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Customs Amendment (Korea-Australia Free Trade Agreement Implementation) Bill 2014 [and] Customs Tariff Amendment (Korea-Australia Free Trade Agreement Implementation) Bill 2014



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ISSN 1328-8091

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BILLS DIGEST NO. 31, 2014-15 30 SEPTEMBER 2014

Customs Amendment (Korea-Australia Free Trade Agreement Implementation) Bill 2014 [and] Customs Tariff Amendment (Korea-Australia Free Trade Agreement Implementation) Bill 2014 Juli Tomaras Law and Bills Digest Section

Tarek Dale Economics Section

Contents

Purpose of the Bill ............................................................... 4

Structure of the Bills ............................................................ 4

Parliament’s role in treaty negotiations and ratification ....... 4

Background ......................................................................... 5

Australian and international trade policy ................................ 5

Free trade agreements ............................................................ 5

What is a free trade agreement? .......................................... 5

Free trade agreements and diplomatic relations .................. 6

Consultation .......................................................................... 6

Estimating the economic benefits of free trade agreements .............................................................................. 6

Committee consideration .................................................... 7

Joint Standing Committee on Treaties (JSCOT) ..................... 7

Senate Foreign Affairs, Defence and Trade References Committee ............................................................................. 8

Senate Legal and Constitutional Affairs Legislation Committee ............................................................................. 8

Policy position of non-government parties/independents ..... 9

Position of major interest groups ....................................... 10

Agricultural producers ........................................................... 10

Trade unions .......................................................................... 12

Date introduced: 4 September 2014

House: House of Representatives

Portfolio: Immigration and Border Protection

Commencement: The operative provisions of both Bills will commence from the later of 1 December 2014 and the day on which the KAFTA comes into force for Australia. Both Australia and Korea are currently aiming for entry into force before the end of 2014.

Links: The links to the Bills, their Explanatory Memoranda and second reading speeches can be found on the Bills’ home pages for the Customs Amendment (Korea-Australia Free Trade Agreement Implementation) Bill 2014 and the Customs Tariff Amendment (Korea-Australia Free Trade Agreement Implementation) Bill 2014, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website.

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Industry organisations ........................................................... 12

Professional bodies ................................................................ 14

Community organisations...................................................... 14

Financial implications ........................................................ 15

Statement of Compatibility with Human Rights .................. 15

Key issues ......................................................................... 15

Implementing legislation and the KAFTA .............................. 15

The Korea-Australia Free Trade Agreement .......................... 16

Background .......................................................................... 16

Korea’s economy and trade with Korea .............................. 17

Tariff reductions .................................................................. 17

‘Sensitive’ products ........................................................... 19

Timing concerns ................................................................ 19

Economic gains under KAFTA .............................................. 20

Benefits to agricultural producers..................................... 20

Impact on the manufacturing sector ................................ 20

Rules of origin and complexity with multiple FTAs ............. 21

Investment .......................................................................... 21

Movement of natural persons provisions ........................... 21

Services ................................................................................ 21

Investor State Dispute Settlement Scheme ........................ 22

Intellectual property commitments .................................... 22

Environment and labour commitments in KAFTA ............... 22

Main provisions of the Customs Amendment (Korea-Australia Free Trade Agreement Implementation) Bill 2014 ................................................................................. 22

Schedule 1, Part 1—Korean originating goods ...................... 23

Rule 1—goods wholly obtained in Korea or in Korea and Australia (proposed Subdivision B) .............................. 23

Rule 2—Goods produced entirely in Korea or in Korea and Australia from ‘originating materials’ (proposed Subdivision C) ...................................................................... 24

Rule 3—Goods produced entirely in Korea or in Korea and Australia from ‘non-originating materials’ (proposed Subdivision D) .................................................... 24

Rule 4—Non-qualifying operations (proposed Subdivision E) ...................................................................... 25

Outward processing zones on the Korean Peninsula (OP) ...................................................................................... 26

Schedule 1, Part 2—Verification powers ............................... 28

Schedule 1, Part 3—Application provisions ........................... 28

Main provisions of the Customs Tariff Amendment (Korea-Australia Free Trade Agreement Implementation) Bill 2014 ............................................................................ 28

Appendix A: Investor State Dispute Settlement .................. 30

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Background - what is ISDS? ................................................ 30

Rationale for inclusion of ISDS provisions ........................... 30

Critiques of ISDS .................................................................. 31

Most favoured nation clauses ............................................. 32

Protections included in KAFTA ............................................ 32

The Trade and Foreign Investment (Protecting the Public Interest) Bill 2014 ..................................................... 34

Appendix B: Intellectual property in KAFTA ........................ 35

Amendments to the Copyright Act 1968 .......................... 35

Interaction with the ISDS clause ....................................... 35

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Purpose of the Bill The Customs Amendment (Korea-Australia Free Trade Agreement) Bill 2014 (the Customs Bill) and the Customs Tariff Amendment (Korea-Australia Free Trade Agreement) Bill 2014 (the Tariff Bill) are implementing Bills for the Korea-Australia Free Trade Agreement (KAFTA). Their passage is required before the KAFTA can come into effect.

Their primary purpose is to implement the customs dimension of KAFTA by making relevant amendments to the Customs Act 1901 and the Customs Tariff Act 1995.1 The Customs Bill inserts a new Division 1J to Part VIII of the Customs Act providing for:

• rules of origin for goods imported into Australia from Korea: imported goods that satisfy the new rules as 'Korean originating goods' will be eligible for preferential rates of customs duty

• rules relating to the export of goods to Korea: rules regarding record keeping and other obligations, which will apply to persons exporting goods to Korea and wanting to obtain preferential treatment for them in Korea, and on producers of such goods.

The Tariff Bill contains amendments to the Customs Tariff Act to implement the KAFTA by:

• giving free rates of customs duty for certain ‘Korean originating goods’ in conformity with and as a consequence of the new Division 1J of Part VIII of the Customs Act

• amending Schedule 4 to the Customs Tariff Act to maintain customs duty rates for certain Korean originating goods in accordance with the applicable concessional item2

• phasing the preferential rates of customs duty for certain ‘Korean originating goods’ to be ‘free’ of customs duty by 2021

• inserting a new Schedule 10 in the Customs Tariff Act to implement preferential tariff rates, and also phasing rates of duty so as to achieve parity with rates of duty that would be payable if those particular products were manufactured in Australia.

Structure of the Bills The Customs Bill has one Schedule, which is comprised of three Parts:

• Part 1 deals with Korean originating goods or the ‘rules of origin’, which determine whether goods are eligible for the preferential tariff rates

• Part 2 deals with the conferring of ‘verification powers’ in relation to certain trade items (implementing Article 3.23 of KAFTA),3 and

• Part 3 contains application provisions.

The Tariff Bill has one schedule, which makes various consequential amendments to the Customs Tariff Act, including inserting a new Schedule 10 into that Act, which specifies the preferential tariff rates available to Korean goods under KAFTA.

Parliament’s role in treaty negotiations and ratification The constitutional system in Australia enables the Executive Government to commit Australia to treaties at the international level. The conclusion of and accession to treaties is a matter for the Government of the day in the exercise of the executive power of the Commonwealth conferred by section 61 of the Constitution.4 Government negotiation of or agreement to international treaties is normally considered by Cabinet. The Federal Executive Council, established under section 62 of the Constitution must approve Australia’s entry into treaties. The responsibility for making recommendations to the Executive Council with respect to the issuance of full powers, signature, accession, ratification, termination and amendment of treaties rests with the Minister

1. Customs Act 1901 (Cth); Customs Tariff Act 1995 (Cth), accessed 29 September 2014. 2. Schedule 4 to the Customs Tariff Act lists a range of goods in respect of which concessional rates of import duty have been granted. Schedule 4 delivers a range of policy objectives, including industry assistance and the implementation of tariff concessions arising from international treaties.

3. Significantly, chapter 3 of KAFTA also sets out the methods by which exporters are to claim their tariff concession from foreign Customs. 4. Commonwealth of Australia Constitution Act 1901 (Cth), accessed 29 September 2014.

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for Foreign Affairs. Having become a party to the treaty, the Government is then able to rely upon the external affairs power in section 51(xxix) of the Constitution, which enables Parliament to enact legislation that may otherwise be outside its legislative power.

The process by which a treaty enters into force, and the relationship between the powers of the Parliamentary and the Executive branch, can be complex, and has been examined in a number of reports - most recently in the report by the Joint Standing Committee on Treaties on the Treaties Ratification Bill 2014, and in the Productivity Commission’s 2010 report.5 Concern has been expressed about this system in terms of the transparency and opportunity for input and amendment by the Parliament and a number of proposals have been suggested for reform.

Although the two Bills covered by this Bills Digest only make changes to tariff rates and the rules of origin, they are a necessary step, and likely the one involving the most significant Parliamentary involvement, prior to the final ratification of KAFTA.

Background Australian and international trade policy Australia has a long history of supporting trade liberalisation. It has worked through multilateral trade forums such as the World Trade Organisation (WTO), and undertaken unilateral tariff reduction.6

While commitments made under WTO agreements are an important part of the international trade framework, in recent years regional trade agreements (including both free trade agreements and customs unions) have increased significantly. As of 15 June 2014, the WTO had received 585 notifications in relation to regional trade agreements.7 One contributing factor to the increase in agreements is the failure of the multilateral system; the WTO’s Doha Round of negotiations, started in 2001, is stalled, and the recent attempt to achieve agreement on a smaller subset of issues also appears to have foundered.8

Australia has followed the global trend, and entered into a number of agreements over the last decade. Prior to 2003, its only agreement was with New Zealand, but since then it has entered agreements with Singapore, Thailand, America, Chile, Malaysia, and a regional free trade agreement with the Association of South-East Asian Nations and New Zealand.9

Free trade agreements

What is a free trade agreement? The Productivity Commission noted in a 2010 report that the ‘terms bilateral trade agreement, regional trade agreement, free trade agreement, reciprocal trade agreement and preferential trade agreement are used at different times and in different ways’.10

A trade agreement is a written contract between two or more States for the purpose of regulating trade between the parties. Most trade agreements fall into two categories - multilateral or bilateral. Multilateral agreements refer to an agreement between more than two states and are often used to establish a collective set of rules governing conduct in a particular area.11 Bilateral trade agreements (between two states) establish a

5. Joint Standing Committee on Treaties, Review of the Treaties Ratification Bill, Parliament of Australia, Canberra, August 2012; Productivity Commission, Bilateral and Regional Trade Agreements, Canberra, 2010, pp. 287-313. 6. For further detail, see the Productivity Commission’s report, Bilateral and Regional Trade Agreements (Canberra, 2010, p. 1); or for an in-depth discussion, see R. Snape, Australian Trade Policy 1965-1997: A documentary history (Allen and Unwin, St. Leonards, 1998). The General

Agreement on Tariffs and Trade (GATT) came into effect in 1948, and transitioned to the World Trade Organisation in 1994 (Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014 - Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), Parliament of Australia, Canberra, p. 3, 4 September 2014). 7. World Trade Organisation (WTO), ‘Regional Trade Agreements’, WTO website, accessed 24 September 2014. 8. S Schwab, ‘After Doha: Why the negotiations are doomed and what we should do about it’, Foreign Affairs, May-June 2011, pp. 104-117; R Callick, ‘Modi-led bloc puts kybosh on Bali deal’, Weekend Australian, 2 August 2014, p. 29. 9. Productivity Commission, Bilateral and Regional Trade Agreements, op. cit., p. 1; Department of Foreign Affairs and Trade (DFAT), ‘Australia’s Trade Agreements’, DFAT website, accessed 24 September 2014. 10. Productivity Commission, Bilateral and Regional Trade Agreements, op. cit., p. 5. 11. PB Butt and D Hamer, eds., LexisNexis Concise Australian Legal Dictionary, fourth edn., LexisNexis Butterworths, Chatswood, 2011, p. 387.

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system of mutual benefit in respect of trade and investment and are often known as free trade agreements (FTAs).12

The Productivity Commission noted in its 2010 report that:

While most of these are commonly referred to as Free Trade Agreements (FTAs), it is important to distinguish the effects of these agreements from ‘free trade’. Free trade would require the removal of all tariffs, quotas, subsidies and other government measures that distort trade flows. FTAs involve preferential arrangements under which tariffs and some other barriers to trade are lowered (although not always eliminated), but only for those countries party to the agreement. The barriers for other countries are not reduced by the agreement … As such, FTAs can potentially distort trade flows as between members and non-members …

13

The WTO notes that entering into an FTA involves granting more favourable conditions to parties to the agreement than to other WTO members’ trade, which ‘departs from the guiding principle of non-discrimination’.14 However, WTO members can enter regional trade agreements (a category that includes customs unions and FTAs) so long as they are consistent with ‘WTO rules … which require that parties to a regional trade agreement have must have established free trade on substantially all trade within the regional area, and that the parties cannot raise their tariffs or other barriers against countries outside the agreement’.15

While trade in goods and services remains a key focus for FTA negotiations, there is an increasing trend for FTAs to include commitments in a wide range of other areas. This can include binding commitments on investment, government procurement, intellectual property, competition policy, labour and environmental issues, and a range of others.16

Free trade agreements and diplomatic relations The Joint Standing Committee on Treaties noted in its report on KAFTA that ‘A comprehensive free trade agreement with Korea is expected to further strengthen the broader bilateral relationship between Australia and Korea …’.17

In its report on FTAs, the Productivity Commission discussed the inclusion of strategic or diplomatic goals as objectives in negotiating FTAs, and argued that where an FTA was not of economic benefit to Australia, it should not be pursed for diplomatic reasons which could be achieved through other methods.18

Consultation Treaty negotiations are confidential, but the Department of Foreign Affairs and Trade receives submissions, and consults with industry stakeholders during the negotiation process. The Joint Standing Committee on Treaties noted in its report that it had received ‘conflicting evidence on the amount of industry and stakeholder consultation that took place during the negotiation process for KAFTA’.19

Estimating the economic benefits of free trade agreements Proponents of free trade agreements typically refer to the economic benefits that are likely to flow from an agreement. There are a number of contentious issues in relation to modelling the benefits of FTAs, including both the point in time at which modelling is completed, the aspects of the agreement which are included, and the methods used.

