Australia: Energy and resources opportunities in the China-Australia FTA
Clayton Utz Insights

Key Points:

Once the FTA is in force, approximately 92.9% of Australia's energy, resources and manufactured products will enter China duty-free.

Australian resources account for four of the top five exports to China – iron ore, coal, gold and crude petroleum sales were around $72 billion last year. While the full text of a new China-Australia Free Trade Agreement (FTA) is yet it be released, what we do know promises even more opportunities for the energy and resources sector.

Tariffs for energy and resources will go

Once the FTA is in force, approximately 92.9% of Australia's energy, resources and manufactured products will enter China duty-free, with most tariffs being removed altogether within 4 years.

In addition to the above, the FTA locks in zero tariffs on major exports such as iron ore, gold, crude petroleum oils and liquefied natural gas, and certain manufactured products, including wood chips and radiata pine products.

A small number of products sensitive to China's economy or culture are excluded from tariff concessions, including some fertilisers, wood and paper products. These products account for only 0.1 per cent of China's imports of Australian resources, energy and manufactured products in 2013.

Australian tariffs on Chinese resources, energy and manufactured goods will also be eliminated under the FTA. Taking into account the impact of tariff reductions on sensitive industries, the 5% tariff on some products within the automotive, steel and aluminium sectors will be phased out within two or four years.

More opportunities in China for Australian resources services

While details are yet to be released, we do know that the FTA will also allow Australian suppliers to provide:

• technical consulting and field services for the extraction of coal bed methane and shale gas;
• a range of services relating to the extraction of oil and gas, iron, copper and manganese resources in conjunction with Chinese partners; and
• mineral resources exploitation services in the central and western regions of China.

Barriers for skilled labour to be lowered

The FTA will reduce existing barriers to labour mobility and improve access for a range of Australian and Chinese skilled service providers, investors and business visitors with the aim to support investment. This will likely benefit the Australian resources sector - new Investment Facilitation Arrangements, which will operate within the framework of Australia's existing visa system, will be available for large infrastructure projects above $150 million, allowing companies to respond to labour market challenges.

Australian investment screening thresholds to rise

The FTA will also increase the screening threshold for Chinese investments to $1,078 million. It is important to note, however, that this will not affect the existing foreign investment notification requirements for:

• acquisitions of interests in Australian urban land or Australian urban land corporations or trusts, where notification is required irrespective of value; and
• Chinese foreign government investors – notification (under Australia's Foreign Investment Policy) will still be required where a foreign government investor makes a "direct investment" in Australia (essentially, any investment ultimately made by a foreign government investor that provides it with potential influence or control over the target entity or asset), starts a new business or acquires any interest in land, irrespective of value.

The next steps for the China-Australia FTA –and beyond

After the agreement is translated into Chinese and executed, both countries will need to complete their respective legal processes with the hope that the FTA will come into force by the end of 2015.

The Government has also indicated that it is keen to enter into Free Trade Agreements with India, Indonesia and the Gulf states. An India-Australia Free Trade Agreement would benefit Australia's energy and resources exporters in particular, given India's significant energy needs. In a recent joint statement, both countries agreed that co-operation on energy, extending to coal, liquefied natural gas, renewables and uranium, and on resources such as iron ore, copper and gold, would form key elements of their relationship.

What you should do now

Energy and resources participants should consider whether or not the China-Australia FTA:

• can assist in attracting capital investment to their projects; and/or
• will facilitate the export of their products and/or services,

and review their marketing arrangements in light of the China-Australia FTA.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.