Parliamentary scrutiny of free trade agreements cannot be ignored
Labor members of the Senate Legal and Constitutional Affairs Legislation Committee note the majority committee report on the Customs Amendment (Product Specific Rule Modernisation) Bill 2019 (the bill).
Labor senators recommend amendments to the bill in relation to parliamentary oversight, and provide comments on other relevant issues.
Only three submissions were received by the committee. Two were from the Commonwealth agencies directly involved in the administration of aspects of free trade agreements: the Department of Foreign Affairs and Trade; and Australian Border Force, an agency of the Home Affairs portfolio. The only other submission was from the Construction, Forestry, Maritime, Mining and Energy Union (CFMMEU).
Labor members ask, where is the pressure from exporters and importers to make these changes? There are no submissions from individual firms or industry groups. That would indicate that while efforts to simplify arrangements are generally welcomed, there is no strong demand for significant changes. It also likely indicates a limited public awareness of these highly complex but important arrangements.
This situation reinforces the need for deliberative parliamentary scrutiny via disallowable instruments.
Government submissions identify two reasons for the changes: workload issues; and that 'domestic implementation of [product specific rules] in the latest Harmonized System nomenclature can be several years behind Australia’s domestic tariff updates'.
What are product specific rules?
The majority committee report includes the following background:
1.10 Australia's free trade agreements (FTAs) contain rules of origin, which are used to determine whether goods are eligible for preferential tariff treatment under the FTA. These include product specific rules of origin (PSRs).
1.11 PSRs apply to goods containing material sourced from a non-party to an FTA. Such goods may qualify as originating goods under an FTA (and therefore be eligible for preferential tariff treatment) if the non-originating materials have been 'substantially transformed' in Australia, the other party, or both. PSRs are used 'to determine whether non-originating materials have undergone sufficient transformation for the final goods to be considered "originating"'.
1.12 PSRs are set out in an annex to each FTA, which lists goods according to their classification under the Harmonized Commodity Description and Coding System (the Harmonized System).
1.13 The Harmonized System is 'a structure for classifying goods based on internationally agreed descriptors for goods'. It is administered by the World Customs Organization, which reviews and updates the system every five years. The classification system is uniform across the approximately 200 countries that have adopted the Harmonized System.
What is proposed?
According to the explanatory memorandum, the bill's main purpose is 'to streamline the way in which the product specific rules of origin of six of Australia's free trade agreements are given effect domestically'.
This will occur by 'removing the PSRs from regulations' and amending the Customs Act 1901 (Customs Act) to directly reference the annexes of the FTAs that contain the PSRs.
Labor senators recommend amendments to the current bill to protect parliamentary oversight through retention of a process that includes a disallowable instrument. This would ensure that a high level of parliamentary scrutiny continues, rather than the current proposal which would remove the PSRs from regulations and amend primary legislation (the Customs Act) to directly reference the PSRs in the FTAs.
As the bill stands now, the current level of parliamentary oversight of six FTAs—Australia-Chile Free Trade Agreement (ACLFTA); Australia‑New Zealand Closer Economic Relations Agreement (ANZCERTA); Australia‑United States Free Trade Agreement (AUSFTA); Korea-Australia Free Trade Agreement (KAFTA); Malaysia-Australia Free Trade Agreement (MAFTA); and Thailand‑Australia Free Trade Agreement (TAFTA)—will be reduced.
According to the explanatory memorandum to the bill:
For ACLFTA, ANZCERTA, AUSFTA, KAFTA, MAFTA and TAFTA it is also proposed to amend relevant provisions in the Customs Act to apply the PSRs for each FTA by direct reference to the PSR Annex. This would provide for the PSR Annexes in these FTAs to be directly referenced, without the need for a regulation under the Customs Act to prescribe the PSRs. These amendments would apply to both the table of PSRs and any product specific process rules included in the relevant Annex for these agreements by direct reference.
By removing the PSRs from regulations, the implementation of future versions of the Harmonized System in the PSRs, such as HS2022 that will be implemented on 1 January 2022, will be administratively simpler. The implementation of revised PSRs would still need to be done in accordance with the specific provisions of each FTA and Australia's domestic treaty‑making process.
Following the passing of the bill in its current form, PSRs would not be implemented via regulations that are subject to parliamentary scrutiny.
The Standing Committee for the Scrutiny of Bills offered 'no comment' on the bill. However, the Law and Bills Digest Section of the Parliamentary Library does express concerns:
If the PSR Annexes in these FTAs are to be directly referenced, without the need for a regulation under the Customs Act to prescribe the PSRs, then this would mean that the prescription of PSRs may not be subject to tabling and disallowance.
