House of Representatives

Explanatory Memorandum

Circulated By Authority of the Minister for Home Affairs, the Honourable Bob Debus Mp

OUTLINE

The purpose of this Bill is to amend the Customs Act 1901 (the Customs Act) to introduce new rules of origin for goods that are imported into Australia from Chile to give effect to the Australia-Chile Free Trade Agreement (the Agreement). The Customs Act amendments will enable goods that satisfy the rules of origin to enter Australia at preferential rates of customs duty.

Complementary amendments will also be made to the Customs Tariff Act 1995 (the Customs Tariff Act) by the Customs Tariff Amendment (Australia-Chile Free Trade Agreement Implementation) Bill 2008 to give effect to the Agreement.

The Agreement is a comprehensive and wide-ranging agreement that provides Chile and Australia with more liberal access to each other's goods, services and investments markets.

Formal talks between the Governments of Australia and Chile to establish a Free Trade Agreement between the two countries began in February 2007. These negotiations concluded in May 2008.

Following finalisation of the text, the Agreement was signed on 30 July 2008. The Agreement was tabled in Parliament on 17 June 2008. The amendments to the Agreement are expected to come into force on 1 January 2009, subject to Australia's treaty process and the exchange of diplomatic letters.

To give effect to the preferential entry of goods under the Agreement, the amendments contained in this Bill provide rules for determining whether goods are Chilean originating goods. The amendments to the Customs Tariff Act will provide for the preferential entry of goods that meet those rules.

The amendments contained in this Bill also impose obligations on exporters of Australian goods to Chile and for which a preferential rate of duty will be claimed, and on people who produce such goods.

The amendments contained in this Bill will be operative from the latter of 1 January 2009 or the day on which the Agreement comes into force for Australia.

FINANCIAL IMPACT STATEMENT

It is estimated that the customs duty forgone as a result of the implementation of the Agreement will be approximately $1.9 million in 2008-09 and between $4 million to $4.5 million per year between 2009 to 2012.

REGULATION IMPACT STATEMENT

The following regulation impact statement was tabled in the Joint Standing Committee on Treaties on 17 June 2008:

REGULATION IMPACT STATEMENT

PROBLEM/ISSUE IDENTIFICATION

1. Despite the considerable market access improvements achieved by the World Trade Organization (WTO) and tariff reductions implemented voluntarily within Asia Pacific Economic Cooperation (APEC), Australia's goods and services still face substantial barriers to trade globally.

2. Achieving a timely and successful outcome from the WTO Doha Round remains the highest priority of Australia's trade policy. In this environment, in order to advance their export interests, free trade agreements (FTAs) are being pursued by most countries. Chile has an ambitious FTA strategy, having preferential trade arrangements with 54 other countries, including benchmarks for the negotiation of any future agreements.

3. Australia has negotiated FTAs with Singapore, Thailand and the United States of America (US), and has a long-standing Closer Economic Relations agreement (CER) with New Zealand. Australia is also negotiating FTAs with Japan, China, Malaysia, Association of South East Asian Nations (ASEAN) with New Zealand, and the Gulf Cooperation Council. A joint non-government feasibility study with the Republic of Korea commenced in April 2007 and Australia announced joint FTA feasibility studies with Indonesia and India to commence in 2008.

4. In February 2008, in parallel with a review of Australia's export policies and programs, the Government commissioned an analysis of Australia's recent FTAs to assess their net benefits and to develop new benchmarks for Australia's future bilateral and regional trade agreements. The analysis is likely to be completed by 31 August 2008.

5. Although Australia's trading relationship with Chile is modest at AU$856 million (ranked as Australia's 41st largest merchandise trading partner and 28th largest services trading partner in 2007), it is underpinned by a solid investment relationship. Australian companies have significant investments in Chile, estimated at about $US3 billion in 2007 , with a major presence in the mining sector. Australia's top goods exports to Chile in 2007 were coal, civil engineering equipment, specialised machinery and transport vehicles. Australia's main imports from Chile were copper, pulp and waste paper, non-ferrous base metal waste and pig iron.

6. Australian business sees significant potential in the Latin American market and considers Chile - with its relatively stable and transparent commercial environment - to be the practical stepping stone into other markets in Latin America. In addition to Australia's exporters of coal and, possibly, LNG in the future, Australia's mining services companies see increasing opportunities in Chile's buoyant mining industry, and there is also increasing interest in Chile's agriculture, entertainment and education sectors as well as in professional services (particularly engineering).

7. Australian business is currently disadvantaged by Chile's flat six per cent tariff on all products (particularly on coal, LNG and mining equipment); substantially higher tariffs on sugar, wheat and wheat flour; and the absence of tariff parity on a range of major products (including meat, dairy and some industrials) compared with countries like the US and New Zealand which have already negotiated preferential access to the Chilean market. The US-Chile FTA entered into force in 2004 and the Trans-Pacific Strategic Economic Partnership (P4) Agreement (New Zealand, Singapore, Brunei Darussalam and Chile) entered into force in 2006. Although Chile has reasonably open and transparent services, investment and intellectual property regimes, it has made limited commitments in the WTO. Australian businesses are constrained by this regulatory uncertainty, particularly when making new investment decisions.

