1. Indian student attacks

Two attacks on Indian students in Melbourne, seemingly racially motivated, threatened to curtail this multimillion-dollar industry in a significant source market. However, it was not just education, Australia’s third largest export and our highest value service export, at risk. Australia’s image in India was at least temporarily tarnished as this issue, unresolved since 2009, increased in profile.

Diplomacy was in full force as former acting Prime Minister and Minister for Education Julia Gillard, and acting Minister for Foreign Affairs Simon Crean, met with their Indian counterparts to ease tension.

2. China versus Rio Tinto

In 2009, Chinese authorities arrested detained four Rio Tinto employees, including Australian executive Stern Hu, for five weeks before formally charging them with commercial bribery and trade secrets infringement. Hu attended a closed trial in March 2010 and accepted the Chinese court’s 10-year sentence.

The sentence came as a warning for exporters to avoid corrupt practices when doing business in China, particularly in the resources sector, which is Australia’s biggest earner in China.

3. Mining tax debacle

The resources sector came out in force against the Henry Tax Review suggestion that the sector pay 40 percent tax on its so-called ‘super profits’. The Federal Government decided to adopt the suggestion and the industry spent millions in a nationwide advertising campaign in protest. Economists believe the tax will curb some investments and affect mineral exports, which may have a trickle-down effect in the wider economy.

4. Rising Australian dollar

The Australian dollar reached parity with the US dollar in mid-October after months above US80c and US90c. The weakness of the US economy, in addition to flailing markets in the UK and eurozone (particularly Portugal, Ireland, Greece, Spain), boosted the Australian dollar in global markets, and threatened to chew at exporters’ margins. Competing on a lower dollar is no longer an option for exporters as near-parity is predicted to continue well into 2011.

5. Global travel woes

An ash cloud created by the eruption of Eyjafjallajökull, the Icelandic volcano most found difficult to say and spell, interrupted much of Europe’s airspace for five days in April. Airlines had to deal with thousands of stranded passengers and airfreight routes had to be re-routed or delayed.

Let’s not forget natural disasters in Haiti, China, and Pakistan, the Gulf oil spill, and the US Department of Homeland Security’s Transportation Security Administration body-scanning controversy added to the mix. On a domestic front, Virgin Blue suffered a system crash that saw several planeloads of passengers stranded in September.

Things to celebrate

But it wasn’t all bad. Exporters started the year with a larger backyard market thanks to the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA). Australia’s foray into China at the Shanghai World Expo and as country of honour at the China International Small and Medium Enterprises Fair was also successful, and we also launched a nation brand, Australia Unlimited, as distinct from our tourism campaigns.

Not that we forgot about tourism, which received a lot of attention in December when US talk show host Oprah Winfrey decided to visit for her last show, Oprah’s Ultimate Australian Adventure, bringing an entourage of 302 dedicated audience members and employing hundreds of US and Australian staff. Organised by Winfrey’s Harpo Productions in conjunction with Tourism Australia and local airline Qantas, the tour will be televised in January 2011.

What events rocked your exports in 2010?

With an astounding 60 percent of the population under 30 years of age, the masses have never been so well educated, well connected or well travelled. The demand for brand names and luxury items is exploding, as awareness and wealth accumulate, providing Australian exporters a willing consumer market filled with repression-based desire for all things western.

Senior manager and international growth specialist at the NSW Business Chamber Ian Bennett says, “Australian exporters are not giving Vietnam sufficient consideration. Most people are still thinking of Vietnam under the old cadre system; they don’t realise that the technocrats and modernists have taken over.”

Vietnam is one of the 10 members of the Association of South East Asian Nations (ASEAN), and Australian exporters looking to build relationships have never had easier conditions in which to do so now that the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) is in force. The agreement provides a progressive reduction or, in most cases, elimination of tariffs on Australian goods exports, and an elimination of all Australian tariffs from AANZFTA parties. This advantage over other countries that are yet to sign an FTA with Vietnam is substantial, yet fleeting, as it is in negotiation with many other countries for FTAs.

The economy, once centrally planned but now market-based, withstood the global financial crisis relatively well. Tony Burchill, senior trade commissioner at Austrade, says the market is expecting growth of around six percent this calendar year.
Bennett continues: “Vietnam wasn’t really affected, simply because they don’t have hedge funds and derivatives like other, more sophisticated, markets.”

