Free Trade Agreement between Australia and the Republic of Peru; The Agreement to terminate the Agreement between Australia and the Republic of Peru on the Promotion of Investments
This Chapter reviews two treaty actions: the Free Trade Agreement between Australia and the Republic of Peru (PAFTA) and the Agreement to terminate the Agreement between Australia and the Republic of Peru on the Promotion and Protection of Investments (IPPA). PAFTA was signed in Canberra on 12 February 2018 and tabled in the Parliament on 26 March 2018.
The IPPA was signed in Lima on 7 December 1995 and will terminate when PAFTA comes into force.
According to the National Interest Analysis (NIA) PAFTA is a comprehensive free trade agreement intended to open new trade and investment opportunities for Australia. The NIA states that the Agreement not only captures the gains of the Trans-Pacific Partnership (TPP), but also improves on market access outcomes in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP-11).
The NIA states that Peru is a growing market for Australian goods and services exporters. Peru’s GDP is comparable to that of Vietnam ($US189 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 A$590 million. PAFTA is expected to provide Australian businesses with an opportunity to expand and deepen engagement with Latin American markets. This assessment was reiterated by various submitters to the Committee.
Peru will eliminate tariffs on 93.5 per cent of its tariff lines from entry into force of the Agreement, and ultimately will eliminate 99.4 per cent of all its tariffs. New market access opportunities are expected to be available for Australia in areas of major export interest, including the elimination of tariffs on beef, sheep meat, wine, pharmaceuticals, medical devices, paper products and machinery.
The red meat and livestock industry pointed out that all tariffs on Australian beef, sheepmeat and goatmeat would be eliminated within 5 years under PAFTA whereas under the TPP it would take 10 years to achieve this result. The Minerals Council of Australia (MCA) notes that tariffs on all product groups that include mining equipment will be eliminated. The progressive reduction of tariffs on dairy products over five years ‘provides Australia with significant export growth potential’ in what is currently a small market for Australia.
Even the relatively small gains achieved for some products are seen by industry as important. For example, the sugar industry claims that the achievement for sugar has broader implications:
While the new market access opportunities for sugar may be modest, the Peru-FTA provides strategic trade policy outcomes. Sugar’s inclusion in the deal sends a clear message that sensitive commodities, such as sugar, which have been excluded from some past Australian trade agreements can and should be included in all trade agreements.
Additionally, the NIA expects PAFTA to create a platform for significant growth in Australian services exports and investment in Peru. The Department of Foreign Affairs and Trade (DFAT) claim it is one of its ‘most ambitious FTAs on services trade’. Peru’s commitments represent an almost ten-fold improvement over its World Trade Organization (WTO) General Agreement on Trade in Services (GATS) commitments (by sectoral coverage and extent of commitments), which is expected to improve certainty for Australian service suppliers and investors in Peru.
The MCA cites Austrade and identifies the significant potential for both investment and Australian services in the Peruvian mining sector:
[Peru] is already a major mining province, ranking third in global copper production, second for silver and sixth for gold. Furthermore there is a pipeline of US$58 billion ($74 billion) in new mining investment projects expected to be delivered over the period from 2016 to 2020.
The MCA sees ‘major opportunities’ for investment between the two countries. It also stresses that PAFTA will assist the delivery of mining services by Australia’s world class mining equipment, technology and services (METS) firms:
Under the free trade agreement, the Australian Government has secured specific services market access commitments from Peru that will create new opportunities for mining and related services. Peru has agreed to provide market access with no limitations or conditions for Australian businesses providing services related to mining.
Further, the MCA lists a range of other services that will benefit from these provisions that are directly relevant to mining: engineering services, research and development services for natural sciences, technical testing and analysis services, scientific and technical consulting services, consulting services relating to construction and environmental services.
Reasons for Australia to take the treaty action
The Regulation Impact Statement (RIS) explains that Australia’s trading relationship with Peru is currently governed by Peru’s obligations under the 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.
Further, 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 to be 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.
The Australian Government considered that action is required to address the constraints on Australian trade with Peru and concluded that a bilateral FTA was the most effective solution. The RIS maintains that PAFTA provides unprecedented market access, providing new opportunities for Australian businesses and making Australian exporters more competitive in the Peruvian market. The RIS states that it is in Australia’s interest to secure a preferential advantage in the Peruvian market as soon as possible to enable Australia to keep pace with competitors, many of which have already negotiated FTAs with Peru.
