Seizing a Sino free trade moment

The ball is well and truly in Australia's court on the issue of free trade with China. Kevin Rudd or Tony Abbott must navigate a direct investment dilemma.

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Newly re-installed Prime Minister Kevin Rudd has declared he wants a free trade agreement with China. Chinese President Xi Jinping seems receptive. While any agreement is unlikely in the life of the current parliament, it will remain an issue for whoever wins this year’s federal election.

There are a number of hurdles to an agreement, but perhaps the chief stumbling block is Australia’s regulation of foreign direct investment. China wants the threshold for screening its investment proposals raised to around $1 billion, on a par with Australia’s agreements with the United States and New Zealand.

Under current arrangements, very little Chinese FDI in Australia escapes scrutiny because of Canberra’s policy of screening all investment by foreign government-related entities, regardless of transaction size.

Canberra maintains that this policy is applied in a non-discriminatory fashion to all foreign government-related investors. But the rules for these entities were only publicly articulated subsequent to the surge in Chinese investment from 2008 onwards. The Chinese can thank the US Embassy in Canberra and Wikileaks for confirming their suspicions that the policy is unofficially directed at them.

The marked deterioration in Australia-China relations during Kevin Rudd’s previous occupancy of the Lodge was in no small part due to the inability of his government to articulate a coherent policy on FDI from China.

Most Chinese FDI proposals are ultimately approved, which in itself is strong evidence that the current level of regulatory scrutiny at the border is costly and unnecessary.

Chinese direct investment in Australia is subject to the same competition, tax, industrial relations, planning, development and environmental laws that apply to other investors.

The additional layer of regulatory scrutiny Australia imposes at the border adds little to these robust regulatory frameworks behind the border. It serves mainly as a vehicle for political interference in commercial transactions the government does not like.

The rejection or modification of foreign investment proposals has often been explicitly protectionist in intent.

Former Treasurer Wayne Swan rejected Singapore Exchange’s bid for the Australian Securities Exchange in part because it would "risk us losing many of our financial sector jobs".

Minmetals’ acquisition of OZ Minerals was made subject to conditions that were, to quote the former treasurer again, "designed to protect around 2000 Australian jobs".

The Australian government has even sought to use the FDI screening process to regulate the level of output and employment in local mining operations.

Such micro-management of FDI trivialises the concept of the ‘national interest’ that is meant to inform the application of the treasurer’s discretion under the Foreign Acquisitions and Takeovers Act.

Some foreign investment proposals could raise genuinely vital national interest concerns. Parliament has already proscribed foreign investment in some sensitive assets.

But it is important that our regulation of FDI does not become an arm of protectionist industry or employment policy or a thinly-disguised proxy for domestic political concerns, harming Australia’s reputation as an investment destination.

What about China’s regulation of Australian outward FDI? It is true that China heavily regulates foreign capital inflows, including FDI. But China is a net importer of FDI and has become home to the world’s second large stock of FDI outside the United States. China is anything but closed to foreign investment.

Canberra no doubt wants significant concessions before lowering the threshold for screening. Yet it is in our interests to lower these barriers, regardless of the level of reciprocity.

The conclusion of a free trade agreement with China will require Canberra to give up some of its discretion over FDI. Yet given the current prime minister’s track record, it is difficult to imagine this occurring on his watch.

For its part, the Coalition has signalled an even tougher approach to regulating FDI, especially in agriculture and agribusiness.

The 2005 Australia-US Free Trade Agreement almost foundered on the issue of FDI. Yet most of the benefit from that agreement for Australia came through the liberalisation of investment screening thresholds.

Australia stands to benefit from being more open to Chinese investment, but only if it chooses to become less like China in its regulation of FDI.

Dr Stephen Kirchner is a research fellow at The Centre for Independent Studies. 

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