House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Minister for Customs, Community Safety and Multicultural Affairs, the Honourable Jason Wood MP)

ATTACHMENT 1 - 2009 REGULATORY IMPACT STATEMENT

REGULATION IMPACT STATEMENT: INDONESIA-AUSTRALIA FREE TRADE AGREEMENT

1. This Regulation Impact Statement relates to forthcoming negotiations towards an Indonesia- Australia Free Trade Agreement (IAFTA).

A. Problem Identification

2. In July 2007 Australia and Indonesia agreed to undertake a joint feasibility study on the merits of a bilateral free trade agreement (FTA). The feasibility study finds that a bilateral FTA with Indonesia would provide worthwhile benefits to Australia. The study shows that the greatest gains would be achieved under an FTA that would eliminate tariffs and non-tariff barriers to all trade between the two countries. The objective of an FTA negotiation ought to be to achieve commitments that go beyond those made in the World Trade Organization ("WTO-Plus") and the ASEAN-Australia-New Zealand Free Trade Area ("AANZFTA-Plus") and that aim to remove all barriers to bilateral services trade. Economic modelling undertaken by the Centre for International Economics (CIE) indicated that a bilateral FTA with Indonesia would result in gains of $3.2 billion of GDP to Australia by 2030. The report also concluded that improved access to the Indonesian market accounts for almost all projected GDP and consumption gains for Australia and is manifestly more important than economic gains attributable to opening up the Australian economy to greater trade and investment flows from Indonesia.

3. Indonesia is an important market for Australia. Australia's trading relationship with Indonesia was valued at $10.3 billion in 2007, accounting for 2.3 per cent of Australia's total trade in goods and services (2007 figures). Indonesia is Australia's 11th largest trading partner and third largest trading partner in ASEAN. In 2007, Indonesia purchased $3.9 billion (2.3 per cent) of Australia's merchandise and $896 million (1.9 per cent) of our services exports.

4. Australia has a lengthy history of investment in Indonesia, dating back to 1959. However, both countries acknowledge that bilateral investment links could be stronger. At the end of 2007, Australia's total investment in Indonesia (including portfolio investment) was $3.4 billion, of which direct investment amounted to $1.8 billion, making Indonesia our 20th largest investment destination. Indonesian investment into Australia is limited, with total inward investment (including portfolio investment) amounting to $409 million at the end of 2007, representing just over 4 per cent of total foreign investment in Australia.

5. The recently concluded AANZFTA will provide for significant reduction of tariff barriers faced by Australian exporters to Indonesia. As part of its AANZFTA commitments, Indonesia will eliminate tariffs on 93.2 per cent if tariff lines by 2025. At the end of the transition period, in 2025, 96.7 per cent of Indonesia's tariff lines will be in the 0-5 per cent range. While only 1 per cent of tariff lines are excluded from Indonesia's tariff commitments, this includes a range of products of trade interest to Australia, including some sheep meat and frozen beef lines, wine, rice, maize and sugar. For a range of other products of trade interest to Australia, Indonesia is reducing but not eliminating tariffs, including some on live cattle, certain categories of sheep meat, frozen pork, processed seafood, some dairy products, some fresh and processed fruit and vegetables , some motor vehicles, and some iron and steel lines. For a third group of products of trade interest to Australia, including motor vehicles and some automotive parts lines, tariffs are being eliminated but not within commercially relevant timeframes.

6. Despite a significant reduction in tariffs through commitments made by Indonesia under AANZFTA, the treatment of about US$91 million (or 3.5 per cent) of Australian agricultural exports to Indonesia (2005) will not change after AANZFTA enters into force, specifically sugar, rice, wine and some meat products. A bilateral FTA would provide an opportunity to seek tariff elimination for agricultural exports, which have been excluded from Indonesia's AANZFTA commitments. (sugar, rice, wine and some meat products). Where tariffs have either not been eliminated or the rate of removal is gradual, a bilateral FTA could seek to accelerate or improve on tariff commitments made under AANZFTA, specifically in turnips, mandarins, some livestock and meat products and dairy products.

