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Customs Amendment (China-Australia Free Trade Agreement Implementation) Bill 2015 [and] Customs Tariff Amendment (China-Australia Free Trade Agreement Implementation) Bill 2015



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ISSN 1328-8091

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BILLS DIGEST NO. 29, 2015-16 12 OCTOBER 2015

Customs Amendment (China-Australia Free Trade Agreement Implementation) Bill 2015 [and] Customs Tariff Amendment (China-Australia Free Trade Agreement Implementation) Bill 2015 Paul Davidson Economics Section

Juli Tomaras Law and Bills Digest Section

Contents

The Bills Digest at a glance ................................................... 4

Purpose of the Bill ............................................................... 5

Structure of the Bill ............................................................. 5

Background ......................................................................... 6

Australian and international trade policies ............................. 6

Recent inquiry into the treaty making process ..................... 6

Free trade agreements ............................................................ 7

What is a free trade agreement? .......................................... 7

Estimated economic benefits and costs of free trade agreements .............................................................................. 8

Benefits and costs of the China-Australia Free Trade Agreement ............................................................................. 8

Economic benefits of China-New Zealand FTA ...................... 9

Arguments for export diversification in terms of destination .......................................................................... 10

Committee consideration .................................................. 10

Joint Standing Committee on Treaties .................................. 10

Senate Foreign Affairs, Defence and Trade References Committee ............................................................................. 10

Senate Standing Committee for the Scrutiny of Bills ............ 10

Policy position of non-government parties/independents ... 11

Date introduced: 16 September 2015

House: House of Representatives

Portfolio: Immigration and Border Protection

Commencement: The operative provisions of both Bills will commence from the later of the day of Royal Assent and the day on which the China-Australia Free Trade Agreement comes into force for Australia. Entry into force is expected before the end of 2015.

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 (China-Australia Free Trade Agreement Implementation) Bill 2015 and the Customs Tariff Amendment (China-Australia Free Trade Agreement Implementation) Bill 2015, 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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Opposition policy position ................................................... 11

Policy position of other parties/independents ................... 11

Position of major interest groups ....................................... 12

Agricultural industry organisations ..................................... 12

Other industry organisations ............................................... 12

Trade unions ........................................................................ 13

Consumer groups and community organisations ............... 14

Financial implications ........................................................ 14

Statement of Compatibility with Human Rights .................. 14

Parliamentary Joint Committee on Human Rights ................ 15

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

The China-Australia Free Trade Agreement .......................... 15

Background .......................................................................... 15

Tariff reductions .................................................................. 15

Investment .......................................................................... 17

Commitments on services ................................................... 17

Movement of natural persons............................................. 18

Labour market testing ....................................................... 19

Memorandum of understanding and Investor Facilitation Arrangements ................................................. 20

Skills assessments.............................................................. 20

Investor-State Dispute Settlement ...................................... 20

Critiques of ISDS provisions ............................................... 21

Main provisions of the Customs Amendment (China-Australia Free Trade Agreement Implementation) Bill 2015 ................................................................................. 21

Schedule 1, Part 1—Chinese originating goods ..................... 22

Rule 1—goods wholly obtained or produced in the territory of China (proposed Subdivision B) ........................ 22

Rule 2 - Chinese originating goods that are goods produced in China, or in China and Australia, from originating materials (proposed Subdivision C) .................. 22

Rule 3 - Chinese originating goods that are goods produced in China, or in China and Australia, from non-originating materials (proposed Subdivision D) ........... 23

Change in tariff classification ............................................ 23

Regional value content ...................................................... 23

Subdivision E........................................................................ 23

Subdivision F ........................................................................ 23

Subdivision G ....................................................................... 24

Schedule 1, Part 2—Verification powers ............................... 24

Schedule 1, Part 3—Application provisions ........................... 24

Main provisions of the Customs Tariff Amendment (China-Australia Free Trade Agreement Implementation) Bill 2015 ............................................................................ 25

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Schedule 1—Amendments .................................................... 25

Item 28 - Proposed Schedule 12—Chinese originating goods ................................................................................... 26

Application and transitional provisions ............................... 26

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The Bills Digest at a glance

Purpose of the Bills

The purpose of the Customs Amendment (China-Australia Free Trade Agreement Implementation) Bill 2015 (the Customs Bill) is to amend the Customs Act 1901 (Cth) to:

• define Chinese originating goods, and permit preferential rates of customs duty when those goods are imported into Australia

• facilitate record keeping requirements, the power to require records to be produced, and the power to ask questions; for goods exported to China.

The purpose of the Customs Tariff Amendment (China-Australia Free Trade Agreement Implementation) Bill 2015 (the Tariff Bill) is to amend the Customs Tariff Act 1995 (Cth) to:

• facilitate the staged reduction of applicable rates of customs duty to relevant Chinese originating goods, and to facilitate other Chinese originating goods to become duty-free upon commencement

• maintain rates of customs duty on alcohol, tobacco, and petroleum products that are equivalent to the excise duties that apply to those goods when they are manufactured in Australia.

Background

The Bills implement the substantive provisions of the China-Australia Free Trade Agreement, done in Canberra on 17 June 2015.

Proposed measures

Schedule 1 of the Customs Bill defines Chinese originating goods so that such goods which are imported into Australia can receive preferential customs duties. The Customs Bill also provides for exporters of specified goods — manufactured in Australia which are exported to China — to be potentially subject to record keeping and information provision requirements.

Schedule 1 of the Tariff Bill provides for the staged reduction of rates of customs duties applicable to specified goods. Goods not specifically listed will become duty-free upon the commencement of the Act. The Tariff Bill also provides that excise-equivalent rates of customs duty will apply to various alcohol, tobacco, and petroleum products, at rates equivalent to those that apply to domestically manufactured products.

Views of interest groups and non-government parties

Agricultural groups are highly supportive of the China-Australia Free Trade Agreement; whereas trade unions and consumer groups have expressed concerns surrounding labour market testing provisions, and investor-state dispute settlement provisions.

The Opposition has expressed concerns on the labour market testing provisions in the Agreement, and the Australian Greens have expressed concerns about trade agreements which contain investor-state dispute settlement provisions. Independent Senators have also expressed reservations about the labour market testing and investor-state dispute settlement provisions contained in the Agreement.

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Purpose of the Bill The Customs Amendment (China-Australia Free Trade Agreement Implementation) Bill 2015 (the Customs Bill) and the Customs Tariff Amendment (China-Australia Free Trade Agreement Implementation) Bill 2015 (the Tariff Bill) are what is known as implementing Bills for the China-Australia Free Trade Agreement (ChAFTA).1 Their passage is required before the ChAFTA can come into effect.

The basic purpose of the Bills is to implement the customs dimensions of the ChAFTA by making relevant amendments to the Customs Act 1901 (Cth) (Customs Act) and the Customs Tariff Act 1995 (Cth) (Customs Tariff Act).2

The Customs Bill inserts:

• a new Division 1L into Part VIII3 of the Customs Act providing for:

- rules of origin for goods imported into Australia from China: imported goods that satisfy the new rules as 'Chinese originating goods' will be eligible for preferential rates of customs duty • a new Division 4J into Part VI4 of the Customs Act providing for:

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

- verification powers relating to the exportation of goods to China. The Tariff Bill contains amendments to the Customs Tariff Act to implement the ChAFTA by:

• giving free rates of customs duty for most goods that are ‘Chinese originating goods’ in accordance with new Division 1L of Part VIII of the Customs Act

• amending Schedule 4 to the Customs Tariff Act to maintain customs duty rates for certain Chinese originating goods in line with the applicable concessional item5

• phasing the preferential rates of customs duty for certain ‘Chinese originating goods’ to be ‘free’ of customs by the fifth year of phasing and

• inserting a new Schedule 12 to the Customs Tariff Act to accommodate the preferential and phasing rates of customs duty, and to maintain excise-equivalent rates of duty on certain alcohol, tobacco and petroleum products. This is done to achieve parity with rates of duty that would be payable if those particular products were manufactured in Australia.

Structure of the Bill The Customs Bill consists of two schedules:

• Schedule 1 has three parts

- Part 1 deals with Chinese originating goods or rules of origin - Part 2 deals with verification powers in relation to certain trade items (implementing Article 3.21 of ChAFTA)6 and

1. Free Trade Agreement between the Government of Australia and the Government of the People's Republic of China (ChAFTA), done at Canberra 17 June 2015, accessed 10 October 2015. 2. Customs Act 1901 (Cth) and Customs Tariff Act 1995 (Cth), accessed 20 September 2015. It should be noted that ChAFTA itself does not need approval by the parliament. This is because the negotiation and conclusion of treaties such as free trade agreements are matters for the

executive.

3. Part VIII of the Customs Act is concerned with Customs duties, including their payment and computation. Although subject to qualification, the general position is that ‘the rate of any import duty payable on goods is the rate of the duty in force when the goods are entered for home consumption’ (s 132(1)).

