Focus: Australia-Thailand Free Trade Agreement – December 2003

Closer Economic Relations

In brief: Australia and Thailand are close to signing a bilateral trade agreement. Lawyer Adam Malouf looks at the basic framework of the agreement and which industries stand to gain from this bilateral trade liberalisation. 

• Capital inflows
• Benefits to Thai business
• Benefits to Australian business
• Australian real estate exposure

On 19 October this year, after months of negotiation, a Closer Economic Relations/Free Trade Agreement was agreed to between the Australian and Thai governments. While focusing heavily on reduction of tariffs (which are pervasive in the Thai economy), there are significant concessions and incentives to encourage two-way business investment between both countries, especially in the services sector. Although 'Rules of Origin' for products was a sticking point in negotiations, we understand that the final agreement (set to be signed during a state visit by the Thai Prime Minister to Canberra in the next four or five months) sets down product-by-product rules.

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Capital inflows

Part of the drive to open up Thailand to foreign capital inflows has been spearheaded by Thailand's Board of Investment (BOI). The BOI is focusing less on high regulation and more on facilitation of foreign investment, particularly investment that promotes research and development and skill transfer, as well as economies of scale and efficiency. This policy augurs well, especially for those involved in the biotech and life sciences sectors, as well as those whose business is based on mass production of goods generally and consumer durables.

Generally, the agreement guarantees that both countries' investors and their investments will enjoy treatment at least as good as that available to Thai nationals or nationals of any other country, and that they will be granted compensation for loss incurred through expropriation and social unrest at fair market value. Investors will also be able to repatriate their invested funds and returns (except in circumstances of balance of payments crises) and have recourse to international arbitration to resolve post-establishment investment disputes.

The agreement also significantly opens up Thai investment in most Australian business sectors without the need for specific approval from the Australian Government, except in the following circumstances:

• Acquisition of 'substantial interests' in existing Australian businesses with total assets of A$50 million or more.
• Proposals to take over offshore companies whose Australian subsidiaries or assets are valued at A$50 million or more, or account for more than 50 per cent of the target company's global sales.
• Proposals to establish new businesses in Australia involving a total investment of more than A$10 million.
• Investments by the Thai Government.

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Benefits to Thai business

Specifically, Australia has made undertakings in relation to the following business sectors:

• Legal services: Thai service suppliers can provide advisory services in Thai law, third country law and international law, and Thai lawyers can join local firms, except in WA and SA.
• Landscape architectural services: Thai service suppliers can provide planning and design services for aesthetic landscaping of parks, commercial and residential land.
• Computer and computer-related services: Thai service suppliers can provide database services and other computer services but, significantly, not content.
• Mining and related services: Thai service suppliers can provide consultancy services incidental to mining, and other services incidental to mining, including drilling services, repair and dismantling services and well-casing services. Australia will also permit Thai suppliers to provide mining-related scientific and technical consulting services, as well as mining site preparation (such as tunnelling).
• Communications services: Australia will not impose quotas on the number of satellite and mobile phone services and will permit unlimited Thai interest in Optus and Vodafone, but no commitment has been made on ownership by Thai nationals of Telstra. It is worth noting that, in May 2002, the Thai cabinet approved an increase to the foreign equity limit in the telecommunications sector from 25 per cent to 49 per cent.
• Insurance services: Australia will permit a registered Thai life insurance company to operate without a principal officer resident in Australia. Australia will not require an authorised Thai insurance company operating in Australia as a non-incorporated entity to appoint an Australian resident as agent. In Thailand, there are proposed amendments to the Life and non-Life Insurance Acts to increase the limit on foreign equity in insurance companies from 25 per cent to 49 per cent.
• Banking services: Australia will permit the Thai central bank and government monetary institutions to invest in Australia without providing an assurance to the RBA that it will be a stable holder of the Australian dollar or that it will consult the RBA in the event of a significant change in its Australian dollar profile.
• Automotive products: The vast majority of tariffs in the Australian automotive industry have already been eliminated or substantially reduced, which is favourable for international producers. This also benefits Australian consumers, and forces manufacturers to continually strive to adopt world-best practice in all stages of production and product development:
  • Australia will eliminate current tariffs on all passenger vehicles, off-road vehicles, goods vehicles and other commercial vehicles of Thai origin. These tariffs are currently 15 per cent for passenger motor vehicles (although the general rate is legislated to fall to 10 per cent on 1 January 2005) and 5 per cent for other vehicles.
  • Of the 146 tariff items covering automotive parts and components where the current Australian tariffs for goods of Thai origin are 10 per cent or 15 per cent, tariffs on 98 items will fall to 5 per cent immediately, then will be eliminated in 2010. Tariffs on the remaining 48 items will be eliminated.
  • Australia will eliminate all current tariffs of 5 per cent or below on automotive parts and components.
• Steel products:
  • Australia will maintain its current tariff of 4 per cent on goods of Thai origin on eight tariff items until 2010, when the tariff will be eliminated.
  • Australia will immediately eliminate current tariffs of 5 per cent or less on other steel items of Thai origin.

