Purpose of the Bills

This Bills Digest relates to two Bills comprising:

• the Customs Amendment (Australia-United Kingdom Free Trade Agreement Implementation) Bill 2022 (the Customs Bill)
• the Customs Tariff Amendment (Australia-United Kingdom Free Trade Agreement Implementation) Bill 2022 (the Tariff Bill).

The purpose of the two Bills is to implement the customs and tariff commitments made in the Free Trade Agreement between Australia and the United Kingdom of Great Britain and Northern Ireland (Australia-UK FTA or the FTA) by making relevant amendments to the Customs Act 1901 and the Customs Tariff Act 1995.

Two separate Bills are needed in order to comply with the Australian constitutional requirement that ‘laws imposing duties of customs shall deal with duties of customs only’,[1] and provisions regarding other matters must be dealt with separately.[2] As such, the Customs Act sets out the administrative rules and relevant penalties regarding the export and import of goods, while the Customs Tariff Act focuses exclusively on the tariff rates applicable to imported goods.

Background

What is the Australia-UK FTA?

Due to Brexit, the European Union’s trade agreements no longer apply to the UK as of 1 January 2021.[3] Consequently, Australia and the UK began formal negotiations for a bilateral FTA in June 2020. Following the conclusion of an ‘Agreement in Principle’ in June 2021, the Australian Government and the UK Government officially signed the Australia-UK Free Trade Agreement on 17 December 2021.[4]

The FTA is the UK’s first ‘new’ trade agreement since Brexit.[5] Some commentators argue that in the wake of Brexit, the UK’s lack of progress in trade talks with the United States has made a trade deal with Australia ‘more appealing than ever’.[6] In July 2020, the UK Government said:

A free trade agreement (FTA) with Australia is part of delivering the government’s top strategic trade priority of using our voice as a new independent trading nation to champion free trade, fight protectionism and remove barriers at every opportunity.[7] [emphasis added]

The FTA aims to reduce trade and investment barriers between the two countries. It contains 32 chapters covering a wide range of issues, including trade in goods, trade in services, investment, digital trade, intellectual property, government procurement, competition policy, state-owned enterprises, labour, environment, innovation, development, animal welfare, and small and medium sized enterprises.[8] Notably, the FTA does not contain provisions on the controversial investor-state dispute settlement.

If it enters into force, the FTA will remove tariffs on the vast majority of goods traded between Australia and the UK.[9] Many economists believe lower tariffs and fewer trade barriers between countries will promote economic growth.[10]

The UK is Australia’s fifth largest trading partner, with two-way trade (in goods and services) valued at $36.7 billion in 2019–20.[11] Some commentators argue that Australian agricultural and food exports to the UK have been low due to high UK tariffs and other trade barriers.[12]

According to former Trade Minister Dan Tehan, the FTA is a gold standard trade agreement that will bring many benefits to Australian businesses. In particular, Mr Tehan argued:

This deal will lead to growth in Australian agricultural exports, which will make Australian farm produce more competitive in a market of more than 65 million [British] consumers.[13]

Some stakeholders disagree with this assessment and argue the FTA will harm Australian workers (discussed below in the ‘Position of major interest groups’ section).

When will the FTA come into effect?

Will the recent political instability in the UK affect the FTA’s entry into force?

Prime Minister Anthony Albanese has expressed concerns that the recent UK leadership changes and the resulting political instability may delay the FTA’s entry into force.[14]

For a bilateral treaty (for example, the Australia-UK FTA) to come into effect, there is usually an exchange of diplomatic notes that confirms both sides have completed all necessary domestic procedures to enable entry into force.[15] Although the Australian Government and the UK Government signed the FTA in December 2021, Parliaments in both countries still need to pass their respective domestic legislation to enable the FTA’s entry into force.[16] In other words, the tariff reduction process outlined in the FTA will only come into effect when the trade deal is ratified by both countries.

In May 2022, the UK Government (led by Boris Johnson) introduced a Bill aiming to implement the Australia-UK FTA.[17] It remains to be seen whether the UK Parliament will prioritise passing the Bill. Recent British Prime Ministers Boris Johnson, Liz Truss, and Rishi Sunak have had diverging views on the FTA.

Some British parliamentarians warned their government against ‘overselling benefits of Australia trade deal’, and they called for the UK Parliament to scrutinise the FTA further.[18] Rishi Sunak, prior to becoming the British Prime Minister, criticised the FTA as a ‘one sided deal’ that could harm British farmers.[19] He said the UK Government ‘shouldn’t be rushing to sign trade deals as quickly as possible’.[20] However, Mr Sunak also said he would not seek to renegotiate the trade deal because it would be wrong to renege on an international treaty.[21]

As a Chinese proverb goes: ‘A long night is fraught with nightmares.’ If there is further political instability in the UK that causes the FTA ratification process to drag on, then it could be subject to more unforeseen interruptions.