4. Part VI of the Customs Act provides the legislative basis for Customs control over the exportation of goods. The exportation of goods may be prohibited absolutely, prohibited in specified circumstances, prohibited to specified places, or prohibited unless prescribed conditions are complied with.

5. 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.

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- Part 3 contains application provisions. • Schedule 2 contains a minor contingent amendment to the Customs Act.

The Tariff Bill has one schedule, which makes various consequential amendments to the Customs Tariff Act, including inserting a new Schedule 12 into that Act, which specifies the preferential tariff rates available to Chinese goods under ChAFTA.

Background Australian and international trade policies Australia has a long history of supporting trade liberalisation. It has done this via multilateral forums such as the World Trade Organisation (WTO), as well as unilaterally reducing tariffs and other protective measures.7

While commitments made under WTO agreements are an important part of international trade policy, their relative importance is reducing. This is because of increased difficulties in countries reaching agreements on new areas of trade liberalisation — areas that tend to be considered of national significance or strategic importance.8 Partly as a result of these difficulties, there has been a significant rise in the number of free trade agreements at the regional level.9

Australia has followed the global trend of negotiating agreements on either a bilateral or regional basis. Prior to 2003, Australia’s only agreement was with New Zealand, but since then agreements have been entered into with Singapore, Thailand, the US, Chile, Malaysia, Japan, Korea, and a regional free trade agreement with the Association of South-East Asian Nations (ASEAN) and New Zealand.10 There are also several separate agreements currently under negotiation, including with India and Indonesia.

Recent inquiry into the treaty making process A recent report by the Senate Standing Committees on Foreign Affairs, Defence and Trade outlined four problems with the current treaty making processes:

1. All treaties are presented to parliament and subject to scrutiny after agreements have been signed, leaving parliament ‘with an all-or-nothing choice’ when considering treaty implementation legislation.

2. The Joint Standing Committee on Treaties does not commence inquiries until after agreements are signed, and that this ‘does not provide an adequate level of oversight and scrutiny’.

3. The Department of Foreign Affairs and Trade’s consultation ‘is not working’, falling short of expectations and adding to stakeholders’ frustrations.

4. There is ‘an insufficient amount of publicly available information about agreements under negotiation and independently sourced economic analyses of their likely benefits are not mandatory’.11

The Committee made 10 recommendations in relation to the treaty making process, including: recommending independent analyses be undertaken prior to the commencement of negotiations (as well as an ex-post evaluation of likely costs and benefits after negotiations have concluded); granting confidential access to draft treaty texts; and the creation of a ‘model trade agreement’ that ‘covers controversial topics such as investor-state dispute settlement, intellectual property, copyright, and labour and environmental standards’.12

6. Significantly, chapter 3 of ChAFTA also sets out the methods by which exporters are to claim their tariff concession from foreign Customs - see ChAFTA, op. cit. 7. For further detail, see Productivity Commission (PC), Bilateral and regional trade agreements, Research report, PC, Canberra, November 2010, accessed 10 October 2015. 8. The most recent round of negotiations, the Doha Round, commenced in November 2001. The WTO’s 10th Ministerial Conference is scheduled

to take place in Nairobi from 15-18 December 2015. World Trade Organisation (WTO), ‘A package of issues for Nairobi may be within reach’, WTO website, 17 September 2015, accessed 23 September 2015. 9. As of 7 April 2015, the WTO had received 612 notifications of regional trade agreements, of which 406 were in force. World Trade Organisation, ‘Regional trade agreements’, WTO website, accessed 23 September 2015. 10. Department of Foreign Affairs and Trade (DFAT), ‘Free trade agreements’, DFAT website, accessed 23 September 2015. 11. Senate Foreign Affairs, Defence and Trade References Committee, Blind agreement: reforming Australia’s treaty-making process, The Senate,

Canberra, June 2015, p. ix. 12. Ibid, pp. xiii-xiv.

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Coalition Senators issued a dissenting report, disagreeing ‘with all of the findings and recommendations of the majority report’.13 The dissenting report stated that:

Calls from stakeholders to make the texts of agreements publicly available prior to signature are impractical and do not take into account the realities of negotiating international agreements. 14

The dissenting report concluded that the treaty-making process was working well, and as such, did not support the majority report’s recommendations.15

The Australian Greens also issued a dissenting report. The Greens agreed with the Committee’s identification of problems with transparency, consultation, and independence of the current treaty-making process. The Greens also agreed with the intent of several of the Committee’s recommendations, acknowledging that they were an improvement upon the current treaty-making process. However, the Greens considered that the Committee’s recommendations did not go far enough in addressing the issues identified.16

Free trade agreements

What is a free trade agreement? A trade agreement is a written contract between two or more nation states for the purpose of regulating trade between those nation states. Trade agreements are typically either multilateral or bilateral. Multilateral trade agreements include more than two nation states, and often involve establishing a collective set of rules to govern conduct in particular areas.17 Bilateral trade agreements involve two nation states and establish a system of mutual benefit in respect of trade and investment, and are often referred to as free trade agreements (FTAs).18

Whilst bilateral trade agreements may often be referred to as FTAs, they do not represent ‘free’ trade. As noted by the Productivity Commission (PC) in its 2010 study into bilateral and regional trade agreements:

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… 19

Therefore, FTAs can be considered to involve the granting of more favourable trading conditions than apply to nation states outside of the FTA. 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’.20 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’.21

13. Ibid, p. 77. 14. Ibid, p. 78. 15. Ibid.

16. Ibid, pp. 80-82. 17. PB Butt and D Harmer (eds) LexisNexis concise Australian legal dictionary, 4th edn, LexisNexis Butterworths, Chatswood, 2011, p. 387. 18. Joint Standing Committee on Treaties, Treaty tabled on 14 August 2012 — Malaysia-Australia Free Trade Agreement done at Kuala Lumpur on 22 May 2012, report, 130, Parliament of Australia, Canberra, October 2012, pp. 3-4.

19. PC, Bilateral and regional trade agreements, op. cit., p. 6. 20. World Trade Organisation (WTO), ‘The WTO’s rules’, WTO website, accessed 23 September 2015. 21. Department of Foreign Affairs and Trade (DFAT), ‘The World Trade Organisation and free trade agreements’, DFAT website, accessed 23 September 2015.

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Further, under the General Agreement on Tariffs and Trade 1994, members of the WTO are required to apply ‘non-discrimination clauses’ to nation states outside of an FTA.22 This is typically done via the most-favoured nation rule, which (with some exceptions) requires that each WTO member must grant all its trading partners the conditions that it grants to its ‘most favoured’ trading partner.23

While trade in goods and services remain substantive aspects of FTAs, there has been an increasing trend for FTAs to include a wider range of commitments, including matters such as investment, government procurement, and intellectual property.24

Estimated economic benefits and costs of free trade agreements The PC, in its 2010 study noted that it is inherently difficult to estimate the expected benefits and costs of FTAs.25 In that study, concerns were raised about the timing, as well as the quality, of analysis undertaken to estimate the benefits and costs of FTAs.26 The PC noted:

In practice, the actual agreements negotiated have sometimes entailed gaps in coverage and/or long phase-in periods, and the available evidence suggests that the anticipated benefits of their liberalising provisions have not been fully realised. Some BRTAs [bilateral and regional trade agreements] have also incorporated costly provisions that were not included in the estimates. Together, these points suggest that the economic value of Australia’s preferential BRTAs has been oversold.

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Benefits and costs of the China-Australia Free Trade Agreement Accompanying the China-Australia Free Trade Agreement (ChAFTA), though not formally part of the Agreement, is the National Interest Analysis (NIA), and Attachment II comprises the Regulation Impact Statement (RIS).28 The NIA provides a high-level summary of the current trade relationship, the key provisions of the ChAFTA, and estimates of the economic benefits and costs of entering into the Agreement.

The NIA notes that in 2013-14, two-way trade reached nearly $160b, making China Australia’s largest trading partner. Around two-thirds of the trade related to Australian exports to China ($107.6b, which was 33 per cent of Australia’s total exports), and one-third related to Chinese imports ($52.1b, which was 15 per cent of Australia’s total imports).29

The RIS notes that Australia stands to benefit from increased market access outcomes in:

• agricultural exports

• resources, energy, and manufactured goods exports

• services exports and

• investment.30

The only explicit cost that the RIS considers is the impact of forgone tariff revenues, estimated to be more than $4b over the forward estimates.31 The RIS also notes that the ChAFTA does not remove tariffs on a range of

22. General Agreement on Tariffs and Trade (GATT) [1948] ATS 23, done at Marrakesh on 15 April 1994. The GATT originally commenced on 1 January 1948. See also: World Trade Organisation (WTO), GATT documents, WTO website, accessed 10 October 2015. 23. A further rule, the national treatment rule, ensures that conditions imposed for imported goods and services are no less favourable than those for domestically produced goods and services. 24. PC, Bilateral and regional trade agreements, op. cit., p. 255. 25. Ibid, p. 292. 26. Ibid, pp. 289-95. 27. Ibid, p. XXVIII. 28. National Interest Analysis of the Free Trade Agreement between the Government of Australia and the Government of the People’s Republic of

China, [2015] ATNIA 7; China-Australia Free Trade Agreement, Regulation Impact Statement (RIS), 23 March 2015, both accessed 10 October 2015. The RIS is also at pages 4 to 36 of the Explanatory Memorandum for the Customs Amendment (China-Australia Free Trade Agreement Implementation) Bill 2015, accessed 10 October 2015. 29. China-Australia Free Trade Agreement, Regulation Impact Statement (RIS), Attachment II, op. cit., p. 2. 30. Ibid, pp. 8, 13-17, 18-20, 22-26. 31. Ibid, p. 29.

