Free trade agreements are used by businesses, large and small, by exporters, importers and investors. Some FTA use by business is overt, such as accessing a preferential tariff rate in the FTA partner market.Other use is more subtle, such as the evaluation of risk in business decision-making.
All FTAs are different and need to be looked at separately. But the ways in which businesses use them are common.
We have drawn together the top ten ways FTAs are used by business.
• Increasing goods exports to a market.
• Commencing new goods exports to a market.
• Achieving efficiencies through cheaper imported inputs.
• Harnessing new or more secure access to services markets.
• Deepening engagement in global value chains.
• Investing with enhanced protections and certainty.
• Travelling for business more easily.
• Accessing government procurement markets.
• Addressing ‘behind the border’ barriers to trade.
• Contributing to trade negotiation business consultations.
Why are FTAs complicated?
FTAs are complicated. They are complicated because the range of potential goods and services trade and investment between any two economies is very wide. They have to reflect the legislation and procedures in the partner countries. They are also binding treaties that contribute to, and interact with, international trade law. If FTAs were not complicated, they would not deliver the benefits they do. The benefits of the agreement might flow also in an unintended way to third parties.
A range of explanatory tools help to educate and assist business with FTAs.
1. Increasing goods exports to a market
FTAs offer preferential treatment in partner countries for Australian goods, in the form of tariff elimination or reduction. In some cases there may be quota expansion.
For businesses already exporting goods to an FTA partner country, this increases the competitiveness of their products in those markets, especially compared to competitors from countries that do not receive preferential treatment under an FTA.
FTAs may also address customs and trade facilitation matters, to provide expeditious, predictable, transparent and simplified customs administration for importers and exporters.
2. Commencing new goods exports to a market
Lower tariffs or other preferential treatment can be a good incentive for Australian businesses to consider exporting to a new market for the first time or expanding a product range. Foreign businesses may be more interested in importing Australian products as a result of an FTA coming into force.
Demonstrating that goods are eligible for FTA benefits
Accessing goods benefits requires compliance with the rules of origin under the agreement. Step-by-step guides are available for each agreement on entry into force.
Even for a company that may elect not to use the competitive benefits of an FTA, that business decision should be reviewed periodically. For many products under Australia’s FTAs, tariff reductions intensify over time, and Australian and international competitors may be accessing preferential arrangements, to the disadvantage of that business
3. Achieving efficiencies through cheaper imported inputs
While in general Australia’s tariffs are already low, FTAs may improve access to cheaper, better quality or more technologically advance imported inputs to business. This is because Australia’s agreements also contain commitments to eliminate and bind our tariffs.
Those savings can provide a little more to invest in other parts of the business.
4. Harnessing new or more secure access to services markets
The WTO has existing agreements which underpin the trade in services. FTAs may provide new outcomes, liberalising market access and reducing regulatory barriers in different service sectors. For example, an Australian law firm may be able to establish an office in a foreign market without needing a local partner, or a financial services company may be able to provide financial advice across the border to consumers in another country.
An FTA partner may also make a commitment to guarantee existing services access in some areas or agree to treat foreign service suppliers the same as domestic suppliers.
This reduces business risks and gives confidence to corporate decision makers.
Examples of the many ways of supplying services internationally
Cross-border supply: where a service is supplied from one country to another, such as, international telecommunications Consumption abroad: where consumers from one country purchase a service in another country, such as education and tourism services Commercial presence: where a company from one country establishes a subsidiary, branch or office in the other to provide, for example, legal services Presence of natural persons: where individuals travel to another country on a temporary basis to provide a service, such as a consultant undertaking an IT contract overseas.
5. Deepening engagement in global value chains
Global value chains are increasingly a feature of international trade, and FTAs help open up these opportunities through preferential tariffs and services market access.
Regional FTAs in particular may encourage production to be shared across countries, including through rules allowing the “accumulation” of origin for the purposes of meeting the FTA’s rules of origin.
So the positive incentive created under an FTA may help businesses secure contracts to supply a production input.
6. Better mobility for business travel
International businesses work best when it is easy for people to travel from one economy to another. This could be for a short-term stay to conclude a contract or a longer-term stay to work in the overseas branch of an Australian company.