Submitters concurred, stressing the lack of a level playing field as a major concern and identifying PAFTA as a significant step in addressing this issue. The National Farmers’ Federation (NFF) indicated the connection between Australia’s small share of the lucrative Peruvian market and competitive disadvantage:
In 2016, Peru imported $6 billion of agricultural goods; however, only $6.7 million of this came from Australia, due partly to preferential access for our competitors including the United States, Canada and the European Union.
Likewise, the Australian dairy industry made the same link:
Peru is currently a small market for Australian dairy. In 2017 Australia exported 118 tonnes of dairy products at a value of $USD529k. This is predominantly due to larger supplying nations–Chile, European Union and United States, being more price competitive because of having bilateral agreements in place.
PAFTA consists of 29 Chapters with associated Annexes. According to the NIA, PAFTA is consistent with Australia’s other international agreements, including in the World Trade Organization. Chapter 1 (Initial Provisions and General Definitions) provides that the PAFTA will coexist with Parties’ rights and obligations in other agreements to which they are also a party. The NIA claims that the obligations in PAFTA align with those made by Australia to other FTA partners. Key obligations are outlined below.
Upon entry into force of PAFTA, Australia is required to eliminate or reduce specified tariffs and non-tariff barriers, or restrictive policies, on imports of goods from Peru. These obligations are contained in Chapter 2 (National Treatment and Market Access for Goods) and associated annexes. In order to benefit from preferential rates, goods must originate in Peru. The criteria for determining origin are contained in Chapter 3 (Rules of Origin and Origin Procedures) and associated annexes. The phased elimination of these tariffs aligns with existing FTAs.
The provisions contained in PAFTA’s goods related chapters (Chapters 2–7), reaffirm existing rights and obligations under the relevant WTO Agreements. In addition, PAFTA will contain provisions included in more modern FTAs that enhance transparency and cooperation. In particular:
committees on sanitary and phytosanitary measures and technical barriers to trade;
commitments on transparency;
allowing for self-certification of rules of origin; and
disciplines specific to wine and spirits labelling and organic products to promote greater regulatory coherence across the region.
Services and investment
Under Chapter 8 (Investment), Chapter 9 (Cross-Border Trade in Services) and Chapter 10 (Financial Services), each Party is required to grant market access and non-discriminatory treatment to investments and services from the other Party. That is, services suppliers and investors from Peru must be treated no less favourably than like providers from Australia or other countries on the basis of nationality. Parties are also prevented from requiring investors of the other Party to appoint people of a particular nationality to senior management positions (the ‘senior management and board of directors’ obligation).The obligations will apply unless otherwise specified in the non-conforming measures annexes to the proposed Agreement (Annexes I, II and III). The obligations and non-conforming measures of PAFTA are generally consistent with those of the TPP-11.
Chapter 8 (Investment) contains a set of modern rules governing the treatment of investors and their investments, balanced with safeguards to preserve the right of the Government to continue regulating in the public interest. It also contains an ISDS mechanism which provides investors with access to an independent arbitral tribunal to resolve disputes for breaches of these investment rules. The ISDS mechanism contains explicit safeguards protecting the Australian Government’s right to regulate in the public interest.
Temporary entry for business persons
Chapter 11 (Temporary Entry for Business Persons) regulates the temporary entry of business persons. It does not create any obligations in relation to citizenship, residence or employment on a permanent basis. Under the Chapter, each Party makes specific commitments guaranteeing access for categories of business persons who, provided they fulfil visa eligibility requirements, will be permitted to enter and temporarily stay in a Party. In PAFTA, Australia has reaffirmed existing commitments under the World Trade Organization to waive labour market testing for several categories of Peruvian temporary skilled workers, including for intra-company transferees and independent executives.
Telecommunications and electronic commerce
Chapter 12 (Telecommunications) and Chapter 13 (Electronic Commerce) include obligations consistent with those of the 2017 amendments to the Singapore–Australia Free Trade Agreement and TPP-11. Key obligations include:
ensure telecommunication companies with a dominant market position, in Peru or Australia, provide telecommunications suppliers from the other country with access to services and key infrastructure on reasonable terms and conditions;
access to public telecommunication services on a reasonable and non-discriminatory basis;
prohibition on requiring a service supplier or investor to use or build local data centres in order to conduct business.
