Mondaq | 19 August 2008
Australian-Chile Free Trade Agreement - The New Freedom!
Article by Björn Gehle
On 30 July 2008 Australia and Chile signed the Australia-Chile Free Trade Agreement (AC-FTA). The AC-FTA is the most comprehensive outcome in trade negotiations since the Closer Economic Relations Trade Agreement with New Zealand in 1983 and will liberalise trade and investment between Australia and Chile. The liberalisation will be in respect of goods, services and investments and includes commitments well beyond both countries’ commitments under the WTO agreement.
Tariffs on most goods will be eliminated immediately, with the remainder to be abolished by 2015.
The Agreement is expected to enter into force in January 2009.
Over the last 15 years Chile’s economy has grown at an average rate of almost 5.5% a year and is estimated to reach a total GDP of US$170 billion in 2008. Chile is Australia’s second largest export market in Latin America, with coal, civil engineering equipment, lead, optical equipment and refined petroleum accounting for a majority of exported goods. Imports from Chile into Australia have also increased by 125% between 2006 and 2007. The majority of those imports are of copper, non-ferrous base metal waste, pulp and waste paper, pig iron and wood.
According to the Department of Foreign Affairs and Trade (DFAT) Australia is the fourth largest foreign investor in Chile, with around US$3 billion of direct investment.
Chile already has a number of existing Free Trade Agreements with most Latin American countries, the European Union, India, USA, Canada, Japan and China. The AC-FTA therefore puts Australia on an equal footing with competitors from these countries, in particular Canadian coal exporters who have increased their market share following the elimination of tariffs under the Canada-Chile FTA in 1997. Australian coal exporters will therefore be more competitive and increase their market share in Chile.
In any event, the AC-FTA will generate export opportunities for Australian companies in many services and investment areas such as mining and energy technology, engineering and consulting services, information technology, tourism, agriculture, and the food and wine industry.
The AC-FTA introduces extensive obligation for both countries (referred to below as ’Parties’), some of which are outlined below:
National Treatment and Market Access for Goods
Upon entry into force the AC-FTA will eliminate tariffs on around 92% of tariff lines covering about 97% of trade in each direction. All remaining tariffs will be eliminated by 2015, with the exception of one component of Chile’s sugar tariff which will remain subject to its current ’price band’ system.
Each Party is required to accord to national treatment to the goods of the other party in accordance with article III of GATT 1994, ie. to treat goods from the other country no less favourably than domestic goods (article 3.3). The AC-FTA also provides for a general prohibition on import and export restrictions, with only a few exceptions (article 3.9), and a commitment for both parties to eliminate agricultural export subsidies (article 3.13).
Rules of Origin
The Rules of Origin (ROO) in chapter 4 of the Agreement establish the criteria for determining which goods qualify for preferential treatment under the AC-FTA. According to the ROO (article 4.2) a good only qualifies for preferential treatment if it:
is a wholly obtained good of a Party;
is produced entirely in the territory of a Party exclusively from originating materials;
satisfies all applicable requirements of Annex 4-C of the AC-FTA, as a result of processes performed entirely in the territory of one or both of the parties by one or more producers; or
otherwise qualifies as an originating good under chapter 4.
Another important feature under the AC-FTA is that exporters are allowed to self-assess as to whether an export good meets the ROO for preferential treatment by issuing a certificate of origin.
Chapter 5 of the AC-FTA establishes a simplified and harmonised customs procedure consistent with international standards. This allows quick processing of so-called ’low risk goods’ so that customs administration can focus on higher risk goods.
It further provides for advance rulings which allow exporters to verify with customs administration the tariff classification, valuation and the qualification of a good as an originating good (article 5.10) prior to its import or export.
Cross-Border Trade in Services
In respect of trade in services the AC-FTA introduces obligations for national treatment and most-favoured-nation treatment. Chapter 9 also contains provisions to reduce limitations on market access by eliminating requirements such as economic need tests, quota requirements or requirements regarding the specific types of legal entities or joint ventures through which a service supplier may supply a service (article 9.5).
In addition, neither Party may require a service supplier of the other Party to establish or maintain a representative office or other local presence (article 9.6).
Chapter 10 (Investment) covers the pre-establishment as well as the post-establishment phases of investments.
In addition to the usual national treatment and most-favoured nation treatment requirements, the investment chapter also includes provisions on performance requirements and obligations in respect of senior management.
In broad terms, the performance requirements prevent a Party from:
imposing or enforcing performance requirements in respect of the level, volume or value of export or domestic content;
request the transfer of a particular technology, productions processes or other proprietary knowledge; or
request that supply of particular goods or services are exclusively made from the Party’s territory.
In addition, an investor from the other Party must be allowed to freely transfer funds in relation to an investment in that country (article 10.10).
Most importantly, section B of chapter 10 of the AC-FTA contains detailed provisions on Investor-State dispute settlement. Where a dispute between a Party and an investor of the other Party relating to an investment covered by the AC-FTA arises, it is in the first instance referred to consultations and negotiations between the investor and the Party.
If the dispute is not resolved the investor may refer the investment dispute to:
arbitration under the ICSID Convention;
proceedings under the ICSID Additional Facilitations Rules;
arbitration under the UNCITRAL Arbitration Rules; or
arbitration under any other arbitration rules.
The procedures and remedies available are significantly broader than those included in the existing Bilateral Investment Treaty between Australia and Chile. For that reason Annex 10-E clarifies that the Australia-Chile BIT will terminate on the date of entry into force of the AC-FTA.
Where a dispute regarding any matter arises under the AC-FTA the Parties are encouraged to enter into consultations with each other. If the dispute is not resolved within a certain time each Party may then refer the matter to the Joint FTA Committee or to arbitration as the ultimate dispute resolution process.
The arbitration process under the AC-FTA is somehow different and unusual in some respects. At the conclusion of the proceedings the arbitral panel presents a report in which it summarises its findings and determinations, but may only make a recommendation with regard to the resolution of the dispute if the parties so agree.
If the non-conformity is not remedied further arbitration proceedings may be commenced to determine the measures and amount of compensation.
The AC-FTA represents a new generation of Free Trade Agreements and establishes a broad level of market access. Australian companies are certain to benefit from the improved market access. Although traditional export sectors such as the mining, petroleum and engineering industry will be the obvious beneficiaries, other sectors such as agribusiness, food and beverages, education, tourism and information technology will follow once the markets have been researched and opportunities established.
DFAT has also earmarked the energy sector as one with significant potential for Australian firms, given the steep increase in energy demand in Chile over the next few years.
The author would like to thank Kristina Reinhardt for her valuable contributions and assistance in preparing this article.