Free Trade Agreement between Australia and the Republic of Peru
This Chapter provides background information on the Free Trade Agreement between Australia and the Republic of Peru (PAFTA) with particular reference to those provisions under consideration by the Joint Standing Committee on Treaties (JSCOT).
PAFTA was signed in Canberra on 12 February 2018 and tabled in the Parliament on 26 March 2018. The Committee considered the treaty action and recommended ratification in its report tabled in the Parliament on 15 August 2018.
The National Interest Analysis (NIA) emphasised the importance of the Peruvian market for Australian goods and service exporters. Peru’s GDP is comparable to that of Vietnam (US$189 and $US193 billion respectively), and it has been one of the fastest growing economies in Latin America over the last ten years. In 2016, two-way trade with Peru was worth $A590 million. PAFTA is expected to provide Australian businesses with an opportunity to expand and deepen engagement with Latin American markets. Evidence received by the Committee during the original inquiry into PAFTA confirmed this assessment.
Current market status
According to the Regulation Impact Statement (RIS) Australia’s current trading relationship with Peru is governed by Peru’s obligations under the World Trade Organization (WTO) Agreement. Australia’s exports of beef, sheep meat, horticulture, wheat, barley, rice, canola, sugar and wine are effectively shut out of the Peruvian market because of high tariff barriers. Sugar, dairy, rice and corn are subject to Peru’s price band system, which can result in applied tariffs of up to 29 per cent. There are also tariffs of up to 11 per cent on beef, and up to 9 per cent on sheep meat, almonds, vegetables and wine.
The RIS notes that Peru’s market access commitments in relation to services are as agreed under the WTO GATS. These commitments do not include services in sectors of commercial interest to Australia, including telecommunications, financial services, professional services, energy and mining-related services, environmental services, construction services, and transport services.
The RIS considers that Australian investment is the most important feature in Australia’s commercial ties with Peru. Australia’s commercial presence in Peru has increased significantly with nearly 90 Australian companies now represented in Peru. The RIS estimates that Australian investment in Peru is around $5 billion. Australia is the fourth largest investor in Peru’s mining and energy sector. Australia’s investment relationship with Peru remains governed by a 1995 bilateral investment treaty. The RIS explains that, while this older treaty provides protections for Australian investors, it does not include the more effective, modern safeguards aimed at better protecting Australia’s right to regulate in the public interest. Nor does it contain procedural safeguards regarding investor-state dispute settlement. The RIS claims that these safeguards provide greater legal certainty and reduce the risk of investors bringing claims against the government for regulations designed for legitimate public policy purposes.
The RIS points out that a number of Australia’s competitors, including the United States (US), Canada, European Union (EU), and Singapore, have Free Trade Agreements (FTAs) with Peru. As a result Australian exporters face additional barriers including tariffs, restrictions on the sale of services, additional red tape, and barriers on temporary entry for business people. The RIS considers that this places Australian exporters of goods and services at a significant disadvantage to their competitors.
For these reasons, the Australian Government considered that a bilateral FTA was justified. The RIS maintains that PAFTA provides unprecedented market access for Australian businesses and makes Australian exporters competitive in the Peruvian market.
Improvements under PAFTA
Evidence to the Committee suggests that Australian businesses and exporters will significantly benefit from the implementation of PAFTA and that it will improve on the options available under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP 11). The Department of Foreign Affairs and Trade (DFAT) summarised the overall benefits:
In PAFTA, Peru has provided Australia with greater market access than it agreed to provide in the TPP-11. PAFTA provides for better treatment than the TPP-11 for goods covered by 1405 tariff lines. 93.5 per cent of Peru’s tariff lines will be eliminated to zero on entry into force, rising to 99.4 per cent of tariff lines within 10 years.
The Department explained that there were a range of important benefits that were provided under PAFTA that were not available under the TPP-11:
Other benefits include outcomes that we were not able to achieve in TPP-11 at all, where there was no market access for a number of products. They include sugar, dairy, rice and sorghum, where there are no outcomes in the TPP-11 because the price band was not removed. There was improved market access for a range of agricultural commodities including wine, beef and almonds. And on the services side the major outcome that was not included in TPP-11 was the recognition of Australian university degrees, which the Peruvians agreed to do in PAFTA.