OBJECTIVES

8. Objectives for the Australia-Chile FTA (ACl-FTA) should align closely with the objectives identified for our concluded and current FTAs, as well as taking into account specific regional Australian interests, namely:

Goods

-

Eliminate Chile's flat six per cent tariff and some higher tariffs on sensitive items (wheat, wheat flour, and sugar) over the shortest possible time frame to ensure that Australia's specific interests are addressed;

-

Address non-tariff measures and business practices across-the-board that restrict Australian exports to Chile;

-

Agree on a set of rules of origin that avoid unnecessary obstacles to trade and reflect the principle of substantial transformation;

-

Reinforce mutual commitment to the development and application of science-based quarantine measures, consistent with the WTO Agreement on Sanitary and Phytosanitary Measures;

Services

-

Remove discriminatory treatment (to the extent feasible) and bind Chile's services regime to guarantee access for Australian service suppliers in the Chilean market, including by addressing restrictions on commercial presence and licensing requirements;

Investment

-

Lock in the regulatory disciplines on Chile's foreign investment regime and, to the extent possible, increase transparency and reduce the regulatory burden on Australian investors associated with foreign investment;

Other objectives

-

Improve transparency, to the extent feasible, expand access to the Chilean government procurement market, and agree rules that are transparent, flexible and fair;

-

Ensure the rights of Australian holders of intellectual property are protected effectively and enforced by binding Chile's intellectual property regime;

-

Enhance use of electronic commerce in goods and services trading, including by ensuring that customs duties will not be introduced on electronic transactions; and

-

Provide a framework for settling disputes arising under the ACl-FTA.

OPTIONS

9. Australia can address the market access problems identified above through multilateral, regional and bilateral trade negotiations.

Multilateral

10. At the multilateral level, as noted above, the successful and early conclusion of the Doha Round of negotiations in the WTO is the Australian Government's key trade policy priority. Australia is seeking improved market access across agriculture, industrial products and services. The Doha Round has made important progress since it was launched in 2001, but a number of significant differences remain between key WTO Members. Conclusion of the Doha Round this year is possible but not assured.

Regional

11. At the regional level, the Australian Government remains committed to the achievement of voluntary trade liberalisation and the APEC Bogor Goals by 2020. APEC's future work on regional economic integration are guided by actions and recommendations endorsed by Leaders during Australia's hosting of APEC in 2007. Key agreed actions include continuing support for the multilateral trading system; examination of the options and prospects for a Free Trade Area of the Asia-Pacific (FTAAP); and strengthening APEC's work to promote high-quality free trade areas. Australia will take an active role in examination of the prospects for an FTAAP, including examination of the feasibility of streamlining existing FTA/RTA agreements within APEC into an FTAAP. The process has not begun, but it is expected to be a longer-term project.

Bilateral

12. At the bilateral level, a comprehensive, WTO-consistent bilateral FTA with Chile would build on those multilateral and regional objectives. To help boost the pace of trade liberalisation and encourage the successful conclusion of the Doha Round, most countries are entering into bilateral trade agreements. Chile is no exception and, as noted above, has an expansive FTA agenda having concluded preferential trade arrangements with 54 countries.

13. In December 2006, the Government agreed to commence a bilateral negotiation process with Chile with a view to obtaining a comprehensive and ambitious FTA. In parallel, public submissions were sought for and consultations undertaken with stakeholders, including other federal government agencies, State and Territory governments, industry groups and business. Preparatory meetings were held in Chile in February and April 2007 to discuss the scope of the ACl-FTA and to compare in detail our respective FTAs with the US. Following this preliminary phase, in July 2007 the Government agreed to enter into FTA negotiations with Chile. Negotiating rounds were held in August and October 2007. A split round was held in December (goods/related issues) and January 2008 (services/investment/IP). In March 2008, inter-sessional meetings were held in Canberra and in Santiago. These meetings were followed by a full round in Santiago in early April 2008. Chapter headings in the FTA give an indication of the issues that were the focus of the negotiations:

-

Trade in Goods: tariffs will be eliminated on lines covering 97 per cent of trade with tariffs on the remaining lines eliminated by year six of the ACl-FTA;

-

Rules of Origin: product specific rules based on the change in tariff classification system have been agreed; exporters will be able to issue certificates of origin directly;

-

Customs Procedures: the FTA enshrines a modern, harmonised and simplified system of customs procedures that is consistent with Australian practice;

-

Trade in Services and Investment: the services and investment package locks in Chile's current liberal services and investment regime and is therefore significantly GATS-plus;

-

Government Procurement: the ACl-FTA will provide Australian exporters with a level of access equal to competitors from other countries which have an FTA with Chile;

-

Intellectual Property: the ACl-FTA makes commitments on intellectual property protection for patents, trademarks and copyright, including the appropriate enforcement mechanisms; and

-

Cooperation: the ACl-FTA includes provisions on Cooperation, to which Chile attaches considerable significance and which have been a feature of its recent FTAs.

IMPACT ANALYSIS (incorporating Trade Impact Analysis)

14. Concluding a high quality, comprehensive liberalising agreement with Chile would be expected to:

-

boost Australia's merchandise exports to Chile, by increasing Australia's competitiveness via the elimination of the flat six per cent tariff and reducing some higher tariffs on sensitive sectors (wheat, wheat flour, sugar);

-

boost Australian investor confidence in Chile by locking in the regulatory disciplines surrounding Chile's foreign investment regime;

-

increase the opportunities for trade with Chile for small to medium sized enterprises by providing them with greater certainty regarding Chile's trade and investment regulation;

-

increase trade opportunities for Australian business in other Latin American markets - Australian industry sees Chile as a practical stepping stone into the wider region;

-

demonstrate Australia's commitment to Chile, Latin America and APEC; and

-

reinforce both domestically and internationally Australia's commitment to concluding high quality, WTO-plus, comprehensive and liberalising trade agreements and be a positive demonstration to our other FTA partners.

15. The implications of an FTA with Chile on domestic production would be limited, given Australia's already open and liberal trading regime and the low level of bilateral trade. Although the horticulture and salmon industries have expressed concerns regarding Chilean exports threatening domestic supply - based on the possibility of an accelerated Import Risk Assessment process for Chile - Australia's FTAs do not provide for such an acceleration mechanism and do not compromise Australia's science based quarantine approach.

16. Continuing to pursue trade gains only via the multilateral trading system at the expense of FTA negotiations could lock Australia out of any near-term improved market access gains, particularly in coal and LNG. Members have not set a date for conclusion of the Doha Round of negotiations and Chile's ambitious FTA agenda is progressively reducing the competitiveness of Australia's goods exports. In services, Chile's WTO commitments and current GATS revised offer are very limited in their application. Pursuing trade gains via the multilateral trading system is unlikely to provide for the same level of services liberalisation and would not provide for additional commitments in investment that are outside the current scope of the WTO but can be covered by FTAs.