12. Joint Standing Committee on Treaties, Report 130:Treaty tabled on 14 August 2012 - Malaysia-Australia Free Trade Agreement done at Kuala Lumpur on 22 May 2012, October 2012, Parliament of Australia, Canberra, pp. 3-4. 13. Productivity Commission, Bilateral and Regional Trade Agreements, op. cit., p. 6. 14. World Trade Organisation (WTO), ‘The WTO’s Rules’, WTO website, accessed 24 September 2014. 15. Department of Foreign Affairs and Trade (DFAT), ‘The World Trade Organisation and Free Trade Agreements’, DFAT website, accessed

24 September 2014. 16. Productivity Commission, Bilateral and Regional Trade Agreements, op. cit., p. 255. 17. Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014 - Free Trade Agreement between the Government of Australia

and the Government of the Republic of Korea (Seoul, 8 April 2014), op. cit., p. 8. 18. Productivity Commission, Bilateral and Regional Trade Agreements, op. cit., p. 208-211. 19. Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014 - Free Trade Agreement between the Government of Australia

and the Government of the Republic of Korea (Seoul, 8 April 2014), op. cit., p. 37.

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For many FTAs modelling has been undertaken prior to entering FTA negotiations, meaning that it is both out of date and may not accurately reflect the final form of the agreement.20 Initial analysis conducted in 2008 suggested that an FTA with Korea could add USD $450 m to Australia’s GDP in 2020; more recent modelling suggests that the FTA will add AUD $650 m to Australia’s GDP in 2030.21 Official documents relating to KAFTA appear to refer to the more recent modelling.22

The most recent modelling is based purely on expected changes in merchandise trade; that is, it does not attempt to estimate the costs or benefits associated with other commitments in the agreement, including those related to Investor- State Dispute Settlement (ISDS) or intellectual property (IP) law.23 The Productivity Commission has previously noted that stronger IP requirements associated with the Australia-United States FTA ‘imposed a net cost on Australia’, and also in the United States, ‘reflecting adverse impacts on consumer welfare.’24 In line with this, the Productivity Commission also argued that ‘any IP provisions that are proposed for a particular agreement should only be included after an economic assessment of the impacts, including on consumers, in Australia and partner countries’.25

Committee consideration KAFTA was submitted to the Joint Standing Committee on Treaties. The Senate Foreign Affairs, Defence and Trade References Committee is also conducting an inquiry into KAFTA, and the Bills were reported on by the Senate Legal and Constitutional Affairs Legislation Committee.

In addition, the Senate Foreign Affairs, Defence and Trade Legislation Committee examined the Trade and Foreign Investment (Protecting the Public Interest) Bill 2014, which included some discussion of KAFTA.26

Joint Standing Committee on Treaties (JSCOT) The Joint Standing Committee on Treaties completed its inquiry into the KAFTA on 4 September 2014. The Committee report supported the agreement, and recommended that ‘binding treaty action be taken’.27

A dissenting report by Kelvin Thomson and Melissa Parke, two Labor members of JSCOT, stated they could not support the agreement, and recommended renegotiation on ‘ISDS, Copyright, Rules of Origin and Labour Market Testing’.28

A dissenting report by the Australian Greens likewise did not support the KAFTA in its current form.29 The Australian Greens stated they support trade and investment flows between countries that constitute ‘fair trade’. However they strongly oppose the inclusion of ISDS clauses in FTAs and believe that the inclusion of ISDS clauses sets a dangerous precedent and undermines Australia’s sovereignty.30 (See Appendix A to this Digest for information on ISDS provisions.) Notwithstanding the insertion of exclusions and safeguard clauses in KAFTA as a means of reducing the risk of legitimate public policy initiatives (in areas such as health, environment and so on) being impacted by foreign corporate litigation, the Green’s point to Dr Kyla Tienhaara’s analysis of the drafting of

20. Productivity Commission, Bilateral and Regional Trade Agreements, op. cit., pp. 292-294. 21. Australia-Republic of Korea Free Trade Agreement Feasibility Study: A joint study by ITS Global and the Korean Institute for International Economic Policy, 17 April 2008, accessed 24 September 2014, p. 110; Centre for International Economics, Australia-Korea Free Trade Agreement: Implications for Australia, 28 February 2014, p. 13. The value in Australian currency of the gains estimated in $USD in the 2008

analysis depend on assumptions about the inflation rate of both currencies; that study also estimated that Australia’s GDP would be 0.04 per cent higher in 2020. 22. Department of Foreign Affairs and Trade (DFAT), National Interest Analysis: Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea, accessed 24 September 2014, paragraph 5. 23. Ibid., paragraph 8.

24. Productivity Commission, Bilateral and Regional Trade Agreements, op. cit., pp. 259-260. 25. Productivity Commission, Bilateral and Regional Trade Agreements, op. cit., p. 264. 26. Senate Standing Committee on Foreign Affairs, Defence and Trade Legislation Committee, Trade and Foreign Investment (Protecting the Public Interest) Bill 2014, The Senate, Canberra, August 2014.

27. Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014 - Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), op. cit., p. 48. 28. K Thomson and M Parke, Dissenting report, Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014 - Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), op. cit., p. 59. 29. Australian Greens Senator, Dissenting report, Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014 - Free Trade

Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), op. cit., pp. 63-69. 30. Ibid, 63-64.

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KAFTA. Dr Tienhaara stressed that ‘dangerous loopholes in the text of KAFTA remain despite the government's efforts to preserve the right to regulate under the agreement’.31

The Greens raised intellectual property concerns about the ‘potential threat to access to reasonably priced medicines and failure of the agreement to not recognise the broader public interest in access to knowledge and information’.32 They were also concerned about the ‘impacts of this trade deal on the car industry, and what it has cost [Australia], workers and communities’.33

In terms of the process for negotiating and influencing the terms of KAFTA, the Greens were critical of the secrecy of the negotiations and the lack of ability to negotiate, influence and amend the terms of the agreement.34

Senate Foreign Affairs, Defence and Trade References Committee The Senate Foreign Affairs, Defence and Trade References Committee examined the KAFTA, and is expected to report within one month of the JSCOT report.35

Senate Legal and Constitutional Affairs Legislation Committee The Senate Legal and Constitutional Affairs Legislation Committee tabled its report on 24 September 2014. The Committee recommended that the Bill be passed as soon as possible because:

the Korean tariffs on a number of Australian originating goods would drop immediately upon entry into force of KAFTA and thereafter on 1 January each year. If KAFTA enters into force before the end of 2014, the tariffs would drop on entry into force and again on 1 January 2015. If KAFTA does not enter into force until 2015, the tariff reductions would effectively be delayed by a year for the life of the tariff reduction period.

36

The Committee also concurred with the suggestion by the Customs Brokers and Forwarders Council of Australia and the Export Council of Australia that:

the Australian Customs and Border Protection Service makes publicly available a table which refers to each of the specific provisions of Chapters 3 and 4 of KAFTA and which also identifies where those provisions have been adopted or are proposed to be adopted whether in the Bills, otherwise in legislation or regulations or by procedure; and …

the Commonwealth government ensure that the provisions of KAFTA have been properly accommodated in Australian law and practice. 37

In their dissenting report, the Australian Greens stated that ‘there are many elements of KAFTA [they] support such as the increased market access for beef, cheese and wine products’.38 However they also appreciate that the scope of the inquiry was narrow and limited to the specific provisions and associated issues in the two Bills. As such, the inquiry excluded from its considerations issues considered to be of significant concern and which the Greens oppose. Those issues include: ‘Investor State Dispute Settlement Clauses, flawed intellectual property provisions and a continuing flawed process in the consultation and negotiation phase of trade agreements’. The Greens discuss these issues in detail in the Joint Standing Committee on Treaties (JSCOT) dissenting report.39

31. Ibid., p. 64. 32. Ibid., p. 65. 33. Ibid., p 66. 34. Ibid., p. 67-68. 35. Senate Standing Committee on Foreign Affairs, Defence and Trade, Korea-Australia Free Trade Agreement, The Senate, Canberra, 2014. 36. Senate Legal and Constitutional Affairs Legislation Committee, Customs Amendment (Korea-Australia Free Trade Agreement Implementation)

Bill 2014 [Provisions] and a related bill, Report, The Senate, Canberra, September 2014, p. 13, accessed 24 September 2014. 37. Ibid., p. vii. 38. Australian Greens, Dissenting Report, Senate Legal and Constitutional Affairs Legislation Committee, Customs Amendment (Korea-Australia Free

Trade Agreement Implementation) Bill 2014 [Provisions] and a related bill, Report, The Senate, Canberra, September 2014, p. 17, accessed 24 September 2014. 39. Ibid.

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Policy position of non-government parties/independents The Australian Labor Party (ALP) initiated FTA negotiations with the Republic of Korea while in Government, but the ALP’s policy of not agreeing to include ISDS clauses in FTAs may have contributed to the delay in concluding negotiations. 40 Two ALP members of JSCOT issued a dissenting report that did not support the KAFTA in its current form. A subsequent press release by the Opposition Leader stated that ‘Labor will support legislation implementing the Korea-Australia Free Trade Agreement’.41

The Australian Greens issued a dissenting report on the JSCOT inquiry into KAFTA, which did not support KAFTA in its current form.42

Greens Senator Whish-Wilson is particularly opposed to the use of ISDS provisions in FTAs. On 5 March 2014, Senator Whish-Wilson introduced into Parliament the Trade and Foreign Investment (Protecting the Public Interest) Bill 2014.43 The purpose of this Private Senator’s Bill is to preclude the Commonwealth from entering into FTAs which contain ISDS provisions. The basic rationale for the Bill relates to Australia’s basic sovereign right, ‘Parliaments should be free to [legitimately] set laws that protect the public and the environment without fear of the government being sued by corporations’.44 On 6 March 2014, the Senate referred the Trade and Foreign Investment (Protecting the Public Interest) Bill 2014 to the Foreign Affairs, Defence and Trade Legislation Committee for inquiry and report. ‘The Committee has received over 11,000 emails from individuals using an online tool asking people to express their opposition to investor state dispute settlements under trade agreements to the committee.’45 The majority report of the Committee recommended the Bill not be passed, concluding that:

alleged risks to Australian sovereignty and law making arising from the ISDS system are overstated and are not supported by the history of Australia's involvement in negotiating trade agreements. 46

… legislation was perhaps not the best mechanism by which to address the concerns raised about risks associated with ISDS provisions. [It believed that the] risks associated with ISDS can and should be managed more effectively and in ways which do not require legislation, including careful treaty drafting […] and development of a well-balanced Model Investment Treaty.

47

While Senator Whish-Wilson’s concern is for the Parliament not to be constrained in making laws on a range of non-trade policy issues, the majority report of the Committee emphasised the constraint that a ban on the inclusion of ISDS clauses in FTAs would place:

on the ability of Australian governments to negotiate trade agreements that benefit Australian business. 48

40. In April 2011, the Gillard government announced that it would no longer include ISDS provisions in free trade agreements. The new trade policy was announced in response to recommendations of the 2010 review of Bilateral and Regional Trade Agreements by the Productivity Commission. Department of Foreign Affairs and Trade, Gillard Government Trade Policy Statement: Trading our way to more jobs and prosperity, April 2011, p. 14. For a discussion of the role of including ISDS provisions in the negotiation process, see R Callick, ‘Korea ready to talk turkey after FTA hurdle removed’, The Australian, 1 November 2013, p. 18; J Adams (Deputy Secretary, Department of Foreign Affairs and Trade), Evidence to Joint Standing Committee on Treaties, Korea-Australia Free Trade Agreement, 5 August 2013, p. 6, accessed 24 September 2014.

41. B Shorten (Opposition Leader) and P Wong (Shadow Minister for Trade and Investment), Labor backs Korean trade deal to support jobs, media release, 23 September 2014. 42. Australian Greens Senator, Dissenting report, Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014 - Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), Parliament of Australia,

Canberra, 2014, pp. 63-69. 43. Trade and Foreign Investment (Protecting the Public Interest) Bill 2014, accessed 29 September 2014. 44. Senator Whish-Wilson, Greens to introduce Bill to protect public interest against Trojan horse provisions in trade agreements, media release,

5 March 2014. 45. Senate Foreign Affairs, Defence and Trade Legislation Committee, Inquiry into the Trade and Foreign Investment (Protecting the Public Interest) Bill 2014, Senate, Canberra, accessed 23 September 2014. 46. Ibid., p. 17. 47. Ibid. 48. Ibid.