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Benefits to Australian business

Specifically, Thailand has relaxed foreign investment limits for Australian entities as follows:

• Mining operations: majority Australian ownership can be increased from 49.9 per cent to 60 per cent.
• Distribution services: Australian companies that manufacture goods in Thailand can provide such related services without limitation of Australian equity, effectively pushing the limit from 49.9 per cent to 100 per cent.
• Construction services: increase in majority Australian ownership limit from 49.9 per cent to 60 per cent (this relates to services to the public sector in utilities or transport requiring special tools, machinery, technology or construction expertise).
• Management consulting services: increase in majority Australian ownership limit from 49.9 per cent to 60 per cent (where the services are provided via a regional operating headquarters or associated company or branch).
• Major restaurants and hotels: increase in majority Australian ownership limit from 49.9 per cent to 60 per cent.
• Tertiary education institutions: increase in majority Australian ownership limit (for those institutions specialising in science and technology that are located outside Bangkok) from 49.9 per cent to 60 per cent.
• Maritime cargo services: increase in majority Australian ownership limit from 49.9 per cent to 60 per cent (this relates to port and waterway operation services, including marina facilities, provided the facilities include a ship lifter, inland berthing and a shipyard for maintenance and repair).

Tariff concessions

In terms of tariff concessions, Thailand has made undertakings in relation to particular industries which will make Australian products increasingly competitive in a market characterised by low fixed and variable manufacturing overheads:

• Automotive:
  • Thailand will immediately eliminate tariffs on large passenger motor vehicles (engine capacity of over 3000cc) and goods vehicles, currently at 80 per cent and 60 per cent respectively. For other passenger motor vehicles, Thailand will immediately reduce the current 80 per cent tariff to 30 per cent, before phasing this down by 6 per cent each year to zero in 2010.
  • Tariffs on all automotive parts, components and accessories, currently up to 42 per cent, would be immediately reduced to a ceiling of 20 per cent, and phased to zero by 2010. Tariffs on engines would be immediately reduced from the current 30 per cent to 15 per cent. Other tariffs currently at or below 20 per cent would also be immediately reduced and phased down accordingly.
• Steel:
  • Thailand will immediately eliminate its current 1 per cent tariff on slab steel.
  • It will also immediately halve its tariffs on flat-rolled steel products of interest to Australia, including hot-rolled coil (current tariff of 10 per cent), cold-rolled coil (12 per cent) and coated steel (15 per cent). Tariffs will then be eliminated in 2015, with the exception of most coated steel products for which the tariffs will be phased to zero in 2008.
  • On long products, Thailand will generally reduce tariffs to zero by 2010. On a limited number of products, including structural sections and merchant bar, Thailand will immediately halve tariffs, which will then be held until elimination in 2015.
  • On steel articles, where Thailand's current tariffs are generally 20 per cent, some tariffs will be eliminated immediately, with the remainder to be phased to zero by 2010.
• Pharmaceuticals:
  • Thailand will phase current tariffs of 10 per cent or 20 per cent to zero in 2009. On products of specific interest, current tariffs of 10 per cent will be halved immediately and eliminated in 2007.
• Wine, beer and spirits:
  • Thailand will immediately reduce its current 54 per cent tariff on wine to 40 per cent, and then phase the tariff to zero in 2015.
  • For beer and spirits, Thailand will immediately reduce its current tariff of 60 per cent to 30 per cent, before phasing to zero in 2010.

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Australian real estate exposure

A significant development also worth noting is that the low-to-medium end real estate market in Australia may be subject to greater exposure to Thai investment, with such investment permitted as long as it does not fall into the following categories:

• Non-residential commercial real estate, where the property is subject to a heritage listing, valued at more than A$5 million.
• Developed non-residential commercial real estate, where the property is not subject to a heritage listing, valued at A$50 million or more.
• Accommodation facilities.
• Vacant urban real estate (it is not clear whether this applies to vacant Crown land).
• Residential real estate.

The introduction of this policy, especially for developed non-commercial real estate, may provide a boon for all types of suppliers along the supply chain in relation to property development, especially financiers, suppliers of raw materials and suppliers of specialist consulting services.

For further information, please contact:

Adam Lunn Partner, Melbourne Ph: +61 3 9613 8481 Adam.Lunn@aar.com.au

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