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With the monumental ChAFTA currently being discussed, Feng Guo outlines what Australia has to lose and gain out of the deal.
In the media, there has been a large amount of outcry and public protest (from unions especially) in response to the passing of the China-Australia Free Trade Agreement (or ChAFTA for short); but it is important to dispel the myths surrounding the perceived losses, in order to understand what we could potentially gain through the agreement.
Under ChAFTA, any Chinese company with a project worth more than $150 million in Australia will be able to bring its own workforce to undertake the development. Another concern raised is that labour market testing is not required on these projects. Chapter 10 does not cap the number of temporary work visas given to Chinese people with “trade, technical or professional skills and experience.” The underlying concern seems to be this fear that companies will begin to sideline Australian workers and instead give them to overseas workers.
Negotiations for a free trade agreement with China commenced under the Howard Government in 2005 and languished between 2007 and 2013. Recently, on November 2014 the Minister for Trade and Investment Andrew Robb and his counterpart, Chinese Commerce Minister Gao Hucheng signed a Declaration of Intent in the presence of Australian Prime Minister Tony Abbott and Chinese President Xi Jinping at Parliament House in Canberra.
Whilst the agreement has not yet been ratified, the Joint Standing Committee on Treaties is holding hearings across Australia over these next few weeks to examine the positive and negative aspects of ChAFTA.
Perhaps the most significant consequence of entering into the ChAFTA, is that more than 85 per cent of Australian goods exports will be tariff free upon entry into force. (Rising to 93 per cent in four years). Some of these goods are currently subject to tariffs of up to 40 per cent. Upon full implementation of ChAFTA, 95 per cent of Australian goods exports to China will be tariff free.
The ChAFTA will eliminate tariffs of up to 20 per cent on dairy exports within 11 years, eliminating the 12 to 15 per cent tariff on beef over 9 years and the 14 to 20 per cent tariff on wine over 4 years and give Australia an extra duty-free quota for wool.
Tariffs will also be removed on a range of Australian resources and energy products, including the 8 per cent tariff on aluminium oxide on the first day of the Agreement, benefitting our exports worth around $1.3 billion a year. Tariffs on coking coal will be removed on day one, with the tariff on thermal coal phasing out over 2 years as well as tariffs being eliminated on pharmaceutical products and car engines.
ChAFTA will improve opportunities for investors in both countries by protecting the competitive position of Australian businesses in China. It will lock in existing trade and provide a catalyst for future growth across a range of areas including goods, services and investments. It will provide better market access for Australia to the world’s second largest economy, improve our competitive position in a rapidly growing market, all while promoting increased two-way investment and reduce import costs.
Together with the trifecta of trade agreements with Australia’s top three export markets China, Japan and Korea, the ChAFTA accounts for more than 55 per cent of our total goods and services exports.
Once Australian tariffs on Chinese imports have been progressively removed, Australian households and businesses will also reap the benefits of cheaper goods and components from China such as vehicles, household goods, electronics and clothing, thereby placing downward pressure on the cost of living and the cost of doing business.
A key concern is that the proposed ChAFTA benefits Chinese more than Australian investors. The Australian Fair Trade and Investment Network has found that although firms with Chinese ownership can bring in an unlimited number of temporary Chinese nationals to work in Australia, there is no provision for Australian firms to bring in Australian workers. Australian firms are limited to importing senior managers and specifically skilled workers.
Moreover, where Australia is subject to a general provision preventing discrimination against Chinese investment, China does not have this general provision. China is only required to discriminate against investments in the particular sectors of transport, tourism, hospital, aged care, education and financial services.
The ChAFTA will contain an Investor State Dispute Settlement (ISDS) mechanism as a safeguard that allows Chinese companies to appeal to an extraterritorial tribunal if they believe that they have been subjected to discriminatory treatment. Australian companies gain reciprocal rights to appeal against Chinese government decisions. The mechanism contains safeguards that protect the Australian Government’s ability to regulate in the national interest. Through that mechanism is the Australian government’s power to screen Chinese investments at lower thresholds for agricultural land and agribusiness, as well as sensitive sectors including media, telecommunications and defence-related industries.
In terms of practical operation, an ISDS claim can only be brought on the basis of a breach of either party’s obligation to provide nondiscriminatory treatment to established investments of the other party. Government decisions on investment proposals such as those considered by Australia’s Foreign Investment Review Board cannot be challenged using the ISDS mechanism.
On a larger scale, the ISDS mechanisms are mostly used in bilateral investment treaties such as ChAFTA, which are designed to encourage investors of one country to engage in foreign investment in another.
It enables investors in one state to be able to commence arbitration against another state party where they have breached investment protection obligations. It is effective in that it provides Australian investors with the ability to enforce investment obligations contained in the agreement, and to partly mitigate any sovereign and political risk associated with investing in China.
Risks associated with the ISDS
In spite of the perceived advantages, the ISDS mechanism is also subject to a number of criticisms. First, it could be seen to erode sovereignty in key areas; states are bound to their obligations and the risk of public interest carve-outs could become commonplace. There are also not many ways for aggrieved investors to hold states accountable for breaches under the ChAFTA.
Moreover, the ISDS mechanism lacks democratic legitimacy because there is no public involvement, and only elite stakeholders have the power to determine proceedings. To counter this point, the lack of election does not make tribunals inherently unaccountable, especially since there is a movement towards greater transparency in investment arbitration. Moreover, third parties are able to file amicus curiae submissions to the tribunal in relation to matters falling within the scope of the dispute.
There is also a lack of definition for terms such as indirect expropriation or fair and equitable treatment for foreign investors.
This is important, because these are the provisions that foreign investors would use to make a claim under the ChAFTA. The related fear is that foreign investors can bring a claim against the state hosting the investment, which may sometimes have the effect of conferring greater legal rights on foreign investors versus local businesses.
Australia’s High Court Chief Justice French has noted that under the ISDS mechanism, the tribunal is not independent or impartial because the tribunal has no independent judiciary and arbitrators are chosen from a pool of investment law experts. The implication is that such arbitrators can continue to practice as corporate advocates without a system of precedents or appeals, so the decisions of arbitrators are final. And possibly inconsistent.
ISDS claims are allegedly expensive to defend, but it is equally costly to pursue such claims. The reality is that arbitration is usually a measure of last resort in order to protect valuable investments, and this is also the reason why it is necessary to have such a mechanism in place in ChAFTA. Without it, Australian investors would be left with local judicial systems to defend their investments, which is an undesirable predicament as they might be the subject of discriminatory treatment.
There are many reasons why it is essential that the ChAFTA is ratified this year. It will support increased trade and investment between the two countries by reducing barriers to labour mobility and improve temporary entry access within the context of each country’s existing immigration and employment frameworks and safeguards. It will provide improved access for a range of Australian and Chinese skilled service providers, investors and business visitors, support investment and provide business with greater certainty. It will enhance our vital trade and investment relationships in the region, create jobs, and assist the process of reform and foster greater prosperity in the Asian Pacific economy. The sooner it is passed, the better.
Feng Guo is a commercial litigator with Thomson Geer Lawyers.