This chapter examines some of the issues that have been raised with the Committee concerning the Comprehensive Economic Partnership Agreement between the Government of Australia and the Government of Indonesia (IA‑CEPA).
The chapter looks at the following issues which were raised with the Committee that directly relate to IA-CEPA:
business environment and technical and non-tariff barriers;
investment: bilateral investment treaty (BIT) and investor-state dispute settlement (ISDS);
proliferation of trade agreements with a single partner;
human and labour rights and environmental standards;
The chapter then turns to two general issues:
independent economic modelling of Free Trade Agreements (FTAs); and
Witnesses urged that the Agreement be ratified without delay, but also noted that full implementation would require attention. Australia’s Ambassador to Indonesia, Mr Quinlan, advised that IA-CEPA will require further ongoing work by both government and business:
Both [Australia and Indonesia], of course, need and want to diversify our economic relationships. IA-CEPA ratified and in force can be a catalyst for this - a catalyst, not a magic bullet - and an objective which will require a lot of advocacy by government and business, and a change in mindset among Australian business to start thinking about the opportunities that IA-CEPA will present in Indonesia, in many instances for the first time. Of course, it’s going to need demonstrated success stories by business in order to encourage other businesses to follow suit. But the openings are there.
The Committee was warned that the conditions on the ground in Indonesia can prove difficult to navigate and that considerable groundwork will be required to ensure success:
… post the agreement, a lot of work is going to be needed to actually make it a reality. Agreements can specify things at very high structural levels. What we find in Indonesia—and I say this as somebody who goes there every few months—is that the machinery that then down-translates that into practice is sorely lacking. It’s more a sense of where the Indonesian system is up to. So they can’t readily engage with us on certain things.
Implementation will require Indonesia to follow through on commitments to change laws and regulations, something that may meet with some resistance and will require the ongoing attention of Australia:
… Australian officials will need to not only press Indonesia to deliver on its IA-CEPA commitments, but also maintain a constructive approach to ensuring that Indonesia continues to see the benefits of investing in and extending the agreement.
In this regard full support for the provisions set out in the chapter on economic cooperation is considered important for effective implementation of the Agreement.
The Department of Foreign Affairs and Trade (DFAT) assured the Committee that it will continue to work with the Government of Indonesia ‘to ensure that once IA-CEPA enters into force, the market access outcomes agreed are implemented’.
The AIBC, among others, also stressed the need to ensure that Australian businesses are aware of the opportunities provided by IA-CEPA and have the ongoing support to take advantages of those opportunities:
… AIBC recommends that the committee note the potential for market failure—despite the IA-CEPA—leading to ongoing underperformance of trade and investment relative to potential, and the consequent need for active mechanisms beyond ‘business as usual’ to facilitate trade investment by Australian and Indonesian firms. Despite enormous economic potential and the comprehensive provisions of IA-CEPA, AIBC is concerned that Australian and Indonesian business will fail to engage at the scale necessary to achieve the goals of IA-CEPA. There is a need for active promotion and facilitation of trade and investment beyond the worthy ‘business as usual’ activities of the Australian Trade Commission and the Indonesian Ministry of Trade.
These sentiments were echoed by industry support groups including the Australian Industry Group (Ai Group), the Australian Chamber of Commerce and Industry (ACCI) and the Chamber of Commerce and Industry Western Australia (CCIWA).
The Department of Foreign Affairs and Trade (DFAT) told the Committee that they are actively promoting the Agreement and will continue to do so as it is implemented:
Since signing the Agreement the Australian Government has continued to work with the Indonesian Government to ensure the IA-CEPA is implemented as intended. Closer to the time of entry into force of IA-CEPA, the Free Trade Agreement portal will be expanded to include IA-CEPA outcomes and DFAT will publish a guide for businesses seeking to obtain tariff reductions under IA-CEPA. The Government will continue to raise awareness and use of IA-CEPA.
Business environment and technical and non-tariff barriers
As noted in the previous chapter, the business environment in Indonesia can be challenging for Australian businesses. The National Interest Analysis (NIA) notes that, in addition to tariffs, non-tariff issues, variable customs procedures, red tape and World Trade Organisation (WTO)-inconsistent import licensing arrangements are major obstacles for many Australian businesses in the Indonesian market.