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In their dissenting report, the Greens argued that this Bill was perhaps the best mechanism by which to address the concerns raised about risks associated with ISDS provisions until the Government and the Minister [for Trade] could demonstrate that they had an effective mechanism or were willing to develop such a mechanism.49

Senator Nick Xenophon has expressed opposition to FTAs that could damage the Australian automotive manufacturing industry.50 Senator John Madigan has previously commented on the importance of supporting local industry, and that ‘Having completely unrestricted imports is a naive purist ideal that does not reflect the reality of world trade … We shouldn’t do it’.51 Senator David Leyonhjelm has previously written in support of free trade, but expressed reservations about free trade agreements.52

Position of major interest groups Agricultural producers A large number of agricultural exporters expressed support for KAFTA, citing the likely increases in exports following reduction of Korean agricultural tariffs. Agricultural producers such as the Almond Board of Australia, Australian Macadamia Society, Australian Nut Industry Council,53 Cherry Growers Australia and Citrus Australia all supported the agreement.54

Industry bodies in the livestock industry also support the agreement, including the Sheepmeat Council of Australia, Australian Pork, Australia Lot Feeders’ Association, Meat and Livestock Australia, and the Cattle Council of Australia55. Meat and Livestock Australia stated:

KAFTA is critical to the long term positioning of Australian red meat in Korea, with a liberalised import regime providing a major boost to trade … The critical requirement now is to ensure that KAFTA enters into force in calendar year 2014. 56

The dairy industry also supports KAFTA. A joint submission by the Australian Dairy Industry Council and Dairy Australia stated:

The Australian dairy industry supports the signing of the Korea Australia Free Trade Agreement … The Australian dairy industry urges the Australian Government to undertake to expedite entry into force of the Korea Australia Free Trade Agreement, certainly before the end of the 2014 calendar year. 57

49. Ibid., p. 29. 50. N Xenophon, Free trade deals risk auto jobs, media release, 8 April 2014. 51. J Madigan, True believers in Australia’s future, media release, 28 September 2011. 52. D Leyonhjelm, ‘Ultimate goal is free trade’, Farmonline, 14 April 2014, accessed 24 September 2014. 53. Almond Board of Australia, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade

Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 10 June 2014; Australian Macadamia Society, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 2 June 2014; Australian Nut Industry Council, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 13 June 2014, accessed 27 September 2014. 54. Cherry Growers Australia, Inc., Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade

Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 10 June 2014; Citrus Australia, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), June 2014, accessed 27 September 2014. 55. Sheepmeat Council of Australia, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 12 June 2014; Australian Pork Limited, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014); Australian Lot Feeders Association, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 13 June 2014; Meat and Livestock Australia, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014) , 13 June 2014; Cattle Council of Australia, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 13 June 2014, accessed 27 September 2014. 56. Meat and Livestock Australia, Submission to the Joint Standing Committee on Treaties, op. cit., p. 1. 57. Australian Dairy Council Inc. and Dairy Australia, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), June 2014, p. 1, accessed 27 September 2014.

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The Australian Food and Grocery Council supported the agreement, stating:

The Australian Food and Grocery Council welcomes the Korea-Australia Free Trade Agreement (KAFTA), and the improved market access arrangements for one of the most distorted agri-food markets in the world.

While not a perfect outcome, the scheduled tariff reductions across a wide range of agri-food products are welcome and will provide relief to Australian exporters facing fierce competition in Korea, and strong domestic cost pressures. 58

AUSVEG, the national peak industry body representing Australian vegetable and potato growers, was supportive of the agreement. AUSVEG’s submission to the JSCOT stated:

… the KAFTA tariff outcomes represent a generally favourable outcome for the Australian vegetable industry, particularly the removal of the tariff on potatoes in Australia’s export season. While vegetable tariff outcomes were not as favourable as those provided for in the Korea-U.S. FTA, the relatively early conclusion of KAFTA negotiations is reasonably expected to provide Australia with some level of advantage against other competitors in the Korean market … The existence of phytosanitary related trade barriers diminishes market access and therefore the potential of vegetable trade liberalisation under Australia’s FTAs.

59

The New South Wales Farmers’ Association and National Farmers’ Federations support the agreement.60 The National Farmers’ Federation stated:

… the agreement represents a strong step towards securing Australia’s important trading future with Korea and in improving international market access for Australian agricultural goods … The agreement gives Australian farmers and exporters significantly improved market access in goods eliminating high tariffs on a wide range of products, including beef, wheat, sugar, dairy, wine, horticulture and seafood.

61

Canegrowers Australia, the Australian Sugar Industry Alliance, Australian Sugar Milling Council and Queensland Sugar Limited were all supportive of KAFTA.62 The Australian Sugar Industry Alliance noted that: ‘South Korea is the largest export market for Australia’s raw sugar … Removing the raw sugar tariff as soon as the agreement enters into force will provide a significant boost to Australia’s raw sugar exports.’63

The Winemakers Federation of Australia and Wine Australia both support the agreement.64 The Winemakers Federation of Australia commented:

58. Australian Food and Grocery Council, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014 - Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), p. 4, accessed 27 September 2014.

59. AUSVEG, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 10 June 2014, pp. 5-6, accessed 27 September 2014.

60. National Farmers’ Federation, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 10 June 2014; NSW Farmers’ Association, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), June 2014, accessed 27 September 2014.

61. National Farmers’ Federation, Submission to the Joint Standing Committee on Treaties, op. cit., pp. 4-4. 62. Canegrowers, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 28 May 2014; Australian Sugar Industry Alliance Limited, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade

Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 28 May 2014; Australian Sugar Milling Council, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014); Queensland Sugar Limited, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 29 May 2014, accessed 27 September 2014. 63. Australian Sugar Industry Alliance Limited, Submission to the Joint Standing Committee on Treaties, op. cit., p. 1. 64. Winemaker’s Federation of Australia, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free

Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014); Wine Australia, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 10 June 2014, accessed 27 September 2014.

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Australia is the sixth-largest wine exporter to South Korea. Australian sparkling, red and white wines are currently subject to a tariff of 15 per cent but wine from the US, EU and Chile enter duty free. The FTA will provide a boost to the wine industry, whose exports to Korea have been steadily decreasing since 2007. With this deal, Australian wines have the best chance to take advantage of a growing market.

65

Trade unions A number of trade unions expressed opposition to KAFTA, both because of trade impacts and because of the inclusion of the ISDS provisions.

A press release by the Australian Council of Trade Unions (ACTU) quoted ACTU president Ged Kearney:

This disgraceful deal will not only cost thousands of Australian manufacturing jobs, it also leaves the door open to imports from parts of North Korea that are not subject to labour standards and which are notorious for forced and prison labour. 66

The Australian Manufacturing Workers’ Union does not support the agreement, describing it as an:

… agreement that favours natural resource endowment sources of comparative advantage at the expense of more sophisticated, advanced and value adding industries and sources of advantage. As such, it will undermine the complexity and advanced industry basis of the economy, putting the prosperity of all Australians in jeopardy … its inclusion of an ISDS provision undermines the sovereignty of the Australian people, places unnecessary and damaging restrictions on future social policies and places Australian firms at a competitive disadvantage as compared to foreign based firms.

67

The Construction, Forestry, Mining and Energy Union (CFMEU) was particularly concerned with the movement of natural persons provisions in KAFTA, and stated that the agreement ‘risks undermining a “fair go” for Australian workers and manufacturers in a range of ways’.68

The New South Wales Nurses and Midwives’ Association does not support the agreement while it contains ISDS provisions, stating:

The inclusion of ISDS within any free trade agreement clearly exposes the Australian health care system. This places at risk future initiatives around food and beverage labelling, regulation of health professionals, health care delivery and environmental standards. To include ISDS processes could be seen as government acting in the interests of investors over the rights of our community, our health and our environment … The Association seeks that the KAFTA is not approved until such time that ISDS provisions are removed. Australian Governments must have the ability to legislate domestically without fear of being sued for simply acting in the interests of our health, our environment and our future.

69

Industry organisations A number of industry organisations were broadly supportive of the agreement. The Australian Chamber of Commerce in Korea views:

… the conclusion of this agreement as a significant milestone for the Australia-Korea partnership and the bilateral business community. This is a balanced, comprehensive and high quality free trade agreement that substantially liberalises trade between Australia and Korea. It will strengthen and expand opportunities for Australian companies

65. Winemaker’s Federation of Australia, Submission to the Joint Standing Committee on Treaties, op. cit., p. 5. 66. Australian Council of Trade Unions, Korean free trade agreement sells out Australian workers, media release, 24 September 2014, accessed 25 September 2014. 67. Australian Manufacturing Workers’ Union, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-

Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), June 2014, pp. 1-2, accessed 27 September 2014. 68. Construction, Forestry, Mining and Energy Union, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 23

June 2014, p. 1, accessed 27 September 2014. 69. New South Wales Nurses and Midwives’ Association, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014),

10 June 2014, p. 3, accessed 27 September 2014.

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doing business with Korea and open up new opportunities for businesses to enter the Korean market. It contains significant benefits for Korean companies looking to invest in Australia including enhanced investment protection mechanisms and a raising of the foreign investment review threshold. 70

The Australian Chamber of Commerce and Industry noted concerns over the complexity of the rules of origin, particularly in conjunction with differing rules of origin in other agreements, but supports the agreement as a whole.71

The Australian Industry Group raised concerns over the rapid reduction in Australia tariffs under the agreement, with potential impacts for manufacturing, and noted that industry members were often unaware of the details of the agreement which might impact them until the final text was signed. Despite these particular reservations, the Australian Industry Group supports the ratification of the agreement.72

The Business Council of Australia supports the agreement. Its submission to the JSCOT stated:

KAFTA is unambiguously good news for the Australian economy. It is a high-quality, comprehensive agreement that substantially liberalises trade with Australia’s fourth largest trading partner, our third largest export market (goods and services, 2012-13) and a substantial source of overseas students, tourists and investment … The BCA strongly supports an early entry into force for KAFTA; the sooner the agreement enters into force, the sooner the Australian economy will start benefiting from increased trade and investment flows resulting from the agreement.

73

The Minerals Council of Australia supports the agreement. Its submission to the JSCOT stated:

The Minerals Council of Australia strongly supports the Korea-Australia Free Trade Agreement (KAFTA). It combines all the principal elements of a substantial FTA between two significant economies that have an important and growing trading relationship … the agreement liberalises market access for goods and services, and opens up new opportunities for investment. It also introduces more liberalising approaches across rules (such [as] rules of origin and technical barriers to trade) and cross cutting issues (such as trade facilitation, cooperation and competition) … No other alternatives to KAFTA exist at present to achieve these outcomes. The Doha Round of Multilateral Trade Negotiations is on virtual life support. Regional Comprehensive Economic Partnership (RCEP) negotiations are still at an early stage and their ambition is yet to be determined. And Korea is not a party to Trans Pacific Partnership (TPP) negotiations, although it is interested in joining them at some stage. KAFTA is the right agreement at the right time.

74

The Export Council of Australia, a peak body for importers and exporters, ‘strongly supports KAFTA and the early entry into force of KAFTA’.75 The Financial Services Council supports the agreement, describing the KAFTA as ‘a high quality agreement [that] provides opportunities for all Australian industries including financial services’.76

70. Australian Chamber of Commerce in Korea, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 13 June 2014, p. 1, accessed 27 September 2014.

71. Australian Chamber of Commerce and Industry, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), June 2014, accessed 27 September 2014.

72. Australian Industry Group, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 18 June 2014, accessed 27 September 2014.

73. Business Council of Australia, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), May 2014, p. 1, accessed 27 September 2014.

74. Minerals Council of Australia, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 11 June 2014, p. 1, accessed 27 September 2014.

75. Export Council of Australia, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 18 June 2014, accessed 27 September 2014.

76. Financial Services Council, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 13 June 2014, p. 1, accessed 27 September 2014.

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Professional bodies Engineers Australia is supportive of the agreement, noting the potential for international employment:

Engineers Australia sees the Korea FTA as invaluable in facilitating the international cooperation and labour mobility that our profession relies upon so heavily … Engineers Australia remains strongly supportive of the Australian Government’s efforts in negotiating the Korea FTA, and we congratulate the Government on achieving this important milestone.

77

Music Rights Australia, representing ‘songwriters and music publishers’, provided a submission in support of articles 13.9.28 and 13.9.29 (both relating to stronger intellectual property online).78

Community organisations A number of community organisations were opposed to KAFTA’s implementation, with particular concerns raised around the ISDS provision and intellectual property clauses.

Australian Digital Alliance

The Australian Digital Alliance is a ‘non-profit coalition of public and private sector interests formed to promote balanced copyright law and provide an effective voice for a public interest perspective in the copyright debate’.79 The Australian Digital Alliance does not support the IP commitments in KAFTA, stating concerns that the agreement:

extends our international obligations;

is being used as a means to change domestic policy;

restrains our flexibility to adjust copyright policy in the future;

lacks balance, or even a recognition that the public interest may not always align with the rigid enforcement of IP rights;

is not based on any economic evidence or cost benefit analysis; and

ignores recommendations from previous committees and reviews. 80

Australian Fair Trade and Investment Network

The Australian Fair Trade and Investment Network (AFTINET) is a network of community organisations, including church groups, unions, environmental and public health organisations, ‘aid and development organisations and human rights organisations’.81 AFTINET argued against the agreement for a number of reasons: the inclusion of an ISDS clause, material on intellectual property, the weakness of chapters on environmental and labour provisions, and the lack of reciprocity on labour market testing. 82 In Committee hearings, the AFTINET Convenor

77. Engineers Australia, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 6 June 2014, p. 2, accessed 27 September 2014.