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agricultural products.32 It is expected that the outcomes under ChAFTA, if implemented, will be more mixed for Australian manufacturing and small businesses.33

Economic benefits of China-New Zealand FTA China and New Zealand signed an FTA on 7 April 2008, which entered into force on 1 October 2008.34 A strong focus of the FTA was on liberalising trade in goods, particularly reducing applicable Chinese tariffs on New Zealand dairy exports.

Figure 1 illustrates the value of dairy exports to China for both New Zealand and Australia. Some care is needed in interpreting the figure. As shown, after the commencement of the China-New Zealand FTA, New Zealand dairy exports experienced strong growth. While recognising the strong correlation between the timing of the FTA and the significant growth in NZ dairy exports to China, it is not possible to categorically state that the growth in New Zealand dairy exports was solely as a result of the introduction of the FTA. There are many possible causes that could explain the strong growth in New Zealand dairy exports post-2008. For instance, the growth could relate to another dairy exporting country (or indeed several) having faced domestic problems (such as drought for instance) meaning that they were unable to take advantage of increased Chinese demand. Additionally, it should be noted that the most recent data indicate that both New Zealand and Australian dairy exports to China have in fact fallen slightly.

Figure 1: Chinese dairy imports from New Zealand and Australia, 1995-2014

Source: United Nations Conference on Trade and Development (UNCTAD) statistics (unpublished), accessed 24 September 2015.

32. These are: rice, wheat, cotton, maize, sugar, and rapeseed and vegetable oils, including olive oil. Ibid., pp. 17-18. 33. Ibid., pp. 20-21, 28. 34. New Zealand Government, ‘China-New Zealand FTA factsheet’, New Zealand Government website, accessed 14 September 2015.

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Arguments for export diversification in terms of destination The significant expansion in global trade since the latter half of the 20th century has seen patterns of trade which diverge from those predicted (and even prescribed) ‘by classical trade theories35 built around perfect competition, comparative advantage and constant returns to scale.’36

According to Sannassee et al:

In most of the studies carried out, reference is made to the “concentration phenomenon”, which basically consists of commodity and market concentration and which is believed to be the major contributor to instability in export revenue. It is argued that countries with commodity concentration are adversely affected by volatility in market prices through swings in foreign exchange revenues.

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While there is much recognition of the prospects that a growing Chinese economy and middle class create in terms of demand for Australian exports, there has been nonetheless some commentary around whether Australia might be wise to have a ‘plan B’ in the event of fluctuations in the Chinese economy.

It has been pointed out that even in the absence of a free trade agreement with China:

Australia is now the most China-dependent economy in the world. Australian exports to China have grown from 8.5% of the total in 2003-04 to 32.5% in 2013-14 - and they continue to grow.

Australia’s dependence on its top three export destinations has also increased over the past ten years. The top three accounted for 33.7% (Japan 15.7%, US 9.5% and China 8.5%) in 2003-04, rising to 55.1% (China 32.5%, Japan 15.8% and South Korea 6.8%) by 2013-14. The top five now account for 63.7%, up from 47.7%. 38

While it is acknowledged the ChAFTA may help us diversify our economy, it does not necessarily offer any guarantee. Thus it has been argued in simple terms, that ‘Australia needs active policy efforts to diversify the economy away from a reliance on resources and on buying and selling houses. Policymakers need to reconsider industry policies and think of ways to develop new industries rather than just support old ones in ad hoc ways’.39

Committee consideration Joint Standing Committee on Treaties The China-Australia Free Trade Agreement has been referred to the Joint Standing Committee on Treaties (JSCOT) for inquiry and report by 12 October 2015.40

Senate Foreign Affairs, Defence and Trade References Committee On 24 March 2015, the Senate referred matters relating to the proposed China-Australia Free Trade Agreement41 to the Senate Foreign Affairs, Defence and Trade References Committee for inquiry and report.42 The report is due within one month of the JSCOT inquiry.

Senate Standing Committee for the Scrutiny of Bills At the time of writing this digest, the Senate Standing Committee for the Scrutiny of Bills had yet to consider this Bill.

35. P Krugman, “Scale economies, product differentiation, and the pattern of trade”, American Economic Review, (70)5: 950-959, cited in RV Sannassee, B Seetanah and MJ Lamport, ‘Export diversification and economic growth: the case of Mauritius’, p. 11, in M Jansen (eds) Connecting to global markets: challenges and opportunities: case studies presented by WTO chair-holders, WTO Publications, Geneva, 2014, accessed 10 October 2015.

36. RV Sannassee, B Seetanah and MJ Lamport, ‘Export diversification and economic growth: the case of Mauritius’, in M Jansen (eds) Connecting to global markets: challenges and opportunities: case studies presented by WTO chair-holders, op. cit. 37. Ibid, p. 11. 38. T Conley, ‘Australia’s China dependence: do we need a Plan B?’, The Conversation, (online edition), 9 December 2014, accessed

28 September 2015. 39. Ibid.

40. Joint Standing Committee on Treaties, Free Trade Agreement between the Government of Australia and the Government of the People's Republic of China (Canberra, 17 June 2015), The Senate, Canberra, 2015, accessed 10 October 2015. 41. Australia, Senate, Journals, (proof), 88, 24 March 2015, p. 2371, accessed 10 October 2015. 42. Senate Foreign Affairs, Defence and Trade References Committee, Inquiry into the proposed China-Australia Free Trade Agreement, The

Senate, Canberra, 2015, accessed 10 October 2015.

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Policy position of non-government parties/independents Opposition policy position The Australian Labor Party has stated that it supports a free trade agreement with China, although reservations have been expressed about potential labour arrangements under the agreement:

Labor’s concern about the free trade agreement isn’t that we shouldn’t have a free trade agreement - we should. … There is no doubt as more evidence comes to light that the Government needs to do more secure preference for Australians to get jobs in Australia. Now this isn’t a deal killer. It doesn’t involve changing the treaty but if the Government say there hasn’t been any secret deals done then I think they should come to the negotiating table. Labor believes in Australian jobs. … I think it is important as we pursue trade opportunities with China and the rest of Asia, that we also prioritise Australians getting jobs in Australia.

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More recently, the Leader of the Opposition stated:

We think that a China Free Trade Agreement is a good thing but we also want to ensure that Australians are getting the opportunities to work in Australia and getting priority. That's all. Now the Government says that there's no problem and that any of the concerns we have won't materialise, that's the basis for a negotiation. If they say there is no problem and legitimate concerns have been expressed we'll work it out.

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Policy position of other parties/independents The Australian Greens have stated that they do not agree with FTAs which contain Investor-State Dispute Settlement (ISDS) provisions,45 and Senator Whish-Wilson introduced a Private Senators’ Bill to preclude the Commonwealth from entering into FTAs which contain ISDS provisions.46 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 reported that it had ‘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.’47 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. 48

In a 2014 article, Senator David Leyonhjelm wrote in support of free trade, but expressed reservations about the value of free trade agreements, suggesting that unilaterally removing tariffs would lead to better outcomes.49 Senator Nick Xenophon has criticised the inclusion of ISDS provisions in the ChAFTA, and more broadly considers that trade has tended to become more unbalanced with other recently commenced FTAs.50 Senator John Madigan argued that the ChAFTA amounts to ‘WorkChoices by stealth’, allowing Chinese workers into Australia under reduced terms and conditions of employment.51 Senator Jacqui Lambie noted that the ChAFTA should be renegotiated so that it ‘protects Australian workers’ and ‘takes away China’s right to sue our government’.52

43. B Shorten, Transcript of doorstop interview, Melbourne, 6 September 2015, p. 2. 44. B Shorten, Transcript of doorstop interview, Sydney, 24 September 2015, p. 8. 45. ISDS clauses are covered in more detail in the Key Issues section of this Digest. 46. Parliament of Australia, ‘Trade and Foreign Investment (Protecting the Public Interest) Bill 2014 homepage’, Australian Parliament website,

accessed 10 October 2015. 47. Senate Committee on Foreign Affairs, Defence and Trade, Inquiry into the Trade and Foreign Investment (Protecting the Public Interest) Bill 2014, The Senate, Canberra, August 2014, accessed 10 October 2015. 48. Senate Committee on Foreign Affairs, Defence and Trade, Inquiry into the Trade and Foreign Investment (Protecting the Public Interest) Bill

2014, Report, 27 August 2014, p. 17, accessed 10 October 2015. 49. D Leyonhjelm (Senator), ‘Ultimate goal is free trade’, farmonline, (online edition), 14 April 2014, accessed 25 September 2015. 50. N Xenophon (Senator), China syndrome, media release, 18 June 2015, accessed 25 September 2015. 51. J Madigan (Senator), China FTA is WorkChoices by stealth, media release, 4 September 2015, accessed 25 September 2015. 52. J Lambie (Senator), Change of PM welcomed: Lambie, media release, 15 September 2015, accessed 25 September 2015.