Current Australian exports to Vietnam are worth almost $1.25 billion, with wheat, copper, aluminium and cereal preparations the major Australian exports. While trade relations with Vietnam appear to be at an all-time high, exporters must be aware of remaining obstacles.

New exporters

“It’s a good complementary market for Australian exporters on a number of fronts,” Burchill says. “Where Vietnam offers a lot of scope, particularly for new exporters, is in the services area. Vietnam needs technology and advanced skills, so we’re seeing a lot of companies coming over to work in the energy sector, and in the building and property sector: for instance, engineers, architects and surveyors.”

The growth of the middle class has created a desire for premium brands and labels, especially clothing, food and wine. “A lot of Vietnamese people have travelled widely overseas and seen what’s available in other markets, and they want those things. They can also see the health benefits of eating and drinking well,” Bennett explains. “With the evolution of the Vietnamese economy, there’s increasing wealth at various levels and now they can afford these products,” he adds.

Grain is a particular area of focus in the food industry, as it is required to make the increasingly popular noodles eaten around the country, while luxury automobiles have become a must-have status symbol in recent times.

Cold storage systems for food were once an issue, but it’s now less difficult because of the entry of German hypermarket, Metro, into the community. Bringing their own cold storage supply chains with them, they have helped to improve the overall market by making it more competitive.

AANZFTA has paved the way for the professional services sector to become a growth market, due to the relaxation of many of the requirements that practitioners previously had to meet. “The nation’s rapid commercial and industrial growth has led to an increase in the demand for international legal services firms, human resources and accounting practices. There are increasing opportunities for an array of business consulting firms through the many multilateral project activities that occur in Vietnam, including those of the Asian Development Bank and World Bank,” Burchill says.

More than 140 Australian exhibitors are in attendance to showcase the finest of Australian flavours and produce to top Asian buyers and importers at the National Pavilion, organised by Austrade.

“The South East Asian markets are some of Australia’s closest and most significant export markets. In 2007/08, Australian food exports to the ASEAN member countries was worth over $4.3 billion, nearly five times that of [food exports to] China,” said David Twine, Austrade’s regional director for ASEAN, South Asia and the Pacific.

He noted that the region’s growing middle class “has created diverse and expanding opportunities for Australian businesses” and said the ASEAN free trade agreement would further enhance opportunities in this space.

Free trade agreements

Earlier this year, the Australian Industry Group (Ai Group) released results from a survey they conducted among small to large exporters on the benefits of free trade agreements. The survey found that in more than half of all cases, for all countries with which Australia has a bilateral FTA, businesses reported no benefits.

Far from saying that FTAs were a waste of time, the survey results indicated that agreements were just the beginning and that businesses need more than signatures to succeed, says Innes Willox, director of International and Government Relations at Ai Group. “What industry is saying is there needs to be more follow-through to help take advantage of opportunities that might arise from an FTA.”

He confirms that while “industry basically welcomes the concept of free trade because of the potential market access, the FTAs alone guarantee nothing. It doesn’t mean the floodgates open and the market is suddenly wholly accessible,” he explains.

Parliamentary Secretary for Trade Anthony Byrne sees an FTA as a symbol of a “global commitment to an open international trade and investment system”, particularly in the wake of the global financial crisis, when protectionism threatened world trade. Therefore, regional agreements such as the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA), which came into force at the beginning of this year, sends a clear message against protectionism, he says.

The breadth of the agreement, covering goods and services, investment, intellectual property, e-commerce, business travel, competition policy and capacity building, provides opportunities for exporters across the board. “One key feature of AANZFTA is that, even if it does not deliver perfect market access right now, over time the barriers will fall for most products,” Byrne notes. “FTAs are not panaceas for exporters, but they are steps forward on the road to greater market access and require a bit of faith to work.”

Living documents

“The benefits come over a period of time,” agrees Cameron MacMillan, former trade commissioner and current executive director of International Business at global business advisory BDO (QLD). “They are living documents and there are regular negotiation points where our government can go to the American government or the Chilean government or whoever and say ‘we’d like a review of the situation’. Prior to the FTA, we never had that opportunity.”