78. Music Rights Australia website, accessed 25 September 2014; Music Rights Australia, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014, accessed 27 September 2014 .

79. Australian Digital Alliance, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), p. 1, accessed 27 September 2014.

80. Ibid., p. 1. 81. P Ranald (Convenor, Australian Fair Trade and Investment Network), Evidence to Joint Standing Committee on Treaties, Korea-Australia Free Trade Agreement, 29 July 2014, accessed 25 September 2014, p. 4. 82. Australian Fair Trade and Investment Network, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May

2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 13 June 2014, p. 1, accessed 27 September 2014.

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stated that the group considers that ‘there are a number of problems with this agreement and that it is not in the national interest. We are recommending against ratification’.83

Conference of Leaders of Religious Institutes NSW

The Conference of Leaders of Religious Institutes NSW does not support the agreement, stating:

CLRI NSW does not support the inclusion of ISDS in any trade agreement. CLRI NSW believes that the Australian government should not enter into a Free Trade Agreement with Korea because it includes investor state dispute settlement provisions (ISDS) … It is unacceptable for foreign corporations to be able to mount legal challenges against governments over policies or laws which they perceive to affect the value of their investments.

84

Electronic Frontiers Australia

Electronic Frontiers Australia, an ‘organisation representing Internet users concerned with on-line freedoms and rights’, did not support the IP approach taken in the agreement, arguing that the final content ‘has introduced many redundant requirements that will serve only to complicate and constrain the evolution of domestic IP policy’.85

Financial implications The Explanatory Memoranda to the Bills show that the tariff concessions on Korean goods are expected to reduce revenue by the amounts in the table below ($635m over the forward estimates). These costs relate directly to tariffs on merchandise goods; the costs and benefits associated with other aspects of the KAFTA are not included in this analysis (see Estimating the economic benefits of free trade agreements, above and Gains under KAFTA, below).

Table 1 Underlying cash impact ($ millions)

2014-15 2015-16 2016-17 2017-18 Total

-100.0 -165.0 -180.0 -190.0 -635.0

Source: Explanatory Memorandum, Customs Tariff Amendment (Korea-Australia Free Trade Agreement Implementation) Bill 2014, p. 2.

Statement of Compatibility with Human Rights The Statements of Compatibility with Human Rights can be found at page 27 of the Explanatory Memorandum to the Customs Bill, and page 3 of the Explanatory Memorandum to the Tariff Bill.

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bills’ compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bills are compatible.

The Parliamentary Joint Committee on Human Rights has concluded its examination, and considers that the Bills are compatible with human rights.86

Key issues Implementing legislation and the KAFTA As outlined above (Parliament’s role in treaty negotiations and ratification), while treaty-making power rests with the executive, implementing legislation must pass the Parliament before the KAFTA can be ratified and enter into force.

83. P Ranald (Convenor, Australian Fair Trade and Investment Network), Evidence to Joint Standing Committee on Treaties, op. cit., p. 2. 84. Conference of Leaders of Religious Institutes NSW, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), pp. 1-2, accessed 27 September 2014.

85. Electronic Frontiers Australia, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014-Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 16 June 2014, pp. 1-2. 86. Parliamentary Joint Committee on Human Rights, Examination of legislation in accordance with the Human Rights (Parliamentary Scrutiny) Act 2011: Bills introduced 1 - 4 September 2014, Legislative Instruments received 2 August - 5 September 2014, Parliament of Australia, Canberra,

September 2014, pp. 4-5.

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The National Interest Analysis submitted by the Government identifies a number of changes that will be required to implement the KAFTA:

• amendments to the Customs Act 1901 and the Customs Tariff Act 1995 (which is the purpose of these two Bills), and the Customs Regulations 1926

• new customs regulations to implement the KAFTA rules of origin

• amendments to the Foreign Acquisitions and Takeovers Regulations 1989 (to implement a higher threshold for screening Republic of Korea investors)

• amendments to the Life Insurance Regulations 1995 to implement the agreement enabling Korean insurers to operate in Australia through branches rather than subsidiaries and

• amendments to the Copyright Act 1968 (this change is contentious, and is discussed in more depth in the section on intellectual property below).87

Of this list of required amendments, the only items requiring legislative amendment (and hence the passage of legislation) are the two Bills covered by this digest, and the potential changes to the Copyright Act. The other changes require amendments to regulation, and there is some debate over whether changes to the Copyright Act are required by the KAFTA.

Thus, although the two Bills covered by this Bills Digest only make changes to tariff rates and the rules of origin, they are a necessary step, and potentially the one involving the most significant Parliamentary involvement, prior to the final ratification of the agreement.

Concern has been raised by the Export Council Association and the Customs Brokers and Forwarders Council of Australia that many of the changes to the law required to implement the KAFTA are intended to be contained in Regulations and have not been subject to Parliamentary inquiry and scrutiny.88 In paragraph 3.7 of its submission, the Export Council of Australia provides a list of examples where it believes that the Customs Bill may not address many of the actual provisions of KAFTA.89

The Korea-Australia Free Trade Agreement

Background An initial evaluation of the potential gains from a free trade agreement between Australia and Korea was released in April 2008, and negotiations began in May 2009.90

In 2011 the former Labor Government released a trade policy statement that included a commitment not to include an ISDS in future agreements.91 Media commentary and statements by officials suggest that the inclusion of an ISDS clause in KAFTA was a key requirement for Korea.92

During the 2013 election, the Coalition announced that it would consider the inclusion of ISDS as part of trade agreements.93 The conclusion of KAFTA negotiations was announced in December 2013; the agreement was signed in April 2014 and tabled in May 2014.94

87. Department of Foreign Affairs and Trade (DFAT), National Interest Analysis: Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea, accessed 24 September 2014, paragraph 17. 88. Export Council of Australia, Submission to the Senate Legal and Constitutional Affairs Legislation Committee, Inquiry into the Customs Amendment (Korea-Australia Free Trade Agreement Implementation) Bill 2014 [Provisions] and a related bill, 15 September 2014, p.3, accessed

24 September 2014; Customs Brokers and Forwarders Council of Australia, Submission to the Senate Legal and Constitutional Affairs Legislation Committee, Inquiry into the Customs Amendment (Korea-Australia Free Trade Agreement Implementation) Bill 2014 [Provisions] and a related bill, 15 September 2014, p. 13, accessed 24 September 2014. 89. Export Council of Australia, Submission to the Senate Legal and Constitutional Affairs Legislation Committee, op. cit., p. 4; Customs Brokers and Forwarders Council of Australia, Submission to the Senate Legal and Constitutional Affairs Legislation Committee, op. cit., p.3. 90. S Crean (Minister for Trade), Study reveals gains to Australia from FTA with Korea, media release, 22 April 2008; S Crean (Minister for Trade), Australia-Korea FTA preparatory talks begin, media release, 12 October 2008; S Crean (Minister for Trade), Australia and Korea launch FTA negotiations, 5 March 2009; S Crean (Minister for Trade), Visit to Australia by South Korea’s Trade Minister, media release, 17 May 2009. 91. Department of Foreign Affairs and Trade (DFAT), Trading our way to more jobs and prosperity, DFAT, Canberra, April 2011. 92. R Callick, ‘Korea ready to talk turkey after FTA hurdle removed’, The Australian, 1 November 2013, p. 18; J Adams (Deputy Secretary, Department of Foreign Affairs and Trade), Evidence to Joint Standing Committee on Treaties, Korea-Australia Free Trade Agreement, 5 August 2013, accessed 24 September 2014, p. 6. 93. Liberal Party of Australia and the Nationals, The Coalition’s policy for trade, Coalition policy document, Election 2013.

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Korea’s economy and trade with Korea The Republic of Korea is a fast-growing economy, with real GDP growth estimated at 3.5 per cent in 2014 and 4.1 per cent in 2015.95 Manufacturing accounts for around a third of Korea’s GDP, and is supported over services to some extent by the Korean government.96 Exports are a key economic driver for Korea, particularly for manufactured goods such as cars, ships, and mobile devices.97

Tariffs - particularly in agriculture - have been an important revenue source for the Korean government, and there is still some government involvement in the economy.98

Australia has a significant trading relationship with South Korea. South Korea is Australia’s fourth-largest overall trading partner (based on two-way trade) and South Korea is Australia’s third-largest goods export market.99 Australia primarily exports commodities (both agricultural and mineral), while Korea exports manufactured goods.100

Tariff reductions A key component of the KAFTA is the reduction, by both Australia and Korea, of tariffs on a wide range of merchandise goods. Evaluating the total level of tariff reductions is complex, because of the wide range of goods covered, and the varying tariff levels. The Regulatory Impact Statement (RIS) accompanying the KAFTA includes a summary of the agreement’s phasing out of tariffs over time, outlined in the figure below. Among a range of tariff reductions, Korea will eliminate tariffs on Australian raw sugar, wheat and wine on entry into force, and progressively for beef products - key tariff reductions are outlined in the table below.101

94. T Abbott (Prime Minister), Australia concludes FTA negotiations with the Republic of Korea, media release, 5 December 2013; Department of Foreign Affairs and Trade (DFAT), ‘Korea-Australia Free Trade Agreement’, DFAT website, accessed 24 September 2014. 95. Department of Foreign Affairs and Trade (DFAT), National Interest Analysis: Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea, accessed 24 September 2014, paragraph 11. 96. World Trade Organisation (WTO), Trade Policy Review: Republic of Korea, WTO, August 2012, accessed 24 September 2014, paragraph 21. 97. Department of Foreign Affairs and Trade (DFAT), Korea-Australia Free Trade Agreement: Regulation Impact Statement, 4 February 2014,

accessed 24 September 2014, paragraph 11. 98. World Trade Organisation (WTO), Trade Policy Review: Republic of Korea, WTO, August 2012, accessed 24 September 2014, paragraph 16. 99. Department of Foreign Affairs and Trade (DFAT), ‘Republic of Korea Country Brief’, DFAT website, accessed 24 September 2014. 100.Ibid. 101.Department of Foreign Affairs and Trade (DFAT), Outcomes at a glance, DFAT, Canberra, accessed 24 September 2014.

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Figure 1 Tariff reductions under KAFTA: exports by value

Source: Department of Foreign Affairs and Trade (DFAT), Korea-Australia Free Trade Agreement: Regulation Impact Statement, 4 February 2014, accessed 24 September 2014, Tables 1 and 3, p. 7-9. MFN = ‘most favoured nation’, i.e. the tariff rate that currently applies before any reductions under KAFTA.

0

10

20

30

40

50

60

70

80

3 years 5 years 7 years 10 years 11-20 years

MFN 0 Tariffs

eliminated on entry into force

Phased tariffs No access

concession

Per cent of exports by value, 2011

Australian exports to Korea Korean exports to Australia

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Table 1 Key Korean tariff reductions under KAFTA

Agricultural exports to Korea Resources, energy and industrial exports to Korea

Product

Korea’s MFN tariff (per cent)

$m (2012-13)

Years to tariff elimination Product

Korea’s MFN tariff $m (2012-13)

Years to tariff elimination

Beef

40-72 703 15

Crude petroleum

3 1,534 5

Sugar, raw 3 461 0 Natural gas 3 701 0

Wheat

1.8 449 0

Unwrought aluminium 1 and 3 677 0

Fodder

100.5 149 15

Propane, butane

3 236 0

Malt and malting barley

269 and 513 88 15

Gold

3 209 0

Dairy

36-176 80

3-20; some duty free quotas

Ammonia

1 and 2 196 0

Canola oil 8-10 26 5-10 Sea salt 1 90 0

Maize

328 20 7

Unwrought lead 1 and 3 90 10

Sheepmeat

22.5 18 0

Cobalt mattes and articles

3 35 0

Wine

15 10 5

Titanium dioxide

6.5 8 0

Source: Department of Foreign Affairs and Trade (DFAT), Korea-Australia Free Trade Agreement: Regulation Impact Statement, 4 February 2014, accessed 24 September 2014, Table 2, p. 7-8.

‘Sensitive’ products While tariffs have been reduced on a range of goods, 171 of Korea’s ‘most sensitive products … receive no tariff concessions’.102 These include rice, walnuts, milk powders, honey, abalone and ‘certain wood products’.103

In its submission to the Joint Standing Committee on Treaties, the Australian Dairy Industry supported the ratification of KAFTA because of tariff advantages it would bring, ‘with the notable exception being milk powder’.104

The Australian Nut Industry Council supported the ratification of KAFTA, but described the decision not to reduce tariffs on walnuts as ‘bewildering’, and noted that Korea had removed tariffs on walnuts in its FTAs with the US and Chile.105

Timing concerns A concern raised by a number of stakeholders was the timing of the agreement. The timetable of the tariff reductions is such that tariff reductions occur on 1 January of the relevant year (i.e. year three or five of the

102.Department of Foreign Affairs and Trade (DFAT), Korea-Australia Free Trade Agreement: Regulation Impact Statement, 4 February 2014, accessed 24 September 2014, paragraph 22. 103.Ibid. 104.Australian Dairy Industry Council and Dairy Australia, Submission to Joint Standing Committee on Treaties, op. cit., p. 2. 105. Australian Nut Industry Council, Submission to Joint Standing Committee on Treaties, op. cit., p. 3.

