This chapter examines the Free Trade Agreement between Australia and Hong Kong, China (A-HKFTA) and the Investment Agreement between the Government of Australia and the Government of the Hong Kong Special Administrative Region of the People’s Republic of China (Investment Agreement) signed on 26 March 2019 in Sydney. The two Agreements were tabled in the Parliament on 2 April 2019. The Committee’s inquiry lapsed at the dissolution of the 45th Parliament and the treaty action was re-referred to the Committee by the Minister of Foreign Affairs on 29 July 2019.
The Investment Agreement contains the investment rules linked to A-HKFTA. The Investment Agreement will replace the 1993 Agreement between the Government of Australia and the Government of Hong Kong for the Promotion and Production of Investments (the 1993 Investment Agreement).
Overview and national interest summary
Understanding Hong Kong
Hong Kong has an unusual status in international law. It is a Special Economic Region of the People’s Republic of China. It has a constitutional framework called the ‘Basic Law.’ It is a limited democracy, with an elected Legislative Council.
The Basic Law was negotiated as part of the return of jurisdiction over Hong Kong from Britain to China. The Basic Law came into effect at the handover in 1997. The Basic Law will expire in 2047.
In economic matters, the Basic Law entitles Hong Kong to act like a nation state. It is a member of the World Trade Organization (WTO) and the International Monetary Fund. It has its own currency, the Hong Kong Dollar, which is linked to the value of the United States Dollar.
Hong Kong has the authority to negotiate its own trade agreements, with the exception of matters relating to foreign investment, over which China has some legal jurisdiction. The investment exception means that the Investment Agreement under consideration here is a separate treaty.
Hong Kong’s success is based on international trade. As a single economy, Hong Kong is the seventh largest importer in the world and the eighth largest exporter in the world.
This economic strength has resulted in Hong Kong having the eighteenth highest per capita Gross Domestic Profit in the world. By way of comparison, Australia is ranked 29th.
Because the Hong Kong economy is based on international trade, Hong Kong does not in general impose barriers to trade. Trade in goods is tariff free for Australian exports and the services and investment environment is liberal and open.
According to the National Interest Analysis (NIA) Hong Kong is one of Australia’s most significant trading partners. Australia’s exports to Hong Kong in goods and services were valued at $14.5 billion in 2017–18, approximately 3.6 per cent of Australia’s total goods and services exports. Hong Kong is Australia's fifth largest source of foreign investment ($116.6 billion in 2017) and the tenth largest destination for Australian foreign investment abroad ($47.4 billion in 2017).
The NIA suggests that A-HKFTA and the Investment Agreement will strengthen this economic relationship. Together the Agreements are intended to address the contemporary needs of Australian businesses and investors operating in Hong Kong, and set up a framework for future engagement.
Australia’s largest commercial presence in Asia is in Hong Kong—across a wide range of industry sectors including banking and finance, construction and engineering, food and beverage, education, consumer and retail, transport and professional services. The NIA expects that further integrating Australia into the region and using Hong Kong as a launch pad into Chinese and regional markets will improve Australian businesses’ competitive advantage.
Australia already has Free Trade Agreements (FTAs) with China, Japan and the Republic of Korea, and is one of a small number of countries to have an FTA with both mainland China and Hong Kong.
Reasons for Australia to take the proposed treaty action
The NIA advises that the multilateral negotiations underway in the World Trade Organization (WTO) to liberalise trade rules and market access have stalled. In addition, at present, there are no regional FTA negotiations to which both Australia and Hong Kong are party.
Because Hong Kong maintains an open economy, the Australian Government’s stated reasons for entering into the A-HKFTA are based, with some exceptions, on guaranteeing present levels of openness into the future.
