Developments in Australia's bilateral and regional trading arrangements
by Michael Mugliston, Head, Asia Trade Task Force, Department of Foreign Affairs and Trade
1 March 2006
Paper submitted to the ABARE Outlook Conference, 2006
Progressing liberalisation of trade and investment conditions remains the primary focus of Australia's trade diplomacy and is vigorously pursued at all levels, including through multilateral, regional and bilateral trade negotiations.
Australia's Free Trade Agreement (FTA) agenda is focussed on engaging key trading partners in negotiations on trade and trade-related instruments to deliver concrete outcomes in realistic timeframes. Australia's four existing FTAs (with New Zealand, Singapore, the United States and Thailand) cover 24 per cent of its current two-way trade in goods and services. FTAs with Australia's current negotiating partners (the countries of the Association of Southeast Asian Nations (ASEAN) and New Zealand (as a group), China, Malaysia and the United Arab Emirates) will provide coverage for a further 19 per cent of total two-way trade. Each of these negotiations is managed within a coherent, whole-of-government framework designed to maximise gains for Australian exporters and the community more broadly.
The World Trade Organization (WTO) Doha Round negotiations represent the greatest opportunity for Australia to increase access to overseas markets and improve the competitiveness of Australian exports. Achieving a substantial outcome from these negotiations remains Australia's top trade priority. However, the simultaneous pursuit of Australia's WTO and FTA agendas is mutually reinforcing. By delivering access gains faster to key markets, comprehensive trade-creating bilateral and regional trade agreements can act as building blocks for WTO liberalisation. At the same time, WTO rules and commitments provide a firm basis for the freeing of trade at the bilateral and regional levels. FTAs, through their coverage of non-WTO provisions such as investment and competition policy, can further facilitate trade in goods and services by contributing to the stability, predictability and transparency of the business environment.
The benefits derived by the Australian economy from international trade and investment are considerable. Extensive two-way trade and investment, including with countries in the region, have contributed to Australia's strong economic growth and international competitiveness over the past decade. In 2005, the value of total trade in goods and services reached $373 billion - an increase of nearly 12 per cent over the previous year. Australian foreign direct investment (FDI) abroad also increased significantly over the past decade, while at the same time the economy continued to attract inward FDI. In December 2004, the stock of inward FDI in Australia and Australian outward FDI stood at $343 billion and $254 billion respectively.
East Asia and the development of FTA agendas
The global spread of FTAs and preferential trade agreements gained pace in the mid-1990s and accelerated following the failure at Seattle in 1999 to launch a new round of multilateral trade negotiations. A February 2005 WTO1 report noted that around 300 preferential agreements had been notified between 1948 and October 2004, although many agreements were no longer in force. Remarkably, more than half of these agreements - nearly 180 - had been notified after January 1995. As at July 2005, only one WTO member (Mongolia) was not a party to a regional trade agreement. The report estimated that some 300 agreements could be in force by the end of 2007. This estimate would appear to be quite conservative given the increasing trend in the number of negotiations on FTAs and preferential agreements involving countries in East and South-East Asia.
The expansion of FTA activity in recent years has been accompanied by growing acceptance within the global trading community that comprehensive FTAs have the capacity to deliver deeper, faster and broader liberalisation than the multilateral system. While there are concerns that the increase of FTA activity could divert attention from the Doha Round, this is balanced by a recognition that liberalisation in a bilateral and regional context has also often proved to be a stepping stone to multilateral liberalisation.
Since the late 1990s, East Asia has actively sought to negotiate free trade agreements, including with countries outside the region. Described as the "new Asia Pacific regionalism" or "new bilateralism", the simultaneous move by countries to negotiate FTAs, or to position themselves to negotiate, has been influenced by a complex set of dynamics. At the same time as ASEAN is seeking to accelerate its own liberalisation under the ASEAN Free Trade Area, it is also negotiating commitments on a regional basis with Australia-New Zealand, China, India, Japan and South Korea. The pursuit of bilateral agreements by individual ASEAN members - especially Singapore and Thailand -has also been an important factor motivating other ASEAN countries, such as Malaysia, to pursue their own bilateral FTAs.