MacMillan believes FTAs are a great way to understand issues between markets, starting from the negotiation phase. “You never get a better opportunity to put your dirty laundry on the table, so to speak. If you have an issue with a country, it’s the most appropriate time to bring it up and negotiate. It takes the relationship to a whole new level,” he says.

This then paves the way for a priority trade relationship, one that enables Australia to more easily change aspects of the agreement as the economic environment evolves, he says. “The fact that it is a living document means you can go back at agreed intervals and say ‘this isn’t working for me’, whereas prior to that there was no foundation for negotiation, you just fought battle-by-battle and it wasn’t a relationship.”

An FTA “opens up discussion”, says MacMillan. “It focuses people on the outstanding issues and endeavours to make the operating environment more transparent.”

Doing business

While negotiation is an important aspect of an FTA, exporters are understandably more interested in the benefits to be gained after the parties have signed the agreement. MacMillan points out that an FTA merely lays the groundwork for open business, so it is unlikely that everyone will see benefits from day one. “FTAs don’t do business for people, they just set environments,” he says. “It doesn’t mean exporters can relax, but it does mean they need to do more research.”

Willox says exporters need to understand this crucial point about FTAs—while the agreement may open a market, a business still needs to make it work. “There are the issues of making contact, developing business proposals, developing your credibility, marketing,” he explains. “It takes a long time to build up credibility, and that would be the case if there was an FTA or not. There are a whole lot of other factors at play. The FTA is not the whole answer.”

He believes government and industry need to work together to achieve the trade results expected when parties sign an FTA. “Governments are quite rightly proud of having an FTA, they’re not easy things to negotiate, but there’s a feeling that industry is not taking advantage of it,” Willox observes. “Industry is a little bit reticent to jump fully into the pool of a new market without some sort of help. FTAs do present opportunities, but it takes a long time.”

In short, although exporters need to be aware of the access to a market allowed by an FTA, they also need to select the market on its own merits, not just because Australia has an FTA with a party.

Say ‘AANZFTA’ and someone is likely to say ‘bless you’, unless they trade in South East Asia. After all, creating a market of 600 million people, which has $1.3 trillion in gross domestic product, is nothing to be sneezed at.

On January 1, 2010, the 10 nations of the Association of South East Asian Nations (ASEAN), Australia and New Zealand became virtually one trading bloc when AANZFTA, the ASEAN-Australia-New Zealand Free Trade Agreement, came into force.

AANZFTA is significant for a number of reasons. Firstly, it represents the biggest free trade agreement Australia has signed with any entity. On top of that, it was finalised at a time when the global economic downturn threatened to make countries more cautious, resulting in protectionist measures to preserve their economies. Minister for Trade Simon Crean was therefore delighted when this agreement came through, stating that it “sends a positive signal of the economic dynamism of our region and provides a building block for regional integration”.

The most visible of AANZFTA’s benefits is the elimination or reduction of more than 90 percent of tariff lines in key industries including agriculture, minerals, automotive and pharmaceuticals. For more information on the tariff commitments, refer to the Department of Foreign Affairs and Trade website (see Trade Links).

For services, the agreement binds the 12 parties to current levels of market openness to above World Trade Organisation commitments, as well as provides a platform for recognition between the countries on competency standards. The FTA further specifies “enhanced procedural transparency and review and appeal disciplines in relation to licensing procedures”, which will allow Australian service providers to compete on a level playing field with their ASEAN counterparts.

Lastly, for investors, the agreement provides some peace of mind through its requirements to allow investors’ funds to be transferred freely and without delay, and for investors to receive prompt and adequate compensation in the event of expropriation or nationalisation of an investment, and also allows legal protection for Australian investments in ASEAN countries, including the right to international arbitration to settle disputes.

The rules have changed

The FTA has also significantly changed the rules of origin provision for products. Rod Morehouse, Austrade’s Indonesia-based senior trade commissioner to ASEAN, believes that this could represent the biggest opportunity for small businesses.

Under the new rules of origin provisions, a product that has been wholly produced, obtained, or substantially transformed in any of the 12 countries comes under AANZFTA trade rules. This enables Australian manufacturers, for example, to tap into a cost-effective supply chain within ASEAN without being penalised with tariffs.