Consequently, the Analysis of Regulatory Impact on Australia (ARIA) prepared by the Australian Government focusses on mitigating future risk:
Australian goods exporters cannot be legally guaranteed zero-tariff treatment on their goods entering Hong Kong;
Australian services exporters and investors remain exposed to risk, should any policy settings currently applied in Hong Kong be changed in the future, and with no opportunity to secure better access;
Australian businesses are not best placed to take advantage of Hong Kong’s status as a key e-commerce hub into mainland China and the wider Asia region for consumer goods and services;
Australia’s investment relationship is governed by outdated international investment protection rules, increasing the risk of further investor-state dispute settlement (ISDS) claims against the Commonwealth; and
Australia is deprived of an opportunity to bolster existing FTA networks across the region to deepen liberalisation and economic integration over the long term.
The summary of sectoral outcomes below is taken from the NIA and ARIA.
Hong Kong was Australia’s sixth largest goods export market in 2017-18, with goods exports totalling $11.39 billion. The NIA maintains that there is strong demand for traditional Australian exports to Hong Kong, in sectors such as food and beverages. The ARIA states that Hong Kong’s demand for Australian goods increased by 5.8 per cent in the last five years.
Hong Kong does not currently apply tariffs on imported Australian goods. However, under WTO rules, Hong Kong has left unbound 52.3 per cent of tariff lines. This means that Hong Kong could potentially apply a tariff of any rate on these goods, which include key Australian exports such as coal, gold, zinc ores and liquefied natural gas. In A-HKFTA, Australia and Hong Kong have agreed to bind all tariffs at zero from entry into force. The ARIA considers that the A-HKFTA will provide certainty to Australian exporters by binding all tariffs at zero upon entry into force.
The ARIA indicates that Australia has made a reciprocal commitment to immediately eliminate all remaining tariffs on goods produced in Hong Kong upon entry into force.
Australian goods exporters have been positive about the benefits of the A‑HKFTA. According to the Australian Chamber of Commerce and Industry:
In the case of the agreement with Hong Kong, in terms of goods, the agreement locks in current operating arrangements...
Australia’s resources exports to Hong Kong have been dominated by gold. According to the Minerals Council of Australia, total gold exports to Hong Kong are worth approximately $7 billion in 2018. Hong Kong is expected to remain the principal market for Australian gold exports into the future.
Gold aside, there are also sizeable resources exports to Hong Kong. Australia exports iron ore and concentrates ($66.9 million in 2018), refined petroleum ($62.7 million in 2018), coal ($17.6 million in 2018) and non-ferrous waste and scrap ($11.9 million in 2018).
The Committee heard from a number of agriculture exporters as part of the inquiry. The most important factor for agricultural exports to Hong Kong is the demand for quality in the Hong Kong market.
Australia’s dairy exports to Hong Kong ranged between 25,000 tonnes and 30,000 tonnes over the past ten years, making Hong Kong one of the top ten export markets by volume.
On average just under 4 per cent of total Australian dairy exports are destined for the Hong Kong market. In value terms, dairy exports to Hong Kong have ranged between $100 million and $150 million per annum in recent years. Craig Hough, Director, Strategy and Policy at Australian Dairy Farmers, advised the Committee that:
Hong Kong’s … more of a high-end high-value play. That’s because of the higher per capita income ratio.
Meat and Livestock Australia also emphasised that Hong Kong was a market for quality Australian produce. In relation meat:
Last year… we sent just over 7,000 tonnes of beef to Hong Kong. That was worth $96 million. It is an exceptionally high-level product that we are sending over there. We send about $30 million worth of mutton there as well.
Australian wine is also a significant export to Hong Kong. Australian Grape and Wine states that Australia is the second largest exporter of wine behind France. Total wine imports to Hong Kong amounted to 60.88 million litres in 2017. Up to 20 per cent of that imported wine is transhipped from Hong Kong to other destinations.
In relation to technical barriers to trade, the A-HKFTA provides for more transparent and efficient customs procedures, making it easier for Australian companies to export and do business in Hong Kong.
Hong Kong has also committed to harmonised rules and technical requirements for food products and wine, which is expected to help facilitate trade in areas of Australia's export strengths. The Wine Annex (Annex 5-A) provides guidance on labelling, including harmonised minimum requirements for wine labels. The NIA states that this will reduce uncertainty and minimise compliance costs for traders. The Wine Annex includes an exemption for certain legitimate objectives, such as the protection of human health and safety, consistent with Australia’s approach in other FTAs.