The Export Council of Australia (ECA) told the Committee that Indonesia ‘is not an easy country in which to do business’. The Minerals Council of Australia (MCA) observed that, despite the gains in the removal of tariffs, the overall environment remains difficult:
Generally, by contrast with the position for mining commodities, barriers to Australia’s exports [of] including mining and construction services to Indonesia, including non-tariff measures (NTMs), are consistently considerable. Indonesia is rated the second most restrictive country in the OECD in relation to barriers to services trade.
The Technical and Vocational Education and Training (TVET) sector highlighted barriers that will inhibit their ability to make full use of the concessions in IA-CEPA:
There are barriers to greater VET [Vocational Education and Training] collaboration between Australia and Indonesia, including difficulties in finding a partner who can enter into a commercial arrangement; lack of national TVET policy coordination in Indonesia spread across multiple ministries; low levels of literacy and numeracy in Indonesian regions, making access to further education challenging; and well-coordinated competitor activity.
The Australian dairy industry identified the difficulties encountered for cold chain distribution in Indonesia, including the absence of refrigeration required to get dairy products to consumers, as well as the lack of facilities and distribution networks.
DFAT acknowledged the difficulties faced by Australian businesses in the Indonesian market but emphasised that many Australian businesses had successfully navigated those challenges:
… the regulatory environment for imports—especially finished goods—can be complex, ambiguous and changing. Several sectors remain fully or partially closed to foreign investment. Rules can also constrain foreign professionals from working in Indonesia. Despite these challenges, there is a diverse range of Australian companies doing business profitably in Indonesia, from start-ups right through to some of our largest companies.
DFAT explained that to succeed in the Indonesian market, Australian businesses required tenacity and an understanding of the business environment:
To succeed, Australian firms have had to exercise patience, build local partnerships and have a product or service keenly sought by Indonesian consumers. Australian companies have found success providing support services to Indonesia’s domestic players. Many Australian businesses find it easier to work through long-term contractual arrangements with local partners.
DFAT considers that the architecture delivered by IA-CEPA will provide ‘an important mechanism through which to engage the Government of Indonesia to redress market barriers and blockages’. Additional DFAT stressed that the provisions in IA-CEPA will directly address the challenges presented by the business environment in Indonesia:
Collaborative mechanisms in the various chapters of the Agreement provide scope for regular outreach on goods, services, investment and economic cooperation, as well as ad hoc problem solving including on non-tariff measures.
Technical and non-tariff barriers
The inclusion in IA-CEPA of separate chapters on technical barriers to trade and NTMs was widely welcomed. The inclusion of a specific chapter on non-tariff barriers, a first for Australia, is considered particularly significant, ECA calling it ‘probably … one of the most important parts of the agreement’. The Department of Foreign Affairs and Trade (DFAT) noted the importance of the chapter in light of the increase of non-tariff barriers:
We see increasingly now as tariff barriers are reducing around the world the non-tariff measures increasing. It provides an opportunity really for us to have a formal mechanism through which to trigger reviews of barriers that we face in the Indonesian economy.
As in former inquiries into trade agreements, the Committee repeatedly heard that the removal of non-tariff barriers is as important as, if not more important than, the removal of tariffs:
What we see, probably, as the most gain is the process around non-tariff barriers that are enshrined in agreements. That’s where we see the biggest bang for the buck.
The meat and livestock industry equated the removal of non-tariff barriers with the removal of tariffs:
Importantly, this economic partnership will also establish better mechanisms for Australia to address current and future technical market issues and non-tariff barriers - which is just as necessary as the removal of tariff barriers.
However, despite the inclusion of these provisions, Australian businesses still face a range of ‘behind the borders’ barriers to accessing the Indonesian market. The National Farmers’ Federation (NFF) warned that non-tariff barriers are not static and that continued vigilance is required to address new barriers as they arise:
Non-tariff barriers are a little bit whack-a-mole: as soon as we deal with one, often another will stick its head up. That doesn’t mean we shouldn’t continue to try to address them as they arise, but FTAs often can only go so far in trying to address these barriers … all these FTAs include provisions, to some extent, that try to address the existing non-tariff barriers that we know about, but it’s a never-ending task.
The non-tariff issues brought to the Committee’s attention included:
implementation of quotas; and
movement of people, particularly staff and students.
