. Moreover, options for Australian private health sector’s offering which include Australian-owned hospitals have the option to expand their services through East Asia. This agreement provides various benefits to Australia businesses which provide educational services. In this agreement, the Chinese government has listed around 68 additional Australia private higher education institutions. All these institutions are listed on the Commonwealth Register of Institutions along with Courses for Overseas Students. This is an overseas study website by Chinese Ministry of Education. The Australian organisations which provide tourism and travel related services have given guaranteed market access in the ChAFTA.

The Australia based services suppliers that provide facilities such as construction, renovations and operate wholly owned hotels and restaurants in China have gained benefits by introduction of this agreement. They are able to easily expand their services in different locations in China without paying substantial charges. Based on the terms of ChAFTA, China is committed to delivering new or improved market access to Australia based financial service providers. These organisations provide their services in different markets which include banking insurance, securitisation, futures, securities, and funds management. It has become easier for these corporations to establish their operations in China and increase their clients due to introduction of ChAFTA. The telecommunication sector in Australia has received significant benefits after introduction of ChAFTA. The corporations operating in this industry have received guaranteed market access which provides Australian based companies to invest in specified value-added telecommunication services in the Shanghai Free Trade Zones (SFTZ). These policies provide greater certainty to Australian telecommunication corporations which have made investments in SFTZ.

One of the key objectives of introducing ChAFTA was to increase the foreign investment in both nations which resulted in increasing their economic growth. This objective is achieved by the nations by creating and improving opportunities for investors in both countries. Australian businesses have sustained their competitive advantage in China after this agreement because the government has made commitments in the agreement. The direct investment in China is led by Australian banking and wealth management businesses. A total of $77.1 billion was invested by Australian businesses in China at the end of 2017. The provisions given under ChAFTA directly apply to both Australian and Chinese investors. These provisions impose obligations on these investors through an Investor-State Dispute Settlement (ISDS) mechanism. This mechanism is incorporated by the Australian and Chinese government in this agreement to increase the amount of foreign investment in both nations. This mechanism provides safeguard to ensure that the governments’ ability is protected to ensure that they are able to regulate these policies in public interest. This protection also ensures that the government is able to regulate policies to pursue legitimate public welfare objectives which include public health, safety and the environment. Due to this agreement, the Chinese investment made in Australia has raised to $65 billion from $6 billion in a period of 10 years at the end of 2017.

This shows a significant achievement of ChAFTA which resulted in opening new doors for foreign investment in both nations which resulted in promoting and supporting the economic growth of both nations. For instance, this agreement has liberalised the screening threshold of the Foreign Investment Review Board (FIRB) for private Chinese investors that are operating in non-sensitive sectors from $252 million to $1,094 million. It is provided that the government will continue to screen Chinese investment at lower thresholds especially for investors who are making investments in agricultural land and agribusinesses and in sensitive sectors which include defence related, media and telecommunication industry. Furthermore, the Chinese state-owned enterprises will be able to make direct investments in Australian businesses regardless of the transaction size. Any other policies introduced by the Australian government regarding other FTAs are not changed by the arrangements in the ChAFTA. These provisions are introduced by the governments in ChAFTA to ensure that both countries are able to receive the benefit of foreign investment which is crucial for their economic growth. It also allows them to increase the GDP of the country and built strong trading ties with each other by allowing businesses to invest in different markets of the country easily.

The provisions given under the ChAFTA did not contradict with other bilateral trade agreements which the Australian government has formed with others nations. The policies given in Australia’s other bilateral trade agreements are consistent with ChAFTA, and they remain unaffected throughout the nation. The agreement has resulted in eliminating the five percent tariff which is imposed by the government on Chinese manufacturing exports, electronics and white goods. Due to removal of this tariff, the customers and businesses have benefited from downward pressure on prices, and it has made it easier for customers to purchase Chinese products because they are easily available.

While doing business with China and before entering into Chinese business market, the corporations have to take into account a number of factors which include culture, politics and business etiquette. The corporations should evaluate the type of goods which they are exporting or importing to determine whether the concessions provided in the agreement are available for them or not. They should identify customs tariff code for their goods to evaluate how these goods are treated under ChAFTA. The businesses should identify the lower (preferential) duty rate for your goods. As per this agreement, only goods which are ‘originate’ in Australia or China are eligible for preferential tariff treatment under ChAFTA. It means that other nations cannot avail the benefits of ChAFTA by simply transhipping their goods through Australia or China which means that this deal is exclusively available for Australian and Chinese businesses. Businesses should check the FTA portal to determine the preferential FTA tariff rate which applies to their products. Compliance with these policies assists corporations in increasing their growth and profitability by expanding their operations in China.

Conclusion

In conclusion, ChAFTA is a bilateral FTA which is formed between Australian and Chinese governments to build new trading relationships and promote foreign investment in both nations. Under this agreement, the government has reduced or eliminated various tariffs which is imposed on Australia businesses while exporting or establishing their business in China which encourage them to establish their operations in the Chinese market. Various negative implications of this agreement are that tariff has not reduced or eliminated on certain products including sugar, rice, wheat, and others and in many cases, the Chinese government can impose additional customs duties on Australian businesses. The impact and outcome of ChAFTA on Australia based goods exporters and service suppliers are evaluated in this essay to understand how ChAFTA benefit them. The impact of ChAFTA on investors and consumers is discussed as well because these policies have open new opportunities for investors to invest in both nations and provided benefits to customers. Lastly, the government needs to continue to improve the policies of ChAFTA by reducing or eliminating tariff on other products which are not included in the agreement to create more trading opportunities which will result in increasing the economic growth of both nations. Further research is needed to be done in the future in areas such as how both nations can expand their trading relationships in other sectors which are not covered in ChAFTA.

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