Compliance costs

17. With respect to trade in goods, rules of origin (ROO), which determine whether or not a good qualifies for preferential tariff treatment, are one of the main areas of an FTA that can impose compliance costs on business, for example by requiring additional paperwork. The product specific ROO and the certification system used in the FTA with Chile have been designed to minimise these costs.

18. The product specific rules (PSRs) are based primarily on change in tariff classification (CTC), a simple means of judging whether goods have undergone substantial transformation in the production process and therefore qualify for preferential tariff treatment. CTC rules are supported by industry as they do not require burdensome cost calculations or extensive records. CTC rules are already used in Australia's FTAs with the United States and Thailand and, more recently, with New Zealand in the Closer Economic Relations trade agreement. CTC is also the main methodology under consideration in Australia's current FTA negotiations. The CTC rules in the FTA with Chile are supplemented for certain items by regional value content rules (which require a certain percentage of production to be undertaken in the territory of an FTA Party). Although these require additional records and calculations, they are necessary in order to take into account instances where a CTC would not reflect substantial transformation.

19. Australian exporters will be able to directly issue certificates of origin (which specify that their goods meet the relevant PSR). This will be of particular benefit to those companies that have the capacity to easily self-assess their production processes with respect to ROO, such as many manufacturers and agricultural producers, who will not have to engage a third party to issue certificates - saving money and time. Exporters will also have the option to ask representatives to issue certificates of origin on their behalf. This will allow exporters to seek guidance as necessary from bodies such as the Australian Chamber of Commerce and Industry, the Australian Industry Group and others who have experience in issuing certificates.

20. The FTA will not impose any new costs on exporters or importers as far as customs clearance is concerned as the rules in the FTA chapter on customs procedures are consistent with current domestic regulations. Australian exporters will benefit from 'advance rulings' that will enable them to ascertain whether their exports will qualify for preferential tariff treatment before they ship their goods.

21. The ACl-FTA secures non-discriminatory access to the Chilean government procurement market for Australian suppliers, creating export opportunities for Australian business. The ACl-FTA covers procurement by Chile's central and sub-central (municipal) government entities and effectively provides Australian exporters with a level of access equal to competitors from other countries which have an FTA with Chile.

22. The provisions which have been agreed in the Government Procurement chapter are broadly consistent with those contained in the equivalent chapter of the AUSFTA and will not require any changes to the established government procurement policy and procedures of either the Commonwealth, or State/Territory Governments.

23. Australian industry's access to trade remedies would not be affected by the ACl-FTA, which seeks to maintain the integrity of our system and is consistent with our WTO rights and obligations.

24. The chapters on Sanitary and Phytosanitary Measures (SPS) and Technical Barriers to Trade (TBT) reaffirm the commitment of each party to the relevant WTO Agreements and enhance consultative arrangements to facilitate a closer trading relationship. They do not propose any modifications to Australia's system.

25. Chile's commitments on services and investment lock in its current open domestic regulatory regime, but go substantially beyond its existing WTO commitments and generally match the commitments made in Chile's most liberalising FTA to date - that with the US. Overall, the services outcome provides significant improvements for Australian service providers compared with Chile's WTO commitments.

26. The Cross-Border Trade in Services chapter includes obligations on national treatment, market access, most-favoured nation treatment and local presence. The chapter, like the GATS, respects the right of governments to adopt domestic regulation affecting trade in services, but requires these to be administered in a reasonable, objective and impartial manner. The Investment chapter covers both the pre-establishment and post-establishment stages of investment. The key obligations of the chapter are national treatment, most-favoured nation, performance requirements and on senior management and boards of directors. The Financial Services chapter contains similar obligations, with additional provisions that reflect the importance of regulation of this sector to ensure the integrity and stability of the financial system. These provisions draw on specific WTO provisions relating to financial services and recognise the right of the Parties to take measures necessary for prudential reasons while seeking to ensure that these and other regulatory actions do not become unnecessary or discriminatory barriers to trade.

27. Australia's States and Territories are fully covered by the provisions of the services and investment chapters. States and Territories have agreed to list individually all of their existing non-conforming measures against the obligations in these chapters. The Department of Foreign Affairs and Trade is currently working with the States and Territories to compile this list, to be inserted into the FTA prior to signature.

28. Chile was initially reluctant to negotiate chapters on Financial Services, Telecommunications and Electronic Commerce but agreed at our insistence that the FTA be truly comprehensive and WTO-plus. The chapters on these issues, as well as the one on movement of natural persons, extend existing WTO rules in a manner that protects Australia's commercial interests and reinforces our negotiating positions on these issues in the WTO.

29. Key provisions of the Electronic Commerce chapter include commitments to maintain domestic legal frameworks governing electronic commerce that minimise the regulatory burden; support industry-led development of electronic commerce; and provide protection for consumers using electronic commerce that is at least equivalent to that provided for consumers of other forms of commerce.

30. The Intellectual Property chapter locks in Australia and Chile's current standards of intellectual property protection for patents, trademarks, geographical indications and copyright, including through appropriate enforcement mechanisms.

31. The impact of an Australia-Chile FTA on Australian consumers is likely to be wholly positive, providing a greater availability of Chilean products (albeit limited at present) in the Australian marketplace and at more competitive prices in those cases where the consumer good is currently subject to duty (eg wine).

CONSULTATION

32. DFAT negotiators consulted with relevant Commonwealth agencies, State and Territory Governments, peak industry groups (eg Horticulture Australia, Australian Vice Chancellors Committee, Australian Institute of Consulting Engineers, Australian Industry Group), Australian companies (including those based in Chile) and education institutions in five state capital cities (teleconferences for Hobart) and Santiago between February and May 2007. State and Territory Governments and Ministers were also consulted via correspondence, Officials' Groups meetings and teleconferences. Federal Government agencies and Ministers have been consulted via bilateral meetings, correspondence and inter-departmental committee meetings. Public submissions were invited via nation-wide press advertisements, the DFAT website and industry association networks. Consultations sought information on trade relations with Chile, including information on market access, issues that industry would like to see addressed in an FTA, and views on the impact of an FTA on Australia's exports to Chile. Stakeholders were updated via bulletins following each round of negotiations.