Ai Group raised concerns regarding the potential administrative burden placed on Australian business, particularly small and medium enterprises (SMEs), in order to take full advantage of the agreement.
Implementation of quotas
Several sectors have welcomed the provision of quotas by Indonesia, providing certainty around access to the Indonesian market. Citrus Australia explained that under the previous arrangements, Indonesia issued quotas on a six-monthly basis which did not coincide with the Australian season and hindered forward planning. The new quota will enable the industry to take full advantage of the Indonesian market:
If on face value we can accept the agreement as it is, we’ve actually got some regulatory transparency, because we at least know we can get 10,000 tonnes of oranges and 7,500 thousand tonnes of mandarins in and so people can actually put some planning in place to service that market. What’s happened over the last five or so years is demand for citrus has been good, so by the time the Indonesians get their quota allocation the fruit is already sold and there’s nothing to give them.
However ECA, while acknowledging the benefits of quotas as providing a significant improvement in access, advised that they can create difficulties:
… the problem is that there have been cases in the past where the quotas, for various reasons, have proven to be very low compared to what the demand for Australian produce is.
The ECA referred to the example of the Korea-Australia Free Trade Agreement (KAFTA) in which a quota was set for what had previously been the peak in Australian beef exports to Korea:
But, a few years down the track, for various reasons, that quota was met in November, then it was met in October, then September and … it’s now being met around midyear. Above that quota, you need to pay higher tariffs. Ideally, we would love to see no quotas involved in any of the free trade agreements, but we understand that there are negotiating factors that require them to be put in place.
The ECA suggested that, in order to avoid similar problems with the quota provisions in the IA-CEPA, the arrangements ‘will need to be monitored and continue to be negotiated as the agreement gets older’.
DFAT explained that, learning from previous experience, the quotas were negotiated to provide greater market access certainty for Australian businesses:
… Indonesia had locked in tariffs at zero under the ASEAN-Australia-New Zealand Free Trade Area, but still the trade wasn’t flowing. So we have locked in this agreement some tariff rate quotas with the notion, and backing it up, that we would require automatic licences—which has really been the thing that has stopped the trade flowing—without seasonality for live cattle, for grains, for feed.
Movement of people
As discussed in the previous chapter, IA-CEPA is seen as providing a significant platform for increased business-to-business and person-to-person relationships. However, facilitating the movement of people required to encourage those relationships remains an issue. In particular the need to streamline visa applications processes to enable young Indonesians and Australians to visit each other’s countries for work and leisure. Research by the Australia-Indonesia Youth Association (AIYA) indicate that ‘there are practical barriers that prevent uptake in the work and holiday visa scheme by both Australians and Indonesians’.
Anecdotal evidence from the Indonesia Institute confirmed AIYA’s findings:
… two young Indonesian Chinese directors for a company that runs a partnership with Indonesia were speaking to me the other week in Surabaya, and I asked both of them-one is 30; the other is 31-how often they come to Australia … Both looked and said, ‘Oh.’ Yet the partnership is based here in Perth. Apart from work, they don’t ever come here. So I asked them why, and they said: ‘You know what our generation is like. We don’t even make our mind up until Thursday, when we realise it’s a long weekend, that we want to go somewhere. Like all of us, we just discount Australia, because it takes two weeks to get a visa, it’s $140 each and it’s 16 pages. We just jump on a plane. We can go to Tokyo, Delhi and any of the ASEAN countries overnight, so we don’t really worry about it.’
Investment: BIT and ISDS
There are two issues that were brought to the Committee’s attention regarding the investment provisions in IA-CEPA:
the risks surrounding the decision not to terminate the existing bilateral investment agreement with Indonesia; and
the inclusion of an ISDS clause in IA-CEPA.
Bilateral Investment Treaty
The existing Agreement between the Government of Australia and the Government of the Republic of Indonesia concerning the promotion and Protection of Investments (IA-BIT) was signed in 1992 and entered into force in July 1993. The usual process has been for these older types of bilateral investment treaties to be terminated when Australia enters into newer agreements, including trade agreements that contain investment chapters.