“There’s an element that I don’t think companies have woken up to, which is how much leverage this is giving them,” says Morehouse. “That’s a supply chain management issue. That’s really interesting because it means the small guys get to play. They may not be big in themselves, but they might control a key element. They can get bigger people to play around with them because they now have these access channels. It’ll allow smaller companies to access markets that previously they weren’t big enough to take on.”

He gives the example of a European business selling to the ASEAN market. As Europe is unlikely to forge an FTA matching these concessions, Morehouse suggests it would be smart to invest in Australia or to allow Australians to take charge of the manufacturing in some shape or form, under licence, technological transfer or from an Australian base, for example.

Australia’s advantage is our robust regulatory system, strong intellectual property protection and advanced skill set, he believes: “We stay in the top in skill set, we don’t get lock lower down in the skill set where we’re not terribly competitive. And it includes the servicing of that, the financing, the management, the marketing, the packaging, the design of it can all be up to us. The Australians then take that into ASEAN as Australian under the new rules of origin.”

The only thing exporters will have to worry about is existing FTAs with New Zealand, Singapore and Thailand. Businesses are not permitted to ‘mix and match’ rules of origin provisions and tariff concessions from both AANZFTA and the individual country agreements. If, for example, you label your product under the rules of origin of one FTA, you must follow through with the tariff measure for the same agreement. This is why exporters should look carefully at AANZFTA and existing agreements and decide which FTA best serves their business.

Byrne said the size of the food, beverage and grocery industry was comparable to mining, contributing 2.5 percent to Australia’s gross domestic product.

He pointed out that Asia’s growing middle class, consumer concerns about food safety and quality, and regional trade liberalisation would stand Australia in good stead: “Australia’s brand as a clean and green nation producing reliable, healthy products is strong platform to take advantage of both rising disposable incomes and changing consumer preferences across the region.”

Trade figures for the 2008/09 financial year show that Japan was once again Australia’s largest food export market, with six Asia-Pacific countries in our top ten export destinations for food.

Byrne noted that the ASEAN free trade agreement (AANZFTA) with the 10 nations of the Association of South East Asian Nations and New Zealand will further enhance opportunities in the region through the reduction of tariffs and improvement of market access.

The FTA is Australia’s largest, and will account for one-fifth of Australia’s two-way trade, or more than $110 billion. The agreement spans the 10 nations of ASEAN, Australia and New Zealand, a growing economic area of about 600 million people with a combined gross domestic product of $3.1 trillion.

A statement jointly released by Prime Minister Kevin Rudd and Minister for Trade Simon Crean declared the elimination of tariffs on 96 percent of our exports, up from the 67 percent currently eligible: “This will support Australian industry by promoting exports, and will play an important role in supporting Australian jobs.”

The FTA, signed in February, comes at an opportune time as leaders feared some countries would resort to protectionist measures to protect their local markets.

“The initial signing of the AANZFTA in February was an important sign of the determination of nations to work together to build economic recovery, and today’s announcement cements that cooperation,” read Rudd and Crean’s statement. “The entry into force of AANZFTA is also another important step towards greater cooperation and economic integration in the region.”

The ASEAN nations are: Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Burma, the Philippines, Singapore, Thailand and Vietnam.

Indonesia is the world’s fourth most populous country and, perched on Australia’s doorstep, one with which we have a unique and important relationship. The Department of Foreign Affairs and Trade (DFAT) reports that there are more than 400 Australian companies currently operating in Indonesia in such sectors as mining, construction, finance, food and beverage, and transport, including some of Australia’s most trusted names: BHP Billiton, the Commonwealth Bank and Goodman Fielder.

The Australian Bureau of Statistics valued investment in Indonesia at $3.4 billion in 2008. Two-way trade in goods and services reached $10.3 billion in 2007/08, making Indonesia our 13th largest trading partner, and our 11th ranked export market. Australia primarily exports live animals, aluminium, wheat, crude petroleum and sugars to Indonesia, with our major service exports being education-related travel and personal travel.

In 2009/10, Australian aid to Indonesia will be worth an estimated $452.5 million, making Indonesia the largest recipient of Australian aid, and demonstrating our commitment to neighbourly relations.