The right of governments to impose appropriate and proportionate restrictions on the cross-border transfer of information in order to achieve legitimate public policy objectives is preserved.
Chapter 14 (Government Procurement) includes obligations broadly consistent with those of the TPP-11. Peru’s ability to tender for government procurement contracts through PAFTA are the same as those provided to it under the TPP-11. The NIA notes that Australia has maintained its standard exceptions in sensitive areas, such as Indigenous procurement, defence, and health services.
Termination of bilateral investment treaty
During the course of PAFTA negotiations, Australia and Peru agreed to terminate the IPPA on the date of entry into force of PAFTA. The NIA states that the IPPA is an older style bilateral investment treaty that contains an ISDS mechanism without the explicit safeguards of modern agreements.
The NIA notes that the IPPA will continue to apply for a period of five years from the date of termination to any investment which was made before the entry into force of PAFTA with respect to anything that took place before the date of termination. However, an investor may only submit an ISDS claim under the IPPA within three years of the date of termination.
According to the NIA, the following regulatory and legislative changes will be required to implement PAFTA:
changes to the Customs Tariff Act 1995 and the Customs Act 1901 to incorporate preferential tariff rates and associated rules of origin for Peruvian goods; and
changes to the Foreign Acquisitions and Takeover Regulations 2015 to implement the commitment to a higher threshold for screening by the Foreign Investment Review Board.
The RIS notes that both Australia and Peru are aiming for entry into force before the end of 2018.
The NIA states that the expected cost of PAFTA is negligible. PAFTA will be implemented through existing resources and the NIA estimates that loss of revenue from tariff elimination by Australia from PAFTA is negligible. The estimates are based on existing trade between Peru and Australia, and do not take into account any changes to Australia’s trade and investment relationship that may result from the implementation of PAFTA. Nor do these estimates take into account any reductions in tariff revenue as a result of Australia’s commitments under the TPP-11.
Evidence to the Committee identified four main areas of concern:
proliferation of trade agreements covering the same markets;
inclusion of investor-state-dispute mechanisms;
labelling provisions for wine and spirits.
Proliferation of trade agreements
PAFTA was negotiated between Australia and Peru after the collapse of the TPP negotiations. The TPP-11, which includes Australia and Peru, is currently before the Joint Standing Committee on Treaties (JSCOT) for consideration. Negotiations have commenced for the Pacific Alliance Free Trade Agreement which also includes both countries.
The Committee asked what the differences were between the TPP-11 and PAFTA and whether PAFTA was justified. DFAT explained that PAFTA provides better market access for Australian exporters than the TPP-11:
… what we got on goods market access was significantly better than what we were able to achieve in the TPP. In particular, we got quota access for sugar, for dairy, for rice and for sorghum, and that was access that we were not able to achieve under the TPP. For many other products, particularly Australia’s trade priorities, we got much faster phase-outs than we were able to get, so the period of time in which the tariff was eliminated was much faster in Peru compared with the TPP. For example, in the TPP beef cuts going into Peru were phased out within 11 years. In the Peru-Australia FTA they’re phased out within five years. Some of the longer phasing periods that, in particular, applied for Australian exports such as pharmaceuticals and medical devices, faced a range of phase-out periods of six years, 11 years or 16 years. Those products are now being eliminated on entry into force.
Submitters raised ongoing concerns over the increasing complexity created by the number of trade agreements Australia is committing to, particularly multiple agreements with the same partner. This ‘noodle bowl’ effect is seen as causing confusion for businesses, particularly small businesses, and considered an impediment to participation.
DFAT defended the decision to go ahead with both TPP-11 and PAFTA and argued that there are resources available to assist businesses to determine which agreement will best suit their needs:
… traders face a range of applicable standards. Some of those standards come from the WTO system. Many of what we call technical barriers to trade and sanitary or phytosanitary standards are set by the WTO system. There will be tariffs. There will be a rule of origin that is needed to meet that particular tariff if it’s under a free trade agreement. There could be technical standards. And so, essentially, with the system as it is at the moment, either you have a free trade agreement, which can provide an expedited process, or arguably an easier process than some of those WTO processes and one which can still apply or is clarified through a free trade agreement process … there are many factors that an exporter has to take into account, and there is a range of tools that the government and the department has to try to help exporters navigate those particular questions.