The existing IA-BIT contains both investment provisions and ISDS provisions. If the IA-CEPA is ratified and enters into force without the IA‑BIT being terminated ‘there will be two sets of bilateral rules covering investment flows between’ Indonesia and Australia. The Committee was advised that consideration should be given to terminating the existing IA‑BIT in order to prevent future complications:
The existence of overlapping investment treaties complicates Australia’s compliance with these treaties and makes it harder to understand the nature and scope of Australia’s investment obligations and harder to predict the outcomes of an ISDS claim alleging breach of these obligations.
Further complications could arise as both countries are parties to the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) which includes ISDS provisions.
As will be discussed below, the updated and modernised ISDS provisions in IA-CEPA are considered stronger and safer than previous iterations of these types of provisions. It is suggested that terminating the current IA-BIT will remove any ambiguity with regard to the updated provisions in IA-CEPA and remove the uncertainty caused by the IA-BIT remaining operative:
The continued operation of the Australia-Indonesia BIT increases the risk of an ISDS claim against Australia and the risk of such a claim succeeding.
Asked if an applicant could take advantage of the provisions in both the IA‑BIT and IA-CEPA if the former remains in force when the latter comes into force, DFAT explained that which provision was chosen would depend on when the breach occurred. The provisions in IA-CEPA will only apply from the date it comes into force, breaches committed prior to that would be covered by the IA-BIT. However, the Department added that an applicant could not use both provisions at the same time:
One of the provisions in the investment chapter in IA-CEPA provides for a written waiver. So, in order to bring a claim under IA-CEPA the claimant has to waive their right to bring any action domestically or under another agreement. If there were a case where an investor was seeking to use IA-CEPA on the basis of article 14.26, they would need to waive their right to bring an action under the bilateral investment treaty.
Several possible reasons were given for why termination of the IA-BIT has not been pursued with the implementation of IA-CEPA. Evidence to the Committee suggests that the current IA-BIT is more pro-host state. While Indonesia has a sophisticated, large economy and is keen to attract foreign investment, it is still a developing state and recognises that its ‘domestic legal system and administrative capacity is far from perfect’. It has negotiated investment treaties with other countries accordingly:
… so it’s obviously negotiated with the Australian government, as it has done with other counterparties, particularly from developed countries, to build into the treaty a few more provisions that favour its interest as primarily a host state for foreign investment.
DFAT explained that the IA-BIT is a separate treaty action and its termination can be negotiated separately to the IA-CEPA negotiations. The DFAT assured the Committee that the Australian Government recognises the benefits of terminating the IA-BIT. However, DFAT states that a decision had to be made whether to prolong the IA-CEPA negotiations to this end or conclude those negotiations and treat the termination of the IA-BIT separately:
As to the question about why we didn’t move to terminate the BIT, it was more to do with the fact that we needed to take a decision at the end of the negotiation on whether we just keep the negotiation going for the purpose of terminating a separate treaty, which we didn’t need to do because we can deal with the separate treaty on its own terms. That was the conclusion at the end of the day: we can deal with the separate treaty on its own terms and enter into a discussion with the Indonesian government on its own terms on this treaty.
The Committee was also alerted to potential issues presented by the ‘survival clause’ in the IA-CEPA. This states:
In respect of investment made prior to the date of termination of this Agreement, the provisions of the Agreement shall continue to be effective for a further period of fifteen years from the date of termination of the Agreement.
If this clause remained in force it could leave Australia open to an ISDS claim being brought for up to fifteen years after the IA-BIT had been terminated. To avoid this risk ‘Australia and Indonesia would need to clarify their intention regarding the survival clause in terminating the agreement’.
Investor-state dispute settlement provisions
While there is support for the inclusion of an ISDS provision in the IA‑CEPA, some concerns were raised. The inclusion of ISDS provisions in FTAs is seen as an important protection for Australian investors operating in foreign markets, particularly those with less developed legal systems:
While it may be observed that Australia has a well-developed and transparent legal environment that can meet the needs of foreign investors here, the same observation does not always apply to the legal environments of other countries in which Australian companies might seek to invest. ISDS provides an additional and useful mechanism for remediating problems in these overseas environments when or if issues arise. The existence of ISDS as a possible fall back mechanism can help assuage potential investors, and encourage more Australian business activity overseas.