On the other hand, if the Australian Parliament passes the Customs Bill and the Tariff Bill, then it may signal Australia’s commitment to the FTA and prompt the UK to ratify the deal.

Why does it matter when the FTA enters into force?

The timing of the FTA’s entry into force determines the exact tariff rate that importers must pay for goods traded between Australia and the UK. A delay in the treaty ratification process could cause Australian importers to miss out on preferential (lower) tariff rates.

For example, currently cheese imported into Australia is subject to a tariff rate of $1.22/kg.[22] In other words, Australian importers buying cheese from the UK could be paying $1.22 per kilogram in tariff or import duty to the Australian Government.

If both Australia and the UK pass their relevant domestic legislation to enable the FTA to come into effect in November 2022, then for the remainder of the year 2022, UK originating cheese imported to Australia will be subject to a preferential (lower) tariff rate of 1.02/kg. From 1 January 2023, the tariff rate for UK originating cheese will be reduced again to $0.81/kg. A new, lower tariff rate will be applied from 1 January of each new year, until the rate reaches ‘Free’ (zero).[23]

Table 1 below indicates the tariff schedule on British cheese as outlined in the FTA.[24] It shows that if the FTA can be ratified quickly and comes into effect before the end of 2022, then it will give effect to an immediate tariff reduction, followed by a phased tariff reduction process. This is colloquially known as a ‘double tariff cut’, because it enables two tariff reductions to occur in a relatively short period of time.

Table 1: Tariff rates for UK originating cheese if the FTA enters into force

Source: Explanatory Memorandum to the Tariff Bill, 6.

On the other hand, if there is a delay that means the Australia-UK FTA does not enter into force until 2023, then the next phased reduction will not occur until 1 January 2024. This potential delay could affect the profitability of importing businesses as they may not be able to enjoy the ‘double tariff cut’ immediately.

Committee consideration

Joint Standing Committee on Treaties

The Joint Standing Committee on Treaties (JSCOT) published its report on the Australia-UK FTA on 16 November 2022 and recommends that binding treaty action be taken.[25]

While the Committee is supportive of the FTA, the Committee has also expressed concerns that there is a lack of independent economic analysis and genuine consultation regarding the impact of the FTA:

The Committee, relevant stakeholders, and the Australian community as a whole are restricted in their ability to examine the potential economic and broader impacts of trade agreements, and cannot subsequently judge their achievements because they are not accompanied by independent economic modelling. This is a long-running concern of the Committee and the subject of a recommendation in this report, as are its concerns about the mechanics and substance of the consultation process during negotiation.[26] [emphasis added]

Senate Standing Committee for the Scrutiny of Bills

At the time of writing the Scrutiny of Bills Committee has not yet considered the Bills.[27]

Policy position of non-government parties

Liberal Party of Australia

The Australia-UK FTA was signed by the Morrison Government in December 2021.

In October 2022, Shadow Trade Minister Kevin Hogan said the Coalition in Government did the ‘heavy lifting’ to negotiate the trade deals with the UK and India, and now it is up to the Labor Government to ratify the FTAs as a matter of priority:

The Coalition backs these agreements 100% and we will do whatever is needed, including sitting extended hours, to ensure passage through both Houses of Parliament as quickly as possible.[28]

Australian Greens

The Australian Greens have called on the Government to ensure the Australia-UK FTA upholds environmental standards, labour rights, human rights and includes a First Nations trade chapter. The Greens’ spokesperson for trade, Senator Dorinda Cox, has said:

For too long, we have witnessed dodgy trade deals that undermine workers rights and trash our planet. This must stop. It is essential that the UK-Australia free trade agreement includes measures that address the climate crisis…

Securing a First Nations trade chapter as part of this agreement would be a game changer for First Nations businesses across the country. It has the potential to unlock significant capital, create jobs and offer careers on Country…

The Greens are disappointed that the text of the agreement was not released to the community before it was finalised. It is clear we need a more transparent and democratic process for negotiating treaties that enables community engagement going forwards.[29]

The positions of other parties and Independents could not be identified at the time of writing this Digest.

Position of major interest groups

Business Council of Australia

The Business Council of Australia (BCA) welcomes the FTA and recommends that the Australian Parliament support the FTA’s ratification, and that this ratification occurs as soon as possible.[30]

The BCA argues:

The early entry into force of AUKFTA will give Australian businesses an advantage as trade competitors seek to negotiate preferential access to the UK market through bilateral FTAs and the UK’s potential accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). It will also enhance the opportunities for labour mobility between our two countries, further strengthening people-to-people links and knowledge exchange.[31]

The BCA believes the FTA will help further boost trade through tariff removal, more efficient customs processes, and greater mobility for workers.[32]

Aside from the potential economic benefit of the FTA, the BCA also argues that perhaps the most important aspect of the FTA is that it signals ‘the enduring partnership [between Australia and the UK] in the context of increasing geopolitical uncertainty.’[33]

The BCA says:

The UK is expanding its engagement in the Indo-Pacific region, including through a greater diplomatic and military presence, as well as through new trade and investment links….