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Position of major interest groups Agricultural industry organisations Submissions to the Joint Standing Committee on Treaties (JSCOT) inquiry on ChAFTA from agricultural producers were strongly supportive of the agreement. For example, the Winemakers Federation of Australia stated:

The China-Australia Free Trade Agreement delivers real benefits for the Australian wine sector. We would urge the government to proceed as quickly as possible to ratify the agreement so that we can maximise the benefits to the sector. 53

Similarly, the Australian Red Meat Industry submitted:

Our industry is strongly supportive of the ChAFTA, which upon entry into force will initiate significant improvements to current access arrangements. ChAFTA has delivered on our priorities via securing future elimination of all import tariffs imposed on our respective products over various implementation timeframes - thereby helping to maintain competitiveness and bolster trade certainty.

54

Likewise, the National Farmers Federation (NFF) strongly supported the ChAFTA:

In the NFF’s view, the agreement will provide millions of dollars in export value to Australian farmers, including those in the red meat, grains, dairy, sugar, pork and horticulture sectors. The agreement recognises agriculture as one of the nation’s export strengths and will open opportunities for the sector in China. 55

The Australian Dairy Industry stated its approval of the ChAFTA, and expressed concern about the possibility of its introduction being delayed:

Timing is of the essence. The Australian dairy industry strongly urges the Federal Parliament to implement ChAFTA prior to the end of 2015, so that a second round of tariff cuts can occur on 1 January 2016.

Any delay in implementation of ChAFTA would cost at least $20 million in tariff savings for Australian origin product and could potentially cost $60 million in tariff savings for Australian dairy products, making it extremely difficult for Australian industry to compete and gain further market share. 56

Other industry organisations Overall, industry organisations considered that the ChAFTA in its current form would bring benefits to Australia. For example, the Minerals Council of Australia noted:

ChAFTA is the best available option for advancing Australia’s broader commercial interests with our largest trading partner, including by advancing our interests in minerals and energy and related services and investment. The Agreement provides for substantial liberalisation of trade and investment that will deepen bilateral economic integration. It eliminates all tariffs on minerals and energy exports to China within four years of entry-into-force, reducing transaction costs by up to around $600 million per year.57

53. Winemakers Federation of Australia, Submission to the Joint Standing Committee on Treaties, Treaty tabled on 17 June 2015—Free Trade Agreement between the Government of Australia and the Government of the People’s Republic of China (Canberra, 17 June 2015), p. 5, accessed 10 October 2015.

54. Australian Red Meat Industry, Submission to the Joint Standing Committee on Treaties, Treaty tabled on 17 June 2015—Free Trade Agreement between the Government of Australia and the Government of the People’s Republic of China (Canberra, 17 June 2015), p. 5, accessed 10 October 2015.

55. National Farmers Federation, Submission to the Joint Standing Committee on Treaties, Treaty tabled on 17 June 2015—Free Trade Agreement between the Government of Australia and the Government of the People’s Republic of China (Canberra, 17 June 2015), p. 5, accessed 10 October 2015.

56. Australian Dairy Industry, Submission to the Joint Standing Committee on Treaties, Treaty tabled on 17 June 2015—Free Trade Agreement between the Government of Australia and the Government of the People’s Republic of China (Canberra, 17 June 2015), p. 5, accessed 10 October 2015.

57. Trading Nation Consulting, China, minerals and energy and the China-Australia Free Trade Agreement (ChAFTA): A policy paper commissioned by the Minerals Council of Australia, report prepared for the Minerals Council of Australia, Minerals Council of Australia, Canberra, June 2015, p. 6, accessed 10 October 2015.

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Master Builders Australia, while expressing support for the ChAFTA, did express views on skills assessments for various Chinese visa applicants under the Agreement:

Master Builders recommends that the commitment in ChAFTA only removes the need for a mandatory skills assessment at the 457 visa application stage and that all applicants be required to demonstrate to the Department of Immigration and Border Protection that they possess the requisite skills and experience to work in particular occupations in Australia.

…Master Builders recommends that an additional skills assessment from a credible Registered Training Organisation approved by Trades Recognition Australia should be undertaken when further verification of skills is required during the visa application stage. The need for additional assessment should be determined by the Department of Immigration and Border Protection.

58

The Australian Bankers’ Association expressed support for the ChAFTA and submitted that:

…there is considerable upside for Australia in broadening its trading base with China to include other areas of comparative advantage and complementarity. Trade in services, particularly financial services, provides a key opportunity. 59

The Public Health Association of Australia (PHAA) expressed concern over the inclusion of ISDS provisions in a submission to the Senate Standing Committee on Foreign Affairs and Trade inquiry into ChAFTA:

PHAA is strongly opposed to the inclusion of investor-state dispute settlement in trade agreements. ISDS provides an avenue for foreign investors to sue governments (including state/territory and local governments) in international tribunals for monetary compensation over policies and laws that they perceive as harmful to their investments. In recent years there has been a dramatic increase in ISDS claims over health and environmental issues.

60

Trade unions Several unions provided submissions to the JSCOT inquiry. For example, the Electrical Trades Union of Australia expressed concerns about the ChAFTA, specifically in terms of labour market testing requirements:

We submit that the provisions around labour mobility, training, worker protections (or lack there-of), corporate rights and more, mean the agreement cannot be supported by the Committee in its current form.

The ChAFTA will lock Australians out of job opportunities, erode industrial and public safety standards, and expose Australia to unfunded legal action that costs millions. 61

The Australian Council of Trade Unions (ACTU) expressed support for a free trade agreement with China, but considered that the ChAFTA as currently proposed:

…contains serious deficiencies that should be removed through renegotiation of the relevant provisions.

While the ACTU would welcome a real prospect of new opportunities for decent work that could be created by improved access to China’s market, the agreement’s deficiencies as presently constructed, on balance are clearly not in the national interest. 62

58. Master Builders Australia, Submission to the Joint Standing Committee on Treaties, Treaty tabled on 17 June 2015—Free Trade Agreement between the Government of Australia and the Government of the People’s Republic of China (Canberra, 17 June 2015), p. 5, accessed 10 October 2015.

59. Australian Bankers’ Association, Submission to the Joint Standing Committee on Treaties, Treaty tabled on 17 June 2015—Free Trade Agreement between the Government of Australia and the Government of the People’s Republic of China (Canberra, 17 June 2015), p. 5, accessed 10 October 2015.

60. Public Health Association of Australia, Submission to the Senate Standing Committee on Foreign Affairs, Defence and Trade, Treaty tabled on 17 June 2015—Free Trade Agreement between the Government of Australia and the Government of the People’s Republic of China (Canberra, 17 June 2015), 34, p. 3, accessed 10 October 2015.

61. Electrical Trades Union of Australia, Submission to the Joint Standing Committee on Treaties, Treaty tabled on 17 June 2015—Free Trade Agreement between the Government of Australia and the Government of the People’s Republic of China (Canberra, 17 June 2015), p. 5, accessed 10 October 2015.

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The Construction, Forestry, Mining and Energy Union summarised the ChAFTA as:

…the worst trade agreement that an Australian government has ever signed and attempted to impose on the Australian public. 63

Consumer groups and community organisations Consumer group CHOICE expressed concern over the inclusion of ISDS provisions in the ChAFTA, and stated that it:

…opposes the inclusion of Investor State Dispute Settlement (ISDS) provisions in trade agreements due to the risk they pose to future policy changes in the interest of Australian consumers. …CHOICE believes that it would be to the public detriment to implement a free trade agreement that further restricts the Government’s ability to legislate changes to Australia’s country of origin labelling framework or to other food labelling policies.

64

The Australian Fair Trade & Investment Network expressed concern about the apparent lack of labour market testing in the ChAFTA, as well as the inclusion of ISDS provisions:

The ISDS section of the ChAFTA investment chapter spells out a detailed procedure for these disputes. But the section is unfinished, with important definitions of the criteria that can be used to sue governments to be determined by review process in three years’ time. These include two of the most controversial aspects of ISDS, the definition of indirect expropriation and the definition of minimum standard of treatment for foreign investors. These are provisions often used to sue governments under other agreements. The Australian Parliament is being asked to vote for the implementing legislation for this agreement without having the details of what these future provisions may be. This is like asking Parliament to sign a blank cheque for an agreement which has been badly negotiated.

