How Free Trade Agreements Can Help You Expand into Asia
Many micro-to-medium sized Australian companies might be surprised to learn that they are missing out on lucrative export opportunities overseas, simply because they’ve never looked into Australia’s Free Trade Agreements (FTAs) with North Asia. Australia has three FTAs in place with North Asia countries: China, Japan and Korea.
With a combined population of 1.56 billion people, these three countries represent enormous export markets for Australian businesses. They alone account for two thirds of all Australian goods exported overseas and nearly a quarter of services exports. There are a range of FTAs that your business can benefit from. This article covers Australia’s three North Asia agreements, which are:
- The China-Australia Free Trade Agreement: ChAFTA
- The Japan-Australia Economic Partnership Agreement: JAEPA
- The Korea-Australia Free Trade Agreement: KAFTA
What are FTAs?
FTAs are international treaties, designed to reduce barriers to international trade and investment. They do so firstly by cutting tariffs, which are taxes or duties that are paid on traded goods. Australia has a number of FTAs in place with individual countries (like China and Japan) as well as FTAs in place with groups of countries (such as ASEAN).
As well as reducing or eliminating tariffs, FTAs also address what are called ‘behind-the-border’ issues. They're important to understand because as a business owner they can make doing business internationally more complicated for you. They include things like intellectual property rights, professional standards and qualifications.
How can my business benefit from a FTA?
There are several ways to benefit from a FTA. Some of these are overt and obvious, like accessing a preferential tariff or taking advantage of an increase in export quotas. Other options are more subtle, like reducing business risk overseas or strengthening your supply chain through cheaper imports. A few methods are outlined below:
1. Preferential tariffs
This is perhaps the most obvious way your business can take advantage of a FTA. Preferential tariffs are duties that are either partially reduced, or eliminated entirely. This helps to give you a real competitive advantage over competitors in other countries who can't benefit from the same export rates.
If you qualify for preferential treatment under a FTA, you can pass these savings directly onto your customers or chose to invest them elsewhere in your business. Information on preferential tariffs is generally very easy to find because the government loves promoting FTAs! Austrade’s FTA portal also makes tariff information highly accessible and really easy to understand: just search by your product or browse by category.
Example: prior to the Korea-Australia FTA coming into force in 2014, Korea placed a 40% tariff on beef imported from Australia. That tariff will be progressively phased out by roughly 3% per year, until it’s eliminated entirely in 2028.
This tariff reduction will help Australian beef exporters gain more market share and a stronger footing in Korea - assuming they remain under safeguard quotas imposed by the FTA (see below). In fact 99% of the goods that Australia exports to Korea are eligible to enter the Korean market with either preferential access or completely duty-free.
2. Quota increases
Trade quotas aim to regulate trade volume between countries. They do so by limiting the total value or number of goods imported over a certain period of time. In some cases, trade quotas are increased under a FTA, which means your industry can export more of that particular product under preferential terms than it ever could before.
Example: under JAEPA, Australian dairy exporters' access duty-free quotas on natural cheese will increase from 4,000 to 20,000 tonnes. Orange and apple juice, honey, poultry and pork products, as well as preserved meats, are just some of the agricultural products to see increased quotas under JAEPA.
Tip: under what are called ‘safeguard measures’, an importing country may have the right to apply the higher non-preferential tariff rates (those that existed prior to the FTA coming into force) once import levels on a given product are reached a certain limit. Trigger levels are generally set above current trade and are designed to grow. Find out if your product has a trigger level in place here.
3. New services markets
The creation of new export markets for Australian services is a fantastic way to expand your business overseas. This is because some FTAs open up access to markets for Australian services that did not previously exist. You may be able to capitalise on these kind of opportunities and give your business a strong competitive advantage over domestic competitors who do not yet have a presence in your target market.
Example: under KAFTA, Australian law firms are now able to setup representative offices in Korea and can provide advisory services to Korean businesses on Australian and international law. As of December 2016, they can enter into cooperative agreements with Korean law firms. They will also be eligible to form joint ventures and hire local Korean lawyers from December 2019.
Likewise, Australian accounting firms are now able to establish offices in Korea, and by December 2019 will be allowed to invest in Korean accounting firms. This will help strengthen business links between the two countries. Other industries to benefit from the Korea-Australia FTA include IT and telecommunications, film and TV, engineering and education services.
The government argues this FTA “provides Australian services exporters with treatment equivalent to the best Korea has agreed with any trading partner, such as its agreements with the United States and Europe".
Where to from here
These options are just some of the ways that your business might be able to capitalise on Australia’s FTAs with North Asia. It’s also important to remember that FTAs are bilateral agreements that serve to provide each trading partner (or country) with preferential access to the other’s markets.
In other words, you might find that the best way to take advantage of an FTA is to think about inbound goods or services from another country. Switching up parts of your supply chain to incorporate lower priced imports could be one way to generate more efficiencies that you can then reinvest in other parts of your business.
The best place to start is the government’s FTA portal, which will help you explore and navigate the relevant information that relates to your core products and services.
Tip: accessing preferential treatment under a FTA is not automatic! If you are a goods exporter, you will often need to demonstrate that your products meet rules of origin requirements to prove they originate in Australia. Again, the government’s portal will help you navigate what these are and explain how to obtain a Certificate of Origin.
If you'd like to learn more about the opportunities available for your business overseas, get in touch to book a complimentary 60-minute Strategy Session with us today.
Sources: Department of Foreign Affairs and Trade; Austrade; Trade Victoria.