The Business Council wishes to see concrete outcomes from AUKFTA and AUKUS [alliance] supporting the development of future industries for the Australian economy, leading to significant new commercial opportunities for Australian businesses…

The UK can make an important contribution to the stability and prosperity of the Indo-Pacific region, to the benefit of Australia and our regional partners.[34]

The Group of Eight

The Group of Eight, a peak body representing Australia’s leading research-intensive universities, is supportive of the FTA and its ratification.[35]

The Group of Eight has said:

The AU-UK FTA contains measures intended to, for example, allow Australian professionals to compete on an equal footing with EU nationals in the UK for the first time in 40 years. It also includes a dedicated innovation chapter, facilitating bilateral engagement on innovative technologies; and clauses encouraging the mobility of workers, including researchers, to facilitate professional engagement across both countries…

The Go8 would welcome a dialogue with Government to clarify how research-intensive universities could use the provisions of this chapter to advance and deepen collaborations with UK partners in advancing innovation goals, particularly in the area of emerging technologies.[36]

National Farmers’ Federation

The National Farmers’ Federation (NFF) is broadly supportive of the FTA.[37] The NFF has said:

This agreement will provide options for a range of Australian producers to diversify their market access by removing tariffs and reducing red tape on Australian agricultural exports.

The proposed Trade Agreement will see the immediate removal of tariffs on a range of Australian produce including wine, rice, certain seafoods, honey and most horticultural products. Furthermore, tariffs in place on beef, sheep meat, dairy products, sugar, and cereals will be phased out over several years, with most of these exports gaining immediate access to duty free quotas.[38]

While broadly supportive of the FTA, the NFF is opposed to the FTA’s changes to the Working Holiday visa arrangements (commonly known as the backpacker visa).[39]

Under the Department of Home Affairs’ current visa requirements, all working holidaymakers are required to undertake 88 days of specified work in regional Australia in order to satisfy the eligibility criteria for a second Working Holiday visa, and 179 days of specified work to be eligible for a third visa. In practice, this means that many British backpackers choose to work on Australian farms to satisfy the visa eligibility criteria.

If the Australia-UK FTA comes into effect, then British backpackers will no longer be required to do specified work to be able to stay in Australia for up to 3 years on second and third Working Holiday visas.[40]

Abul Rizvi, a commentator on immigration matters and a former Deputy Secretary of the Department of Immigration, says backpackers will avoid farm work if they have other options:

If you’ve got the option of waiting at a table instead of picking fruit, you’re going to choose that, because picking fruit is really hard [work].[41]

The NFF argues the changes will reduce the availability of farm labour from British backpackers, when Australian farmers are struggling to recruit workers.[42]

Trade unions

The Australian Council of Trade Unions (ACTU), the Construction, Forestry, Maritime, Mining and Energy Union (Construction Union), and the Australian Education Union (AEU) have criticised several aspects of the FTA.[43] In particular, the ACTU has denounced the FTA as an ‘anti-worker’ deal and opposes its ratification.[44]

The Construction Union and the AEU have argued that should the JSCOT supports the FTA’s ratification, then the Committee should also require amendments to the text of the FTA.[45]

Criticism of the FTA regarding its wavier of labour market testing

The trade unions criticise the FTA for undermining employment opportunities for Australians by waiving labour market testing.

For some work visas, if an Australian sponsor/employer wishes to hire an overseas worker, the sponsor/employer must first demonstrate that they are unable to find a suitable Australian worker to fill the role. Only after the employer demonstrates that they are unable to find a suitable local worker, will the Department of Home Affairs grant a work visa to an overseas worker to fill the role. This is known as labour market testing.[46]

The Australian Government can choose to waive labour market testing for some overseas workers under FTAs. This is known as labour market testing waiver or exemption.

The Australia-UK FTA aims to promote the temporary movement of workers between Australia and the UK via its Chapter 11 on Temporary Entry for Business Persons. For example, if an Australian sponsor/employer wishes to hire certain UK workers (for example, an UK contractual service supplier), the sponsor does not need to demonstrate that they are unable to find suitable Australian workers.

The ACTU says:

Labour market testing is an important measure to ensure that employers properly advertise available positions locally to provide local workers with opportunities and to ensure that employers are not building their business model on exploiting short-term visa workers.[47]

The Construction Union highlights that the labour market testing waiver will have a particularly harmful effect on the Australian construction industry:

The propensity of employers to exploit temporary visa workers by way of wage theft and sham contracting is widespread, notorious and ongoing, particularly in the construction industry.