33. A diverse range of sectors participated in the consultations, including agriculture, education, manufacturing, telecommunications, mining/energy, and financial institutions. Domestic consultations showed that there is considerable support from Australian business for an FTA with Chile, particularly Australian exporters and investors in sectors such as mining/energy; education and engineering services; and the meat and dairy industries. Business identified that the elimination of the flat six per cent tariff would increase their competitiveness, particularly in coal and potentially in LNG.

34. The horticulture (mainly fruit) and salmon industries have expressed on-going concerns about the FTA, largely on grounds of increased competition in the domestic market, limited export opportunities and fear of accelerated Import Risk Assessment processes. This opposition needs to be considered against the fact that Australia's tariffs are already very low on these products (zero in many cases) and the FTA will not affect Australia's strict quarantine regime or systems for assessing food safety risks (all of which would apply to possible future imports of Chilean horticulture and salmon).

CONCLUSION

35. An ACl-FTA that is WTO-consistent and implemented promptly should deliver moderate benefits for Australia by boosting market access, increase the medium term competitiveness of Australian coal and, potentially, LNG and provide a more secure and transparent processes for Australian investors.

36. The adjustment costs to Australia of an FTA with Chile would be small and outweighed by the commercial and strategic regional, economic and foreign policy gains.

IMPLEMENTATION AND REVIEW

37. The FTA negotiation process was carried out over the period February 2007 to May 2008. The text will require translation into Spanish (the first FTA Australia has negotiated which will be official in a language other than English). Once the finalised the ACl-FTA text is approved for signature by the Executive Council, the agreement can be signed by representatives of the Australian and Chilean Governments - potentially in July or soon thereafter. The text will be tabled in Parliament and examined by the Joint Standing Committee on Treaties.

Once domestic processes are completed, Australia and Chile will exchange diplomatic notes advising that the ratification process has been completed by both Parties - possibly at the APEC Economic Leaders meeting scheduled for late November 2008. Both Parties are aiming for entry into force on 1 January 2009.

NOTES ON CLAUSES

Clause 1 - Short title

1. This clause provides for the Bill, when enacted, to be cited as the Customs Amendment (Australia-Chile Free Trade Agreement Implementation) Act 2008.

Clause 2 - Commencement

2. Subclause (1) provides that each provision of this Act specified in column 1 of the table in that subclause commences, or is taken to have commenced, on the day or at the time specified in column 2 of the table. This subclause also provides that any other statement in column 2 of the table has effect according to its terms.

3. Item 1 of the table provides that sections 1 to 3 and anything in this Act not elsewhere covered by the table will commence on the day on which the Act receives the Royal Assent.

4. Item 2 of the table provides that Schedule 1 either commences on 1 January 2009 or on the day on which the Australia-Chile Free Trade Agreement (the Agreement) done at Canberra on 30 July 2008 comes into force for Australia, whichever is later. However, Parts 1 and 2 do not commence at all if the event mentioned in paragraph (b) does not occur.

5. This item also provides that the Minister for Home Affairs must announce by notice in the Gazette the day on which the Agreement comes into force for Australia.

6. Subclause (2) provides that column 3 of the table contains additional information that is not part of the Act.

Clause 3 - Schedule(s)

7. This clause is the formal enabling provision for the Schedule to the Bill, providing that each Act specified in a Schedule is amended in accordance with the applicable items of the Schedule. In this Bill, the Customs Act is being amended.

8. The clause also provides that the other items of the Schedules have effect according to their terms. This is a standard enabling clause for transitional, savings and application items in amending legislation.

SCHEDULE 1 - AMENDMENTS

Part 1 - Chilean originating goods

Customs Act 1901

Item 1 After Division 1E of Part VIII

9. This item amends the Customs Act 1901 (the Customs Act) by inserting new Division 1F into Part VIII. New Division 1F is headed Chilean originating goods and sets out the rules for determining whether goods are Chilean originating goods and therefore eligible for a preferential rate of customs duty under the Customs Tariff Act 1995 (the Customs Tariff Act). These rules are being inserted to give effect to the Australia-Chile Free Trade Agreement (the Agreement), in particular Chapter 4 of the Agreement.

10. New Division 1F contains six subdivisions which are set out below.

Subdivision A - Preliminary

11. Subdivision A contains a simplified outline of Division 1F and contains the interpretation provision for Division 1F.

Section 153ZJA Simplified outline

12. New section 153ZJA sets out a simplified outline of each of the subdivisions B to G of new Division 1F.

New section 153ZJB Interpretation

13. New subsection 153ZJB(1) sets out several new definitions for the purposes of Division 1F. These definitions are:

Agreement which means the Australia-Chile Free Trade Agreement done at Canberra on 30 July 2008, as amended from time to time. The Note to this definition indicates that in 2008, the text of the Agreement was accessible through the Australian Treaties Library on the AustLII Internet site;

Australian originating goods which means goods that are Australian originating goods under a law of Chile that implements the Agreement;

Certificate of Origin which means a certificate that is in force and that complies with the requirements of paragraph 2 of Article 4.16 of the Agreement. Article 4.16 sets out the matters that are to be included in a Certificate of Origin;

Chilean originating goods which means goods that, under this Division, are Chilean originating goods;

composite goods which has the same meaning as it has in the Agreement. Composite goods are goods that can be made up of two or more different components to form a whole. This term is relevant for the purposes of new subsection 153ZJE(10) of the Customs Act which sets out the rule for determining when composite goods are Chilean originating goods;

Convention which means the International Convention on the Harmonized Commodity Description and Coding System done at Brussels on 14 June 1983, as in force from time to time. The Note to this definition indicates that in 2008, the text of the Agreement was accessible through the Australian Treaties Library on the AustLII Internet site;

customs value, of goods, which has the meaning given by section 159. In most cases it will be the transaction value but there are other methods if this value cannot be ascertained;

Harmonized System which means the Harmonized Commodity Description and Coding System (as in force from time to time) that is established by or under the Convention.