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agreement).106 This means that for staged tariff reductions, if the agreement enters into force in 2014, then 1 January 2015 will be the second year of the agreement. A number of stakeholders noted a preference for the agreement entering into force in 2014, to enable a quicker timetable of tariff reductions.107 Meat and Livestock Australia estimated that the difference in tariffs between the agreement entering into force in 2014 rather than in 2015 would be $408m over 15 years.108

Economic gains under KAFTA Estimating the gains from free trade agreements is complex, as discussed by the Productivity Commission in its 2010 review (see also discussion above, Estimating the economic benefits of free trade agreements, above).109 The Government has tabled modelling that suggests that when fully implemented, merchandise trade increases as a result of KAFTA may reach $653m annually in increased Australian gross domestic product.110 Using static analysis (based on current trade flows, not estimating any changes in trade flow as a result of tariff reductions), the New South Wales Parliamentary Library estimated that in 2035, Australian exporters will receive an additional $603m annually as a result of tariff reductions.111

Benefits to agricultural producers During the JSCOT inquiry, a number of agricultural producers noted that they expected to benefit from the ratification of the agreement:

• Dairy Australia estimated that in the first year of the agreement, the tariff savings would be on the order of $7.6m.112

• A representative from the meat and livestock industry estimated that without the agreement, the industry would have lost $1.4b over 15 years, if US producers faced a reducing tariff but there were no concessions for Australian producers.113

• Exports of macadamia nuts could increase from $3m to $40m following the reductions in tariffs.114

• There is the potential increase for winemakers from 4 to 15 per cent of the Korean market (by volume).115

Impact on the manufacturing sector The KAFTA RIS argues that while KAFTA will ‘increase competitive pressure for some Australian manufacturers, the elimination of Korea’s tariffs …. on Australian industrial exports will create opportunities for Australian manufacturers’.116 In hearings for the Joint Standing Committee on Treaties, the Australian Manufacturing Workers’ Union (AMWU) noted that both Holden and Toyota ‘cited KAFTA as one of the reasons why they would close manufacturing’.117

The AMWU was also concerned at the potential for a ‘cascading impact on the entire automotive supply chain’, if reduced tariffs lead to greater imports, and potentially early closure by domestic producers.118 While the RIS noted the removal of tariffs on some manufactured exports to Korea (including engines and gearboxes, for

106.‘Chapter 2: Trade in Goods’, Korea-Australia Free Trade Agreement, opened for signature 8 April 2014, ATNIF [2014] No. 4. 107.M Foster (Chairman, KAFTA Red Meat and Livestock Industry Taskforce), Evidence to Joint Standing Committee on Treaties, Korea-Australia Free Trade Agreement, 29 July 2014, accessed 24 September 2014, p. 18; N Campbell (Chairman, Australian Dairy Industry Council Inc.), Evidence to Joint Standing Committee on Treaties, Korea-Australia Free Trade Agreement, 14 July 2014, p. 21.

108.M Foster, op. cit., p. 18. 109.Productivity Commission, Bilateral and Regional Trade Agreements, op. cit., pp. 117-145. 110.Centre for International Economics, Australia-Korea Free Trade Agreement: Implications for Australia, 28 February 2014, p. 13. 111.A Haylen, NSW Trade with South Korea: Outcomes for exporters from the KAFTA, New South Wales Parliamentary Research Service, March

2014, accessed 24 September 2014, p. 9. 112.N Campbell, op. cit., p. 21. 113.M Foster, op. cit., p. 17; see below for discussion of the timing issues associated with KORUS and KOREU. 114.Australian Nut Industry Council, Submission to Joint Standing Committee on Treaties, op. cit., p. 2. 115.A Battaglene (General Manager Strategy and International Affairs, Winemakers Federation of Australia), Evidence to Joint Standing Committee

on Treaties, Korea-Australia Free Trade Agreement, 5 August 2014, accessed 24 September 2014, p. 3. 116.Department of Foreign Affairs and Trade (DFAT), Korea-Australia Free Trade Agreement: Regulation Impact Statement, 4 February 2014, accessed 24 September 2014, paragraph 51. 117.T Skladzien (National Economic and Industry Advisor, Australian Manufacturing Workers’ Union), Evidence to Joint Standing Committee on

Treaties, Korea-Australia Free Trade Agreement, 29 July 2014, accessed 24 September 2014, p. 34. 118.Australian Manufacturing Workers’ Union, Submission to Joint Standing Committee on Treaties, op. cit., p. 7.

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which Korea is a major export destination), the AMWU expected that after the major automotive manufacturers ceased operations, Australia would no longer manufacture engines and gearboxes.119

Rules of origin and complexity with multiple FTAs As discussed below in relation to the main provisions of the Customs Bill, in order to access preferential tariff rates under KAFTA, exporters must comply with the rules of origin. However, these rules can be quite complex, and different FTAs may have different rules of origin, creating additional challenges for exporters who must comply with multiple frameworks. This complexity means that businesses may make limited use of concessions available under FTAs, and to some extent the complexity of rules of origin may act as non-tariff barriers to trade.120 A 2013 survey by the Australian Chamber of Commerce and Industry suggests that many Australian exporters may not understand FTAs or how to access their benefits, which matches previous research on the topic.121

Investment Under the Foreign Investment Review Board (FIRB) framework, acquiring an interest worth more than AUD$248 million in an Australian business must be notified to the FIRB; particular rules and thresholds apply for some sectors and asset types.122 New Zealand and United States investors can invest up to a higher threshold ($1,078m) without a requirement to notify the FIRB.123

Under KAFTA, Korean investors will receive similar treatment to New Zealand and US investors, and be able to acquire an interest worth $1,078m without a requirement to notify the FIRB (some exceptions remain in relation to particular sectors and asset types).124

Movement of natural persons provisions Chapter 10 of KAFTA relates to commitments on the movement of natural persons. Under that chapter, Australia has made a commitment not to apply labour market testing, while Korea retained the right to apply labour market testing for contractual service suppliers.125 A DFAT official commented that this was ‘part of a negotiated outcome of the overall chapter’.126

While the relationship between FTA clauses and Australia’s administrative visa categories is not entirely transparent, the Construction, Forestry, Mining and Electrical Union has argued that there is an imbalance in the commitments, and that potentially the FTA will see Korean nationals entirely exempt from any labour market testing requirements.127

Services Chapter 7 of KAFTA includes a number of commitments in relation to cross-border trade in services.128 This will enable Australian providers of a range of services (including legal, accounting, and adult education services) to better access the Korean market.129 This includes enabling:

119.Department of Foreign Affairs and Trade (DFAT), Korea-Australia Free Trade Agreement: Regulation Impact Statement, op. cit., paragraph 51; T Skladzien, op. cit., p. 35. 120.For discussion, see Productivity Commission, Bilateral and Regional Trade Agreements, op. cit., pp. 104-107. 121.Australian Chamber of Commerce and Industry, Submission to Joint Standing Committee on Treaties, op. cit., August 2014, p. 41; J Lynch,

‘Many businesses bewildered by free trade agreements’, Sydney Morning Herald, 19 August 2014, accessed 24 September 2014; M Kawai and G Wignaraja, ‘A Closer Look at East Asia’s Free Trade Agreements’, World Trade Organisation website, accessed 24 September 2014. 122.Foreign Investor Review Board (FIRB), ‘Monetary Thresholds’, FIRB website, accessed 24 September 2014; for a broader discussion see K Sanyal, ‘Australia’s Foreign Investment Policy’, Parliamentary Library Briefing Book, Parliamentary Library, Canberra, 16 December 2013. 123.Foreign Investor Review Board (FIRB), ‘Monetary Thresholds’, op. cit. 124.‘Annex I: Schedule of Australia’, Korea-Australia Free Trade Agreement, opened for signature 8 April 2014, ATNIF [2014] No. 4; Department of

Foreign Affairs and Trade, Fact Sheet: Investment, 23 June 2014, accessed 24 September 2014. 125.Department of Foreign Affairs and Trade (DFAT), Korea-Australia Free Trade Agreement: Regulation Impact Statement, op. cit., paragraph 77; ‘Chapter 10: Movement of Natural Persons’, Korea-Australia Free Trade Agreement, opened for signature 8 April 2014, ATNIF [2014] No. 4;

Construction, Forestry, Mining and Energy Union, Submission to Joint Standing Committee on Treaties, op. cit.,; Department of Foreign Affairs and Trade, Answer to Question on Notice, Report 142: Treaty tabled on 13 May 2014 - Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), p. 2. 126.J Adams (Deputy Secretary, Department of Foreign Affairs and Trade), Evidence to Foreign Affairs, Defence and Trade Committee, Korea-Australia Free Trade Agreement, 9 September 2013, accessed 24 September 2014, p. 62. 127.For more detail on this issue, see Department of Foreign Affairs and Trade, Answer to Question on Notice, op. cit. 128.‘Chapter 7: Cross-Border Trade in Services’, Korea-Australia Free Trade Agreement, opened for signature 8 April 2014, ATNIF [2014] No. 4.

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• Australian legal and accounting firms to establish representative offices, and provide some advisory services

• Australian adult education service providers to establish certain types of institutions in Korea, and

• lifting some restrictions on ownership of certain telecommunications entities.130

For financial services, Korea’s commitments in KAFTA include ‘binding current regulatory arrangements locking in existing access for Australian service providers’.131

The modelling commissioned by the Department of the Foreign Affairs and Trade hypothesised that trade services liberalisation could double the growth rate of services exports to Korea, but did not include services in the main modelling exercise.132

Investor State Dispute Settlement Scheme In the chapter on investment, KAFTA includes a section allowing investors of one country to submit a claim against the other country to arbitration, under an investor-state dispute settlement (ISDS) process.133 The inclusion of an ISDS provision in KAFTA is contentious, and has received significant attention. A committee inquiry into a Bill that would prevent the Commonwealth from entering into agreements that include ISDS received over 11,000 emails submitted via a GetUp! tool.134 More detailed discussion of the ISDS provisions of KAFTA, and some of the issues associated, are included in Appendix A to this Digest.

Intellectual property commitments KAFTA includes a number of commitments on intellectual property protections. Broadly speaking, commitments in KAFTA reflect Australia’s current IP laws.135 While incorporating existing standards into the agreement does not introduce new commitments, locking-in Australia’s current systems has been criticised by a number of commentators, as it does not allow flexibility to make regulatory changes in response to new developments.136 For a more detailed discussion, see the Appendix B to this Digest.

Environment and labour commitments in KAFTA KAFTA includes chapters on labour and the environment (chapters 17 and 18, respectively). The commitments under KAFTA’s chapter on the environment are, however, specifically excluded from the dispute settlement mechanism between the two countries, leaving them effectively as domestic policies.137 Similarly, the commitments under the labour chapter are excluded from the dispute settlement mechanism between the two countries.138

Main provisions of the Customs Amendment (Korea-Australia Free Trade Agreement Implementation) Bill 2014 Chapter 3 of KAFTA deals with the Rules of Origin (ROO), setting out the procedures and documentation required to show that a good qualifies for preferential tariff rate under KAFTA. The provisions of the Customs

129.Department of Foreign Affairs and Trade (DFAT), Korea-Australia Free Trade Agreement: Regulation Impact Statement, op. cit., paragraphs 56-66.

130.Ibid. 131.Department of Foreign Affairs and Trade (DFAT), Korea-Australia Free Trade Agreement: Regulation Impact Statement, op. cit., paragraph 63. 132.Centre for International Economics, Australia-Korea Free Trade Agreement: Implications for Australia, 28 February 2014, pp. 4 and 15. 133.‘Chapter 11: Investment’, Korea-Australia Free Trade Agreement, opened for signature 8 April 2014, ATNIF [2014] No. 4. 134.Standing Committee on Foreign Affairs, Defence and Trade, Trade and Foreign Investment (Protecting the Public Interest) Bill 2014, The Senate,

Canberra, August 2014, p. 2; GetUp!, ‘The most important trade agreement you've never heard of’, GetUp! website, accessed 11 September 2014. 135.K Weatherall (Associate Professor, University of Sydney), Submission to Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014 - Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014) ,

13 June 2014, p. 3, accessed 27 September 2014. 136.Ibid.; IP Australia, IP Australia submission: Productivity Commission Study on Bilateral & Regional Trade Agreements, accessed 24 September 2014; Productivity Commission, Bilateral and Regional Trade Agreements, op. cit., pp. 257-264. 137.’Article 18.9: Procedural guarantees’, Korea-Australia Free Trade Agreement, opened for signature 8 April 2014, ATNIF [2014] No. 4. 138.’Article 17.6: Procedural guarantees’, Korea-Australia Free Trade Agreement, opened for signature 8 April 2014, ATNIF [2014] No. 4.

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Amendment (Korea-Australia Free Trade Agreement Implementation) Bill 2014 (Customs Bill) amend the Customs Act 1901 to implement these rules.139

ROO are used to determine where a product or good has been made, or its country of origin, for tariff purposes. The significance of a determination about the country of origin of a product lies in the fact that only products which have been produced in a country which is party to the relevant FTA can be given the preferential tariff rates of, and thus improved access to, the Australian market under that FTA.

A central part of FTAs is access to preferential tariff rates; however, the benefit of a reduction in these rates is not automatic or guaranteed. Being able to take advantage of the zero tariff rate will depend on the particular ROOs and their restrictiveness for the goods being imported. An FTA ‘only confers preferential terms for market access and tariff concession to those goods, services and investments that comply with the terms and conditions of the agreement’.140 As discussed above (Rules of origin and complexity with multiple FTAs), the complexity involved with distinct ROO under multiple FTAs can create cumulative complexity for business, and potentially reduce the extent to which FTAs are utilised.