The Wine Annex has been welcomed by Australian Grape and Wine:
Annex 5-AWine of the ‘Technical Barriers to Trade’ chapter, will assist to address harmonisation of practices and technical requirements across the two parties and provides a template for future agreements. The annex will help remove any uncertainty around classification, certification and labelling of wine.
However, the Australian Fair Trade and Investment Network (AFTINET) points out that the Wine Annex:
…provides for a standard labelling regime allowing a manufacturer to use the same main label in both countries. Any additional mandatory labelling requirements by individual governments must be on a supplementary label, not on the main label. These rules reduce the flexibility of governments in the future to design labelling requirements based on new public health research.
The Food Products Annex (Annex 5-B) includes specific commitments to facilitate trade in food products. Recognising the perishable nature of many food products, the Annex includes commitments for each Party to process perishable goods as quickly as possible and initiate discussions to resolve any non-tariff barriers as they arise. This is expected to help prevent and address trade barriers related to food products and promote Australia’s export interests.
The Dairy Industry Council and Australian Red Meat and Livestock Industries both commented favourably on the Food Products Annex.
The Department of Foreign Affairs and Trade (DFAT) explained that the Annex was designed to address existing problems that Australian exporters are facing:
Delays in processing goods at the border can add to the costs for exporters, particularly in the case of perishable goods. The quick release of perishable goods reduces wait times for the clearance of agricultural exports in foreign ports.
Non-tariff barriers can be any kind of ‘red tape’ or trade rules that unjustifiably restrict the flow of goods and services. Australia commonly establishes mechanisms in FTAs to discuss and resolve non-tariff barriers as they arise.
Hong Kong was Australia’s eighth largest services export market in 2017-18, with services exports totalling $3.1 billion. According to the NIA, Australia’s services trade with Hong Kong is relatively unhindered.
The NIA maintains that commitments in A-HKFTA safeguard Australian service providers against future changes to Hong Kong’s open policy settings.
While the NIA states that the A-HKFTA includes Hong Kong’s most ambitious and comprehensive set of services commitments to date, it is worth noting that the A-HKFTA for the most part only preserves existing access, including in:
the movement of natural people.
The Business Council of Australia argues that the A-HKFTA will:
…help encourage trade with Hong Kong in new areas of services and digital trade. The proposed agreement contains new commitments that will expand opportunities for Australia companies to provide services in Hong Kong, including guaranteeing the ability of legal service providers to practice both Australian and international law in Hong Kong; assisting Australian banks to incorporate in Hong Kong; and providing new outcomes for a range of other professional service providers.
Hong Kong represents the ninth largest source for international, onshore higher education enrolments at sector level, so education institutions were particularly welcoming of the services provisions in the A-HKFTA.
According to Vanessa Bourne, Chief of Staff at the University of Wollongong College Hong Kong, there are four central benefits from the A-HKFTA for education institutions:
the development of collaborative training, research and development initiatives, including technology transfer and collaboration between education institutions within Australia and Hong Kong;
the development of programs which can be jointly delivered by education institutions in Australia and in Hong Kong;
the exchange of teaching staff, administrators, researchers and students between the two jurisdiction; and
the proposal for academic credit transfer and mutual recognition of academic and vocational education and training qualifications between educational institutions.
In relation to vocational education:
The [A-HKFTA]… solidifies existing arrangements. Some individual TAFEs have partnerships in Hong Kong. There is one main training provider in Hong Kong, called the Vocational Training Council [VTC], which has a number of campuses. We have TAFEs that have good relationships with the VTC.