65

Financial implications The Explanatory Memorandum to the Customs Bill 2015 provided a financial impact statement (Table 1). The financial position relates to forgone tariff revenues on Chinese imports.66 It does not consider other costs or benefits of the ChAFTA.

Table 1: Underlying cash impact ($ million)

2015-16 2016-17 2017-18 2018-19 Total

-610 -1,070 -1,210 -1,260 -4,150

Source: Explanatory Memorandum to the Customs Amendment (China-Australia Free Trade Agreement Implementation) Bill 2015, p. 3.

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed both Bills’ compatibility with the human rights and freedoms recognised or declared in the

62. Australian Council of Trade Unions, Submission to the Joint Standing Committee on Treaties, Treaty tabled on 17 June 2015—Free Trade Agreement between the Government of Australia and the Government of the People’s Republic of China (Canberra, 17 June 2015), p. 5, accessed 10 October 2015.

63. Construction, Forestry, Mining and Energy Union, Submission to the Joint Standing Committee on Treaties, Treaty tabled on 17 June 2015— Free Trade Agreement between the Government of Australia and the Government of the People’s Republic of China (Canberra, 17 June 2015), p. 5, accessed 10 October 2015.

64. CHOICE, Submission to the Joint Standing Committee on Treaties, Treaty tabled on 17 June 2015—Free Trade Agreement between the Government of Australia and the Government of the People’s Republic of China (Canberra, 17 June 2015), p. 5, accessed 10 October 2015. 65. Australian Fair Trade & Investment Network, Submission to the Joint Standing Committee on Treaties, Treaty tabled on 17 June 2015—Free Trade Agreement between the Government of Australia and the Government of the People’s Republic of China (Canberra, 17 June 2015), p. 5,

accessed 10 October 2015. 66. Explanatory Memorandum, Customs Amendment (China-Australia Free Trade Agreement Implementation) Bill 2015, p. 3, accessed 10 October 2015. The financial impact statement also includes the expected forgone revenue from tariff reduction under the Tariff Bill.

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international instruments listed in section 3 of that Act. The Government considers that both Bills are compatible.67

Parliamentary Joint Committee on Human Rights At the time of writing, the Parliamentary Joint Committee on Human Rights had yet to consider this Bill.

Key issues The China-Australia Free Trade Agreement

Background A joint feasibility study was conducted in 2005 and recognised ‘…that an Australia-China FTA is feasible and, on balance, would substantially benefit both countries.’68 The first round of negotiations took place on 26 May 2005 in Sydney, and the twenty-first and final round of negotiations took place on 1-5 September 2014 in Beijing. Negotiations formally concluded in November 2014.69

The ChAFTA was signed on 17 June 2015 in Canberra, and was tabled in the Australian Parliament the same day.70

Tariff reductions As noted in the NIA:

On entry into force, more than 85 per cent (85%) of Australia’s trade to China will have tariffs set at zero and on the full implementation of ChAFTA, 95 per cent (95%) of trade will enter duty-free. 71

Many agricultural tariffs, some of which are currently set at 30 per cent, will be progressively reduced by a process of staged reduction after the ChAFTA enters into force. In addition to reductions in agricultural tariff rates, tariff rates will also be reduced by China on a range of resources and energy products such as coal, zinc, some aluminium products, and mineral substances. Tariff rates are also set to be reduced for some products manufactured in Australia, such as car engines, aluminium plates and sheets, and motor vehicles.72

The RIS accompanying the NIA noted that, after full implementation, 97 per cent of Chinese tariff lines will be duty-free for Australian exporters.73 Once entering into force, the ChAFTA will reduce the tariff rates on 92 per cent of Australian tariff lines to zero, reducing the remaining eight per cent over the next three to five years, until 100 per cent of tariff lines are reduced to zero.74

67. The Statement of Compatibility with Human Rights can be found at page 37 of the Explanatory Memorandum to the Customs Amendment (China-Australia Free Trade Agreement Implementation) Bill 2015, and page 4 of the Explanatory Memorandum Explanatory Memorandum to the Customs Tariff Amendment (China-Australia Free Trade Agreement Implementation) Bill 2015.

68. DFAT, ‘Memorandum of Understanding on the recognition of China’s full market economy status and the commencement of negotiation of a free trade agreement between Australia and the People’s Republic of China’, DFAT website, accessed 29 September 2015, paragraph 1. 69. DFAT, ‘News’, DFAT website, accessed 29 September 2015. 70. Ibid.

71. National Interest Analysis of the Free Trade Agreement between the Government of Australia and the Government of the People’s Republic of China, [2015] ATNIA 7, op. cit., p. 3. 72. China-Australia Free Trade Agreement, Regulation Impact Statement (RIS), Attachment II, p. 11. 73. Ibid, p. 9. 74. Ibid, p. 12.

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Table 2: Examples of some of the significant tariff phase-outs that will occur in regard to key Australian exports to China. There is already evident and forecast growth in a few of these sectors.

Sector Current tariffs Phase-out period Current exports to

China

Energy & Mineral Resources ‘China is Australia’s largest resources and energy market, with exports worth over $77 billion in 2014.’ 75High-cost miners who are struggling with

falling commodity prices will enjoy a slight cost reduction.

Alumina 8% Immediately $1.2 billion

Coking coal 3% Immediately $5.1 billion

Non-coking coal 6% 2 years $3.2 billion

nickel mattes and oxides76

3% Immediately $672 million

Agriculture, forestry and fisheries77 China is Australia’s largest export market, worth $8 billion in 2014, up from $5 billion in 2010.78

Skins, hides and leather

5% - 14% 2-7 years $910 million

Beef meat China’s demand for high-quality beef is growing rapidly, driven by a growing middle class. The OECD assesses that beef will be the fastest-growing import sector in China.79

12-25% 9 years $655 million

Sheep and goat meat China’s demand for sheep meat is growing rapidly and China is already Australia’s second-most important sheep meat export destination, despite current tariff rates.80

12%-23% 8 years $425 million

Barley

Sorghum

Pulses

Malt & wheat gluten

3%

2%

7%

10%

Immediately

Immediately

4 years

4 years

$1 billion81

$264 million

Australian seafood82 (including abalone,

8%- 15% 4 years $35 million

75. DFAT, ‘Factsheet: resources, energy and manufacturing’, China-Australia Free Trade Agreement, DFAT website, 26 August 2015, accessed 1 October 2015. 76. Australia was China’s largest source of imports of these materials in 2014. 77. China’s demand for high-quality agriculture and food products is growing rapidly. The Australian Bureau of Agriculture and Resource

Economics and Sciences (ABARES) predicts that China will account for 43 per cent of global growth in agricultural demand by 2050. Source: DFAT, ‘Factsheet: agriculture and processed food’, China-Australia Free Trade Agreement, DFAT website, 26 August 2015, accessed 1 October 2015. 78. DFAT, ‘Factsheet: agriculture and processed food’, op. cit. 79. Ibid. According to DFAT, ‘China has retained the right to apply a discretionary safeguard on beef (not including offal) if imports exceed a set annual “safeguard” trigger volume. The trigger starts at 170,000 tonnes - 10 per cent above Australia’s historic calendar year peak export levels to China - and grows over time. There is also a set review process to consider removal of the safeguard.’ 80. DFAT, ‘Factsheet: agriculture and processed food’, op. cit. 81. According to DFAT the demand for barley has jumped by 330 per cent since 2010. Source: DFAT, ‘Factsheet: agriculture and processed food’, op. cit. 82. It may be interesting to consider what the growing demand for quality Australian seafood by the increasing number of wealthy middle-class in China alone, might imply for the price and/or available quantity of Australian seafood for our own domestic market over time. Will imported cheaper seafood from Asia and other markets feature more prominently to satisfy local demand in Australia? Will the increased demand be environmentally sustainable?

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rock lobsters, prawns, scallops and oysters)

Horticulture, including fruits, vegetables and nuts

China is already a rapidly growing market for Australian horticultural products, with exports worth $56 million in 2014 - up from $13 million in 2010.83

Up to 30% 4 - 8 years $56 million

Dairy84 China is Australia’s second largest market for dairy exports with demand expanding rapidly and exports almost doubling recently in 2013-14.85

10%-19% 4 - 11 years $443 million

Wine and spirits ‘China’s wine import market is growing dramatically, almost doubling in size since 2010.’ 86

Wine 14% - 20% 4 years $211 million

Alcoholic beverages and spirits

Up to 65% 4 years

Live animal exports A growing market, with exports doubling since 2010.87

10% 4 years $254 million

Source: DFAT, ‘Factsheet: resources, energy and manufacturing’ and ‘Factsheet: agriculture and processed food’, China-Australia Free Trade Agreement, 26 August 2015, both accessed 1 October 2015.