Ai Group note that while Australia faces a slight risk of facing ISDS claims, it considers ISDS provisions essential to encourage Australian businesses to invest overseas:
Ai Group believes that an important factor in encouraging Australian firms to invest overseas is to assist them in protecting their assets by signing up to an [ISDS] agreement. As a liberal democracy with transparent laws and procedures, Australia has little to fear from an ISDS … however as Australian companies are encouraged to invest in markets with less certain political systems, they have much to gain from a system that prohibits their host government from appropriating their assets, restricting their ability to send capital back to Australia, or deny equal treatment as local firms.
The Indonesian market is recognised as a challenging investment environment, presenting risks for Australian investors because of its ‘uncertain regulatory climate and increasing economic nationalism’. The Australian mining industry which is particularly exposed to the Indonesian market, indicated that in these circumstances, ISDS provisions provide certainty and confidence for Australian investors:
[ISDS provisions] will allow investors to seek mediation and arbitration where they claim that a government has breached the investment commitments it has made under the agreement. An ISDS mechanism provides greater comfort and investor certainty for both Indonesian and Australian investors alike. It also reduces sovereign and political risk—and, for the mining sector, provides greater certainty for what can be millions or billions of dollars of capital.
The ECA recognised the contested nature of ISDS provisions but pointed out that there was little debate about the need to protect Australian investors, rather the ‘argument is about the mechanism itself’:
I think there are probably ways to make it a bit more palatable to people, but I don’t see any inherent problems with the working of the mechanism that should prohibit its inclusion.
Risk to Australian government
There is some concern that the ISDS system exposes the Australian government to the risk of costly and time-consuming litigation. These concerns were illustrated by the Philip Morris case against Australia claiming compensation for Australia’s 2011 plain packaging legislation, even though Philip Morris lost the case. The Australian Fair Trade and Investment Network Ltd (AFTINET) articulated general concerns over the ISDS system:
… ISDS is an enormously costly system with no independent judiciary, precedents or appeals, which gives increased legal rights to global corporations which already have enormous market power, based on legal concepts not recognised in national systems and not available to domestic investors.
However, it was repeatedly pointed out to the Committee that Australia has been a party to ISDS provisions for a considerable time and has not been subject to successful litigation:
In the 30 years Australia has been subject to these provisions, no Australian law, regulation or public policy has had to be changed due to ISDS. In fact, in all that time under all those agreements, there have only been two ISDS claims against Australia.
As the MCA highlighted, neither of the claims against Australia was successful. Philip Morris lost their case and costs were awarded against the company.
AFTINET also suggested that there were alternative processes available to investors to protect themselves from the risks of doing business in foreign countries. They indicated the state-to-state dispute processes included in FTAs, risk insurance and the use of specific contracts with government for major projects. However, with regard to risk insurance the Australia Indonesia Business Council (AIBC) considered that premiums would be too high to make the proposal viable.
Asked if businesses would be prepared to take out risk insurance to cover their operations, Ai Group put it quite bluntly:
… when there is no ISDS and the environment seems risky, companies simply don’t invest in that market.
Dr Nottage noted that empirical evidence suggested that ISDS provisions increased bilateral investment flows.
The NIA claims that the ISDS provisions in IA-CEPA have been updated with higher level safeguards that will provide a ‘better balance between the protection of investors and maintaining the government’s right to regulate in the public interest’. The safeguards include ‘carve-outs, exceptions and other protection for government policy setting’. These claims have been contested by some.
AFTINET considers that the safeguards in AI-CEPA are not strong enough to prevent claims against the Australian government:
Other more general safeguards in IA-CEPA will not actually prevent ISDS cases against changes in other public interest regulation, like environmental laws to address climate change or new industrial laws.
The Electrical Trades Union of Australia (ETU) acknowledged that the provisions had been upgraded but still considered that they were deficient. The Australian Council of Trade Unions (ACTU) argued that the inclusion of safeguards for specific sectors indicated that there was an overall problem:
… the fact that safeguards have been provided in the legal text only for certain sectors highlights that there is an actual problem here - because they have left other sectors completely without safeguards at all. Industrial relations and environment are key examples where there are no safeguards … What we are saying is that there are huge sectors and parts of policy that aren’t safeguarded.
