All systems go for ChAFTA
The full benefits of the Australia China Free Trade Agreement (ChAFTA) took affect at the start of this year. In this address to the Henan Investment and Trade Fair, Asialink Chairman The Hon Andrew Robb AO maps out the opportunities now up for grabs.
The Linked Hybrid complex in Beijing. Photo by Wojtek Gurak
KEYNOTE SPEECH - HENAN INVESTMENT AND TRADE FAIR
8 April 2019
China, the most populous nation in our region and our largest trading partner is very important to Australia.
We welcome China’s remarkable success, and we are committed to a long-term constructive partnership and friendship based on mutual respect.
Australians look to grow our relationship. Over 6 percent of our total population are Chinese Australians, many of these arriving in the last 25 years. These Chinese Australians are making a strong contribution and have been warmly accepted into our community. Many proudly came from Henan.
This Chinese diaspora of more than 1.3 million people is a wonderful resource in the development of supply lines between China and Australia.
The successful entry into the Australian market can be achieved in many ways, but the two most successful approaches involve, initially at least, entering into joint ventures with local Australian businesses, and/or making effective use of members of the Australian Chinese community residing in Australia.
Owning 100 percent of an Australian business from the outset is not necessary, nor is owning a controlling share necessary to making an effective business entry into Australia.
Some Chinese companies who bring substantial capital have de-risked their entry and been very successful after acquiring 30 or 40 percent of an Australian business, thus providing the capital necessary to substantially grow the business while gaining valuable experience operating a business in Australia.
In forming a joint-venture it is very sensible to spend considerable effort in establishing that you can trust the Australian party, that your objectives are compatible and that a high standard due diligence is carried out.
The other source of important help involves engaging with appropriate Chinese Australians who understand both the Chinese business environment, as well as the Australian business world.
Currently, as mentioned earlier, these Australians, of Chinese descent make up 6 percent of Australia’s total population. On top of this, there are currently 170,000 foreign students who are Chinese.
People with contacts who have an understanding of both countries can be an invaluable source of advice to help avoid costly mistakes and identify wonderful opportunities. As well, their ability to assist in managing the supply line can be crucial. Most of the major financial institutions and professional business advisory bodies have experienced Chinese Australians working with them.
Chinese entrepreneurs planning to enter Australia for the first time need to also understand that Australian business people conduct business differently to their Chinese counterparts – the role of MOUs, the extent of information sharing, the means of establishing trust, the role of the rule of law, the attitude towards contracts, the interpretation of a commitment to a deal at different stages, the business and taxation regulations, and much more.
It doesn’t mean that one way is necessarily better than the other, but understanding the differences is critical.
Establishing a successful business in Australia also requires all foreign investors, including the Chinese, to seek help to understand the cultural differences, to understand the different governance requirements, to understand the language, to understand the political differences, to understand how China is perceived by Australians.
This understanding can be very difficult to master. This is equally true for Australian business people seeking to invest and trade into China.
Let me focus now with some observations about where Chinese entrepreneurs can best target your trade and investment activities in Australia.
Your search for appropriate investment opportunities should also be very mindful of the outcomes of the China-Australia Free Trade Agreement (ChAFTA) which entered into force on 20 December 2015. I was very privileged to negotiate and sign this agreement on behalf of the Australian Government.
China is Australia’s largest trading partner, taking more that 25 percent of Australia’s exports to the world in 2017, and Australia is China’s seventh biggest trading partner. The ChAFTA has built much further on Australia’s large and successful commercial relationship with China.
On full implementation of the free trade agreement, almost all of Australia’s goods exports to China will enjoy duty-free entry.
This includes exports of virtually all of Australia’s clean, green agricultural, aquaculture and horticultural produce, and exports of virtually all of Australia’s resources, energy, manufacturing and pharmaceuticals, including vitamins and health products to China.
In ChAFTA, China offers Australia its best-ever market access commitments on services, other than China’s agreement with Hong Kong and Macau.
Hundreds of services concessions relating to market access into China are included in areas where Australia provides world’s best services such as education, health, aged care, construction, telecommunications, financial, securities and futures companies, insurers, tourism, law firms and professional services, environmental, forestry, computer and related services, certain scientific and consulting services, and more.