Risky Business

Recent high-profile court cases on drugs, perceived complexities in doing business in Indonesia, previous terrorist attacks such as the Bali bombings, political upheaval and natural disasters such as tsunamis and earthquakes are all existing sources of negative investor sentiment for Indonesia. Cautious investor confidence has, however, returned since the Bali bombings, and was greatly enhanced by the re-election this year of President Susilo Bambang Yudhoyono for another five-year term.

The 2009 terrorist attacks on the Marriott and Ritz-Carlton Hotels in Jakarta challenged this growing confidence. Although the attacks appeared to target foreign businesspeople, a DFAT spokesperson says early indications are that the bombings “are not significantly adversely affecting business and investor sentiment. Anecdotal evidence suggests that if they are isolated events these attacks will have little lasting impact on investment planning by Australian investors”.

Roger Donnelly, chief economist of the Export Finance and Insurance Corporation (EFIC), reports in the agency’s World Risk Developments paper that prior to the bombings, the currency, share and bond markets had all been rallying and that interestingly, “the blasts completely failed to shake this optimism”.

Indonesia still faces many challenges moving forward, however. In the World Bank’s Doing Business 2010 report, Indonesia ranked 142 on contract enforcement, with investment risks largest in the mining and energy sectors, where not coincidentally foreign investment has stagnated over the past decade, according to Donnelly.

“High tax and royalty payments, an uncertain regulatory environment and concerns over the sanctity of contracts, all accentuated by the devolution of power to regional bodies, are the chief headaches,” he says.

Australia Indonesia Business Council (AIBC) national vice-president Ross Taylor agrees, noting that addressing ‘KKN’ (corruption) is a major problem for the Yudhoyono government, and that “dealing with a number of recalcitrant regencies as a result of the introduction of regional autonomy legislation presents some enormous challenges.”

Other challenges are business systems and governance Taylor adds: “Many major companies involved in telecommunications and in the resources sector still want more transparent and simplified systems for establishing and operating large scale businesses in Indonesia.”

EFIC identified that “budgetary constraints mean the government has limited capacity to invest. Roads have seen little investment over the past decade, while ports cannot accommodate the larger cargo ships. Electricity generation is struggling to keep up with annual demand growth of 8 percent.”

Donnelly also found that direct investors were holding tight and that a bigger setback for the economy than the bombings was on the horizon—oil price rises. “The fall in world commodity prices in general, and oil prices in particular, from vertiginous peaks last year has conferred several benefits: cutting Indonesia’s import bill, lowering rupiah prices of fuel and rice, damping inflation, and enabling the central bank to cut interest rates. But now that the oil price is climbing again these effects are unwinding. The budget is particularly vulnerable because it subsidises fuel and electricity prices.”

The ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) – signed earlier this year and expected to come into force on January 1, 2010 – will be the catalyst for regional growth, said Crean: “ASEAN’s resilience during the global economic downturn and sound economic growth in the coming years will further enhance prospects for Australian businesses when the historic FTA comes into force.”

Last week in Melbourne, Parliamentary Secretary for Trade Anthony Byrne opened a series of seminars designed to inform Australian businesses of the changes and opportunities the AANZFTA, Australia’s largest FTA, provides.

The Association of South East Asian Nations (ASEAN) comprises of Brunei Darussalam, Cambodia,
Indonesia, Laos, Malaysia, Burma (Myanmar), Philippines, Singapore, Thailand and Vietnam.

The seminar series continues Australia-wide:

Brisbane: October 22

Canberra: October 27

Adelaide: October 28

Perth: October 28

Darwin: October 30

Hobart: October 30

Details: Visit www.austrade.gov.au/aseannow or call 13 28 78

Crean spoke between sessions at last week’s Association of South East Asian Nations (ASEAN) conference and said the significant growth potential of Asia was key to global revival. Beyond China and India, he predicted Indonesia and Vietnam would play a role in strengthening an economic recovery.

The conference further delivered some promising indications for Australia, Crean added, who said all ministers showed strong political commitment towards bringing the ASEAN-Australia-New Zealand Free Trade Agreement into effect on January next year.

“We have agreed to redouble our efforts to realise this,” he said. “Australian exporters want this FTA to come into force as soon as possible, so they can access the significant tariff reductions and other commitments it contains.”

ASEAN also recently signed a free trade agreement (FTA) with India and an investment FTA with China.