However, Professor Voon told the Committee that, in her view, the carve-outs in the IA-CEPA are sufficient and that broader exemptions are preferable to product specific ones, providing better coverage of an area of concern:
… but in my view in general I would say that it’s preferable not to have product-specific carve-outs such as the tobacco carve-out we have in the CPTPP [Comprehensive and Progressive Agreement for Trans-Pacific Partnership] and in some of the other treaties and … specific reference to particular programs such as the PBS. Sometimes those references also say ‘and any successor program’, which is valuable. I think the difficulty is that, if you refer only to specific programs or products, you don’t cover other things that could be challenged or other programs that haven’t been created yet; therefore, it’s preferable to have wider exceptions that refer, for example, to policy objectives such as health or the environment in a general way.
DFAT offered assurance that the carve-outs were considered strong enough to prevent claims against Australia in any area of public health:
With Indonesia, we had discussions, both internally and we consulted closely with the Attorney-General’s Department Office of International Law, on which approach to take. It was felt that the broader carve out for public health protected us not only in the case of, say, the tobacco situation but also more broadly for public health, and, as a consequence, we felt that that broader exception was preferable.
Composition of tribunals
Concerns remain over the consequences of allowing the arbitrators for the ISDS system to be drawn from a pool of practicing investment lawyers and the implication that this may impinge on their independence and impartiality. Dr Nottage termed this practice ‘double hatting’:
I notice that there is no express provision … here that prevents double-hatting. This phenomenon that’s attracted a lot of public and also academic discussion of the highest ISDS arbitrators in acting to judge disputes and give rulings in ISDS disputes. They also act as counsel in other cases where, in particular, the problem arises where, as we see in these treaties, there are quite similar provisions. Of course, you might be tempted, even unconsciously, as an arbitrator to give a decision—and most of these awards are not public and therefore can be used as persuasive precedents in other cases—for an award or some line of reasoning that might favour your argument in a different case, even under a different treaty, where you’re the counsel. It at least gives a bad impression. It’s an appearance, perhaps, of bias or lack of independence and impartiality of the arbitrator.
Dr Nottage was, however, very supportive of the inclusion of the pre-arbitration mediation stage featured in IA-CEPA:
… the host state can require the foreign investor to go through a mediation process. The investor and the host state—most likely Indonesia since we invest more in them than vice versa—need to appoint an independent third-party neutral as a mediator who will try to get the disputing parties to come to an agreed settlement. If that’s requested and it doesn’t work then the foreign investor can go to arbitration.
Proliferation of trade agreements with a single partner
ACCI raised the issue of multiple trade agreements with a single partner, the so-called ‘noodle bowl effect’, and the difficulties this can cause for Australian businesses, particularly SMEs. As noted above, in addition to IA-CEPA, Australia and Indonesia are both parties to AANZFTA.
ACCI argues that the multiplication of treaties with the same partner makes it difficult for businesses to navigate the provisions of trade agreements, leading to underutilisation. ACCI maintains that this complexity defeats the purpose of these agreements to make trade freer and easier. ACCI again called on the Australian Government to streamline overlapping agreements:
We urge government to rationalise agreements where they overlap, in order to remove the red tape associated with both duplication, and different terms, in multiple agreements covering the same market.
However, other stakeholders considered that the multiplication of trade agreements with a single partner provide options for businesses:
… the noodle bowl of FTAs … I put on the record that this is not an argument the Export Council buys into, for the simple reason that businesses opt into FTAs. They choose whether to take these complexities on and they do so because they see the benefits. From a personal perspective I have never heard a member of ours complain about too much market access; it’s only the other way round.
This point was reiterated by the Ai Group:
The benefits of FTAs do not apply automatically, companies must opt in to realise them. This means that if there is one FTA with a country, or five, an Australian company must look at the relevant FTA to determine if there is an advantage for their business and what they must do to comply with the rules.
What all stakeholders agree on is the need to provide support to ensure that Australian businesses have sufficient assistance to take full advantage of the opportunities provided by trade agreements. Ai Group provide this type of support and drew attention to the assistance available through the DFAT:
Fortunately for Australian companies, this information [on FTAs] is freely and readily available from organisations such as Ai Group as well as DFAT’s FTA Portal. Unlike similar databases produced by other governments, this portal searches by market, not agreement, and automatically compares the different agreements for an importer and exporter’s individual product.