Economic and strategic interest in the markets of South-East Asia has moved China, Japan and South Korea to enter FTA negotiations with ASEAN. For Japan (as well as South Korea) the decision to participate in FTAs, including with ASEAN countries, has entailed a shift of long-held policy. The United States has also retained FTA options with countries in the region. Although it has only concluded one FTA with an ASEAN country (with Singapore) and is currently negotiating one other (with Thailand), the groundwork for future agreements is established in its Enterprise for ASEAN Initiative. A meeting of ASEAN-APEC leaders and the President of the United States in the margins of the 2005 APEC Economic Leaders' Meeting also produced agreement to launch an "Enhanced Partnership", underlining the United States' commitment to South-East Asia. The United States also announced the launch of US-South Korea FTA negotiations on 2 February 2006.
Developments in Australia's FTA agenda
Australia's bilateral and regional trade agenda is ambitious and involves the pursuit of trade liberalisation objectives not immediately available through the multilateral system. It recognises the significant distortions that remain in the global trading environment, particularly in the agriculture sector.
The Australian Government examines FTA proposals against clear criteria. An agreement must be comprehensive in scope and coverage. It must be consistent with WTO rules and principles and contain very liberal bindings on tariffs, other market access barriers and services trade. It must always be WTO-plus in its level of commitments. It must deliver improved market access opportunities for Australian business in key export markets and address the variety of measures designed to facilitate trade, including in areas where WTO rules are either non-existent or less developed (for example, on investment and competition policy). These benefits must be delivered to Australia in a timeframe that would not be possible at the multilateral level. Account is also taken of Australia's broader trade and foreign policy objectives.
Australia's approach to negotiating FTAs is consistent with WTO rules which permit FTAs under certain conditions to ensure that they are genuinely liberalising and will not undermine the multilateral trading system. Australia has been an active participant in WTO negotiations aimed at clarifying and improving disciplines and procedures applying to regional trade agreements.
Current status of Australia's FTA negotiating agenda
Australia's bilateral and regional trade negotiating agenda is ambitious. Since the end of 2004, the Government has launched negotiations on new FTAs with ASEAN and New Zealand (as a group), and bilaterally with China, Malaysia and the United Arab Emirates. These negotiations involve a major resource commitment and the Department of Foreign Affairs and Trade (DFAT) has dedicated additional resources to lead and coordinate the negotiations. In addition to these current FTA negotiations, Australia is conducting a FTA feasibility study with Japan to consider options to deepen economic linkages, including through a possible bilateral FTA.
Australia's approach on FTAs is informed by extensive domestic consultations2 as well as our experience in negotiating multilateral commitments and our four existing agreements.
The 1983 Australia-New Zealand Closer Economic Relations Trade Agreement - usually known as CER - is regarded as one of the world's most open and successful trade agreements and has resulted in a high degree of integration of the two economies. The agreement covers all trans-Tasman trade in goods and most services and is supported by a web of bilateral arrangements. The Agreement is being updated with new Rules of Origin provisions based on a Change of Tariff Classification approach, which both countries are aiming to implement from 1 January 2007.
Entering into force in 2003, the Singapore-Australia FTA (SAFTA) secured outcomes for Australia that go beyond the WTO in relation to trade in services, intellectual property, investment and competition policy. The agreement eliminated all tariffs from entry into force.
The two most recently concluded bilateral FTAs - with Thailand and the United States - came into force on 1 January 2005.