Labor members recognise that parliamentary scrutiny is not being abolished completely but it is being reduced. Under similar 2018 legislation and the current bill:
…the domestic [Australian] process includes referring FTA amendments to the Joint Standing Committee on Treaties (JSCOT) as a Category 3 (minor) treaty action. JSCOT has agreed to treat all Harmonized System transpositions as minor treaty actions. This provides an opportunity for Parliament to scrutinise the transposition of the PSRs to ensure that the updated Annex that is agreed by an FTA's parties only includes changes that are technical in nature and does not alter the commitments made in the treaty.
However, Labor members consider a disallowable instrument in the Senate is a more visible and effective means of offering the opportunity for public and Parliamentary debate about any proposed changes.
The particular JSCOT arrangements have not prompted a public inquiry or calls for public submissions. Any active response to proposed changes appears to depend on an activist member or senator or an alert parliamentary official.
Regulations before the Senate are more visible to interested parties.
Why we need to protect parliamentary scrutiny of PSRs
In a democracy like Australia we should always be sceptical about any attempt to reduce parliamentary scrutiny.
One of the reasons offered for the present bill is that the PSRs are complex and technical, so need to be simplified to enable changes to be implemented against each FTA expeditiously.
A reason for that complexity is that PSRs are dealing with Rules of Origin. Definitions of goods and their origins—whether whole goods or components—are complex and technical. They are often open to dispute, re‑interpretation, and subvention. Labor senators acknowledge that there may be real benefits in reducing the current complexities (and thousands of pages) but they do not support this reduction of parliamentary oversight.
Rules of Origin are complex because Australian industry and Australian workers expect the Parliament to guard their best interests. Poorly drafted or ambiguous Rules of Origin, for example, can be an opportunity for firms in third (non-party) countries to gain unfair benefits through an FTA. Any such activities by third parties are likely to undermine the community's confidence in free trade agreements.
These issues are also important in retaining confidence in Australia's anti‑dumping arrangements, particularly in a time of such global trade uncertainty. Opportunities to circumvent or misuse PSR arrangements make it more difficult for Australia's Anti-Dumping Commission to ensure compliance with Australian law and with the arrangements agreed between Australia and parties to various trade agreements.
Labor senators consider that the Coalition government has also missed yet another opportunity to improve the processes around the negotiation and implementation of FTAs to which Australia is a party.
Greater transparency would benefit the whole community and economy, as well as those directly involved in the trade of goods and services. With greater transparency, the Australian community could be more confident that, in the rush to conclude various FTAs and bilateral trade agreements, we are not surrendering vital aspects of Australian life such as Medicare and the Pharmaceutical Benefits Scheme (PBS), and various elements of our workplace rights and obligations.
The Coalition government continues to refuse to conduct and publish any independent economic modelling of proposed FTAs.
Labor senators strongly support the immediate introduction of early stage independent economic modelling of any FTAs currently being negotiated or being contemplated. Labor senators support such modelling being published so that the Australian community can be confident of the benefits of such arrangements.
Labor senators also consider the Coalition government has again missed the opportunity to reform Australia's handling of safeguards inquiries.
Labor senators support the transfer of responsibilities for 'safeguard investigations' from the Productivity Commission to the Anti-Dumping Commission which is already responsible for the administration of other trade remedies. This would align Australia's arrangements with global best practice.
Such a move would also be in line with recommendations of the Economics References Committee's Australia’s steel industry: forging ahead report:
6.100 The committee heard evidence from multiple stakeholders indicating that the current division of Australia's trade remedies system between the Anti-Dumping Commission, which deals with dumping and countervailing, and the Productivity Commission, which deals with safeguards investigations, is ineffective and onerous. So long as the safeguards function rests with the Productivity Commission, it remains inaccessible to industry and removed from Australia's broader trade remedies framework. To facilitate industry's access to future trade remedy actions and reduce administrative constraints, these functions should be incorporated into one agency.
6.101 The committee notes that during Senate Estimates hearings, the Anti‑Dumping Commissioner acknowledged that safeguards investigations in other international jurisdictions (such as the European Union, the United States, Canada and South Africa) are often conducted by the same body undertaking the anti-dumping and countervailing investigations.
6.102 The Department of Foreign Affairs and Trade has also confirmed that similar arrangements exist in Korea and China.
6.103 It is the committee's view that Australia should align its anti‑dumping processes with international best practice/norms to ensure that Australian industry is afforded the same protection as foreign industries and can access safeguards measures when appropriate. The recent United States investigation into whether steel imports pose a threat to national security could lead to American import tariffs on steel, resulting in excess Chinese steel being dumped in Australia. This possibility points to the need to ensure that all trade remedies are made available to protect Australian industry.
Senator the Hon Kim Carr
Labor Senator for Victoria
Senator Anthony Chisholm
Labor Senator for Queensland