Investment The NIA noted that the Foreign Investment Review Board (FIRB) screening thresholds for private Chinese investment will be lifted in non-sensitive areas from $252 million to $1,094 million, in line with concessions granted to other countries under previously negotiated FTAs. As stated in the NIA:

Australia has retained the ability to screen investments in sensitive sectors, including media, telecommunications, and defence-related industries at lower levels and reserved policy space to screen proposals for foreign investment in urban land, agricultural land (at $15 million or above) and in agribusiness (at $53 million or above). 88

The FIRB has a policy of screening all public (that is, government) investments, and the ChAFTA does not affect that policy.89

Commitments on services Australia’s services exports were around $63 billion in 2014-15, which represented 18 per cent of total exports.90 The ChAFTA provides improved market access conditions for Australian service providers in the following range of areas:

83. DFAT, ‘Factsheet: agriculture and processed food’, op. cit. 84. Ibid. According to DFAT, under ChAFTA Australia will face a discretionary safeguard on whole milk powders, with the safeguard trigger volume set well above current trade levels and indexed to grow annually. 85. Ibid. China has already invested in the Australian agricultural industry and this investment is expected to grow even more with the ChAFTA

and its lowering of barriers to investment in Australia for a mix of private firms and sovereign wealth funds from China. These Chinese interests along with Australian dairy farm owners, will have the potential to sell dairy and agricultural products back into the Chinese market. Source: D Welch, ‘China free trade agreement expected to tip billions into Australian farms, dairy industry to be popular with investors’, ABC News, (online edition), 1 September 2015, accessed 10 October 2015. 86. DFAT, ‘Factsheet: agriculture and processed food’, op. cit. 87. Ibid.

88. National Interest Analysis of the Free Trade Agreement between the Government of Australia and the Government of the People’s Republic of China, [2015] ATNIA 7, op. cit., p. 6. 89. Foreign Investment Review Board, Australia’s foreign investment policy, June 2015, p. 2.

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• environmental services

• construction and related engineering services

• services incidental to forestry

• engineering services

• integrated engineering services

• computer and related services

• tourism and travel related services

• related scientific and technical consulting services

• securities services

• some education services.91

In addition to the commitments above, China has agreed to a future review of its commitments to services whereby it may introduce a ‘negative list approach’. Such a list proscribes services that are not covered under a trade agreement. Australia adopted this approach in its commitments to services under the ChAFTA. More generally, the Chapter on services is to be reviewed every two years (or as otherwise agreed) ‘with a view to the progressive liberalisation of the trade in services between [China and Australia] on a mutually advantageous basis.’92

In addition to the Chapter on services, a side letter to the ChAFTA notes that 77 Australian CRICOS (Commonwealth Register of Institutions and Courses for Overseas Students) registered higher education institutions will be registered on the Chinese Government’s website for overseas students. The registration will take place within one year of the commencement of the ChAFTA.93

Movement of natural persons Chapter 10 of the ChAFTA covers the movement of natural persons. Both Australia and China have made a range of commitments that apply to several categories of persons. Broadly, these categories are:

• business visitors

• executives, senior managers, and specialists as intra-corporate transferees

• independent executives

• contractual service suppliers

• installers and servicers.

These categories of persons are primarily based on the General Agreement on Trade in Services,94 apart from ‘installers and servicers.’ A number of previously negotiated Australian FTAs have made commitments in relation to the first four categories of persons.95 None of Australia’s FTAs in force have included installers and servicers as part of countries’ commitments.

90. Australian Bureau of Statistics, Balance of payments and international investment position, Australia, June 2015, Time series, cat. no. 5302.0, ABS, Canberra, September 2015. Australian Bureau of Statistics, Australian national accounts: national income, expenditure and product, June 2015, Time series, cat. no. 5306.0, ABS, Canberra, September 2015.

91. ChAFTA, Annex 8-A. 92. ChAFTA, Article 8.24.1. 93. ChAFTA, Annex IV - Side letters. 94. Commitments related to business visitors; executives, senior managers, and specialists as intra-corporate transferees; and independent

executives. See World Trade Organisation, ‘Trade in Services - Australia: Schedule of Specific Commitments, Supplement 2’ GATS/SC/6/Suppl.2, 28 July 1995, accessed 11 October 2015. 95. See, for example, Singapore-Australia Free Trade Agreement, done at Singapore 17 February 2003, [2003] ATS 16 (entered into force 28 July 2003), ch. 11 and Australia-Chile Free Trade Agreement, done at Canberra 30 July 2008, [2009] ATS 6 (entered into force 6 March 2009),

ch. 13, accessed 10 October 2015. ats series

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Entry and temporary stay of installers and servicers is proposed to be granted by Australia for up to three months and is restricted to the following persons:

A natural person of China is an installer or servicer of machinery and/or equipment where such installation and/or servicing by the supplying company is a condition of purchase of the said machinery or equipment. An installer or servicer must abide by Australian workplace standards and conditions and cannot perform services which are not related to the installation or servicing activity which is the subject of the contract.

96

Under all categories, it is currently unclear how many persons may potentially seek entry if the ChAFTA enters into force.

Labour market testing Labour market testing (in relation to a nominated position by an approved sponsor) means the:

…testing of the Australian labour market to demonstrate whether a suitably qualified and experienced Australian citizen or Australian permanent resident is readily available to fill the position. 97

Under the ChAFTA, labour market testing (LMT) is expressly excluded. Article 10.4.3 provides:

In respect of the specific commitments on temporary entry in this Chapter, unless otherwise specified in Annex 10-A, neither Party shall:

(a) impose or maintain any limitations on the total number of visas to be granted to natural persons of the other Party; or

(b) require labour market testing, economic needs testing or other procedures of similar effect as a condition for temporary entry. 98

The application of LMT is not altered by Annex 10-A, and therefore is expressly excluded from applying to the categories of persons detailed above. LMT has also been expressly excluded from other FTAs. The Singapore-Australia Free Trade Agreement provides that:

Neither Party shall require labour market testing, labour certification tests or other procedures of similar effect as a condition for temporary entry in respect of natural persons on whom the benefits of this Chapter are conferred. 99

However, the ASEAN-Australia-New Zealand FTA and the Malaysia-Australia FTA provided that LMT:

…may be required for some occupations, to the extent that this is not inconsistent with Australia’s commitments under the WTO and other international trade agreements to which it is a party as at entry into force of this Agreement. 100

The LMT under the ASEAN-Australia-New Zealand FTA and the Malaysia-Australia FTA only relates to contractual service suppliers.

The majority of Australia’s FTAs are silent as to the application of LMT. However, Ministerial Determinations issued under subsection 140GBA(2) of the Migration Act 1958 (Cth) have expressly excluded LMT from a range of categories of persons covered by the various FTAs.101 It appears that a similar approach is proposed for the ChAFTA:

96. ChAFTA, Annex 10-A, Section A, Article 13. 97. Migration Act 1958 (Cth), subsection 140GBA(7), accessed 10 October 2015. 98. ChAFTA, Article 10.4.3. 99. Singapore-Australia Free Trade Agreement, done at Singapore 17 February 2003, [2003] ATS 16 (entered into force 28 July 2003), ch. 11,

art. 12, accessed 10 October 2015. 100. Agreement Establishing the ASEAN-Australia-New Zealand Free Trade Area, done at Cha-am, Thailand, 27 February 2009, [2010] ATS 1 (entered into force 1 January 2010), ‘Annex 4: schedules of movement of natural persons commitments’.

See also Malaysia-Australia Free Trade Agreement, done at Kuala Lumpur, Malaysia, 22 May 2012, [2013] ATS 4 (entered into force 1 January 2013), ‘Annex 4: schedules of movement of natural persons commitments’, both accessed 10 October 2015. 101. Determination of International Trade Obligations Relating to Labour Market Testing 2014 (Cth), accessed 10 October 2015.

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…in order to implement the obligations in ChAFTA in Australia, a Migration Act 1958 (Cth) Determination is required in relation to labour market testing. 102

Memorandum of understanding and Investor Facilitation Arrangements Alongside the negotiation of the ChAFTA, China and Australia negotiated a memorandum of understanding (MOU) which is proposed to allow for Investor Facilitation Arrangements (IFAs). No other Australian FTA in force has such an arrangement.103 The NIA accompanying the ChAFTA expressly provides that the MOU on IFAs does not form part of the Agreement.104 Since the IFAs do not form part of the Agreement, it appears they represent government policy.

Skills assessments Under a side letter to the ChAFTA (that does form part of the Agreement), Australia has committed to remove mandatory skills assessments from 10 occupations, upon the treaty entering into force. These occupations are:

• automotive electrician

• cabinetmaker

• carpenter

• carpenter and joiner

• diesel motor mechanic

• electrician (general)

• electrician (special class)

• joiner

• motor mechanic (general) and

• motorcycle mechanic.