The Australia-United States FTA (AUSFTA) provides access to the world's largest economy, and the most dynamic and technologically advanced of the major developed economies. From day one of implementation, the agreement made duty-free 97 per cent of Australia's non-agricultural exports to the United States, and 66 per cent of agricultural tariff lines, with almost all tariffs going to zero over a transition period - the exception being sugar and some dairy products (with dairy products getting improved tariff quota access). Australia will eliminate all its tariffs by 2015. The AUSFTA gives Australian industry access to the government procurement markets of 31 states in addition to the United States' federal government procurement market, worth in excess of $200 billion. As with Australia's other FTAs, the AUSFTA contains built-in review provisions to facilitate implementation of the commitments made by the parties. For example, the Agreement establishes a Working Group on Professional Services which aims to promote the mutual recognition of professional qualifications. The first review of AUSFTA will be conducted by the Joint Committee, co-chaired by the Minister for Trade and the United States Trade Representative, which is expected to meet in Washington in March 2006. The Joint Committee will review the operation of the AUSFTA against its objectives and consider ways to further enhance trade relations between Australia and the United States.
On entry into force of the Thailand-Australia FTA (TAFTA), more than half of Thailand's tariffs - accounting for nearly 80 per cent of Australia's exports to Thailand - were eliminated. Of these, only 206 items were previously duty free. An additional 41 per cent of Thai tariffs will be phased to zero by 2010. All remaining tariffs, including tariff rate quotas, will be eliminated by 2015 or 2020, with the exception of skim milk powder and liquid milk and cream, for which the tariff rate quotas will be reduced to zero in 2025. Australia will eliminate all its tariffs by 2015. The first review of TAFTA, including its built-in provisions, was held in December 2005 and agreement reached to progress negotiations on services, investment, competition policy and business mobility.
Outlook for Australia's current FTA negotiations
On 30 November 2004, the Prime Minister and his counterparts from the 10 countries of ASEAN and New Zealand agreed to launch negotiations based on a comprehensive set of Guiding Principles3. The Guiding Principles underscore Australia's ambition for a high-quality FTA. They commit the countries to negotiate an agreement that covers trade in goods and services, as well as investment, the progressive elimination of all forms of barriers to trade, and full implementation within 10 years.
An Australia-ASEAN-New Zealand FTA holds the prospect of substantial economic benefits for the region and would build on the strong network of economic, commercial and financial links that exist between the 12 countries. Counted as a single market, ASEAN (11.4 per cent) ranks below Japan (20.4 per cent) and China (11.6 per cent) - and above the European Union (10.7 per cent), South Korea (7.9 per cent), the United States (6.7 per cent) and New Zealand (6.5 per cent) - as a destination for Australia's merchandise exports. In 2005, two-way merchandise trade with ASEAN increased 19 per cent, exceeding $43.9 billion. Together, Singapore, Malaysia, Thailand and Indonesia account for around 85 per cent of Australia's total goods and services trade with ASEAN.
Since commencing negotiations in March 2005, negotiators have engaged in wide-ranging information exchange on each country's trade and investment regimes. Substantive discussions have also taken place on the modalities for tariff elimination, rules of origin, services, investment and dispute settlement. Australia has invested considerable resources in helping to improve understanding of the commitments required from the ASEAN countries to produce a good outcome from the negotiations. Nevertheless, negotiations between 12 countries present significant challenges. The region is marked by diverse interests and levels of ambition and countries are at different stages of development with varying capacities to negotiate across the full range of trade-related issues. Securing binding commitment to comprehensive liberalisation will be one of the keys to the successful conclusion of the negotiations, and also the biggest challenge.
Australia and China agreed to launch FTA negotiations during the Prime Minister's visit to China in April 20054. A comprehensive FTA with Australia' second largest market for merchandise exports - and Australia's fastest growing major export market - will offer substantial commercial benefits to Australian exporters.
China's economic expansion is immense. Economic growth has averaged 9 per cent over the past decade, with China now accounting for a quarter of total world growth. It has replaced the United States as the world's biggest consumer of a number of products of interest to Australia, including wheat, meat, wool, coal, steel, iron-ore, copper, zinc and aluminium. Confidence in the Chinese economy also remains high with Standard and Poor's recently upgrading its country credit rating from BBB+ to A-.