Schedule 1, Part 1—Korean originating goods Part 1 of Schedule 1 inserts a new Division 1J into Part VIII of the Customs Act, which ‘sets out the rules for determining whether goods are Korean originating goods and therefore eligible for a preferential rate of customs duty under the Customs Tariff Act’.141

In simple terms, a good will meet the requirement of being an ‘originating good’ under KAFTA if one of the following requirements is satisfied:

• it is wholly obtained or produced entirely in Korea

• it is produced entirely in either or both Korea and Australia, from materials that conform to the provisions of the Rules of Origin (ROO) Chapter of KAFTA, or

• the product is manufactured in either or both Korea and Australia using inputs from other countries, and meets the Product Specific Rules (Annex 3A KAFTA) and requirements specified in the ROO Chapter.

Rule 1—goods wholly obtained in Korea or in Korea and Australia (proposed Subdivision B) Proposed subsection 153ZMC(1) stipulates that goods are Korean ‘originating goods’ if they are ‘wholly obtained’ in Korea or in Korea and Australia and either:

• the importer of the goods has, at the time for working out the rate of import duty on the goods, a Certificate of Origin, or a copy of one, for the goods, or

• Australia has waived the requirement for a Certificate of Origin for the goods.

The Certificate of Origin (COO) is a document to certify the place of growth, production or manufacture of goods. It is required when exporting to specific countries, when requested by the consignee for customs clearance. The COO identifies goods and contains an express certification normally by a government authority, or other empowered body, that the goods in question originate in a specific country. The one COO may apply to multiple importations of the goods specified.

It is notable that KAFTA enables Australian and Korean exporters and manufacturers to self-certify the origin of the goods through completing a COO. The Australian Chamber of Commerce and Industry (ACCI) has raised concerns about the self-certification for the COO, pointing out that the COO:

should be certified by a third party, according to internationally accepted standards and in the interests of retaining trust in the trading system for all stakeholders. A exporter declaration without Certification and without the same supporting systems is properly a ‘Declaration of Origin’, and should be titled accordingly. 142

139.Customs Act 1901 (Cth), accessed 29 September 2014. 140.Australian Chamber of Commerce and Industry, Submission to the Joint Standing Committee on Treaties, op. cit., p. 2. 141.Explanatory Memorandum, Customs Amendment (Korea-Australia Free Trade Agreement) Bill 2014, p. 29. 142.Australian Chamber of Commerce and Industry, Submission to the Joint Standing Committee on Treaties, op. cit., p. 4.

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Proposed subsection 153ZMC(2) provides an exhaustive list of circumstances according to which a good is classified as wholly obtained in Korea or in Korea and Australia. The list mirrors the definition of ‘wholly obtained goods’ set forth in Article 3.2 of the KAFTA and includes, for example:

• vegetable goods grown and harvested, picked or gathered in the territory of one or both of the Parties

• live animals born and raised in the territory of one or both of the Parties

• fish, shellfish and other marine life taken from the sea, seabed, ocean floor or subsoil outside the territorial seas of Korea by a vessel registered or recorded in Korea and entitled to fly its flag

• waste and scrap derived from:

- production in the territory of Korea, or - used goods collected in the territory of Korea provided that such goods are fit only for the recovery of raw materials - goods collected from the territory of Korea which can no longer perform their original purpose and are fit

only for the recovery of raw materials.

Rule 2—Goods produced entirely in Korea or in Korea and Australia from ‘originating materials’ (proposed Subdivision C) Proposed section 153ZMD provides that goods are considered to be of Korean origin (Korean originating goods) if they were produced entirely in Korea or in Korea and Australia, using exclusively ‘originating materials’ and either:

• the importer of the goods has, at the time for working out the rate of import duty on the goods, a Certificate of Origin, or a copy of one, for the goods, or

• Australia has waived the requirement for a Certificate of Origin for the goods.

The term ‘originating material’ is defined in proposed section 153ZMB to mean Korean or Australian originating goods that are used in the production of other goods, or indirect materials.

Rule 3—Goods produced entirely in Korea or in Korea and Australia from ‘non-originating materials’ (proposed Subdivision D) Proposed subsection 153ZME(1) sets out the requirements according to which a good which was produced entirely in Korea, or in Korea and Australia, from non-originating material, may qualify as a Korean originating good. These requirements are:

• they are classified to a heading or subheading of the Harmonized Commodity Description and Coding System (also referred to Harmonized System or simply ‘HS’) that is established by or under KAFTA143 and will be specified in column 1 of the table in Schedule 1 to the Customs (Korean Rules of Origin) Regulations 2014 (the Korean Regulations)

• they are produced entirely in the territory of Korea, or entirely in the territory of Korea and the territory of Australia, from non-originating materials only or from non-originating materials and originating materials

• each requirement that is specified in the regulations to apply in relation to the goods is satisfied, and

• either:

- the importer of the goods has, at the time for working out the rate of import duty of the goods, a Certificate of Origin, or a copy of one, for the goods, or - Australia has waived the requirement for a Certificate of Origin for the goods.

143.Article 1.4 of KAFTA defines the Harmonized System as the system governed by the International Convention on the Harmonized Commodity Description and Coding System. The HS was developed by the World Customs Organisation and in simple terms, it is an internationally standardised system of names of commodity groups and identified by a 6-digi code to classify traded products. It uses defined rules to assist with this classification and is used by over 200 countries and assists with the harmonisation or trade and customs procedures. It is estimated that around 98 per cent of merchandise in international trade is classified in terms of the HS.

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Change in tariff classification

For goods that contain inputs/materials obtained outside Korea or Australia (but are used in the production of goods in either Korea or Australia), a change of tariff classification (CTC) approach has been adopted. This means that a good qualifies as an originating good if a transformation takes place, defined in terms of a change in the tariff code of the input to the tariff code of the final product (for example, transforming steel into kitchen products).144 The Schedule of Product Specific Rules sets out the specific CTC requirements (Annex 3A KAFTA).

Proposed subsections 153ZME(2) and 153ZME(3) respectively provide that the regulations may prescribe that each non-originating material used in the production of the goods is required to satisfy a prescribed change in tariff classification, and the circumstances which need to be satisfied in order to achieve that change in tariff classification.

Proposed subsection 153ZME(4) provides that the change in tariff classification is taken to be satisfied if the total value of all of the non-originating materials used in the production of the goods does not exceed ten per cent of the customs value of the goods.145

The Explanatory Memorandum states that the value of non-originating materials for the purposes of proposed subsection 153ZME(4) is to be worked out in accordance with the method that will be included in the Korean Regulations.146

Proposed subsection 153ZME(5) states that proposed subsection 153ZME(4) does not apply to goods that are classified to a headings or subheadings in the HS as follows:

• headings 0301 to 0303 or 0305 to 0308 of Chapter 3 (specified Fish and Crustaceans, Molluscs and Other Aquatic Invertebrates)

• headings 0701 to subheading 0710.10 or heading 0713 to 0714 of Chapter 7 (specified Edible Vegetables and Certain Roots and Tubers. For example, potatoes fresh or chilled, tomatoes fresh or chilled, onions and shallots)

• headings 0801 to 0810 or subheadings 0813.10 to 0813.40 of Chapter 8 (specified Edible Fruit and Nuts; Peel of Citrus Fruit or Melons).

Regional value content

A regional value content (RVC) is a type of rule of origin. For some goods, a RVC approach has been specified. Under a RVC approach, originating materials and domestic processes must represent a specified proportion of the final value of the product. The RVC component represents an additional requirement to the specified CTC.

Proposed subsection 153ZME(7) provides that regulations may prescribe that goods must have a RVC of a minimum prescribed percentage. Proposed subsection 153ZMF(2) provides that if goods are required to have a RVC of at least a particular percentage, the regulations must require the value of the packaging material or container to be taken into account as originating materials or non-originating materials, as the case may be, for the purposes of working out the RVC of the goods. The value of the packaging material or container is to be worked out in accordance with the regulations (proposed subsection 153ZMB(3)).

Rule 4—Non-qualifying operations (proposed Subdivision E) Proposed subsection 153ZMG(1) provides that if any of the following processes or operations are the only operations or processes that take place in Korea, or in Korea and Australia, in relation to goods (either alone or as a combination), this does not make those goods ‘originating goods’:

• operations to preserve goods in good condition for the purpose of transport or storage of the goods

• changing of packaging or the breaking up or assembly of packages

• washing, cleaning or removal of dust, oxide, oil, paint or other coverings

• sharpening or simple processes of grinding, crushing or cutting;

144.The tariff code is the number used to describe a particular good, under the Harmonized Commodity Description and Coding System. 145.Explanatory Memorandum, p. 35. 146.Ibid., p. 36.

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• simple placing in bottles, cans, flasks, bags, cases or boxes, fixing on cards or boards or other simple packaging operations

• affixing or printing marks, labels, logos or other distinguishing signs on goods or on their packaging

• disassembly of goods

• the reclassification of goods without any physical change in the goods, and

• any combination of operations referred to above.

Outward processing zones on the Korean Peninsula (OP) Proposed subsection 153ZMI enables goods that have been exported from Korea and have undergone processing in an area designated as an outward processing (OP) zone (under Annex 3-B of KAFTA) and then re-imported into Korea, to be treated as Korean originating goods under Division 1J. OP refers to the temporary exportation of goods for (additional) processing. The Kaesong Industrial Complex (KIC) located in North Korea is an outward processing zone where South Korean companies have been allowed to establish manufacturing plants and employ North Korean labour.147 Korean goods are temporarily sent to KIC in North Korea for processing and then the finished goods are imported back to South Korea for domestic consumption, export or further processing in Korea.

Korea does not impose any tariff on North Korean products because the Korean government treats inter-Korean trade as trade within one customs territory. This treatment of the two Koreas as one does not derive from any FTA between the two Koreas. Rather, it arises out of Article 12 of the Inter-Korean Exchange and Cooperation Act (IKECA) (South Korean legislation) which provides that ‘inter-Korean trade is internal trade within a nation and, therefore, shall not be regarded as trade between countries’. Professor Ahn points out that the same provision was inserted into:

a special implementation law for WTO Agreements in 1995 and declared that it would treat North Korean products as domestic goods. Article 5 of the South Korean “Special Law on Implementation of World Trade Organization Agreement” [Marrakesh Agreement], subtitled “Intra-Nation Transaction”, provides that “the trade between South and North Koreas constitutes an internal trading within an economy and as such shall not be regarded as that between countries”

148

However, other countries do not consider the two Koreas to be one customs territory.149 Accordingly, they treat products that have been processed in the KIC as North Korean goods. Because North Korea is not a member of the WTO and thus does not enjoy the benefit of Most Favoured Nation rates of duty, it means that Koreans who process their goods in OP (KIC) in North Korea get unfavourable treatment for their North Korean originating goods. As a way around this problem, Korea has entered into a number of FTAs which have been drafted to include OP zone provisions150 that enable the products manufactured or processed in an OP zone to also enjoy preferential tariff rates. In practical terms this means that Korean FTAs extend preferential customs tariff rates to the KIC products that are arguably of North Korean origin. It is notable that this same beneficial treatment is not always extended to goods undergoing OP in other countries.

The Korea-Singapore FTA was one of the first FTAs to include an OP zone provision. Interestingly, it appears to have been drafted much more tightly than the OP zone clause in KAFTA.151

147.D J Knudsen and W J. Moon, ‘Recent Development: North Korea and the Politics of International Trade Law: the Kaesong Industrial Complex and WTO Rules of Origin’ (2010) 35 Yale Journal of International Law, 251, 251-55. 148.D Ahn, ‘Legal Issues of North Korea-EU FTA: New Model for Post-NAFTA FTAs?’, Policy Brief, October 2010, p. 8. 149.D Ahn, ‘Legal Issues for Korea’s “Internal Trade” in the WTO System’, in W Lim & R Torrent eds, Multilateral and Regional Frameworks for

Globalization: WTO and Free Trade Agreements, 2005, p.362 and p. 363, accessed 23 September 2014. 150.For example: Korea-Singapore Free Trade Agreement, Korea-US Free Trade Agreement, FTAs with Chile, Peru, India, Turkey and Colombia. 151. ARTICLE 4.4 : OUTWARD PROCESSING 1. [...] a good listed in Annex 4C shall be considered as originating even if it has undergone processes of production or operation outside the

territory of a Party on a material exported from the Party and subsequently re-imported to the Party, provided that: (a) the total value of non-originating inputs as set out in paragraph 2 does not exceed forty (40) per cent of the customs value of the final good for which originating status is claimed; (b) the value of originating materials is not less than forty-five (45) per cent of the customs value of the final good for which originating status is

claimed;

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Trade Law Professor Ahn points out that:

Although the above approach to treat products from North Korean territories was accepted by Singapore and EU-FTA, other FTA negotiation partners such as Japan and the United States have vehemently opposed to the adoption of similar provisions. In fact, the Korea-US FTA came up with the different approach to leave the important decision in the future, widening the potential to cover the whole peninsula but with much more difficult conditionality. Annex 22-B of the Korea-US FTA stipulates “Committee on Outward Processing Zones on the Korean Peninsula” to address the issues for products manufactured from North Korean territories as follows:

3. The Committee shall identify geographic areas that may be designated outward processing zones. The Committee shall establish criteria that must be met before goods from any outward processing zone may be considered originating goods for the purposes of this Agreement, including but not limited to: progress toward the denuclearization of the Korean Peninsula; the impact of the outward processing zones on intra-Korean relations; and the environmental standards, labor standards and practices, wage practices and business and management practices prevailing in the outward processing zone, with due reference to the situation prevailing elsewhere in the local economy and the relevant international norms.