The Committee asked how possible inconsistencies between the provisions of the various trade agreements would be reconciled. DFAT explained that, in general, the higher standard applies:
… it’s not unusual that there are these different provisions in different agreements governing trade and, in general terms, the higher standard will apply. For some areas, such as goods trade, the trader can choose. So, when the trader makes a decision to use a particular rule of origin that attaches to a particular treaty in order to get a particular tariff preference, they are, in essence, electing to use that agreement and … the provisions of that agreement.
The Committee pointed out that while PAFTA requires labour market testing for contractual service suppliers, the TPP-11 waives this provision for six countries, including Peru. The Committee queried how Australian businesses would be able to identify which provisions applied to them if they were dealing with Peru. DFAT explained that an Australian business could choose to operate under either of the agreements depending on their own needs, in particular the length of time the contractual service supplier was required:
There are differences between the length-of-stay commitments. The current visa system for contractual service suppliers … allows for a length of stay for a contractual service supplier of up to four years. The commitment that we took in the Peru-Australia Free Trade Agreement for contractual service suppliers was for a stay of two years. And the commitment that … we took in TPP-11 was for a stay of one year.
Investor-state dispute settlement mechanisms
Concerns were again raised regarding investor-state dispute settlement (ISDS) mechanisms. The Australian Fair Trade and Investment Network (AFTINET) reiterated its argument that the system has significant flaws and that such mechanisms should not be included in free trade agreements. AFTINET welcomes the exclusions and carveouts but retains reservations regarding the safeguards included in the PAFTA ISDS provisions.
On the other hand, the MCA supports the inclusion of ISDS clauses in PAFTA. The MCA consider that the provisions enhance ‘certainty and predictability around regulatory matters’ for businesses and that the safeguards protect Australia’s and Peru’s ability to implement public policy and regulate in the public interest. The MCA stressed that the advantages the ISDS mechanism provide for investors in both countries will encourage two-way investment flows:
These provisions will allow investors of either country to seek mediation and arbitration where they claim the other country’s government has not complied with its commitments under the Investment Chapter. From the point of view of Australian companies considering investing in Peru, the ISDS provisions will mean there is greater certainty that the investment commitments can be enforced—and the same certainty will be provided to Peruvian investors in Australia. In this way ISDS is an important supporting mechanism for the agreement’s substantive investment commitments.
DFAT confirmed that the ISDS provisions in PAFTA are confined to commitments in the Investment Chapter and cannot be used in regard to any other aspects of PAFTA, including the Financial Services Chapter or the Technical Barriers to Trade Chapter.
Movement of people
Concerns were raised, during the inquiry into both treaty actions, regarding the provisions for recognition of trade qualifications of foreign workers entering Australia temporarily. DFAT confirmed that the current requirements will not be changed by the Agreement:
Whatever the requirements are for the skills or qualifications of a Peruvian electrician coming to Australia today to be recognised will be exactly what happens when PAFTA enters into force, because there is nothing in the agreement that requires us to change our system in relation to the recognition of those qualifications or skills.
The Committee recognises the need for the Australian Government to ensure that Australian businesses were not disadvantaged by the collapse of the TPP negotiations, and that the bilateral arrangements agreed to in PAFTA go towards providing certainty and opportunities for Australian businesses in the Peruvian market.
However, the Committee acknowledges the ongoing concerns caused by the continuing proliferation of trade agreements with the same partners and that the complexity of entering these markets may be hindering businesses from taking full advantage of the opportunities presented. It encourages DFAT, other relevant departments and umbrella organisations to continue developing and providing practical assistance that will assist Australian businesses, particularly small businesses, to navigate the available agreements and engage in these markets.
The Committee notes that Australia and Peru have agreed to terminate the IPPA on the date of entry into force of PAFTA and the conditions of that termination. The Committee supports the termination but, as it will happen automatically when PAFTA comes into effect, has not made any recommendation regarding the IPPA.
The Committee supports PAFTA and recommends that binding treaty action be taken.
The Committee supports the Free Trade Agreement between Australia and the Republic of Peru (PAFTA) and recommends that binding treaty action be taken.