7. An ambitious FTA could create opportunities for Australia in a wide range of manufactures, notably US$78 million worth of industrial products (3.1 per cent of Indonesia's 2005 imports from Australia), US$20.5 million worth of refined copper cathodes and sections of cathodes, Australian oil products, exports of iron and steel products and plastic products, including tubes and pipes, floor coverings and stoppers, worth US$ 4.4 million in 2005, which have either been excluded under AANZFTA or the tariff reduction timeframe is not commercially realistic.

8. There is also considerable scope for improved outcomes to be achieved in a bilateral FTA regarding automotives. Under AANZFTA, Indonesia's commitments on motor vehicles do not provide for elimination until 2014 (for larger engine cars), 2019 (for smaller and medium engine cars) and 2013 for a range of tariff lines in the automotive parts sector. Given the complementarities between Australia and Indonesia in this sector, eliminating tariffs would benefit both countries.

9. Indonesia's services commitments under AANZFTA, like its WTO commitments, are relatively modest and maintain numerous restrictive reservations in its market access and national treatment commitments on services, including on foreign equity and nationality. Under a bilateral FTA, Indonesia could commit to reform or eliminate some of these impediments to Australian exporters. For example, Indonesia has relatively restrictive rules governing legal, accountancy and architecture services, as well as education, telecommunications and construction.

10. In 2007, Indonesia introduced new investment legislation extending national treatment to foreigners and a negative investment list that liberalises equity requirements in a number of sectors. Likewise, a new mining law was passed in late 2008, the commercial significance of this, however, remains unclear until the implementing legislation is passed. AANZFTA provides for post-establishment treatment of foreign investors and investment and provides for a work program to develop investment and market access schedules, covering national treatment issues such as pre-establishment foreign equity limits. The impact of a bilateral FTA on investment will depend not only on the degree of reform undertaken by Indonesia (via the elimination of existing impediments to foreign investment), but also on the degree to which reforms undertaken by Indonesia are made subject to new binding commitments under a bilateral FTA.

B. Objectives

11. Australia's broad negotiating objectives in IAFTA are to:

a.

Achieve a comprehensive and genuinely liberalising FTA that is supportive of the multilateral trading system;

b.

Deliver improved market access for Australian exporters of goods and services and investors to the Indonesian market that provides commercial benefits and a platform for securing continuing trade and investment liberalisation in the future;

c.

Seek more transparent and predictable conditions for Australian traders, service suppliers and investors in Indonesia; and

d.

Position Australia to strengthen our strategic engagement with Indonesia

e.

Maintain competitiveness as Indonesia does FTAs with other trading partners.

C. Options

12. Australia has a number of options for addressing the market access problems identified in Section A above - through multilateral, bilateral and regional negotiations.

Multilateral

13. The Government's highest trade priority remains achieving a successful conclusion to the WTO Doha Round of multilateral trade negotiations. This is because the WTO negotiations offer the greatest opportunity to reduce barriers to trade and for Australia to increase access to overseas markets across agriculture, industrial products and services. Further liberalisation of trade through the conclusion of the Round will be key to stimulating growth in the global economy. Since it was launched in 2001 the Round has made important progress, particularly at the WTO Ministerial Meeting in July 2008.

Regional

14. Australia has continued to promote trade liberalisation at the regional level through the AANZFTA and the Asia-Pacific Economic Cooperation (APEC). In November 2008, the Minister for Trade, the Hon Simon Crean, MP, announced that Australia would participate in negotiations for a Trans-Pacific Partnership Agreement (TPP), expanding on the existing Trans-Pacific Strategic Economic Partnership Agreement (between Brunei, Chile, New Zealand and Singapore). Initial parties to the TPP negotiations are likely to comprise Brunei, Chile, New Zealand, Singapore, Australia, the United States, Peru and Vietnam.

15. The AANZFTA is the first time Australia has negotiated a plurilateral FTA, a key objective of which was to ensure that Australia maintains access to ASEAN markets at least as good as that provided to ASEAN's other FTA partners.

Bilateral

16. The global spread of FTAs gained pace in the mid-1990s and accelerated following the failure of the Seattle WTO Ministerial Meeting in 1999. Australia was part of this trend in seeking to conclude FTAs where these offered the prospect of delivering significant benefits more quickly than might be possible through a WTO round. Since 2003, Australia has concluded bilateral FTAs with Singapore, Thailand, the United States, and Chile. Australia also has FTA negotiations underway with China, the Gulf Cooperation Council, Japan, Korea and Malaysia. In addition, a joint FTA feasibility study has been finalised with Indonesia and a study is underway with India. ASEAN member countries too have substantial FTA negotiating agendas, with Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam, all having completed bilateral FTAs.