The Harmonized System (HS) is the worldwide classification system that has been adopted by all countries that are members of the World Customs Organization. In Australia, the HS has been adopted in the Customs Tariff Act. The HS organises goods according to the degree of manufacture, and assigns classification numbers to all goods. It is arranged into 96 chapters covering all goods, and each chapter is divided into headings, subheadings, and tariff classifications. Under the HS, the chapter, heading, and subheading numbers (6 digits) for any good are adopted in any country using the HS. The Australian Customs Tariff is an 8 digit classification, with the 4 and 6 digit international classification supplemented for the domestic imposition of Customs duties.

indirect materials which means;

a.

goods or energy used in the production, testing or inspection of goods, but not physically incorporated in the goods; or

b.

goods or energy used in the maintenance of buildings or the operation of equipment associated with the production of goods;

including:

c.

fuel (within its ordinary meaning); and

d.

tools, dies and moulds; and

e.

spare parts; and

f.

lubricants, greases, compounding materials and other similar goods; and

g.

gloves, glasses, footwear, clothing, safety equipment and supplies; and

h.

catalysts and solvents;

Interpretation Rules which means the General Rules for the Interpretation of the Harmonized System provided for by the Convention;

non-originating materials which means goods that are not originating materials;

originating materials which means;

a.

Chilean originating goods that are used in the production of other goods;

In some circumstances, in order to determine whether goods that are imported into Australia are Chilean originating goods, and therefore eligible for a preferential rate of customs duty, it may be necessary to have regard to the goods from which the final goods are produced (see Subdivisions C and D). These goods which are used to produce other goods can be originating or non-originating.

Originating materials are those goods that are used to produce other goods and that are also Chilean originating goods, which means that in their own right, they satisfy the requirements of new Division 1F. Non-originating materials are goods that are not originating materials because they do not satisfy the requirements of Division 1F in their own right. For example, where frozen crumbed fish fillets are made in Chile from fish caught in Chile, coated with herbs and spices imported from Thailand, the fish would be originating materials and the herbs and spices would be non-originating materials; or

b.

Australian originating goods that are used in the production of other goods

If goods used in the production of other goods are Australian originating goods under a law of Chile that implements the Agreement, they are also originating materials for the purposes of new Division 1F; or

c.

indirect materials.

person of Chile which means person of a Party within the meaning insofar as it relates to Chile, of Article 2.1 of the Agreement. In Article, 2.1, person not only includes natural persons but also bodies corporate and other types of associations;

produce which means grow, farm, raise, breed, mine, harvest, fish, trap, hunt, capture, gather, collect, extract, manufacture, process or assemble;

territorial sea which has the same meaning as in the Seas and Submerged Lands Act 1973. This definition is taken from Articles 3 and 4 of UNCLOS which provides as follows:

Every State has the right to establish the breadth of its territorial sea up to a limit not exceeding 12 nautical miles, measured from baselines determined in accordance with this Convention.

The outer limit of the territorial sea is the line every point of which is at a distance from the nearest point of the baseline equal to the breadth of the territorial sea.

territory of Australia which means territory within the meaning, insofar as it relates to Australia, of Article 2.1 of the Agreement. In Article 2.1, territory in relation to Australia includes Australia's territorial sea, contiguous zone and the exclusive economic zone and the continental shelf but does include Australia's external territories except Norfolk Island, Christmas Island, Cocos (Keeling) Islands, Ashmore and Cartier Islands, Heard Island and McDonald Island and the Coral Sea Islands.

territory of Chile which means territory within the meaning, insofar as it relates to Chile, of Article 2.1 of the Agreement. In Article 2.1, territory in relation to Chile includes the land, maritime and air space under Chile's sovereignty and the exclusive economic zone and the continental shelf within which Chile exercises sovereign rights in accordance with international law and its domestic law.

14. New subsection 153ZJB(2) provides that the regional value content of goods for the purposes of Division 1F is to be worked out in accordance with the regulations. The regulations may prescribe different regional value content rules for different kinds of goods.

15. New subsection 153ZJB(3) provides that the value of goods for the purposes of Division 1F is to be worked out in accordance with the regulations and that the regulations may prescribe different valuation rules for different kinds of goods. The value of goods is relevant, for example, in determining whether goods satisfy the de minimis requirement in s.153ZJE(4). The value of goods is to be distinguished from the customs value of goods which is to be worked out under section 159 of the Customs Act.

16. New subsection 153ZJB(4) provides that in specifying tariff classifications for the purposes of Division 1F, the regulations may refer to the Harmonized System. The product specific rules in Annex 4-C of the Agreement refer to tariff classifications of the Harmonized System.

17. New subsection 153ZJB(5) provides that subsection 4(3A) of the Customs Act does not apply for the purposes of Division 1F. Subsection 4(3A) provides that reference in the Customs Act to the tariff classification of goods is a reference to Schedule 3 of the Customs Tariff Act, which is not the case in new Division 1F.

Subdivision B - Wholly obtained goods of Chile

18. Subdivision B sets out the rules in relation to goods that are wholly obtained of Chile.

19.

Section 153ZJC Goods wholly obtained in Chile

20. New subsection 153ZJC(1) provides that goods are Chilean originating goods:

a.

if they are wholly obtained in Chile; and

b.

the importer has, at the time of importation of the goods, a Certificate of Origin, or a copy of one, for the goods.