FTAs may include provisions to improve business mobility. Commitments in FTAs may extend to entry and temporary stay for skilled service providers, investors and business visitors in each other’s country.
The types of visitors covered by agreements may include intra-corporate transferees, investors, contractual service suppliers and business visitors. In some cases the visa commitments may be extended to include a businessperson’s spouse and dependents.
Businesses use these benefits when they apply for visas or conduct human resource planning.
7. Investing with enhanced protections and certainty
Australia’s FTAs provide enhanced protections and certainty for Australian investors in partner economies. This applies equally for investors from FTA partner economies in Australia. FTAs include provisions to improve market access, ensure non-discrimination, and guarantee protection and security for investments. For example, investments are protected for expropriation in the absence of prompt, adequate and effective compensation. All forms of investments are protected, including enterprises, shares and stocks, debt instruments, property rights and intellectual property.
These provisions provide certainty to boards and management when making decisions about investing overseas. For businesses seeking investment from overseas partners, FTAs also help make Australia a more attractive destination for foreign investment.
8. Accessing government procurement markets
Governments at all levels are big buyers of goods and services. These purchases represent huge opportunities for international trade. Some governments have preferential government procurement policies that limit opportunities for foreign businesses to access particular government procurement markets.
FTAs may guarantee or improve Australian goods and services suppliers’ access to specified government procurement markets. They may include specific rules, procedures and transparency standards to be applied in the conduct of government procurement, consistent with non-discrimination and with Australia’s existing procurement practices. These may include requirements to ensure suppliers have sufficient time to respond to tender requests, and commitments to ensure the protection of intellectual property and confidential information supplied in tender processes.
Commitments on government procurements generally cover, at a minimum, central government entities, but in some FTAs they also list some provincial or state government entities and government business enterprises. Sometimes even local government is covered.
9. Addressing ‘behind the border’ barriers to trade
A range of ‘behind the border’ issues can make international trade more complicated and less competitive. FTAs seek to address these issues as well.
For example, FTAs ensure Australian innovators and creative industries enjoy high levels of intellectual property protections in partner economies.
They address competition policy to ensure the trade and investment liberalisation achieved in FTAs is not undermined by anti-competitive practices.
And they look at new technologies – for example, supporting businesses in harnessing the efficiencies of electronic commerce, while ensuring the protection of online consumers.
Depending on whether a business is involved in high-technology or innovative industries, or concerned about anti-competitive domestic markets, an FTA can be an important factor in business decision making.
10. Contributing to trade negotiation business consultations
Business consultations are fundamental to trade negotiations, as the Australian Government negotiates FTAs to achieve high quality, comprehensive and commercially meaningful outcomes.
The Department of Foreign Affairs and Trade consults widely and regularly before and during negotiations, and when there are reviews.
Businesses which make timely submissions on their priority trade and investment issues in FTA negotiations stand the best chance to have an issue addressed in the outcome. This could be through written submissions, participation in public consultations or working through a peak body.
Once an FTA enters into force, business consultation often remains an ongoing feature of the agreement, with regular meetings and reviews often taking place under the ‘in-built’ agenda set out in an agreement. Such consultations allow business to inform Government of any problems that may arise with the implementation of the FTA and provides an opportunity for Government to give updates on the progress of any in-built agenda.
Trans-Pacific Partnership Ministerial Meeting in Sydney, 25 October.
Last Updated: 13 April 2015
Free Trade Agreement Dashboard Project
Following the conclusion of free trade agreements (FTAs) with China, Japan and South Korea, the Department of Foreign Affairs and Trade (DFAT) is developing an online FTA dashboard, including a comprehensive tariff finder and rules of origin guide, which will be a fast and efficient tool for businesses to use in order to make decisions about trading internationally.
The project is currently in a design and scoping phase. A range of focus group workshops were held with targeted peak body and business organisations in March 2015 to inform the project design. The first phase of the project is expected to be available in the second half of 2015.
For further information on the project, please contact FTAassistantproject@dfat.gov.au.
Detailed information on Australia’s free trade agreements, including fact sheets and guides, is contained at dfat.gov.au/fta.
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