17. Indonesia has concluded FTAs with...

D. Impact Analysis

18. A wide range of stakeholders identified an interest in IAFTA during a call for public submissions prior to the launch of negotiations. These stakeholders included groups and individuals from the agricultural sector, the manufacturing sector, the services sector, trade unions, employer organisations, state governments and public interest groups.

19. The IAFTA, once implemented, could be expected to have impacts on a number of these stakeholders. There is considerable potential for the IAFTA to create new trading opportunities and contribute to boosting Australia's investment relationship with Indonesia

Compliance costs

20. The main area of additional costs for exporters associated with the AANZFTA would be in relation to complying with the rules of origin provisions required to claim preferential tariff treatment, including obtaining certificates of origin. These costs would be most relevant to the Australian manufacturing sector, due to its use of imported components and parts, but should not be significant.

Trade Unions

21. One of the main concerns of trade unions, as highlighted in the public submission process...while noting a reduction in Australian tariffs, including the higher tariffs in the textile, clothing and footwear (TCF) and passenger motor vehicle (PMV) sectors. The main adjustment costs for Australian industry are likely to be in these areas.

Industry Groups

22. Industry groups were broadly in favour of negotiating IAFTA, provided the agreement was comprehensive in nature and delivered clear benefits to Australian industries. As discussed in the analysis above, liberalisation will occur across a broad range of tariff lines in all sectors - including agriculture and manufacturing - and will create substantial new market access opportunities for Australian exporters of goods and services.

State governments

23. Australia's state governments identified themselves as stakeholders in the negotiation of the IAFTA. The nature of the issues raised by state governments related to...

Public interest groups

24. The IAFTA is likely to have a positive impact on Australian consumers. There should be increased benefit for consumers as falling Australian tariffs provide greater choice across many product lines, including in TCF and PMV. IAFTA provisions on services should also see increased choice in service providers.

Small business

25. The overall impact of IAFTA on small business is likely to be positive. Many of the sectors which are expected to benefit from the FTA contain a significant number of small businesses. These include the dairy sector, beverages, construction, and a range of services industries where barriers to entry are high.

26. In addition, provisions designed to ensure transparency, consistency, and predictability, in the application of customs laws and regulations would increase certainty and also reduce costs for small businesses.

Federal Government

27. The main impact of AANZFTA on the Federal Government will be the loss of tariff revenue. The Treasury has estimated that...

E. Consultations

28. Public submissions were sought prior to the commencement of the AANZFTA negotiations and around xx written submissions were received, including from the South Australian, Victorian and Western Australian governments. Submissions from these governments recognised the potential benefits of an FTA between Australia and Indonesia, and agreed on the need to negotiate a comprehensive, high quality agreement.

29. During the negotiation of IAFTA, DFAT officials will held regular consultations with relevant Commonwealth agencies, state and territory governments and other stakeholders, including industry, unions and public interest groups, to ensure that their views informed development of the Government's negotiating strategy.

30. Commonwealth agencies will be consulted via regular inter-departmental committee meetings and participation of relevant agencies in the Australian delegation to negotiating sessions.

31. State and territory governments will be consulted through regular senior State and Territory Trade Officials Group (STOG) and Commonwealth-States Standing Committee on Treaties (SCOT) meetings, teleconferences and regular visits by the AANZFTA negotiators to state and territory capitals.

32. Consultations with industry will be substantial with DFAT...

F. Recommended Option

33. On balance, it is in Australia's interests to enter into an FTA with Indonesia, given the Agreement will:

a.

deliver significant market access commitments that provide benefits to Australian producers, exporters, consumers and investors and a platform for securing continuing trade and investment liberalisation in the future;

b.

deliver these market access gains in a faster timeframe than appears possible through the WTO Doha Round;

c.

achieve sufficiently comprehensive and reform-oriented WTO-plus commitments to ensure that the IAFTA is consistent with WTO obligations;

d.

impose small adjustment costs that would be outweighed by the overall economic gains to the Australian economy; and

e.

not detract from our ability to continue to negotiate trade liberalisation in other fora - WTO, regional or bilateral.