21. New subsection 153ZJC(2) provides that goods are wholly obtained in Chile if, and only if, the goods are:

a.

minerals extracted in or from the territory of Chile; or

b.

goods listed in Section II of the Harmonized System that are harvested, picked or gathered in the territory of Chile. These goods include all plants, fruit, vegetables and fungi; or

c.

live animals born and raised in the territory of Chile; or

d.

goods obtained from live animals in the territory of Chile; or

e.

goods obtained from hunting, trapping, fishing, gathering, capturing or aquaculture conducted in the territory of Chile; or

f.

fish, shellfish or other marine life taken from the high seas by ships that are registered or recorded in Chile and are flying the flag of Chile; or

g.

goods obtained or produced exclusively from goods referred to in paragraph (f) on board factory ships that are registered or recorded in Chile and are flying the flag of Chile; or

h.

goods taken from the seabed, or beneath the seabed, outside the territorial sea of Chile:

(i)

by Chile; or

(ii)

by a person of Chile;

but only if Chile has the right to exploit that part of the seabed in accordance with international law; or

i.

waste and scrap that has been derived from production operations in the territory of Chile, or from used goods collected in the territory of Chile, and that are fit only for the recovery of raw materials; or

j.

goods obtained or produced entirely in the territory of Chile exclusively from goods referred to in paragraphs (a) to (i) or from their derivatives. For example, pork sausages that are made from pigs born and raised in Chile and cereals and spices harvested in Chile will be Chilean originating goods.

Subdivision C - Goods produced in Chile from originating materials

22. Subdivision C sets out the rule in relation to goods that are produced entirely in the territory of Chile from originating materials only under section 153ZJD. Such goods are Chilean originating goods where the importer of the goods has, at the time the goods are imported, a Certificate of Origin, or a copy of one, for the goods.

Subdivision D - Goods produced in Chile, or Chile and Australia, from non-originating materials

23. Subdivision D sets out the rules for determining whether goods that are produced entirely in Chile, or entirely in Chile and Australia, from non-originating materials only, or from non-originating materials and originating materials are Chilean originating goods.

24. New subsection 153ZJE(1) provides that goods are Chilean originating goods if:

a.

they are classified to a heading or subheading of the Harmonized System specified in column 1 of the table in Schedule 1 to the Customs (Chilean Rules of Origin) Regulations 2008 (the Chilean Regulations); and

b.

they are produced entirely in the territory of Chile, or entirely in the territory of Chile and the territory of Australia, from non originating materials only or from non originating materials and originating materials; and

c.

each requirement that is specified in the regulations to apply in relation to the goods is satisfied; and

d.

the importer of the goods has, at the time the goods are imported, a Certificate of Origin, or a copy of one, for the goods.

25. The table in Schedule 1 to the Chilean Regulations will incorporate the product specific rules relating to change in tariff classification, regional value content and other rules for the purpose of determining whether goods are Chilean originating goods. Column 1 of this table will set out the tariff classifications, column 2 will set out the description of the goods and column 3 will set out the product specific rules.

26. New subsection 153ZJE(2) refers to the first of the requirements that may be specified in Schedule 1 to the Chilean Regulations. It provides that the regulations may specify that each non-originating material used or consumed in the production of the goods is required to satisfy a specified change in tariff classification.

27. New subsection 153ZJE(3) provides that the regulations may also specify set out when a non-originating material used or consumed in the production of the goods is taken to satisfy the change in tariff classification. Regulations made under these heads of power would include provisions to give effect to the cumulation provision contained in Article 4.4 of the Agreement, and would apply where the non-originating materials that are used or consumed in the production of the good do not satisfy the change in tariff classification.

28. The concept of the change in tariff classification only applies to non-originating materials. Goods that have been sourced from outside Chile or Australia and that are used in the production of other goods are non-originating materials. Goods sourced from within Chile or Australia that have not fulfilled the requirements of Division 1F and that are used in the production of other goods are also non-originating materials. All non-originating materials used to produce other goods may not have the same classification under the Harmonized System as the final good into which they are produced. This means that the goods must be classified under one tariff classification before the production process and under a different tariff classification after the production process. This approach ensures that sufficient transformation of materials has occurred within Chile, or Chile and Australia, to justify the claim that the goods originate in Chile.

29. For example, frozen fish fillets (HS 0304) are produced from fish caught in Chile and combined with herbs and spices from Thailand (HS 0907 - 0910) to make crumbed fish fillets (HS 1604). The applicable tariff change for crumbed fish is "a change to heading 1604 from any other chapter". As the herbs and spices are classified to Chapter 9, these non-originating materials meet the tariff change requirement (the fish is the produce of Chile and is therefore an originating material and is not required to change its classification).

30. In order to determine which is the applicable change in tariff classification, the tariff classification of the final goods and each of the goods that are non-originating materials used in the production of the goods needs to be known.

31. New subsection 153ZJE(4) provides that the change in tariff classification is also taken to be satisfied if the total value of all of the non-originating materials used in the production of the goods that do not satisfy the particular change in tariff classification of the goods does not exceed 10% of the customs value of the goods.

32. The provisions of subsection 153ZJE(4) incorporate the de minimis provisions that are set out in Article 4.5 of the Agreement. Therefore, even if all the non-originating materials used to produce a final good do not satisfy a particular change in tariff classification, the final goods may still be Chilean originating goods because the change in tariff classification will be taken to be satisfied.

33. The value of non-originating materials for the purposes of this section is to be worked out in accordance with the method that will be included in the Chilean Regulations.

34. New subsection 153ZJE(5) provides that the regulations may specify that the goods are required to have a regional value content of at least a specified percentage. The regional value content for Chile is 40%. The method of calculation to determine the regional value content will be included in the Chilean Regulations.

35. New subsection 153ZJE(6) provides that if:

a.

the goods are required to have a regional value content of at least a particular percentage; and

b.

the goods are imported into Australia with accessories, spare parts, tools or instructional or other information resources; and

c.

the accessories, spare parts, tools or instructional or other information resources are not invoiced separately from the goods; and

d.

the quantities and value of the accessories, spare parts or tools are customary for the goods; and

e.

the accessories, spare parts, tools or instructional or other information resources are non-originating materials;

then the regulations must require the value of the accessories, spare parts, tools or instructional or other information resources to be taken into account as non-originating materials for the purposes of working out the regional value content of the goods. Without this provision, the value of accessories, spare parts, tools or instructional or other information resources would not normally form part of the value of materials that are used in the production of the underlying goods.

