Speech to the Committee for Economic Development of Australia

Speech

Speaker: Secretary of the Department of Foreign Affairs and Trade, Mr Peter N Varghese AO

Committee for Economic Development of Australia

10 November 2015

Introduction

Thank you for that introduction, it is indeed a pleasure to be here this morning.

Let me at the outset acknowledge the valuable work of the Committee for Economic Development of Australia.

Few organisations play such an important role in fostering debate about the shape of Australia’s economy or are so effective in shining a light on the pressing contemporary social issues we face today.

Today, I want to talk about how fundamental trade and foreign investment are to our economy, particularly as we move beyond the mining boom years.

Today, all business is global – to be competitive, Australian business must be attuned to, and find ways to navigate within, global networks.

As the Secretary of DFAT I have no higher priority than strengthening Australia’s capacity to advance our interests internationally. The meta challenge we face in our diplomacy is how to maximise our economic interests and minimise our strategic risks at a time of profound change in the regional and global environment.

Trade and investment is an important part of this story and today I will also touch on the role that trade policy plays in underpinning our international competitiveness.

I want to specifically talk about the China-Australia Free Trade Agreement – a landmark FTA that has the potential to underpin Australia’s future prosperity – and I will also touch on the Trans-Pacific Partnership Agreement, concluded just last month.

There has been considerable public debate about ChAFTA and free trade agreements more generally in recent months.

For some – the National Farmers’ Federation, the Minerals Council of Australia – ChAFTA offers significant commercial opportunity.

For others, ChAFTA has been the source of significant disquiet and, perhaps, a proxy for concerns about globalisation.

This diversity of views was reflected in the Senate Joint Standing Committee on Treaties report on ChAFTA, tabled in Canberra just a few weeks ago.

The Committee recommended that ChAFTA be brought into force, however some members dissented, based on objections to the provisions on overseas workers and investment.

So today, I will also take the opportunity to address some common misunderstandings about ChAFTA.

Australia a trading nation

Without a deep domestic market, but endowed with abundant natural resources and a competitive agricultural sector, Australia has always depended on trade and foreign investment to grow its economy.

In the first half of the twentieth century, our trade policy existed within an imperial framework – our ties with Britain and the Empire were paramount.

Following the Second World War, Australia became more alert to trade opportunities closer to home, particularly in Asia.

In the 1980s, we began to see and accept our future in global markets.

Since then, trade liberalisation has been at the heart of broader Australian Government economic reform, increasing productivity, stimulating growth and making the economy more flexible and dynamic.

Today, Australia has a very open market with minimal restrictions on imports of goods and services.  

As a country with global trade and investment interests, we are best served by a rules-based international trading system with effective multilateral rule-making and enforcement functions at its core.

That’s why the World Trade Organization remains enormously important – the universal application of its rules among all 161 members makes life simpler for business and maximises the returns of trade liberalisation.

However, there is no denying that global multilateral trade negotiations are under enormous pressures.

After 14 years of negotiations, consensus on a comprehensive Doha Round outcome is not achievable in its current form.

The membership is deeply polarised.

This is disappointing, but Australia – working closely with key countries, such as 2016 G20 Chair China – needs to find new ways to advance the global trade agenda.

Australia’s view is that the WTO’s negotiating architecture needs to be more flexible so that countries wanting to move ahead on specific issues can do so.

This is a challenging idea for some countries but if the current impasse continues, there is a real risk of long term damage to the WTO.

In the meantime, Australia’s trade policy choices must reflect an assessment of how best to pursue and advance our national interests.

We cannot afford to stand apart from undertaking bilateral, regional or plurilateral trade deals. We cannot allow the best to be the enemy of the good.

To not participate would carry with it a significant potential opportunity cost, as Australian businesses’ international competitive position erodes.

Existing Australian export markets, and the businesses that supply them, would face major competitive threats, with the potential for significant adverse impacts.

Breaking into new or growing markets would be much more difficult.

Australia must pursue deals that give business the ability to retain, develop and expand international opportunities and generate new commercial openings.

That’s why the Australian Government has an ambitious FTA agenda. Indeed there is no period in Australia’s trade history when we have been more active on the FTA front than now.

Our first modern bilateral FTA with New Zealand entered into force in 1983.

We waited another 20 years for our second – our FTA with Singapore entered into force in 2003.

Since then, we have secured bilateral FTAs with a further six countries –Thailand, the United States, Chile, Malaysia, Korea and Japan.

Together with NZ, we signed an FTA with ASEAN in 2009 – our first large regional FTA.

In June, Australia and China signed an FTA, which is before the Parliament for consideration.

And, just last month, we concluded the Trans-Pacific Partnership negotiations.

The TPP will deliver enormous benefits to Australia – it will establish a more seamless trade and investment environment across the 12 countries that represent almost 40 per cent of global GDP.

It will eliminate most agricultural and other tariffs and many non-tariff barriers, liberalise services trade, improve the efficiency of customs procedures and set strong intellectual property standards.