The opportunity for Chinese entrepreneurs to invest in Australian services providers, gain experience and then establish an arm of these businesses and related IP back into China, is immense.
China buys more of Australia’s agricultural produce than any other country. ChAFTA provides Australia with an advantage over our major agricultural competitors, including the Unites States, Canada and the European Union. It also counters the advantages Chile and New Zealand have enjoyed through their FTAs with China.
For goods entering Australia from China, all tariffs have been eliminated from 1st January 2019. This includes goods from all sectors of Australia’s economy.
Similarly, tariffs on Australia’s farm produce going into China were largely eliminated on 1st January 2019.
Key Australian exports to China - including wine, most fruit and vegetables, seafood and some dairy products face a zero tariff.
For example, this has seen, over the last 12 months, Australian beef exports increase 34.5 percent, wine exports increase 65 percent, dairy exports increase 38 percent and navel oranges increase by 57.5 percent.
Services in Australia make up over 80 percent of our GDP. China is Australia’s largest services market.
In ChAFTA, China offered Australia it’s best-ever services commitments than any other free trade agreement (other than China’s agreements with Hong Kong and Macau).
Most valuably, this includes new or significantly improved market access commitments for Australian banks, insurers, securities and futures companies, law firms and professional services suppliers, education services exporters, as well as health, aged care, construction, manufacturing and telecommunications services businesses in China.
The agreement also includes a Most-Favoured Nation (MFN) clause, under which Australia’s competitive position in services into the future will be protected if China extends any more beneficial treatment to other trade partners in ten specific sectors: education, tourism and travel- related services, construction, engineering, securities, environmental services, services relating to forestry, computer and related services, and certain scientific and consulting services.
Key outcomes include:
Legal services: Guaranteed market access for Australian law firms to establish commercial associations with Chinese law firms in the Shanghai Free Trade Zone (SFTZ) Education services: China has listed 68 additional Australian private higher education institutions registered on the Commonwealth Register of Institutions and Courses for Overseas Students on a key Chinese Ministry of Education overseas study website.
Telecommunications services: Guaranteed market access for Australian-companies investing in specified value-added telecommunications services in the SFTZ, providing greater certainty for Australian telecommunications investments in the SFTZ.
Financial services: China committed to deliver new or improved market access to Australian financial services providers in the banking, insurance, funds management, securities, securitisation and futures sectors.
Tourism and travel-related services: Guaranteed market access for Australian services suppliers to be able to construct, renovate and operate wholly Australian-owned hotels and restaurants in China.
Health and aged care services: Australian service suppliers can establish profit-making aged care institutions throughout China, and wholly Australian-owned hospitals in certain provinces, enabling Australian private health sector’s offerings of medical services through East Asia to expand.
ChAFTA improves opportunities for investors in both countries. China’s commitments on investment in ChAFTA protect the competitive position of Australian businesses in China into the future. Increasing numbers of Australian businesses are entering the Chinese market with great success, with banking and wealth management the leading sector of Australian direct investment in China. At the end of 2017, Australia’s stock of investment in China totalled $77.1 billion.
The investment obligations in ChAFTA can be enforced directly by Australian and Chinese investors through an Investor-State Dispute Settlement (ISDS) mechanism. The ISDS mechanism includes safeguards to protect governments’ ability to regulate in the public interest and pursue legitimate public welfare objectives such as public health, safety and the environment.
Chinese investment in Australia has increased from $6 billion 10 years ago, to around $65 billion at the end of 2017. ChAFTA promotes further growth of Chinese investment into Australia, in particular by liberalising the Foreign Investment Review Board (FIRB) screening threshold for private Chinese investors in non-sensitive sectors from $252 million to $1,094 million. The Government will continue to screen Chinese investments at lower thresholds for agricultural and agribusiness, and in sensitive sectors, including media, telecommunications and defence- related industries.
Moreover, FIRB also continues to screen all direct investments, new business proposals and acquisitions of interests in land (including agricultural land), by Chinese state-owned enterprises, regardless of transaction size. ChAFTA does not change these arrangements in any way, consistent with the Government’s practice in other FTAs.
These huge two-way opportunities between China and Australia must be developed in a collaborative way given the uncertainties within the global trade environment.