36. The Note to this section indicates that the value of the accessories, spare parts, tools or instructional or other information resources is to be worked out in accordance with the regulations.

37. New subsection 153ZJE(7) provides that for the purposes of subsection 153ZJE(6), section 153ZJG is to be disregarded in working out whether the accessories, spare parts, tools or instructional or other information resources are non-originating materials.

38. New subsection 153ZJE(8) provides that subsections (2) and (5) do not limit paragraph (1)(c). It is proposed that the regulations will include other requirements in addition to change in tariff classification and regional value content requirements.

39. For example, in addition to meeting a tariff change requirement, in respect of textile articles classified in the headings of Chapter 63 of the Harmonized System where the starting material is fabric, the fabric must be raw and fully finished in Chile or in Chile and Australia.

Goods put up in a set for retail sale

40. New subsection 153ZJE(9) sets out the originating rule that applies to goods that are put up in a set for retail sale and are classified in accordance with Rule 3 of the Interpretation Rules. Such goods are Chilean originating goods only if:

a.

all of the goods in the set, considered individually, are Chilean originating goods under Division 1F; or

b.

the total value of the goods in the set that are not Chilean originating goods under Division 1F does not exceed 25% of the customs value of the set of goods.

This means that, even though under Rule 3 of the Interpretation Rules the goods are classified under only one heading, in determining whether goods in a set are Chilean originating goods, each component of the set must be assessed individually.

41. New subsection 153ZJE(10) sets out the originating rule that applies to composite goods that are classified in accordance with Rule 3 of the Interpretation Rules, similar to the rule in subsection 153ZJE(9). Such goods are Chilean originating goods only if:

a.

all of the components of the composite goods, considered individually, are Chilean originating goods under new Division 1F; or

b.

the total value of the components of the composite goods that are not Chilean originating goods under new Division 1F does not exceed 25% of the customs value of the goods.

This means that, even though under Rule 3 of the Interpretation Rules composite goods are classified under only one heading, in determining whether the components of the composite goods are Chilean originating goods, each component of the set must be assessed individually.

For the purposes of this originating rule, composite goods are those goods in which the components are attached to each other to form a practically inseparable whole. Composite goods are also those goods with separable components, provided these components are adapted one to the other and are mutually complementary, and that together they form a whole where the components would not normally be offered for separate sale. An example of the latter category of composite goods is an ashtray consisting of a stand incorporating a removable ash bowl.

Section 153ZJF Packaging materials and containers.

42. New subsection 153ZJF(1) provides that if:

a.

goods are packaged for retail sale in packaging material or a container; and

b.

the packaging material or container is classified with the goods in accordance with Rule 5 of the General Rules for the Interpretation of the Harmonized System provided for by the Convention;

then the packaging material or container is to be disregarded for the purposes of this Subdivision except for the purposes of the exception detailed below. For example, this means that the packaging material or container does not need to satisfy the change in tariff classification test that might apply to the goods under the Chilean Regulations.

Exception

43. However, subsection 153ZJF(2) provides one exception, which applies where the goods are required to have a regional value content of at least a particular percentage and the packaging material or container is a non-originating material. Under this exception, the regulations must require the value of the packaging material or container to be taken into account as a non-originating material for the purposes of working out the regional value content of the goods. Without this provision, the value of packaging materials and containers would not normally form part of the value of materials that are used in the production of the goods.

44. The value of packaging materials and container for the purposes of this section is to be worked out in accordance with the method that will be included in the Chilean Regulations.

Subdivision E - Goods that are accessories, spare parts, tools or instructional or other information resources

45. Subdivision E sets out a specific rule that applies to goods that are accessories, spare parts, tools or instructional or other information resources.

Section 153ZJG Standard accessories, spare parts, tools or instructional or other information resources

46. New section 153ZJG provides that goods are Chilean originating goods if:

a.

they are accessories, spare parts, tools or instructional or other information resources in relation to other goods; and

b.

the other goods are imported into Australia with the accessories, spare parts, tools or instructional or other information resources; and

c.

the other goods are Chilean originating goods; and

d.

the accessories, spare parts, tools or instructional or other information resources are not invoiced separately from the other goods; and

e.

the quantities and value of the accessories, spare parts, tools or instructional or other information resources are customary for the other goods.

Therefore, under the provision, accessories, spare parts, tools or instructional or other information resources will be deemed to be Chilean originating goods even if, in fact, they are non-originating materials, provided all of the requirements of this section are satisfied. However, this deeming section is to be disregarded when performing a regional value calculation on goods under subsection 153ZJE(6) where the accessories, spare parts, tools or instructional or other information resources are non-originating materials (see subsection 153ZJE(7)).

Subdivision F - Non- qualifying operations

47. Subdivision F sets out those operations that will be non-qualifying operations, in relation to goods.

Section 153ZJH Non qualifying operations

48. New subsection 153ZJH(1) provides that goods are not Chilean originating goods under Division 1F merely because of the following operations:

a.

operations to preserve goods in good condition for the purpose of storage of the goods during transport;

b.

changing of packaging or the breaking up or assembly of packages;

c.

disassembly of goods;

d.

placing goods in bottles, cases or boxes or other simple packaging operations;

e.

making up of sets of goods;

f.

any combination of operations referred to in paragraphs (a) to (e).

Therefore, if any of these operations are the only operations that take place in Chile, or in Chile and Australia, in relation to goods (either alone or as a combination), this will not amount to production in relation to the goods. For example, if non-originating goods such a spices from Bolivia are packaged into bottles in Chile, this will not confer the status of Chilean originating goods upon the spices.