4. The Committee shall determine whether any such outward processing zone has met the criteria established by the Committee. The Committee shall also establish a maximum threshold for the value of the total input of the originating final good that may be added within the geographic area of the outward processing zone.

5. Decisions reached by the unified consent of the Committee shall be recommended to the Parties, which shall be responsible for seeking legislative approval for any amendments to the Agreement with respect to outward processing zones. 152

Professsor Ahn goes on to point out that:

The Korea-EU FTA was a crucial opportunity for Korea to reverse the above compromise with the US back to the original approach to more broadly embrace products from KIC. However, the above provision, albeit with much weaker conditions, was adopted similarly in the Korea-EU FTA. 153

As in the case of the Korea-US FTA, Annex 3-B of KAFTA also establishes a Committee on Outward Processing Zones on the Korean Peninsula. However, it is notable that unlike the Korea-US FTA, Annex 3-B of KAFTA is less detailed simply providing that:

The Committee shall review the conditions on the Korean Peninsula and identify geographic areas that may be designated as outward processing zones. The Committee shall also establish a maximum threshold for the value of the total input of the originating final good that may be added within the geographic area of the outward processing zone.

154

OP (KIC) and human rights Issues

(c) the materials exported from a Party shall have been wholly obtained or produced in the Party or have undergone there processes of production or operation going beyond the non-qualifying operations in Article 4.16, prior to being exported outside the territory of the Party; (d) the producer of the exported material and the producer of the final good for which originating status is claimed are the same; (e) the re-imported good has been obtained through the processes of production or operation of the exported material; and (f) the last process of production or operation4-1 takes place in the territory of the Party. [...]

See also: D Ahn, ‘Legal Issues of North Korea-EU FTA: New Model for Post-NAFTA FTAs?’ Policy Brief, October 2010, p. 11 and Australian Council of Trade Unions, ‘Korean free trade agreement sells out Australian workers’, media release, 24 September 2014, accessed 24 September 2014. 152.D Ahn, ‘Legal Issues of North Korea-EU FTA: New Model for Post-NAFTA FTAs?’, Policy Brief, October 2010, p. 11. 153.Ibid. 154.Annex 3-B.3 KAFTA.

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ACTU President Ged Kearney has raised concerns that KAFTA ‘leaves the door open to imports from parts of North Korea that are not subject to labour standards and which are notorious for forced and prison labour’.155 Chapter 17 of KAFTA deals with labour issues. However, the drafting of labour standards in that chapter are arguably expressed as rather weak commitments. Furthermore, they reflect minimum standards156 and do not appear to be enforceable through the government-to-government dispute process that would be applicable to other parts of KAFTA.157

Schedule 1, Part 2—Verification powers Under KAFTA, Australia and Korea are required to create and confer certain verification powers.158 In this regard, proposed Division 4G of Part VI of the Customs Act is titled ‘Exportation of goods to Korea’ and will impose obligations on people who export goods to Korea and who wish to obtain preferential treatment in respect of those goods in Korea, and on people who produce such goods.

Record keeping obligations

The Customs Act already contains record keeping requirements for exporters. However, these are not sufficient to comply with the requirements set out in KAFTA. Proposed section 126AMB provides that regulations may prescribe record keeping obligations in relation to goods that are exported to Korea and are claimed to be Australian originating goods and are seeking preferential tariff treatment in Korea. These regulations may impose obligations on an exporter or producer of goods.

Power to require records

Proposed section 126AMC provides that an authorised officer may require a person who is subject to record keeping obligations under the proposed 126AMB regulations to provide to the officer records which the officer requires.

Power to ask questions

Proposed section 126AMD provides that an authorised officer may require a person who is an exporter or producer of goods that are being exported to Korea and for which preferential tariff treatment is sought, to answer questions in order to verify the origin of the goods.

Schedule 1, Part 3—Application provisions Part 3 of Schedule 1 specifies the application of the rules relating to Korean originating goods, and the new verification powers. Specifically:

• the provisions relating to Korean originating goods apply to goods imported after the date of commencement, or goods imported before the date of commencement but where the relevant period for working out the tariff rate is after commencement, and

• the new verification powers apply to goods exported to Korea on or after commencement (regardless of when the goods were produced).

Main provisions of the Customs Tariff Amendment (Korea-Australia Free Trade Agreement Implementation) Bill 2014 The Customs Tariff Amendment (Korea-Australia Free Trade Agreement Implementation) Bill 2014 (the Tariff Bill) amends the Customs Tariff Act 1995 to create a new set of tariff rates, which are applied to Korean originating goods.159 The Bill does this through:

• a number of technical amendments to the Customs Tariff Act 1995 (Tariff Act), made by items 1 to 25 and items 27 to 31 and

155.Australian Council of Trade Unions, Korean free trade agreement sells out Australian workers, media release, 24 September 2014, accessed 24 September 2014. 156.Article 17.1 is stated in terms of Korea and Australia affirming their obligations under ILO Declaration on Fundamental Principles and Rights at Work and its Follow-up (1998). The ILO Declaration contains four basic policies and in terms of its legal force is regarded by many

commentators as a weak alternative to the traditional standard setting approach. 157.Australian Fair Trade and Investment Network Limited, Submission to Joint Standing Committee on Treaties, op. cit., p. 4. 158.Articles 3.23 and 3.24, KAFTA. 159.Customs Tariff Act 1995 (Cth).

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• inserting a proposed Schedule 10 (item 26 of the Bill) into the Tariff Act. This new schedule sets the tariff rates that will apply for goods which are Korean originating (as discussed under the rules of origin, outlined above).

The Tariff Act refers to ‘duties of Customs’ (section 15); this is the ‘tariff’, or a tax on imports applied according to the relevant schedule (section 16). Schedule 3 of the Tariff Act specifies the general tariff rates, which apply to goods unless they are eligible for concessional rates under an FTA, which is specified in the relevant schedule (proposed Schedule 10 will specify rates under the KAFTA). Tariff rates are set out for goods according to 8 digit codes under the Harmonized Commodity Description and Coding System (Tariff Act subsection 7(3)).

Tariff rates under proposed Schedule 10 are drafted in line with passage and treaty ratification in 2014. If there were a delay in treaty ratification so that the treaty did not enter into force in 2014, then the Bill as drafted would result in tariff reductions beyond those agreed under KAFTA (because the rates agreed to for the second year after entry into force are drafted as applying from 2015).

The tariff rates set out in proposed Schedule 10 cover an extremely wide range of goods, under almost 700 tariff lines. To the extent possible, the discussion above (Tariff reductions) summarises the key concessions made by Australia and the Republic of Korea, and the expected impacts on trade.

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Appendix A: Investor State Dispute Settlement

Background - what is ISDS? The ISDS clause in KAFTA enables an investor of one party to bring an arbitration claim against the other party.160 Instead, the agreement specifies that six months after giving notice of a claim, the dispute may be heard under the Convention for the Settlement of Investment Disputes between States and Nationals of Other States (‘the ICSID Convention’), or the rules of the United Nation Commission on International Trade Law (‘UNCITRAL arbitration rules’).161

Rationale for inclusion of ISDS provisions The Minister’s Statement on the KAFTA and the materials from the Department of Foreign Affairs and Trade do not include extensive discussion of the rationale for including an ISDS in the KAFTA.162 The Regulatory Impact Statement notes that the inclusion of an ISDS ‘will promote investor confidence by providing for international arbitration of FTA-based investment disputes.’163

More broadly, in its report on bilateral and regional trade agreements, the Productivity Commission (‘the PC’) considered the rationale for including ISDS provisions in trade agreements, and identified two key arguments:

1. Governments may have an incentive to offer favourable conditions to foreign investors in the period prior to them making an investment, and then to expropriate that investment after it has been made.

2. Foreign businesses might face systemic biases against them, such as when tendering for government procurement contracts, or might face more onerous requirements in meeting regulatory or planning approvals. 164

In its analysis of the evidence, however, the PC noted earlier findings that the inclusion of ISDS clauses does not increase investment flows, and concluded:

There does not appear to be an underlying economic problem that necessitates the inclusion of ISDS provisions within agreements. Available evidence does not suggest that ISDS provisions have a significant impact on investment flows. 165

While the negotiating process for trade agreements is confidential, media reporting and comments by officials suggest that Korea would not have accepted an FTA that did not include ISDS - a deputy secretary from the Department of Foreign Affairs and Trade commented that ‘the inclusion of an ISDS mechanism was essential to Korea’, and agreed that without the ISDS included, ‘the agreement would never have been signed’.166 A representative from the meat and livestock industry commented that when it became apparent that the inclusion of ISDS was potentially a stumbling block, they ‘actively lobbied’ on the issue.167

In providing evidence to a Senate committee, Professor Luke Nottage also argued that to reject ISDS would be an overly strong response, turning away from the international legal system:

… rejecting completely ISDS … would make Australia unique among developed countries and put us in the company of a very few countries, even among developing countries, mainly a few very Leftists regimes in South America. I think it would torpedo future trade and investment treaty negotiations to which the major parties in Australia have long been committed, as well as potentially inhibit the development of multilateral initiatives and international

160.‘Article 11.16: Losses and compensation’, Korea-Australia Free Trade Agreement, opened for signature 8 April 2014, ATNIF [2014] No. 4. 161.Ibid. 162.Department of Foreign Affairs and Trade (DFAT), Fact Sheet: Investor State Dispute Settlement, accessed 24 September 2014; DFAT, Quick Guide: Key investment and investor state dispute settlement (ISDS) outcomes, accessed 24 September 2014; A Robb, ‘Ministerial Statement:

Korea-Australia Free Trade Agreement’, House of Representatives, Debates, 13 May 2014, pp. 3502-3503. 163.Department of Foreign Affairs and Trade (DFAT), Korea-Australia Free Trade Agreement: Regulation Impact Statement, op. cit., paragraph 74. 164.Productivity Commission, Bilateral and Regional Trade Agreements, op. cit., p. 269. 165.Ibid., p. 271. 166.R Callick, ‘Korea ready to talk turkey after FTA hurdle removed’, The Australian, 1 November 2013, p. 18; J Adams (Deputy Secretary,

Department of Foreign Affairs and Trade), Evidence to Joint Standing Committee on Treaties, Korea-Australia Free Trade Agreement, 5 August 2013, p. 6, accessed 24 September 2014. 167.M Foster (Chairman, KAFTA Red Meat and Livestock Industry Taskforce), Evidence to Joint Standing Committee on Treaties, Korea-Australia Free Trade Agreement, 29 July 2014, p. 20, accessed 24 September 2014.

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investment law. I think it would also reinforce a sense I have, shared among public international law colleagues in Australia, that Australia is turning very inward looking. I think that is obvious, for example, in the field of international human rights, unfortunately … 168

Critiques of ISDS A number of academics and other commentators have expressed significant concerns with the inclusion of ISDS provisions in trade agreements, and in particular with a broader international trend towards greater use of ISDS provisions.

A number of critiques centre on the nature of the ISDS system. As Chief Justice French commented recently, ‘Arbitral tribunals set up under ISDS provisions are not courts. Nor are they required to act like courts … Questions have been raised about the consistency, openness and impartiality of decisions made in ISDS arbitrations.’169

The shortcomings of the ISDS system include:

• inconsistency - because there is no binding precedent, some panels have made different findings on the same set of facts170

• high costs - disputes under ISDS systems are often extremely expensive to pursue. Because the arbitration panellists are paid in proportion to time spent on a case, they have a direct incentive to extend the length of the dispute process

• conflicts of interest - panellists in one case may act as the legal representative for a claimant or respondent in another, creating a situation with potential for strong conflicts of interest, and

• lack of transparency - while more recent agreements tend to include requirements that all proceedings and documents be published, in some cases proceedings are not publicly available, or even restricted.171

In turn, these aspects of the ISDS system have implications for governments, and their ability to regulate in the public interest. Discussing the complexity of ISDS provisions, Chief Justice French noted that ‘the significance of ISDS arbitral processes is global. They have general implications for national sovereignty, democratic governance and the rule of law within domestic legal systems’.172

The first impact on governments is the cost associated with defending ISDS cases. While in many cases information is unavailable or uncertain, an OECD survey estimated that the costs of simply defending a case average around USD $8m, and in some cases exceed USD $30m.173 More importantly, panels may have significant discretion in awarding damages; in one extreme case Ecuador was required to pay USD $1.8 billion.174

The nature of the ISDS system, and the significant costs associated with it, can in turn have a significant impact on government decisions. One potential risk is that the threat of action under an ISDS provision will prevent government from introducing new regulations - ‘regulatory chill’. While one statistical analysis found conflicting evidence on regulatory chill, Dr Tienhaara notes that assessing the level of regulatory chill is difficult, as it

168.L Nottage, Evidence to Senate Foreign Affairs, Defence and Trade Committee, Inquiry into the Trade and Foreign Investment (Protecting the Public Interest) Bill 2014, 6 August 2014, p. 20, accessed 24 September 2014. 169.Chief Justice RS French AC, Investor-State Dispute Settlement—A Cut Above the Courts?, presentation to the Supreme and Federal Courts Judges’ Conference, 9 July 2014, accessed 24 September 2014, p. 1. 170.‘Those arbitral decisions that have entered into the public domain have exposed recurring episodes of inconsistent findings. These have

included divergent legal interpretations of identical or similar treaty provisions as well as differences in the assessment of the merits of cases involving the same facts. Inconsistent interpretations have led to uncertainty about the meaning of key treaty obligations and lack of predictability of how they will be applied in future cases’ (United Nations Conference On Trade and Development, Reform of investor-state dispute settlement: in search of a roadmap, Issues Note, June 2013, p. 3, accessed 24 September 2014). 171.These issues are outlined in more detail in a submission by Dr Kyla Tienhaara (Submission to the Joint Standing Committee on Treaties, Report

142: Treaty tabled on 13 May 2014 - Free Trade Agreement between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), 16 May 2014, accessed 27 September 2014. 172.Chief Justice RS French AC, op. cit., pp. 3-4. 173.D Gaukrodger, K Gordon, Investor-State Dispute Settlement, OECD Working Papers on International Investment 2012/13, 2012, p. 19, accessed 24 September 2014, p. 19. 174.K Tienhaara, Submission to the Joint Standing Committee on Treaties, op. cit., p. 8.