There was some question as to the value of the gains to Australian businesses as Peru is perceived as a ‘small marketplace’. However, individual industry sectors emphasised the importance to their members of even incremental gains. The National Farmers’ Federation (NFF) explained that increased market access provided choices for producers and increased industry resilience:
When you look at the Peru market in and of itself at the moment, some people might assess our trade with that country to be relatively small. For all our exporters the fact is: what maintains prices is the ability to go to the market where you’re going to get the best price and the best outcome, so having more markets with better market access outcomes increases your choice. It also increases your resilience, because where one market might close down for whatever reasons you have options to then move your exports to different markets. It’s easy for people to say this doesn’t mean a lot; actually it means a heap not only for maintaining high prices for agricultural products but also for building farmer resilience by enabling them to move product as the international market conditions change. It’s a bit hard to underestimate. We export two-thirds of what we produce. Without access to those markets, Australian farmers would absolutely struggle, and that’s an understatement.
This assessment was confirmed separately by specific sectors. The Australian Dairy Industry (ADI) referred the Committee to its submission to the previous inquiry into PAFTA and reiterated that the gains the industry will achieve under PAFTA will not be achieved under TPP-11:
The PAFTA reduces 99.4 per cent of the tariffs Australian exporters have previously faced with Peru. For the dairy industry, tariffs are eliminated on 7000 tonnes of product per annum, growing to 10,000 tonnes (capped amount) in year five. Based on current export volumes, this provides Australia with significant export growth potential.
Likewise, the Australian red meat and livestock industry drew the Committee’s attention to, not only the quicker tariff phase-out that the industry will receive under PAFTA compared to the TPP-11, but the ‘distinct competitive advantage compared to other TPP-11 member countries’ that it provides.
The Winemakers’ Federation of Australia (WFA) also sees Peru as a growing market and an opportunity to diversify their export markets:
PAFTA is a good agreement for the wine sector. Immediate elimination of duties across lines of commercial interest to Australia with the remainder being phased out over 5 years (up to 9 per cent) provides an opportunity for exporters.
The Group of Eight (Go8) explained that the Agreement will open up important opportunities for the Australian international education industry that will not be available under TPP-11:
Current Peruvian law only permits recognition of foreign degrees with countries with which a bilateral agreement is in place. Due to its nature as a multilateral agreement, the TPP-11 will not meet this criterion. Therefore, unless the PAFTA comes into force, the Peruvian government cannot recognise any degrees issued by an Australian university. This significantly reduces the attractiveness of Australian offerings to foreign students, since any qualification gained in Australia will not advantage them once they return to their home country.
The competitive edge that PAFTA will provide was also highlighted by AUSTMINE, the leading industry body for the Australian Mining Equipment, Technology and Services (METS) Sector. With $52 billion in proposed projects expected to be developed over the next 10 years, the Peruvian market provides significant opportunities for the Australian METS sector:
We have over 60 members who do business in Peru. This includes those who export there and have established offices. PAFTA would help to increase our METS companies’ competitiveness in the market, which would lead to increased exports and employment in Australia.
Confirming the benefits to the Australian mining sector of PAFTA, the Minerals Council of Australia (MCA) noted that specialised mining equipment, technology and materials dominate Australia’s top exports to Peru:
Seven out of Australia’s top eight biggest mechandise exports to Peru in 2017 were METS or mining commodities: prepared additives for minerals ($14.7 million), iron and steel bars and rods ($8.5 million, measuring and analysing instruments ($7.0 million), civil engineering equipment and parts ($3.8 million, mechanical handling equipment and parts ($3.8 million), specialised machinery and parts ($2.8 million) and aluminium ($2.2 million).
Submitters acknowledged that commercial activity between Australia and Peru is growing. The Australia Peru Chamber of Commerce noted that:
… Australia’s commercial presence in Peru has increased significantly with nearly 90 Australian companies currently present in Peru and an estimated Australian investment of around $5 billion …
Submitters urged the Australian Government to ratify and implement PAFTA as soon as possible in order to enable Australian businesses to secure the market access and competitive advantage that it will provide. Implementation before the end of 2018 would allow a second round of tariff cuts to occur on 1 January 2019, improving the position of Australian businesses in the Peruvian market. Although recognising the benefits of the TPP-11, submitters expressed concern that it will take longer for Peru to complete its domestic processes to bring it into effect than it will for PAFTA. DFAT clarified the internal procedures that Peru will have to undertake to ratify the two agreements:
… PAFTA can be brought into force through executive action, and we understand from Peru that could be done very quickly. We understand that TPP-11 requires going through their parliament, which would not be possible to do by the end of this year and they’re not going to be one of the first who enters into force in the TPP-11.