Hong Kong’s commitments on government procurement are equivalent to those it has made in the WTO Agreement on Government Procurement (GPA). Australia is acceding to, but not yet a party to, the GPA. Hong Kong entities bound by the Government Procurement Chapter of the A-HKFTA include 62 government departments and agencies and five non-government public bodies. The NIA explains that the non-government public bodies account for the majority of Hong Kong’s government procurement, and previously Hong Kong has only offered access to these entities to WTO GPA Members.
Under A-HKFTA, Australian businesses will have the right to bid for government procurement in all categories of goods and construction services, and many services categories, including: computer and related services; business services; transport services; rental/leasing of ships, aircraft and other transport equipment; telecommunications and related services; and environmental services.
A side letter provides a mechanism through which Australia and Hong Kong can work together to facilitate industry capability to engage in each other’s government procurement markets, including conditions for participation and the related assessment process.
The investment provisions in the A-HKFTA and the Investment Agreement contain the most significant change to the trade relationship between Australia and Hong Kong being considered here. In particular, the new Investment Agreement contains a new Investor State Dispute Settlement (ISDS) process.
The ARIA states that the investment provisions in A-HKFTA and the Investment Agreement are expected to provide a modern regulatory regime to support the investment relationship between Australia and Hong Kong.
Levels of Hong Kong investment in Australia have grown significantly over the past decade, and in 2017, Hong Kong was the second largest source of new foreign direct investment in Australia of any single economy worldwide ($13.8bn). The NIA claims that A-HKFTA will promote further Hong Kong investment into Australia and the diversification of these investments.
The NIA states that the Investment Agreement will update the investment rules in force between Australia and Hong Kong to reflect contemporary investment policy on the treatment of investors and investments in each other’s economies. The Investment Agreement includes modern rules which:
protect against discriminatory treatment;
require payment of compensation in certain circumstances where an investment is expropriated;
require that investment-related capital transfers can occur freely and without delay; and
guarantee that investors and their investments will be accorded a minimum standard of treatment.
The A-HKFTA will increase the level at which private foreign investments in non-sensitive sectors will need to be considered by the Foreign Investment Review Board (FIRB) from $266 million to $1,154 million. The ARIA offers assurance that Australia has reserved the right to maintain its existing foreign investment review process, including the ability to screen investments in sensitive sectors. Lower screening thresholds of $15 million and $58 million will continue to apply to investments in agricultural land and agribusiness respectively, and investments in other land will continue to be subject to FIRB screening.
The Investment Agreement contains an ISDS mechanism, allowing investors to directly enforce obligations in the Agreement. The NIA states that the ISDS mechanism includes important safeguards to preserve the Government’s ability to regulate in the public interest:
there are specific carve-outs ensuring that certain measures are outside the scope of ISDS, including tobacco control measures and, for Australia, those relating to the Pharmaceutical Benefits Scheme, Medicare Benefits Scheme, Therapeutic Goods Administration and Office of the Gene Technology Regulator;
Australia reserves the right to maintain existing and introduce new measures in key policy areas, including social security services, measures with respect to creative arts and cultural heritage and Australia's Foreign Investment Framework;
it includes provisions to prevent forum shopping, mechanisms to discourage frivolous and unmeritorious claims and robust transparency requirements; and
general and security exceptions also apply to the Investment Agreement.
The ISDS provisions also include a novel provision relating to ISDS cases that may impact prudential regulation and stability in the financial sector. If the dispute has the potential to impact on prudential regulation and financial sector stability, the ISDS process contains an additional step to assess this risk before the ISDS process can proceed.
DFAT explained that this provision allows the Australian Government to legislate on prudential and banking matters, ‘including for example to implement the Banking Royal Commission recommendations’:
The prudential exceptions and related exceptions are among the features commonly included in Australia’s modern FTAs, providing clarity that nothing in the agreements prevent the Parties form adopting or maintaining ‘reasonable measure for prudential reasons’.
The NIA confirms that the 1993 Investment Agreement will terminate on the date of entry into force of the Investment Agreement. This includes termination of the provisions for extended protection of existing investments.
