ASEAN-Australia-New Zealand Free Trade Area (AANZFTA): Australian Guide to Investment Commitments

(This Guide was prepared by Australian Government officials. It does not form part of the Agreement signed by Australian, New Zealand and ASEAN member governments.)

There is a significant difference between two-way trade, and investment flows, between Australia and ASEAN. Whereas Australia’s trade with ASEAN accounts for around 16 per cent of total merchandise and services trade, only 5 per cent of Australian’s direct investment abroad (i.e. direct physical investment in other countries) is held in ASEAN economies. ASEAN investment in Australia also represents only around 4 per cent of the total stock of foreign direct investment in Australia. ASEAN direct investment stocks in Australia were around $14.8 billion at the end of 2007. Singapore accounts for about 51 per cent of total ASEAN investment. ASEAN direct investment in Australia declined sharply between 2001 and 2002, from $16.3 billion to $7 billion, but has increased steadily since 2003.

Australian direct investment in ASEAN was around $16.4 billion at the end of 2007. Direct investment grew only modestly between 2001 and 2005, but rose strongly by 26 per cent between 2005-06 and 67 per cent between 2006-07, driven by strong growth in investment to Singapore and Malaysia. Investments in the region vary widely. In Singapore, for example, the main investments are in information technology, financial services and investment holdings for regional operations. In Vietnam, there are important investments in manufacturing, food and beverages, financial services and education. Australian investors in Malaysia include prominent companies in industrial and infrastructure development as well as education, while in Indonesia, Australian companies have invested principally in mining, beverages and financial services.

The majority of Australian investment in ASEAN takes the form of portfolio investment (e.g. shares) and other investment rather than direct investment. Total Australian investment in ASEAN was around $31.4 billion at the end of 2007. The same is true of ASEAN investment in Australia. Total ASEAN investment in Australia at the end of 2007 was $52.8 billion. Australian investment in ASEAN is also highly concentrated, with Singapore having been the recipient of more than half of Australia’s total investment in ASEAN over recent years.

Against this background, there is clearly scope to deepen the economic relationship between Australia and ASEAN through an expansion of direct investment and to broaden Australian investment across ASEAN. The AANZFTA cannot address all the factors and economic fundamentals that affect investor perceptions and decisions. However, to the extent that improved market access and legal safeguards can be realised in the AANZFTA, the FTA can contribute to improved investor confidence by providing a more certain, liberal and transparent environment for Australian investors.

With regard to market access in non-services sectors (agriculture, mining, forestry, fishing and manufacturing), Australian investors confront a variety of impediments. These include foreign equity restrictions, restrictions on organisational form, and a lack of legislative and regulatory transparency. While these issues may also adversely impact upon investor confidence, additional post-establishment factors such as the potential for expropriation, restrictions on profit repatriation and transfers, and the absence of adequate legal protection in some ASEAN countries erode investor confidence and limit the potential to increase investment across ASEAN.

AANZTA contains a significant regime of legal protections that will enhance certainty and transparency for investors during the post-establishment stages of investment. These obligations are comparable to Australia’s existing bilateral Investment Promotion and Protection Agreements (IPPAs) with four ASEAN countries. These include requirements on Parties to:

There are detailed provisions on investor-state dispute settlement (ISDS) which provide that where an investor alleges that a Party has breached specific obligations (including those mentioned in the previous paragraph) in such a way as to cause loss or damage, and it has not been possible to resolve the dispute by consultations, the dispute may be referred to international arbitration. Investor-state dispute settlement will not apply to investment screening or admission processes.

On market access restrictions (pre-establishment issues), Parties made the assessment that there was insufficient time to complete market access schedules to an appropriate standard within the timeframe of the negotiations. Therefore, AANZFTA provides for a work program to develop market access schedules, covering pre-establishment issues such as foreign equity limits, within five years of entry into force of the Agreement, subject to agreement of the Parties. The assessment was based, in part, on the novelty of the agreed two-annex “negative listing” approach to scheduling for many ASEAN countries. The work program notes, inter alia, that further discussions between the Parties will take place on the application of Most Favoured Nation (MFN) treatment and procedures for the modification of schedules.

Full text of Chapter 11: Investment