And as a regional FTA, the TPP will support our exporters to tap into global value chains – its provisions on e-commerce and the digital economy and small to medium enterprises set it apart as the gold standard of modern FTAs.

Australia’s pursuit of FTAs is by no means a lone endeavour – from a grand total of 70 Free Trade Agreements in 1990, the number of FTAs signed worldwide has now risen to around 450.

So while we would much prefer to see progress in the multilateral arena, Australia has been confronted with a situation where we have had to adopt an active approach to the pursuit of FTAs.

Our highest FTA negotiating priorities in the period ahead include a Comprehensive Economic Cooperation Agreement with India, the 16-country Regional Comprehensive Economic Partnership (RCEP) and the launch of negotiations with the EU.

FTAs foster freer trade flows and create stronger ties with trading partners.

In all Australia’s FTAs, we have committed to remove all Australian import tariffs in relatively short periods of time.

As such, the FTAs are in effect paving the way for the final removal of almost all remaining tariffs in all sectors in Australia – a key outcome on the economic reform agenda.

And FTAs don’t just eliminate tariffs.

They also address behind-the-border barriers that impede the flow of goods and services between parties, encourage investment, enhance cooperation, and can address other important issues, such as intellectual property, e-commerce and government procurement.

FTAs can increase Australia’s productivity and contribute to higher GDP growth by allowing domestic businesses access to cheaper inputs, introducing new technologies, and fostering competition and innovation.

FTAs promote regional economic integration and build shared approaches to trade and investment, through in-built agendas that encourage ongoing domestic reform and trade liberalisation.

As Trade and Investment Minister Andrew Robb has said, we also see our FTAs – high quality, ambitious, comprehensive instruments – as building blocks for a stronger and more effective global trading environment.

Rise of China

In the 21st century, Australia and China are natural FTA partners.

Over the past few decades, China has undergone an economic transformation which has had no parallel in history.

In 1990, China contributed just 2 per cent to global GDP – today it contributes 15 per cent.

The Economist reported last month that the number of countries for which the US is the biggest export market has dropped from 44 in 1994 to 32 now.

Over the same period, the equivalent figure for China has risen from two to 43.

Today, China is transitioning towards more market-based and consumption-driven growth. It is an ambitious transition made all the more so by China’s determination that a more market-based economy will not come at the cost of weakening the monopoly on power of the Chinese Communist Party.

If we are to take full advantage of the changes underway in China, we must do all we can now to further integrate our economies and foster growth in two-way trade and investment.

We should not forget that Australia is not the only country seeking to establish preferential economic arrangements with China.

Competition in the Chinese market is intense – it has been for years and will only increase in the years ahead, even with slower growth in the Chinese economy

New Zealand signed an FTA with China seven years ago, and its economy has benefitted ever since.

In 2008, New Zealand goods and services exports to China were worth around NZD3 billion.

Four years later, they were worth around NZD8 billion.

Today, New Zealand exports to China are worth nearly NZD12 billion – a close to fourfold increase in seven years off the back of an FTA.

Given that the New Zealand-China FTA won’t be fully implemented until 2019, further growth is likely in the years ahead.

This and another nine FTAs that China has negotiated with trading partners have given some of our competitors the inside running to expand their position in this pivotal market.

ChAFTA outcomes

ChAFTA is a remarkably good deal for Australia and the best deal that China has done with any partner to date.

First thing’s first: overall, it’s a better deal than what New Zealand was able to achieve.

On services and investment, it is a significantly better deal.

ChAFTA will give Australian firms and exporters better access to the Chinese economy, improve our competitive position, promote prospects for increased two-way investment and reduce costs for imports – for Australian businesses and consumers alike.

Given the public debate about ChAFTA, it’s worth exploring in some detail which parts of the Australian economy will benefit the most.

ChAFTA will make a real difference to the livelihoods of Australian farmers and producers.

In the years ahead, China is expected to account for nearly half of global growth in food demand.

Australia, with a reputation for high-quality, safe and sustainable food production, is well placed to help meet this demand.

ChAFTA will remove significant barriers to Australian agricultural exports to China.

Under the agreement, dairy, beef, lamb, wine, hides and skins, horticulture, barley and seafood will all enter China at lower or zero tariff rates.

In 2014, our resources and energy exports to China were worth about $80 billion – twice as much as Japan, in second spot.

Under ChAFTA, 99.9 per cent of Australia’s resources, energy and manufacturing exports will enter China duty-free within four years.

For Australian consumers, the final remaining import tariffs on Chinese manufactured goods, including furniture, fridges, toys and power tools, will be eliminated on entry into force.

Some tariffs in sensitive sectors, including textiles, clothing and footwear, will be progressively eliminated to allow industry to adjust.

ChAFTA is a truly modern free trade agreement for its treatment of trade in services.

Already China is Australia’s largest services export market, worth $8.2 billion in 2014 – ChAFTA will support further growth.

Under ChAFTA, China has made significant new commitments in many sectors of interest to Australia.