Australia's FTA strategy with China is driven by the goal of broadening trade and investment and improving market access for a wider range of exports, including agrifoods and services. Key products of interest to Australia - such as sugar and dairy - face significant tariff barriers in entering the Chinese market. For agricultural products, China's average tariff exceeds 15 per cent compared to its overall average tariff level of less than 10 per cent. In addition to addressing tariffs and tariff rate quotas, an FTA would contain provisions to facilitate trade including in relation to customs matters and "behind the border" measures, such as the protection of intellectual property rights, investment conditions and transparency.
Australia's ability to export a broad range of services to China is another key area of interest in the negotiations. Australian firms have noted difficulties in repatriating profits and restrictions on commercial activities that can be undertaken. Restrictions on the employment of Chinese nationals and foreign nationals have also been identified as constraints on the operation of Australian firms in China.
The Prime Ministers of Australia and Malaysia agreed in April 2005 to launch negotiations on a bilateral FTA. The announcement followed the release of an Australian Scoping Study5 which concluded that an FTA would deliver significant benefits to both countries. An agreement with Malaysia - Australia's second largest trading partner in ASEAN and ninth overall - is conservatively estimated to increase Australia's GDP by $1.9 billion over 20 years, in net present value terms. While Malaysian tariffs are low in many areas, there are still a range of high tariffs. Furthermore, the FTA offers the opportunity to enhance cooperation to address non-tariff measures and to improve access to Malaysia's growing services market, as well as strengthening two-way investment flows.
The services sector in Malaysia is a significant part of its economy and represents around 57 per cent of GDP. Reflecting Australia's sophisticated and competitive services sector, a key interest in its FTA negotiations with Malaysia is to secure better access for Australian services exporters, particularly in relation to commercial presence. As in the WTO Doha Round negotiations, Australia is ready to make comprehensive commitments in this area subject to satisfactory offers from its negotiating partners. Australia is seeking commitments from Malaysia that will open this important market to greater levels of foreign participation.
Following the first round of FTA negotiations, Minister Rafidah and Minister Vaile met in Kuala Lumpur in August and underlined their commitment to a comprehensive, high-quality agreement that would bring benefits to both countries. The priority remains for Australia to secure a good agreement within a reasonable timeframe.
Australia-United Arab Emirates (UAE)
In March 2005, the Trade Minister, Mr Vaile, and the UAE's Economy and Planning Minister, Sheikha Lubna Al Qassimi, announced that negotiations on an FTA would commence. The UAE is a modern and diversified economy and an important and growing hub for services in the Middle East region. The well-developed regional trade networks established in the UAE also make it an important springboard into wider Gulf markets.
In 2005, Australian exports of passenger motor vehicles and car parts to the UAE were valued at over $260 million and agrifood exports reached nearly $230 million. A Report on the Australia-United Arab Emirates Free Trade Agreement6 identified commercial opportunities for Australia in food and wine for gourmet food outlets, hospitality and tourism, architectural services, health care facilities and health services and education services.
Maintaining Australia's competitive edge in the global trading system requires the pursuit of liberalising opportunities on all fronts, including through multilateral, regional and bilateral negotiations.
FTAs have the potential to secure improved access for exporters in key markets by reducing and eliminating tariff and non-tariff barriers to trade. They can boost investment, output and employment, including through the development of new technologies and establishment of joint ventures. FTAs can also reduce the cost of imported raw materials and capital equipment provided from partner economies and help to sharpen competition in the domestic market. FTAs also have the potential to raise the profile of each party as a trade and investment partner of the other.
FTAs are living documents that are designed to evolve and expand as the trade relationship grows. Business also needs to adjust its own operations to take advantage of the opportunities which closer engagement with trading partners presents. While FTAs can facilitate trade and improve access, it is up to business to take advantage of these opportunities.
Reference: Outlook 2006