The separate chapter on e-commerce contained in IA-CEPA is considered significant by stakeholders:
This agreement puts in place important commitments to facilitate trade as the distinctions between online and offline become increasingly meaningless. It also strengthens the global norms around protecting source code.
Ai Group explained some of the difficulties currently hampering the development of e-commerce in the Indonesian trade environment:
… the data localisation laws are quite insidious when they do occur, and before this agreement was quite locked into Indonesia’s data localisation laws, some in the Indonesian business community were worried about the data until we talked through the issues, particularly from the manufacturing sector, and they understood that it’s a higher risk to enforce data localisation rather than to guarantee the sharing of information. I’d liken data localisation to putting chains across the port. You wouldn’t put chains across the port so ships couldn’t come and go, but that is what a data localisation law would be.
ECA elaborated on the extent of e-commerce in today’s trading environment:
In terms of electronic commerce … this agreement will allow the electronic transmission of data unrestricted within each country’s privacy requirements. That is important, because when people think of the transfer of data and information they think of Google and Facebook and those sorts of companies, but if you’ve got a hotel and you’re selling your hotel rooms online that’s electronic commerce. If you’re selling hats and your hats are available for purchase online, you’re doing the same sort of e-commerce and have the same sorts of requirements as the major businesses have. So anything you can do to simplify the requirements there will be of great assistance.
Ai Group stressed the need to facilitate the free flow of information in today’s business environment in order to support and encourage cooperation:
When we think about cybersecurity laws or data laws, we forget that really what it’s about is information, and companies need their corporate information to flow freely between all their sites, whether in Australia, Indonesia or across the region. By protecting Australian companies’ ability to send data, whether it’s machine-to-machine data or financial systems, ordering, stock suppliers—all the bits of data and information you can think of in a modern company—that’s only going to add to the relationship, foster greater cooperation between the two countries and encourage corporations in Australia and Indonesia to collaborate more or invest in each other’s countries.
However, enabling this free flow of information may impinge on the current and a future Australian government’s ‘ability to properly regulate domestic markets, support small businesses to grow and protect consumers’. AFTINET expressed concern that there has been little analysis undertaken of the impact of these provisions on human rights or Australia’s ability to govern the digital economy.
Questions were raised with regard to chapter 12 of the agreement on the movement of natural persons. The issue of the movement of contractual service suppliers in particular raised some concern as the chapter indicates that a final decision on the details has not yet been made:
Article 12.9: Future Work Program on Contractual Service Suppliers
Unless the Parties otherwise agree, the Parties may decide to commence negotiations within three years of entry into force of the Agreement with a view to making mutually advantageous commitments on contractual service suppliers. The Parties shall make their best endeavours to complete the negotiations within two years of initiating them.
The union movement is concerned that this may open the way for an influx of workers from Indonesia without due consideration of Australian workers filling those positions.
When questioned, the DFAT explained that it is at the discretion of the Parties whether or not to open negotiations on contractual workers. Further, any negotiations are likely to include changes to the status of Australia’s regulatory settings and therefore would require a treaty-level commitment. This would entail meeting the standard treaty requirements, including scrutiny by the Joint Standing Committee on Treaties (JSCOT).
Further, under IA-CEPA Australia will accept an additional 4,000 temporary working holiday visa applications, increasing to 5,000 workers over several years, as well as 200 training visas per year. There have been public incidents of exploitation of workers entering the country under such arrangements in recent years and the union movement is concerned that Indonesian workers taking advantage of these provisions will not be protected.
In 2017‑18 a total of 210,456 working holiday visas were issued. Indonesia accounted for just 0.5 per cent of the working holiday visa program. The increase in working holiday visas—up to 5,000 12-month visas for 18–30 year old Indonesians—would mean if all 5,000 work and holiday visa holders are taken up by Indonesians, it will be 2.3 per cent of all this category of visas. In contrast in 2017–18 there were almost 38,000 visas holders in this category from the United Kingdom (UK). This is why it is critical to have domestic industrial relations laws that seek to protect all workers from exploitation regardless of their country of origin.
On a related issue, the union movement expressed concern that the side letter on technical vocational training could lead to a situation where a tradesperson who qualified in Indonesian, could potentially practice in Australia but may not meet Australian standards. DFAT told the Committee this was unable to happen as any Indonesian tradesperson wishing to work in Australia would have to acquire the requisite licence and meet all of the standards set out by the Australian government. DFAT stressed that the purpose of the side letter ‘was to find a mechanism to allow Australian providers of vocational training to train Indonesians for the Indonesian market’.