49. New subsection 153ZJH(2) provides this section applies despite any other provision of new Division 1F.

Subdivision G - Consignment

50. Subdivision G sets out the consignment requirements that must be satisfied in transporting Chilean originating goods to Australia, including production in other countries during transportation to Australia.

Section 153ZJI Consignment

51. New subsection 153ZJI(1) provides that goods are not Chilean originating goods under Division 1F if:

a.

they are transported through a country or place other than Chile or Australia; and

b.

they undergo subsequent production or any other operation in that country or place (other than unloading, reloading, storing, repacking, relabelling, exhibition or any operation that is necessary to preserve them in good condition or to transport them to Australia).

52. Subsection 153ZJI(2) provides that this section applies despite any other provision of Division 1F. This means that even if goods are Chilean originating goods in accordance with any other provisions of Division 1F, if they do not comply with section 153ZJI(1), they will not be Chilean originating goods.

Part 2 Verification powers

Customs Act 1901

Item 2 After Division 4D of Part VI

53. This item amends the Customs Act by inserting new Division 4E into Part VI. New Division 4E is headed "Exportation of goods to Chile" and will impose obligations on people who export goods to Chile and who wish to obtain preferential treatment in respect of the goods in Chile, and on people who produce such goods.

New section 126AKA Definitions

54. New section 126AKA inserts two new definitions for the purposes of new Division 4E, as follows:

Chilean customs official which means a person representing the customs administration of Chile.

producer which means a person who grows, farms, raises, breeds, mines, harvests, fishes, traps, hunts, captures, gathers, collects, extracts, manufactures, processes or assembles goods.

New section 126AKB Record keeping obligations

55. New section 126AKB inserts record keeping obligations that will apply only in respect of goods that are exported from Australia to Chile and that are claimed to be Australian originating goods for the purpose of obtaining a preferential tariff in Chile. While there are record keeping obligations in the Customs Act at present, these are not broad enough to cover the record keeping obligations under the Agreement.

56. New subsection 126AKB(1) provides that the regulations may prescribe record keeping obligations that apply in relation to goods that:

a.

are exported to Chile; and

b.

are claimed to be Australian originating goods for the purpose of obtaining a preferential tariff in Chile.

57. It is intended that the method of keeping the documents, such as the length of time for which they must kept and the manner in which they must be kept, will be similar to current record keeping obligations. However, the type of documents that will be required to be kept will be much broader than current requirements. The requirements will extend to all records relating to the origin of the goods for which preferential tariff treatment is claimed in Chile and may include, amongst other things, records associated with the classification, origin or value of the materials used to produce the goods.

58. New subsection 126AKB(2) provides that the obligations under subsection (1) may be imposed on a producer or exporter of goods.

New section 126AKC Power to require records

59. New subsection 126AKC(1) provides that an authorised officer (which is defined in section 4 of the Customs Act) may require a person who is subject to record keeping obligations under regulations made for the purposes of section 126AKB to produce to the officer such of those records as the officer requires.

60. Under Article 4.22 of the Agreement, Australia or Chile may take action to verify the eligibility of goods for preferential treatment, including requesting the supply of records relating to the production or export of the goods. New section 126AKC gives effect to this Article in respect of goods exported to Chile and that are claimed to be Australian originating goods for the purpose of obtaining a preferential tariff in Chile.

61. New subsection 126AKC(2) provides that an authorised officer may disclose any records so produced to a Chilean customs official for the purpose of verifying a claim for a preferential tariff in Chile. Section 16 of the Customs Administration Act 1985 prohibits the disclosure of protected information except:

a.

as authorised by section 16; or

b.

as required or authorised by any other law; or

c.

in the course of performing the person's duties.

62. Records obtained by an authorised officer under new section 126AKC would be protected information within the meaning of section 16 and therefore cannot be disclosed to Chile except as allowed by section 16. By including an express provision in the Customs Act allowing for this information to be disclosed to a Chilean customs official, the disclosure is required or authorised by any other law for the purposes of paragraph 16(2)(d) of the Customs Administration Act 1985.

63. Under existing section 243SB of the Customs Act, it shall be an offence to fail to produce a record in accordance with new section 126AKC. This offence is not a strict liability offence.

New section 126AKD Power to ask questions

64. New subsection 126AKD(1) provides that an authorised officer (which is defined in section 4 of the Customs Act) may require a person who is an exporter or producer of goods that:

a.

are exported to Chile; and

b.

are claimed to be Australian originating goods for the purpose of obtaining a preferential tariff in Chile;

to answer questions in order to verify the origin of the goods.

65. It is considered that the power to ask questions in the circumstances set out in this section is a necessary adjunct to the power to require records in new section 126AKC.

66. Subsection 126AKD(2) provides that an authorised officer may disclose any answers to such questions to a Chilean customs official for the purpose of verifying a claim for a preferential tariff in Chile.

67. Answers to questions obtained by an authorised officer under new section 126AKD would also be protected information within the meaning of section 16 of the Customs Administration Act 1985 and therefore cannot not be disclosed to Chile except as allowed by section 16. By including an express provision in the Customs Act allowing for this information to be disclosed to a Chilean customs official, the disclosure is required or authorised by any other law for the purposes of paragraph 16(2)(d) of the Customs Administration Act 1985.

68. Under existing section 243SA of the Customs Act, it shall be an offence to fail to answer a question accordance with new section 126AKD. This offence is not a strict liability offence.

Part 3 - Application and transitional provisions

Item 3 Application

69. Item 3(1) provides that the amendment made by item 1 applies in relation to:

a.

goods imported into Australia on or after the commencement of item 3; and

b.

goods imported in Australia before that the commencement of item 3, where the time for working out the rate of import duty on the goods had not occurred before the commencement of item 3. This means that if goods are imported from Chile before the commencement date and are still in a warehouse on that date, the new rules set out in item 1 will also apply to them.

70. Item 3(2) provides that the amendment made by item 2 (the new verification powers) applies in relation to goods exported to Chile on or after the commencement of item 2 (whether the goods were produced before, on or after that commencement).