Australian law firms will now be able to operate with Chinese law firms in the Shanghai Free Trade Zone, allowing them to offer integrated Australian, Chinese and international legal services.

The profile of Australian higher education providers among Chinese students and employers will lift.

Within one year of entry into force of the FTA, China will list an additional 77 Australian private higher education institutions on a key Chinese Ministry of Education website.

This website is intended to provide Chinese students and employers with guidance on quality and fraud assurance issues for assessing their choice of institution – this was an outcome keenly sought by Australian private higher education providers.

In addition to current commitments, China has committed to extend to Australia any better outcomes provided to others in the future in ten key services sectors.

This includes environmental services, construction and engineering services, forestry-related services, computer and related services, tourism and travel, scientific and technical consulting, education and financial securities services.

ChAFTA also includes a framework to advance mutual recognition of services qualifications and to support mutual recognition initiatives by professional bodies in Australia and China.

On investment, China will further open its economy to Australian investors and encourage greater and more diverse Chinese investment into Australia.

China will join the US, New Zealand, Korea, Japan and Chile and receive the highest screening threshold Australia provides private foreign investors in non-sensitive sectors.

Australia has retained flexibility to screen proposed investments at lower levels in agriculture and agribusiness, and in sensitive sectors, including urban land, the media, telecommunications and defence-related industries.

Under ChAFTA, our screening of investment proposals by Chinese state-owned enterprises also remains unchanged.

China’s investment laws and regulations are modernising as quickly as the country itself.

That’s why it’s such a coup that, on investment, China has agreed to automatically provide to Australia the same treatment given to future investment agreement partners.

Given that China is actively pursuing investment treaties with the US and the European Union, this puts Australia in an enviable position.

ChAFTA misconceptions

FTAs are complex legal documents. ChAFTA runs to over 1000 pages.

Despite our best efforts to make them business-friendly, FTAs are notoriously difficult to decipher.

That opens the door to conjecture and misinterpretation.

A number of commentators have claimed that ChAFTA will allow unrestricted access for Chinese business people and workers to Australia.

That’s not correct.

ChAFTA will not undermine Australian labour laws, conditions or wages.

Nor is it inconsistent with Australia’s existing immigration policy.

Australia and China have made commitments on the temporary movement of persons – in essence, visas for businesspeople and service providers.

These two-way commitments will support the more predictable movement of goods, services and capital between our two economies, deepening economic integration and transforming how Australia and China do business.

Australia has also agreed that Chinese companies registered here and making large investments in infrastructure projects in Australia can be assured of access to skilled overseas workers throughout the project.

But those companies cannot do so without advertising and looking for suitable Australian workers first.

In other words, if a company working on an infrastructure project cannot find a suitably qualified Australian and has shown they have made a significant effort to do so, it can, with the approval of the Department of Immigration and Border Protection, bring in Chinese or other foreign workers to fill that gap.

ChAFTA also contains provisions covering visas for four highly specialised occupations: Chinese chefs, martial arts coaches, traditional Chinese Medicine practitioners and Mandarin language tutors.

Under ChAFTA, Chinese tradespeople will not be allowed to work in Australia without any skills assessment.

ChAFTA will simply bring into line the visa application and skills assessment processes for China with those applied to the vast majority of other trading partners.

Chinese visa applicants will, without exception, continue to have to show they possess the right skills, qualifications and experience to work in Australia. They also will continue to have to  meet all existing licensing and regulatory requirements.

I now want to turn to the Investor-State Dispute Settlement provisions, about which there seems to be a fundamental misunderstanding.

These provisions, an important part of ChAFTA’s chapter on investment, do not allow Chinese companies to sue the Australian Government simply because they make a loss on investments – we would never agree to that.

Rather, they establish a mechanism that will give Australian or Chinese investors an option to pursue international arbitration in circumstances where the investor or investment is subjected to discriminatory treatment, compared to local companies.

This mechanism is subject to explicit safeguards that protect the right of Australian governments to regulate in the public interest, including in the areas of health and the environment.

Conclusion

When you consider ChAFTA alongside our FTAs with Japan and Korea and the TPP, it is apparent that the past two years has been an extraordinary period of achievement in Australian trade negotiations.

Modelling by the Centre for International Economics shows that the Korea, Japan and China FTAs are forecast to be worth a combined $24.4 billion in total additional income to Australia between 2016 and 2035.

By 2035, Australia’s exports to these three markets are forecast to be 11 per cent higher than they would be if Australia had not secured these deals.

Ladies and gentlemen, freer trade brings with it immense benefits for the Australian economy.

It stimulates economic activity and creates jobs and opens the global market for Australian products.

Access to global markets makes businesses more competitive and means they are more likely to embrace innovation and make the most of new technologies.

China is Australia’s number one trading partner.

Its growth may now be slowing but its economy will remain of central importance to Australia.

ChAFTA is a once-in-a-generation opportunity for Australia – we should be doing all we can do seize it.

Thank you.


Last Updated: 10 November 2015
Peter Varghese AO, Secretary, Department of Foreign Affairs and Trade