The US shift from a broadly collaborative approach with China, since President Nixon opened up relations with China in the 1970’s, has shifted recently and quickly to a more confrontational approach designed to contain China in some way.
Furthermore, the recent escalation in barriers to free trade is an undeniable attack on the traditional global supply chain, and that will not be easily repaired.
In the face of domestic and international challenges, China’s economy is undergoing a rapid structural transition. This is evidenced by exports as a percentage of China’s GDP halving from 36% to 18% since 2007.
Yet despite the trade and tech war we should all be extremely positive about the demographic growth trends, especially within the millennial generation in Asia, led by China.
This millennial category of citizens, born between 1980 and 1994, are today between 24 and 38 years of age and are now entering the middle-income class, especially in China. There are 830 million Asian millennials, including 300 million Chinese millennials, compared to 66 million in the US.
The trends of the Chinese millennials will accelerate the current China to a domestically focused, service-based economy with increasing technology advancements.
And one thing is obvious. These structural adjustments from the lift in nationalistic agendas around the world, led by the US, and from the burgeoning millennials are likely to present some significant opportunities for foreign investors and trades from those countries who choose to continue with an open, innovative and collaborative approach.
Good luck in identifying and acting on these investment and trading opportunities.
It is the Year of the Pig, so I very much hope that this Henan Fair results in greater prosperity for all.
FAST FACTS: ChAFTA
Chinese tariffs eliminated by ChAFTA on imports of Australian agricultural products
- Under ChAFTA, tariffs of 14 to 20 per cent on Australian wine imports are being eliminated by 1 January 2019
- Tariffs of up to 65 per cent on other alcoholic beverages and spirits are being eliminated by 1 January 2019
- Elimination of the 9 per cent tariff on kangaroo hides and skins and the 14 per cent tariff on kangaroo leather by 1 January 2019
- Elimination of tariffs between 5 and 14 per cent on a range of other leather products, either immediately or by 1 January 2019
- Elimination of the 10 to 25 per cent tariff on macadamia nuts, almonds, walnuts, pistachios and all other nuts by 1January 2019
- Elimination of the 10 to 30 per cent tariff on all non-citrus fruit by 1 January 2019
- Elimination of the 10 to 13 per cent tariff on all fresh vegetables by 1 January 2019
- Elimination of the 15 per cent tariff on cotton seeds - exports worth $100 million in 2017 - by 1 January 2019
- Elimination of the 10 per cent tariff on malt and wheat gluten by 1 January 2019
- Elimination of tariffs of up to 7 per cent on pulses by 1 January 2019
- Elimination of the 10 to 14 per cent tariff on abalone by 1 January 2019
- Elimination of the 15 per cent tariff on rock lobster by 1 January 2019
- Elimination of the 12 per cent tariff on southern bluefin tuna, salmon, trout and swordfish by 1 January 2019
- Elimination of the 14 per cent tariff on crabs, oysters, scallops and mussels by 1 January 2019
- Elimination of the up-to-8 per cent tariffs on prawns by 1 January 2019
- Elimination of the 7.5 to 30 per cent tariff on orange juice by 1 January 2022, and elimination of tariffs of up to 30 per cent on other fruit juices by 1 January 2019
- Elimination of the 15 per cent tariff on natural honey, and the up-to-20 per cent tariff on honey-related products, by 1 January 2019
- Elimination of the 15 per cent tariff on pasta by 1 January 2019
- Elimination of the 8 to 10 per cent tariff on chocolate by 1 January 2019
- Elimination of the 15 to 25 per cent tariff on canned tomatoes, peaches, pears and apricots by 1 January 2019
- Elimination of the 15 to 20 per cent tariff on biscuits and cakes by 1 January 2019
- Elimination of all tariffs on live animal exports by 1 January 2019, including the 10 per cent tariff on live cattle (pure-bred breeding cattle already enter China duty free).
- Elimination of the 15 per cent tariff on infant formula by 1 January 2019
- Elimination of the 10 to 19 per cent tariff on ice cream, lactose, casein and milk albumins by 1 January 2019
- Tariffs of up to 20 per cent on pork will be eliminated by 1 January 2019