Australia has committed to reviewing the remaining occupations within two years of the date of the treaty’s entry into force, ‘with the aim of further reducing the number of occupations, or eliminating the requirement within five years’.105 There are currently 145 skilled occupations listed in the Migration Regulations 1994,106 28 of which require skills assessments.107

Investor-State Dispute Settlement Australia has several FTAs in force that have investor-state dispute settlement (ISDS) provisions, such as the Australia-US FTA and the Korea-Australia FTA.

The ChAFTA includes a section on ISDS. Generally, ISDS allows an investor of a recognised investment of one nation state to bring a complaint against the government of another nation state, under certain circumstances where the other government has in some way reduced the value of the said investment. Definitions vary as to what constitutes an ‘investment’ and who is an ‘investor’. There are also differences around the nature of the complaint, and in what forum it is heard.

‘Investor’ and ‘investment’ as proposed in the ChAFTA are broadly defined.108 Given the breadth of the definitions, there is the potential for a range of investments to be caught within the ambit of the Agreement. To some extent the potential investments are limited by the application of Article 9.11.4:

102. National Interest Analysis of the Free Trade Agreement between the Government of Australia and the Government of the People’s Republic of China, [2015] ATNIA 7, op. cit., p. 8. 103. Memorandum of Understanding between the Government of Australia and the Government of the People's Republic of China on an Investment Facilitation Arrangement, 17 June 2015, accessed 10 October 2015. 104. National Interest Analysis of the Free Trade Agreement between the Government of Australia and the Government of the People’s Republic of

China, [2015] ATNIA 7, op. cit., p. 8. 105. ChAFTA, Annex 4: Side letters. 106. Migration Regulations 1994 (Cth), Specification of Skilled Occupations for Skills Assessments, accessed 12 October 2015. 107. Trades Recognition Australia (TRA), ‘Eligibility’, TRA website, accessed 8 October 2015. 108. China-Australia Free Trade Agreement, Article 9.1.

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Measures of a Party that are non-discriminatory and for the legitimate public welfare objectives of public health, safety, the environment, public morals or public order shall not be the subject of a claim under this Section. 109

The ChAFTA proposes that, in the event of a dispute that cannot be settled, the matter will go to arbitration.110 This means that the dispute, if one were to arise, would not be settled through either the Australian or Chinese judicial systems (depending on where the cause of action arises), but rather through arbitral proceedings.

ISDS claims are generally brought under the International Centre for Settlement of Investment Disputes (ICSID) Convention and associated rules, or under the United Nations Commission on International Trade Law (UNCITRAL) arbitration rules. The ISDS provisions in ChAFTA propose to permit a claimant to bring a matter under either mechanism.111 A side letter that is incorporated as part of the ChAFTA however, modifies the rules around transparency if a matter is brought under the UNICTRAL rules, stating that the transparency rules do not apply. The side letter also notes that the parties shall enter into consultations within 12 months of the entry into force of the ChAFTA to further agree on the application of the UNCITRAL Rules on Transparency.112

In addition to the proposed ISDS provisions, the ChAFTA proposes a forward work program. The forward work program prescribes that Australia and China will conduct a review of the investment legal framework within three years of the Agreement entering into force. The scope of the review is broad ranging and includes ISDS generally, as well as ‘[t]he application of investment protections and ISDS to services supplied through commercial presence’.113

Critiques of ISDS provisions In a 2010 study on bilateral and regional trade agreements (BRTAs), the PC concluded:

Australia has also signed up to investor-state dispute settlement provisions in some BRTAs for which there appear to be few benefits and considerable risks. 114

More recently, the PC reiterated its concerns about including ISDS provisions in FTAs, in the context of both the ChAFTA and the Trans-pacific Partnership Agreement.115

The current Chief Justice of the High Court has expressed reservations about ISDS provisions generally. Specific concerns related to the differences observed across various Australian FTAs, which included:

• the range of disputes covered

• the nature of the investments protected

• the arbitral options

• the extent to which they preserve access to judicial proceedings in the Respondent State and

• whether they require exhaustion of remedies in the courts of the Respondent State.116

Main provisions of the Customs Amendment (China-Australia Free Trade Agreement Implementation) Bill 2015 Chapter 3 of the ChAFTA provides for governing provisions on rules of origin and implementation procedures for various goods that will be subject to tariff reductions. As part of the implementation procedures, an amendment to the Customs Act 1901 is required in order to facilitate the Agreement’s provisions.117

109. China-Australia Free Trade Agreement, Article 9.11.4. 110. China-Australia Free Trade Agreement, Article 9.12.2. 111. China-Australia Free Trade Agreement, Article 9.12.4. 112. A Robb (Minister for Trade and Investment) ChAFTA - Side letter on UNCITRAL Transparency Rules application, 17 June 2015, accessed 12

October 2015. 113. China-Australia Free Trade Agreement, Article 9.9. 114. PC, Bilateral and regional trade agreements, op. cit., p. XXV. 115. PC, Trade and Assistance Review 2013-14, Annual report series, PC, Canberra, June 2015, pp. 77-82. 116. R French AC, Investor-state dispute settlement — a cut above the courts?, Supreme and Federal Courts Judges’ Conference, 9 July 2014,

Darwin, p. 14.

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Schedule 1, Part 1—Chinese originating goods Part 1 of Schedule 1 inserts Division 1L into Part VIII of the Customs Act, and comprises seven Subdivisions. Proposed Subdivision A defines ‘Chinese originating goods’, to which preferential rates of duty apply under the Customs Tariff Act 1995. Proposed Subdivisions B-E outline the circumstances under which goods are to be considered Chinese originating goods.

Rule 1—goods wholly obtained or produced in the territory of China (proposed Subdivision B) In simple terms, a good will meet the requirement of being an ‘originating good’ under ChAFTA if it is wholly obtained or produced entirely in China, and either:

• the importer of the goods has, at the time the goods are imported, a Certificate of Origin or a Declaration of Origin, or a copy of one, for the goods or

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

A COO means a certificate that is in force and that complies with Article 3.14 of the Agreement.118 A Declaration of Origin means a declaration that is in force and that complies with Article 3.15 of the Agreement.119

There are 10 possible ways that goods can be ‘wholly obtained’ or produced in the territory of China (proposed subsection 153ZOC(2)).120

Rule 2 - Chinese originating goods that are goods produced in China, or in China and Australia, from originating materials (proposed Subdivision C) Goods are Chinese originating goods if ‘they are produced entirely in the territory of China, or entirely in the territory of China and the territory of Australia, from originating materials only’ and the importer has either a Certificate of Origin or a Declaration of Origin (or a copy of one), or the need for either has been waived by Australia.121

Originating materials are defined as:

• Chinese originating goods that are used in the production of other goods

• Australian originating goods that are used in the production of other goods or

• indirect materials.122

Indirect materials means:

• goods or energy used in the production, testing or inspection of goods, but not physically incorporated in the goods or

• goods or energy used in the maintenance or operation of equipment or buildings associated with the production of goods.

The types of goods or energy used include fuel, tools, dies and moulds, and spare parts and materials.123

117. Customs Act 1901, accessed 10 October 2015. 118. Proposed subsection 153ZOB(1) of the Customs Act. 119. Ibid. 120. Proposed subsection 153ZOC(2) of the Customs Act. 121. Proposed section 153ZOD of the Customs Act. 122. Proposed subsection 153ZOB(1) of the Customs Act. 123. Ibid.

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Rule 3 - Chinese originating goods that are goods produced in China, or in China and Australia, from non-originating materials (proposed Subdivision D) Non-originating materials means goods that are not originating materials.124 Goods are considered to be Chinese originating goods under the proposed Subdivision if:

• the goods are classified by the regulations for the purposes of the Subdivision and

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

• each requirement that is prescribed by the regulations in relation to the goods is met and

• the importer has either a Certificate of Origin or a Declaration of Origin (or a copy of one), or the need for either has been waived by Australia.125

Change in tariff classification Proposed subsections 153ZOE(2)-(4) provide that regulations may prescribe that each non-originating material used in production of a good is required to satisfy a change in tariff classification, and when such a requirement (if any) is satisfied. A change in tariff classification relates to Article 3.4 of the Agreement, and Annex II to the Agreement which provides for product-specific rules of origin.126 If regulations are made in relation to non-originating materials and the non-originating materials used do not satisfy the change in tariff classification requirements, the requirement is taken to be satisfied providing that the non-originating materials do not exceed 10 per cent of the customs value of the goods.127

Regional value content Regional value content is a variation on rules of origin, and prescribes that a certain percentage of the total value of a good must be from regional (i.e. domestic) origin. The method of calculation is prescribed in Article 3.5 of the Agreement. Proposed subsection 153ZOE(5) permits regulations to be made which prescribe a certain percentage of the total value of a good that is to be comprised of regional value content.