The improved ISDS provisions in the Investment Agreement have been well received in Australia. The Minerals Council of Australia:
… welcomes commitments in A-HKFTA outlined in a new investment agreement … [which] provide greater certainty for both Australian and Hong Kong investors. These are improvements to the existing bilateral investment treaty, the 1993 Agreement between the Government of Australia and the Government of Hong Kong for the Promotion and Protection of Investments.
The new Investment Agreement contains protections for investments in Australia and Hong Kong. The agreement protects investors by providing for a minimum standard of treatment, a requirement to pay compensation in certain circumstances where an investment is expropriated, and protection against discrimination.
The Hong Kong Investment Agreement includes some clear limitations of the scope for ISDS cases against public interest legislation, particularly in relation to public health. We welcome the clear exclusion of claims relating to the Pharmaceutical Benefits Scheme, Medicare, the Therapeutic Goods Administration and the Office of the Gene Technology regulator, and of public health control measures on tobacco products.
… the need to specifically exclude claims relating to these bodies brings into question the effectiveness of broader ISDS ‘safeguards’ for health, environment and other public welfare measures that are included in the Investment Agreement. These broad exclusions do not prevent ISDS cases from being launched.
DFAT advised the Committee that:
…Explicit safeguards included in the ISDS provisions of the investment agreement protect the government’s right to regulate on national security grounds and for legitimate public policy objectives, including on privacy, public health, safety and the environment.
According to the NIA, A-HKFTA contains high-quality commitments on e‑commerce. For the first time in any FTA, Hong Kong has agreed to include rules that provide businesses with certainty about their ability to move information across borders and make investment decisions about data storage facilities. These data rules will also apply to financial services. The NIA claims that Australia’s ability to take measures for public policy reasons, including for essential security or privacy protection, will not be affected.
DFAT stressed that both countries are conscious of the need to ensure strong security provisions in today’s cyber environment:
Hong Kong and Australia have recognised through the cooperation article of the e-commerce chapter the importance of building the capabilities of their entities responsible for computer security incident response and using existing collaboration mechanisms to cooperatively identify and mitigate malicious intrusions or dissemination of malicious code that affect electronic networks.
Other rules to improve the business environment
The ARIA notes that the A-HKFTA also includes a number of provisions which help to improve transparency and provide certainty, in order to support the competitiveness of Australian exports and businesses. Highlights include:
rules on customs procedures and trade facilitation;
intellectual property rules;
a commitment for Hong Kong to maintain legal regimes that target anti-competitive business practices and enforce consumer protection;
undertakings to support Small and Medium Enterprises (SMEs); and
rules encouraging regulatory coherence between the two Parties.
The NIA states that the following legislative changes will be required to implement the A-HKFTA:
the Customs Act 1901, the Customs Tariff Act 1995 and relevant customs regulations will need to be amended to incorporate the preferential tariff rates and rules of origin that will apply to goods imported from Hong Kong under A-HKFTA;
the Foreign Acquisitions and Takeovers Regulations 2015 will also require amendment to incorporate the new thresholds for screening investment proposals by investors from Hong Kong; and
to implement Australia’s obligations to Hong Kong with respect to Labour Market Testing for intra-corporate transferees and independent executives, Migration (LIN 18/183: Determination of International Trade Obligations relating to Labour Market Testing) Instrument 2018 will need to be amended through a Ministerial Determination under section 140GBA(2) of the Migration Act 1958.
The NIA estimates that loss of tariff revenue for Australia from A-HKFTA is approximately $5 million in 2019–2020 and $25 million over the forward estimates period until 2022, as a result of revenue foregone from the elimination of all Australian duties, other than excise, on goods imported from Hong Kong. This estimate assumes A-HKFTA will enter into force in January 2020.
However, the ARIA admits that there is as yet no method for measuring the positive impact on revenue of continued regulatory certainty for Australian service exporters and that it is not feasible to attempt to quantify the benefits of an FTA in this sense. Despite this, overall, given the benefits delivered from the A-HKFTA and the Investment Agreement, the NIA claims that these Agreements are expected to generate a net gain for the Australian economy.