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requires finding ‘evidence of something that hasn’t happened’ (emphasis original).175 Despite this challenge, a number of sources cite evidence - both anecdotally, and of particular reforms - which have been abandoned at the threat of an ISDS case (particularly in Canada, under the North America Free Trade Agreement).176

In its analysis of the risks associated with ISDSs, the Productivity Commission concluded:

In the Commission’s assessment, ISDS provisions can impose a range of potential problems on sovereign countries, the nature and extent of which are very difficult to calculate and may not be known at the time an agreement is made … Experience in other countries demonstrates that there are considerable policy and financial risks arising from ISDS provisions.

177

Most favoured nation clauses The most-favoured nation (MFN) clause is a linchpin in investment agreements (and material on investment in FTAs). As outlined in a report by UNCTAD:

It means that a host country treats investors from one foreign country no less favourably than investors from any other foreign country. The most-favoured-nation standard gives investors a guarantee against certain forms of discrimination by host countries, and it is crucial for the establishment of equality of competitive opportunities between investors from different foreign countries … While most-favoured-nation treatment is generally more than the minimum standard required under customary international law, it does not go so far as to put the foreign investor on an equal footing with domestic investors in the host country.

178

However, depending on the drafting of the ISDS provision and other terms in an FTA, MFN clauses have in some cases been used to access provisions in other treaties that are more favourable to their case.

In addition to the MFN provision at Article 11.4, KAFTA also includes a standard clause providing for ‘fair and equitable treatment’ (FET; Article 11.5). However this clause has been interpreted quite broadly in previous ISDS cases, and in some cases raised concerns - an UNCTAD review noted ‘the application of FET provisions has brought to light the need to balance investment protection with competing policy objectives of the host State, and in particular, with its right to regulate in the public interest’.179

More broadly, ISDS provisions can in some cases provide preferential treatment to foreign investors over domestic investors, who are not able to access the protections provided under an FTA.180 Investors have, in some cases, been able to selectively draw on clauses from other treaties that are more favourable to their case.

Protections included in KAFTA In his speech on the KAFTA, the Minister for Trade noted that in relation to ISDS, the ‘government has ensured inclusion of appropriate carve-outs and safeguards in important areas such as public health and environmental measures’.181

There are a number of protections included in the KAFTA:

• decisions in relation to foreign investment policy are excluded from ISDS claims 182

• general exceptions are provided in Chapter 22, to exempt measures ‘necessary to protect human, animal or plant life or health’, and a number of other categories183

175.J Shoaf, A bit of regulatory chill?, Masters of Public Policy thesis, April 2013, accessed 24 September 2014; K Tienhaara, Submission to the Joint Standing Committee on Treaties, op. cit., p. 21. 176.G Van Harten, Submission to the Productivity Commission Bilateral and Regional Trade Agreement Study, 23 September 2010, accessed 24 September 2014, p. 5; M Rimmer, Submission to Senate Foreign Affairs, Defence and Trade Committee, Inquiry into the Trade and Foreign

Investment (Protecting the Public Interest) Bill 2014, pp. 30-31; W Greider, ‘The Right and US Trade Law: Invalidating the 20th Century’, The Nation, 17 November 2001, accessed 24 September 2014. 177.Productivity Commission, Bilateral and Regional Trade Agreements, op. cit., p. 274. 178.United Nations Conference on Trade and Development (UNCTAD), Most favoured-nation treatment, UNCTAD Series on Issues in International Investment Agreements, 1999, accessed 9 September 2014, pp. 1-2. 179.United Nations Conference on Trade and Development (UNCTAD), Fair and equitable treatment, UNCTAD Series on Issues in International Investment Agreements II, 2012, p. xiii. 180.Productivity Commission, Bilateral and Regional Trade Agreements, op. cit., p. 272. 181.A Robb, ‘Ministerial Statement: Korea-Australia Free Trade Agreement’, House of Representatives, Debates, 13 May 2014, pp. 3502-3503. 182.’Annex 11-G: Foreign Investment Policy’, Korea-Australia Free Trade Agreement, opened for signature 8 April 2014, ATNIF [2014] No. 4.

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- The effectiveness of this broad clause is uncertain - there is currently an ongoing arbitration on environmental issues brought under the North American Free Trade Agreement (NAFTA), despite NAFTA including a similar exception for measures to protect ‘human, animal or plant life or health’.184 A US non-profit organisation estimates that in a different legal system (the World Trade Organisation’s trade dispute settlement process, distinct from ISDS), the exemption has only been successfully used in one of forty cases185

• a clause that specifically mentions ‘legitimate public welfare objectives, such as public health, safety, and the environment’ excludes actions taken to protect these interests from grounds an investor can use to bring a claim, and186

• a number of more technical drafting steps have been used to restrict the extent to which the ISDS clause can be used, and improve its transparency.187

Exactly how these changes will apply, and the extent to which they will provide a significantly improved safeguard is uncertain. One official suggested that the safeguards were stronger than most of Australia’s existing agreements:

CHAIR: You said that we have 28 agreements that have ISDS provisions in them. Would the protections in this agreement be as great or greater than in those 28 other agreements?

Mr Braddock [Director, Office of Trade Negotiations, Department of Foreign Affairs and Trade]: They are as great as any Australia's existing agreements. There are significantly more explicit safeguards for legitimate public welfare regulation than in the vast majority of Australia's agreements. In fact, compared to other agreements worldwide, KAFTA is amongst the most protective of treaties in terms of its safeguards for legitimate government regulation.

188

However, academic commentators have been critical. Dr Kyla Tienhaara wrote in her submission that:

It may be several years before these cases [current ISDS cases which involve similar safeguard clauses] are decided. But even if the tribunals rule in the respective governments’ favour, this will not guarantee that the ‘safeguards’ will work for Australia as awards rendered in ISDS are only binding on the parties involved in the dispute and future tribunals may interpret the clauses differently.

189

Another academic commented that public health exceptions ‘… make harder the case to win [sic] but they do not preclude it from being brought.’190 More definitively, Dr Matthew Rimmer wrote:

Investment clauses in the Korea-Australia Free Trade Agreement 2014 could be used and abused by Big Tobacco. The World Health Organization and tobacco control advocates have warned that Big Tobacco has sought to use investment clauses to challenge tobacco control measures, such as graphic health warnings and plain packaging of tobacco products, and frustrate the implementation of the World Health Organization Framework Convention on Tobacco Control.

191

More broadly, the safeguard clauses do not address concerns in relation to the underlying shortcomings in the ISDS system.

183.‘Chapter 22: General provisions and exceptions’, Korea-Australia Free Trade Agreement, opened for signature 8 April 2014, ATNIF [2014] No. 4. 184.Lone Pine Resources Inc. v The Government of Canada [2012] UNCITRAL. 185.Public Citizen, Only One of 40 Attempts to Use the GATT Article XX/GATS Article XIV “General Exception” Has Ever Succeeded, accessed 24 September 2014; World Trade Organisation (WTO), ‘Understanding the WTO: Settling disputes’, WTO website, accessed 24 September 2014.

186.‘Annex 11-B: Expropriation’, Korea-Australia Free Trade Agreement, opened for signature 8 April 2014, ATNIF [2014] No. 4. 187.These are outlined in Dr Tienhaara’s submission, Submission to the Joint Standing Committee on Treaties, op. cit., pp. 22-23. 188.R Braddock (Director, Office of Trade Negotiations, Department of Foreign Affairs and Trade), Evidence to Joint Standing Committee on Treaties, Korea-Australia Free Trade Agreement, 14 July 2014, p. 7.

189.K Tienhaara, Submission to the Joint Standing Committee on Treaties, op. cit., p. 24. 190.K Weatherall, Evidence to Senate Standing Committee on Foreign Affairs, Defence and Trade, Inquiry into the Trade and Foreign Investment (Protecting the Public Interest) Bill 2014, 6 August 2014, p. 21. 191.M Rimmer, Submission to the Joint Standing Committee on Treaties, Report 142: Treaty tabled on 13 May 2014 - Free Trade Agreement

between the Government of Australia and the Government of the Republic of Korea (Seoul, 8 April 2014), p. 5, accessed 27 September 2014.

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The Trade and Foreign Investment (Protecting the Public Interest) Bill 2014 The Senate Foreign Affairs, Defence and Trade Legislation Committee recently concluded an inquiry into a private member’s Bill, which would have prevented Australia from entering into FTAs with ISDS provisions. The Committee process included public hearings and a large number of submissions. The Committee recommended that the Bill not be passed, although the Australian Greens wrote a dissenting report.192

192.Senate Standing Committee on Foreign Affairs, Defence and Trade, Trade and Foreign Investment (Protecting the Public Interest) Bill 2014, The Senate, Canberra, August 2014.

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Appendix B: Intellectual property in KAFTA Broadly speaking, commitments in KAFTA reflect Australia’s current IP laws.193 While incorporating existing standards into the agreement does not introduce new commitments, locking-in Australia’s current systems has been criticised by a number of commentators, as it does not allow flexibility to make regulatory changes in response to new developments.194

In addition to commitments which match Australia’s existing framework, Professor Kimberlee Weatherall, an academic at the University of Sydney, outlined a number of commitments under KAFTA which would be an extension beyond Australia’s current commitments.195 These include:

• a commitment to ‘provide measures to curtail repeated copyright and related right infringement on the Internet’196

• the presumption of validity for patents and trademarks,197 and

• a prohibition of recording movies in a public exhibition facility.198

The IP material in the agreement has also been criticised as focussing too heavily on the rights of copyright holders, and not enough on the public interest.199

Amendments to the Copyright Act 1968 While not included in any of the Bills currently introduced, the National Interest Analysis tabled on the KAFTA stated that:

Consistent with Australia’s existing obligations in the Australia-US and Australia-Singapore FTAs, and to fully implement its obligations under KAFTA, the Copyright Act 1968 will require amendment in due course to provide a legal incentive for online service providers to cooperate with copyright owners in preventing infringement due to the High Court’s decision in Roadshow Films Pty Ltd v iiNet Ltd, which found that ISPs are not liable for authorising the infringements of subscribers.

200

While this change is not included in the current Bills, a discussion paper on the issue has been released.201 The question of whether changes were in fact required was contentious, with some academics asserting that the High Court decision did not contravene any of Australia’s FTA commitments (either under KAFTA or other agreements). Dr Matthew Rimmer wrote that there ‘is no pretext for overturning the ruling of the High Court of Australia under the guise of international law’.202

Interaction with the ISDS clause KAFTA explicitly excludes IP claims from the ISDS mechanism.203 However, at least one commentator was concerned that the wording could lead to unintended risks, and potentially make changes to IP law more open to ISDS claims.204

193.K Weatherall, Submission to the Joint Standing Committee on Treaties, op. cit., p. 3. 194.Ibid.; IP Australia, IP Australia submission: Productivity Commission Study on Bilateral & Regional Trade Agreements, accessed 24 September 2014; Productivity Commission, Bilateral and Regional Trade Agreements, op. cit., pp. 257-264. 195.K Weatherall, Submission to the Joint Standing Committee on Treaties, op. cit., p. 6. 196. ‘Article 13.9: Enforcement of intellectual property rights’, Korea-Australia Free Trade Agreement, opened for signature 8 April 2014, ATNIF

[2014] No. 4. 197.Ibid., Article 13.9.4. 198.Ibid., Article 13.9.27. 199.M Rimmer, Submission to the Joint Standing Committee on Treaties, op. cit., p. 56. 200.Department of Foreign Affairs and Trade (DFAT), National Interest Analysis: Free Trade Agreement between the Government of Australia and

the Government of the Republic of Korea, accessed 24 September 2014, paragraph 17. 201.Australian Government, Online copyright infringement: discussion paper, July 2014, accessed 24 September 2014. 202.K Weatherall, Submission to the Joint Standing Committee on Treaties, op. cit., p. 8; M Rimmer, Submission to the Joint Standing Committee on

Treaties, op. cit., p. 49. 203.Article 11.7.5, ’Chapter 11: Investment’, Korea-Australia Free Trade Agreement, opened for signature 8 April 2014, ATNIF [2014] No. 4. 204.K Weatherall, Submission to the Joint Standing Committee on Treaties, op. cit., p. 28.

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