Human and labour rights and environmental standards
The absence of commitments to human and labour rights and environmental standards in the Agreement was raised with the Committee by the union movement and AFTINET. AFTINET stressed that such provisions provide insurance that standards will be improved, not compromised when an agreement is implemented:
Without such commitments, the removal of trade barriers can increase pressure to reduce labour rights and environmental standards to gain trade advantage—in effect, a race to the bottom on these standards.
With regard to environmental standards, the Committee was advised that there are safeguards in the investment chapter to protect decisions on the environment.
General issues related to trade agreements more broadly were raised during the course of the inquiry. These issues have all been raised with the Committee during previous inquiries.
Independent economic modelling
ACCI again recommended that independent economic modelling of trade agreements be undertaken to assess if the expected outcomes are being realised. The union movement reiterated its call for such modelling to ensure that the full impact of any agreement on the Australian economy and society is established and understood:
We feel that for good policymaking it’s very important that we conduct independent cost-benefit analysis, and not just of the economic effects - we’d also say environmental and, for us particularly, looking at the labour market. We want to understand what the effects on the labour market are in these agreements. We know that in the past some industries have benefitted but some others have not and there have been job losses as a result. Without an independent economic assessment no-one knows what the effects are.
However, the response from industry was less enthusiastic. Ai Group suggested that they would be more interested in economic analysis of prospective markets to assess what opportunities may be available. Ai Group were hesitant to endorse the need for such analysis, considering it difficult to project possible outcomes:
It’s very difficult to predict behaviour … It sounds like a very simple commercial decision, but particularly amongst SMEs it’s extraordinary how rare it seems to be at just the simple commercial position. There are all sorts of reasons why companies choose to export to a particular market. Sometimes some of those barriers are addressed under an FTA and sometimes they’re not. Market acceptance is far more important, as is finding customers and customers who are willing to adopt the product without too much adaptation and at the price that you want, and those elements can’t be covered by an FTA.
The NFF is also cautious about attempting to assess the overall effect of FTAs, suggesting that the data isn’t available, and highlighting the complexity of the market:
… I don’t think a lot of the studies are capable of taking into account the dynamic impact FTAs have … going back to the US FTA, a number of the increases in exports to the US were in products that did not secure any new additional preferential access. There was this thing called the head-turning effect: people thought, ‘Oh, yes, we’ve got an FTA; let’s see if we can trade here.’ You can do as many studies as you like, but they’re not going to be able to factor in the head-turning effect that an FTA might have.
Citrus Australia, too, were hesitant about the benefits of economic modelling of the benefits of FTAs, telling the Committee that their growers were more concerned about the immediate benefits of an FTA:
… in our sector our growers/packers would be looking at the immediate benefits and they would want to look at the benefits per container. So, looking at a container of citrus at the moment, if you send a container to Indonesia it’s valued at around the $40,000 mark. The tariff on that at the moment is $10,000. They just want to see the $10,000 come off. I suppose the question … is rather academic.
As with previous inquiries into trade agreements, there was some disquiet over a perceived lack of consultation with civil society and union stakeholders. While industry groups told the Committee that they were satisfied with the level of consultation from DFAT and other relevant government agencies, the ETU considered that the union movement had been ‘locked out’ of the negotiation process. The NIA notes, however, a number of unions consulted during the negotiation process.
Questioned on the issue, DFAT informed that Committee that, in their view, their consultation is extensive and thorough. The Department holds stakeholder events a couple of times a year and are contacted regularly by civil society groups wishing to discuss issues of concern. DFAT expressed concern that their attempts to reach these groups was seen as less than optimal:
I would say that we have most regular contact with AFTINET who, over the years, have been extremely active. They will acknowledge that many of their members are trade unions … and so our working assumption for a long time has been that whenever we speak to AFTINET, which is very regularly, it means that that information is well known, because AFTINET obviously does an excellent job with its members. We were concerned to read those comments. We believe that we do a good job in reaching out to civil society, and we will always work to try and improve how we do our work.
The Committee resolves to give further consideration to consultation mechanisms in the context of trade treaties during the 46th Parliament.