Subdivision E Proposed Subdivision E provides that goods are Chinese originating goods if:

• they are accessories, spare parts or tools in relation to other goods

• the other goods are imported into Australia with the accessories, spare parts or tools

• the other goods are Chinese originating goods

• the accessories, spare parts or tools are classified and invoiced with the other goods and are included in the price of the other goods

• the accessories, spare parts or tools are not imported solely for the purpose of artificially raising the regional value content of the other goods and

• the quantities and value of the accessories, spare parts or tools are customary for the other goods.

Subdivision F Proposed Subdivision F outlines non-qualifying operations. Goods are not Chinese originating goods pursuant to six circumstances outlined, despite operations or procedures such as: packaging or repackaging; placing in bottles, cans, flasks, bags, cases or boxes; fixing on cards or boards or other simple packaging operations; or the disassembly of goods.

124. Ibid. 125. Proposed subsection 153ZOE(1) of the Customs Act. 126. China-Australia Free Trade Agreement, Annex II, Product specific rules of origin. A change in tariff classification relates to a change of tariff under the Harmonized Commodity Description and Coding System.

127. Proposed subsection 153ZOE(4) of the Customs Act.

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Subdivision G Proposed subsection 153ZOH(1) provides that goods are not Chinese originating goods if the goods are transported through the territory of a non-party and one or more of the following apply:

• the goods undergo any operation in the territory of the non-party (other than unloading, reloading, repacking, relabelling for the purpose of satisfying the requirements of Australia, splitting up of the goods for further transport, temporary storage or any operation that is necessary to preserve the goods in good condition);

• if the goods undergo temporary storage in the territory of a non-party—the goods remain in the territory of the non-party for a period exceeding 12 months;

• the goods do not remain under customs control at all times while the goods are in the territory of the non-party.

Regulations may be made which specify the circumstances in which goods are under customs control while the goods are in the territory of a non-party.128

Schedule 1, Part 2—Verification powers Part 2 of Schedule 1 proposes to amend the Customs Act by inserting Division 4J—Exportation of goods to China into Part VI of the Act. The proposed definitions section defines the territory of China to mean the same as under Article 1.3 of the Agreement, and expressly excludes Hong Kong, Macao, and the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu.129

Proposed section 126AOB allows for regulations that prescribe record keeping obligations in relation to goods that are exported to the territory of China and are claimed to be Australian originating goods.

Proposed section 126AOC provides that if record keeping regulations are made for the purposes of the previous proposed section, then an authorised officer may require that a person subject to the regulations produce such records.

Proposed section 126AOD permits an authorised officer to ask questions of an exporter (exporting goods to the territory of China and claiming to be Australian originating goods) in order to verify the goods’ origin.

For the purpose of proposed sections 126AOC and 126AOD information may be given to China to assist with verifying a claim for preferential tariff treatment.

Australian originating goods are proposed to mean goods that are Australian originating goods under a law of China that implements the Agreement.130

Schedule 1, Part 3—Application provisions Schedule 1, Part 3 provides that the amendment made by item 1 (the proposed insertion of Division 1L into Part VIII of the Customs Act) applies in relation to:

• goods imported into Australia on or after the commencement of that item; and

• goods imported into Australia before the commencement of that item, where the time for working out the rate of import duty on the goods had not occurred before the commencement of that item.131

Item 2 (the proposed insertion of Division 4J into Part VI of the Customs Act) applies in relation to goods exported to the territory of China on or after the commencement of that item (whether the goods were produced before, on or after that commencement).132

128. Proposed subsection 153ZOH(2) of the Customs Act. 129. Proposed section 126AOA of the Customs Act. 130. Proposed subsection 153ZOB(1) of the Customs Act. 131. Item 3 of the Customs Bill. 132. Ibid.

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Main provisions of the Customs Tariff Amendment (China-Australia Free Trade Agreement Implementation) Bill 2015 Article 2.4.1 of the Agreement provides that each ‘Party shall eliminate its customs duties on originating goods of the other Party in accordance with its Schedule to Annex I’.133 The Customs Tariff Amendment (China-Australia Free Trade Agreement Implementation) Bill 2015 (the Tariff Bill) implements the commitments made under Article 2.4.1, the associated Annex and various Tariff Schedules.

Schedule 1—Amendments Items 1-8 and 18-27 largely reflect minor amendments to the Customs Tariff Act 1995 that are required to facilitate the insertion of proposed Schedule 12, which deals with implementing the agreed elimination of customs duties under the Agreement.134

Items 9-17 provide for necessary amendments to the Customs Tariff Act that relate to the Customs Bill. Item 9 provides for the insertion of proposed section 13J into the Customs Tariff Act, which relates to Chinese originating goods, and is consistent with the various definitions proposed under Division 1L of Part VIII of the Customs Act.

Current section 16 of the Customs Tariff Act sets out how duty is to be worked out for various goods. Section 16 will be amended by items 10 to 13 of Schedule 1 to the Tariff Bill. Item 13 would insert proposed subsection 16(4A) to provide that, for the purposes of Schedule 12 to the Customs Tariff Act:

• a reference in that Schedule to year 2 is a reference to the first calendar year beginning after the commencement of this subsection

• a reference in that Schedule to year 3 is a reference to the second calendar year beginning after the commencement of this subsection

• a reference in that Schedule to year 4 is a reference to the third calendar year beginning after the commencement of this subsection and

• a reference in that Schedule to year 5 is a reference to the fourth calendar year beginning after the commencement of this subsection.

Proposed Schedule 12 to the Customs Tariff Act is inserted by item 28, and is discussed below. Schedule 1 to the Tariff Bill (including proposed subsection 16(4A)) will commence at the same time as that Schedule 1 of the Customs Amendment (China-Australia Free Trade Agreement Implementation) Act 2015 (Cth) commences. This will be on the later of the day that Act receives Royal Assent and the day that the ChAFTA enters into force in Australia.

Item 12 proposes to amend subsection 16(1) and provides that if goods are Chinese originating goods, then:

• if the goods are classified to a heading or subheading in Schedule 3 that is specified in column 2 of an item in the table in Schedule 12—then the rate of duty that applies is set out in column 3 of that item or

• otherwise—Free.

Hence, for goods that are not listed in Schedule 12, pursuant to item 12 (proposed subparagraph 16(1)(r)(ii)), if the goods are Chinese originating goods, they become duty free upon commencement of item 12.

Schedule 3 of the Customs Tariff Act has 21 substantive sections which relate to the classification of goods and general and special rates of duty that apply to those goods. Goods are listed according to the Harmonized Commodity Description and Coding System (HS).135

Item 17 proposes to amend subsection 18(2) and provides that if goods are Chinese originating goods, then:

• if a rate of duty that applies in relation to the People’s Republic of China is set out in the third column of an item in Schedule 12—by reference to that rate of duty or

133. ChAFTA, Annex I. See also the tariff schedule of Australia, the tariff schedule of China, and the unofficial English language explanation of the tariff schedule of China, all accessed 10 October 2015. 134. Customs Tariff Act 1995, accessed 10 October 2015. 135. World Customs Organisation, Harmonized Commodity Description and Coding System, accessed 11 October 2015.

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• otherwise—Free.

Items 12 and 17 therefore provide that in the event that no rate of duty is specified in proposed Schedule 12, Chinese originating goods will be duty free upon commencement of those items.

Items 29-33 provide minor amendments to the User’s guide reflecting the proposed insertion of Chinese originating goods in Schedule 12.

Item 28 - Proposed Schedule 12—Chinese originating goods With reference to item 12, Schedule 12 is proposed to introduce a list of goods based on the HS (in accordance with Schedule 3). Each applicable good is listed in column 2 of proposed Schedule 12. The rate of applicable duty to each applicable good is listed in column 3.

By way of illustration, the first Chinese originating good listed in the proposed table of Schedule 12 in column 2 is 1202.41.00. According to Schedule 3 of the Customs Tariff Act, the HS classifies the good as Ground-nuts, not roasted or otherwise cooked, whether or not shelled or broken; Other; In shell. Column 3 of proposed Schedule 12 provides that the rate of duty applicable to that good, upon commencement of the Act, is 3.3 per cent. From 1 January of year 2 (which from item 13 means the first calendar year after commencement), the applicable rate of duty reduces to 1.7 per cent. From 1 January of year 3 (which from item 13 means the second calendar year after commencement), the good becomes duty free.

Schedule 12 thus provides for the inbuilt reduction of applicable rates of duty to Chinese originating goods over time, until the applicable duty on the good becomes nil. However, some exceptions apply. Applicable rates of duty still apply to certain alcohol, tobacco, and petroleum products so as to maintain excise-equivalent rates of duty. The rates are equivalent to the rates of excise duty payable on such goods manufactured in Australia.

Application and transitional provisions Item 34 provides that the amendments made by items 1 to 17 and 21 to 28 apply in relation to:

• goods imported into Australia on or after the commencement of this Schedule and

• goods imported into Australia before the commencement of this Schedule, where the time for working out the rate of import duty on the goods had not occurred before the commencement of this Schedule.

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