Fine print of China-Australia FTA still an unknown

THE devil is in the detail. Lawyer Jim Harrowell, Chairman of the Australia China Business Council, says the focus of the China-Australia FTA in terms of services seems to be on the Shanghai Free Trade Zone – and no-one yet knows just what the benefits will be. But he says farmers and more broadly regional Australia should benefit . . .

China specialist and leading Australian international lawyer, Jim Harrowell, is concerned that, so far, the China-Australia Free Trade Agreement does not spell out the detail of concessions agreed to for Australia’s services sector.

While he admits to some disappointment with the FTA, Harrowell says “it is the nature of these things” that neither side gets all that it wants. “It is all about compromise. and the Australian team has done a great job to get to this point," he told ATI.

The services side of the agreement, he says, is not set in stone, and he likens it to opening the door to China: “Once it is opened, the chances of fine-tuning the agreement will be easier.”
Harrowell, a senior Partner with Hunt & Hunt who is also NSW President of the Australia China Business Council, says there is “huge value” in having the bilateral FTA, describing it as “the most important step in our relationship with China since Gough Whitlam recognised the People's Republic of China".
“But we are still waiting for clarity on the benefits available to services firms," he adds.
Harrowell says there are lots of announcements in the FTA on the opening of China’s services sectors, but when looked at closely, much of the focus is on the Shanghai Free Trade Zone. “Undoubtedly, the Chinese want the Shanghai zone to succeed, and they are expanding the geographical area covered under the FTZ — but no-one can give a clear explanation of the role of the Zone,” he says.
“Is it the same as a bonded zone? No one is totally clear on what it means.”
This brings into question what happens when professional firms or banks establishing in the Zone choose to operate outside the Zone. “Are they still covered under the FTA?” he asks.
Using his firm as an example, Harrowell says Hunt and Hunt recently renewed its licence to operate as one of six foreign law firms working in China. It is unclear, he says, once the FTA is in place, what the difference will be between a foreign law firm established inside the Shanghai Free Trade Zone and one established outside the FTZ.
From its Shanghai city office, Hunt and Hunt can provide services to anywhere in China, but, if the firm established inside the Shanghai FTZ, would its activities be limited to services within the Zone? “We have asked, and the authorities have said they simply don’t know yet,” Harrowell told ATI.
“Ideally, we would like the opportunity to form joint ventures with (Chinese) firms – to be able to share office space, profits and so on. We can probably do something like that in the Free Trade Zone, but my question is: Can we do the same thing anywhere else in China?”
Harrowell was hopeful that China would agree, as part of the FTA negotiations, to approve a pilot scheme for commercial association with Australian law firms (see ATI April 2014). This would allow those currently licensed in China to form joint ventures with Chinese firms.
Australia’s negotiating team cut the deal, he says, but implementation is handled by other arms of the Chinese Government — in terms of law licences, this is the Chinese Ministry of Justice. For licences for financial services and banking, final approval comes from the People’s Bank of China.
Harrowell is not certain that the various arms of the Chinese Government have yet worked out details of what concessions might apply under the Australia-China FTA.
“If an Australian bank opens a branch in the Shanghai Free Trade Zone, what will be different in what it can do inside the FTZ, compared to, say, in Pudong (the commercial heart of Shanghai) — where ANZ Bank, for example, has an office?
“I am quite sure there are going to be great opportunities — but at the moment we don’t know the detail.”
Harrowell adds a note of warning, saying he has noticed a number of entrepreneurs offering services to Australian companies hoping to seize opportunities thrown up by the FTA.
“These individuals are offering to provide serviced offices — and saying that that will give Australian companies a presence in China without having to go through the process of setting up a representative office there,” he
told ATI.
But as Harrowell sees it, it is not this straightforward. “There is a general principle in China, (which is) you can only have one business at an address, so you can’t have 57 businesses using the same address. Each business in China must have a discreet address — a room, a floor and street number.”
But there are clear winners from the FTA, he says, pointing particularly to Australia’s agri-business sector. “This is good news for regional Australia, because it will create access to brand new markets, helping shift Australia’s reliance on iron ore and resources to a more diverse trading relationship with China.
“A good example is the export of young dairy cows to China. It is a huge business that provides another string to the bow for dairy farmers. For a long time, the dairy industry has been restructuring because of oversupply. Farmers get about 38 cents per litre for their milk. Norco last year sold a shipment of milk to China at $9 per litre.
“You are not going to sell millions of litres at $9, but if you can get $4 out of China on a regular basis, it will be a good thing for Australian farmers.” He adds that this might, in turn, force Australian supermarkets to offer farmers a more reasonable price for milk.
Harrowell also points to the advent of e-commerce, with many Chinese consumers now buying foodstuffs on the Internet. In Shanghai, he says, working couples buy their groceries online — so Chinese developers are having to look at the logistics of dealing with deliveries and the need to set up cold storage and concierge delivery arrangements for apartment residents. Sanitarium, he says, is selling Weet-Bix to China. “Who would have thought people would buy Weet-Bix in China on the Internet?” he asks.
Harrowell says Australian growers of stone fruit like cherries can start to sell boxes of cherries on the Internet to China. “Even with the cost of air freight, they can still make money. So that is a new market there.” The wine industry, which enjoys large tariff cuts under the terms of the FTA, is poised to increase sales to the growing Chinese middle class.
Harrowell confirms that Chinese investors are actively scouting for investment opportunities in Australian agricultural businesses.
As one who routinely deals with these inquiries, he says: “One of the challenges for the Chinese is that they typically will want to buy a hard asset. If they want to be in beef production, they are coming here with a philosophical bent to buy a farm. I ask them why they need to buy a farm and they say it is because they want to export to China.
“I suggest to them that they do not need to come so far down the supply chain. They wouldn’t want to own the farm, because (a) they are going to have to buy and manage a huge farm because of the number of stock they will need, and (b) they will have to deal with the vagaries of weather.
“I suggest that the furthest down the line they need to go would be to invest in abattoirs in regional  locations like Dubbo, where they can buy stock from across a big region.
“If you build a modern abattoir with new technology, labour will not be such a big component of the total cost. Technology will allow them to control expenses and to be competitive. There is a shortage of abattoirs because not many large animal abattoirs have been built in recent times. So there is scope to build abattoirs in strategic locations in regional
Australia.”
Harrowell acknowledges the big demand for milk powder from China, but says the issue for Australian producers is capacity. “We have reduced our dairy herd,” he says. “There are
opportunities, but they need to be treated with caution.  
“There are talks of major projects in Tasmania. But the problem for the Chinese (investor) is to secure the production capacity to put it together. How many cows can you milk to give you adequate supply? Raw milk has to be transported from farms and delivered to a central location within a short timeframe.”
Chinese investors remain concerned, he says, about restrictions to investing in Australia, but he does not think the
investment watchdog, the Foreign Investment Review Board, is necessarily a barrier. “The key is that they must have the right business proposition for a successful investment in Australia.”