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2016-01-15 00:00:00Small Business FinanceEnglishThe China-Australia Free Trade Agreement (ChAFTA) is set to propel trade even further. ChAFTA will impact companies of all sizes, including...https://quickbooks.intuit.com/au/resources/au_qrc/uploads/2017/01/Export-Market-Development-Grants.jpghttps://quickbooks.intuit.com/au/resources/small-business-finance/chafta-what-the-free-trade-agreement-means-for-businesses/Does the China-Australia Free Trade Agreement affect you?

Does the China-Australia Free Trade Agreement affect you?

6 min read

China is a vital market for businesses and consumers across Australia. It became our largest trading partner in 2009 with two-way trade valued at over $150 billion in 2015 — nearly a quarter of Australia’s total global trade. Over 10,000 Australian small and medium-sized businesses (SMBs) already do business directly with China or trade with China through Hong Kong.

The China-Australia Free Trade Agreement (ChAFTA), which came into force in December 2015, drastically changed the world of trade. ChAFTA impacted companies of all sizes, including SMBs. To get a better idea of how ChAFTA affected the business world, let’s look at what the agreement is, why it was necessary, and what it means for businesses.

What is the China-Australia Free Trade Agreement?

According to the Australian government, China is the biggest export market for Australia when it comes to the goods and services industries. In fact, the Department of Foreign Affairs and Trade has China at number one for Australia’s exports by roughly 15%. This is such a sizeable amount, that Australia’s minister for trade, Andrew Robb, worked with Gao Hucheng, the Commerce Minister of the Chinese government, toward an economic future that was profitable for both Australia and China.

The end result was the China-Australia Free Trade Agreement, also known as ChAFTA and the China-Australia FTA. This agreement is essentially a foreign investment for both parties, with tariffs being removed on nearly 95% of all main exports from Australia into China. Further benefiting the export market in Australia, most products going to China are also considered duty-free, meaning they don’t face any kind of customs or excise tax.

Why was ChAFTA necessary?

Australian trade is a booming market, with many countries playing a vital role in Australia’s economy. But, Australia’s trade, like any country’s trade, is stuck in competition with other countries.

The tariff reduction brought forth by ChAFTA allows Australia to be competitive with other countries exporting to China, such as the United States or New Zealand. By lowering or removing tariffs entirely, Australia can offer more competitive pricing in China, which is good for both countries involved.

As Australia’s largest trading partner, China is vital to Australia’s economy. The Australia-China FTA allows both countries to maintain a profitable and mutually beneficial relationship when it comes to their international trade.

Key changes from ChAFTA

Full implementation of ChAFTA has brought many changes to Australia’s trade, especially in goods and services exports.

Tariff-free exports

95% of Australian exports to China have either no or greatly reduced tariffs as a result of ChAFTA. This makes Australian goods more competitive in the Chinese market. Many Australian exporters have struggled against global rivals who already had FTAs with China — now they enjoy a more equal playing field.

Many agricultural products, pharmaceutical and health products, gemstones, and certain manufactured goods now enjoy tariff-free access as well. For a closer look at the tariff reductions, these are what some of the tariffs were before being eliminated by ChAFTA.

  • Australian wine: 14-20%
  • Beef: 12-25%
  • Dairy: 20%

To see the complete tariff reduction list, be sure to read the full ChAFTA document, available on the Australian Department of Foreign Affairs and Trade site.

Service sector liberalisation

Australia’s service sector enjoys easier access to the Chinese market because of ChAFTA. China is already Australia’s largest export market for services, worth $8.2 billion in 2014. Now, businesses are able to operate and expand in the growing Chinese market much more easily.

This includes making it easier for Australian banks, insurers, investment companies, and law firms to set up in China, further assisting Australian businesses operating there. For example, after ChAFTA was drafted up and agreed upon, National Australia Bank (NAB) announced it would open more branches.

Healthcare and aged care are other big winners, with Australian firms allowed to establish profit-making aged care institutions throughout China. China’s over-60 population already exceeds 200 million and is set to rise to 440 million by 2050. That’s 30% of China’s population.

Private investment

It’s become easier for Chinese companies to invest in Australia. Chinese investment in Australia has grown strongly in recent years from $2 billion a decade ago to around $65 billion in 2014. Now, the screening threshold for private investors in ‘non-sensitive’ industries will be raised from $252 million to $1.094 billion.

Australian businesses will also find it easier to find financial services and invest in China, with ChAFTA allowing up to 49% Australian ownership in joint ventures. They’ll even be allowed to take a majority stake in joint ventures that provide services in agriculture, forestry, hunting, and fishing in China.

ChAFTA should continue to drive investors in Australia, which makes understanding how to choose an investor even more important. Whether your business is new or established, always be on the lookout for new opportunities, as investors from China will continue to grow.

Chinese work visas

Investment facilitation arrangements (IFAs) make it easier for Australian companies to respond to economic and labour market challenges by hiring skilled Chinese workers. Movement of natural persons’ has removed the labour market testing requirement for certain categories of Chinese workers, as well.

Under the work and holiday arrangement, up to 5,000 visas are also granted annually to Chinese nationals for work and holidaymakers. This makes it easier for Australian companies to hire Chinese staff and supports the development of Australia’s tourism sector.

What does this mean for you?

You might be wondering what any of this means for your business, especially if you’re not involved in any kind of exporting at the moment. While those not involved in exports won’t be impacted as much, ChAFTA does still have potential implications for smaller businesses dealing locally in Australia.

  1. The door to trade is more open than ever. If you’re still new or simply not involved in exporting, the opportunity to export your goods to China has never been better. If you have a digital business, you can especially take advantage of this agreement, as China has a large online shopping audience.
  2. There’s opportunity to create strategic partnerships with Australian businesses involved in exporting. Even if you’re not interested in personally handling exports, the barrier of entry is lower and businesses will find it easier to stay profitable while exporting. This presents the opportunity to partner with Australian businesses currently exporting goods that may be interested in selling your products.
  3. There’s more potential to travel to China. ChAFTA makes it possible for Australian-owned hotels to operate in China and makes China even more accessible for tourists visiting from Australia. This gives Australian-owned hotels the chance to operate in China. It could also be a powerful networking opportunity, and a fun vacation to boot.

As is the case with many trade agreements, it’s hard to say with utmost certainty how the agreement will affect various industries. The above are a small sampling of the potential perks that ChAFTA brings. No matter what, it’s a good idea to be sure your business has a healthy cash flow to survive any kind of market shifts and raise capital by attracting potential angel investors.

An agreeable agreement

The previously mentioned changes from this agreement are only the beginning. ChAFTA has a built-in mechanism to allow for further liberalisation and the expansion of market access over time. Australian SMBs benefiting from the changes could enjoy further advantages both now and in the years to come.

Like all trade deals, there will be detractors who criticise the deal. Regardless, this deal has helped Australia’s economy and can help even the smallest of businesses interested in exporting products or securing investors. Be sure your business is in tip-top shape, don’t ever rule out exporting your goods, and make this agreement as agreeable to your business as possible.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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