Australia: The new Korea-Australia Free Trade Agreement is an open door for Korean investors, but not in agriculture

Australia's new free trade agreement with Korea is a clear signal Australia is open for business for Korean investors. And, it could fuel a much needed investment surge in Australia's resources and infrastructure sectors.

The final agreed version of the Korea-Australia FTA amounts to some 1000 pages. It deals with several bilateral trade areas, seeking to eliminate tariffs, red-tape and impediments to mutual trade,

Most significant is the agreement's chapter on foreign investment. It affords Korean investors in non-sensitive sectors the same treatment as Australia currently provides to US and New Zealand investors. This means the screening threshold for review of investments in non-sensitive sectors by Korean investors will be raised from $248 million to $1,078 million.¹

Further, it covers all forms of investment including investments in companies and businesses and there is protection against expropriation or nationalisation of investments without prompt, adequate and effective compensation.

AGRIBUSINESS AND AGRICULTURE

However, as with all FTAs, there are restrictions. Australia has reserved the right to screen foreign investment proposals of AU$15 million or more in Australian agricultural land and AU$53 million or more in Australian agribusinesses".

Given these low monetary thresholds, it is clear Australia is treating agriculture as a "sensitive" industry where foreign investment will be scrutinised to determine whether it is in the national interest. Criteria include:

• the quality and availability of Australia's agricultural resources, including water;
• land access and use;
• agricultural production and productivity;
• Australia's capacity to remain a reliable supplier of agricultural production, both to the Australian community and our trading partners;
• biodiversity; and
• employment and prosperity in Australia's local and regional communities.

It is unclear how these criteria relate to what is in, and what is not in, the national interest. They are also different from those applied in the national interest test under the Foreign Investment Review Board rules – for example as seen recently in the Archer Daniels Midland approach to Graincorp.

Putting agriculture aside, it is evident that the higher thresholds for scrutiny of Korean investment in Australia, effectively treating it as an equal to US and New Zealand, should encourage Korean companies and businesses to invest in Australia, particularly in the resources, energy and infrastructure sectors.

INVESTOR STATE DISPUTE PROVISIONS

The inclusion of an investor state dispute settlement (ISDS) provision in the KAFTA should give Korean investors additional confidence the Australian Government will not unduly interfere with their investments.

The ISDS provision grants Korean investors, in certain circumstances, the right to appeal to an international arbitral tribunal if they believe actions of the Australian Government constitute an expropriation or nationalisation of their investments without prompt, adequate and effective compensation.

In effect, it allows Korean companies to sue the Australian government directly for undue interference with their investments.

During KATFA negotiations it was reported the previous Labour Government's reluctance to include an ISDS provision was a key sticking point for both parties and held up the agreement's conclusion.

Last year the newly elected Coalition Government announced it would put the ISDS provision back on the negotiating table provided there were 'safeguards' to protect the Government's ability to make laws in respect of public interest matters.

The final KAFTA text reflects this position. While the ISDS provision still grants Korean investors the ability to institute proceedings against the Australian Government, there are carve outs directed at public interest matters. For example:

• except in rare circumstances, non discriminatory regulatory actions by the Australia Government for the purpose of protecting 'public welfare objectives' - such as public health, safety and the environment - will not constitute expropriation;
• provided measures are not discriminatory or arbitrary, the adoption and maintenance of measures by the Australian Government in the following areas are exempt from the ISDS provision:
• • measures necessary to protect public morals, order or safety;
  • measures necessary to protect human, animal or plant life or health;
  • measures to ensure compliance with laws not inconsistent with the KAFTA;
  • measures to protect intellectual property;
  • measures for the protection of national treasures of artistic, historic or archaeological value;
  • measures relating to the conservation of living or nonliving exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption; and
  • measures relating to taxation; and
• decisions by the Australian Government with respect to whether or not to refuse, or impose conditions on, an investment that is subject to Foreign Investment Review Board approval.

The effect of these carve outs is that in certain areas, Korean investors will not have recourse against the Australian Government.

CONCLUSION

Korea's total investment in Australia at the end of 2012 was around $12 billion. This could rise dramatically under the KAFTA with the resources and infrastructure industries being the most likely beneficiaries.

A word of caution though, research done by the Productivity Commission in 2010 shows that most of Australia's previous FTAs have fallen far short of their promised economic benefits . Could the KAFTA be a turning point?

We will certainly keep a close watch on how Korean investments into Australia's growing agribusiness sector are analysed under the national interest test and whether the ISDS provisions alter Government behaviour over time.

Footnote

¹Sensitive sectors include media, telecommunications, transport, the supply of goods or certain services to the Australian Defence Force and the extraction of uranium or plutonium or operating a nuclear facility.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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