Further, the increase of temporary visa workers will put downward pressure on wages for Australian residents and citizens, the same people who expect their elected parliamentary representatives to protect their interests, not undermine them.[48] [emphasis added]

Consequently, the trade unions have recommended that the Government should remove Chapter 11 (Temporary Entry for Business Persons) from the FTA, or ‘restrict its scope by removing the provisions that facilitate increased numbers of temporary workers who are vulnerable to exploitation and remove the provisions waiving labour market testing’.[49]

The Australian Labor Party previously stated in its Labor’s 2021 National Platform:

Labor will prohibit through legislation the Commonwealth signing trade agreements that… waive labour market testing… [50]

Labor also said:

If prior to the election of a Labor government, trade agreements are signed which are not consistent with the above, Labor in government will seek the renegotiation of the agreement to ensure it is consistent with the above points before bringing any enabling legislation before the Parliament.[51]

Criticism of the FTA regarding the government procurement preference

Government procurement is the procurement of goods and services on behalf of a public authority. Chapter 16 of the Australia-UK FTA specifies the scope of government procurement open to UK suppliers. The general objective of Chapter 16 of the FTA is that Australian Government purchases of goods and services above a certain value must be subject to a competitive tendering process that is open to UK bidders.[52]

The ACTU has criticised the FTA for ‘opening up government procurement markets further, meaning local businesses have to compete with UK suppliers.’[53] The trade unions say all levels of government in Australia should actively preference Australian businesses where possible to support local jobs.[54]

Consequently, the unions have recommended that the Government should review Chapter 16 of the FTA to ensure it does not restrict the ability of the Government to preference local suppliers.[55]

Criticism of the FTA regarding labour rights and labour protection provisions

The ACTU has criticised the FTA for containing inadequate labour rights and labour protection provisions. For instance, the ACTU says the labour dispute settlement process outlined in the FTA is long and convoluted, rendering the mechanism very weak.[56]

Furthermore, the trade unions argue that although the Labour Chapter (Chapter 21 of the FTA) does contain statements on the mutual ambition of the Parties to tackle forced labour and modern slavery, there are no substantive commitments in this regard. The Australian and the UK Governments will merely ‘strive to ensure’ that private and public entities operating in its territory take appropriate steps to prevent modern slavery in their supply chains and will ‘to the extent it considers appropriate adopt or maintain measures to this effect.’[57]

The trade unions have recommended that the Government should renegotiate the labour chapter to contain ‘an effective, timely, and accessible labour arbitration mechanism, where unions in both countries can challenge exporters for violations of fundamental labour standards.’[58]

The Australian Labor Party and the Australian Greens have previously criticised the Coalition Government for signing FTAs that do not contain adequate human rights, labour rights, and environmental protection provisions.[59]

Financial implications

The March 2022–23 Budget estimated that implementing the FTA will reduce customs duty receipts by $430 million over the forward estimates period.[60]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bills’ compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bills are compatible.[61]

Parliamentary Joint Committee on Human Rights

At the time of writing, the Parliamentary Joint Committee on Human Rights has not yet considered the Bills.[62]

Key issues and provisions

As noted, various stakeholders disagree about the overall economic impact of the FTA. However, the provisions in and of themselves do not appear controversial.

Customs Bill

The Customs Bill has one Schedule comprising three Parts:

• Part 1 is titled UK originating goods and deals with rules of origin for goods imported into Australia. Goods imported into Australia that are classified as ‘UK originating goods’ will be eligible for preferential (lower) tariff rates
• Part 2 is titled verification powers and deals with businesses’ record-keeping obligations and customs officials’ powers to verify claims of preferential tariff treatment
• Part 3 contains application provisions which set out the situations or timeframes in which the Bill will apply.

Part 1 – UK originating goods

Part 1 of Schedule 1 of the Bill deals with the rules of origin for the FTA and inserts proposed Division 1P into Part VIII of the Customs Act. Under the Australia-UK FTA, goods defined as ‘UK originating goods’ will be entitled to receive preferential tariff treatment when they are imported into Australia.

Broadly speaking, to be a UK originating good, a good must be:

• wholly obtained or produced in the UK, or the UK and Australia (Subdivision B of proposed Division 1P)
• produced in the UK, or the UK and Australia using originating materials (Subdivision C of proposed Division 1P) or
• produced with non-originating materials provided the good meets the Product Specific Rules set out in Annex 4B to Chapter 4 of the FTA (Subdivision D of proposed Division 1P).

Furthermore, the rules of origin also specify the treatment of:

• accessories, spare parts, tools or instructional or other information materials (Subdivision E of proposed Division 1P)
• originating goods that are transferred through other countries before arriving in Australia (referred to as consignment) (Subdivision F of proposed Division 1P).

Part 2 – Verification powers

Part 2 of Schedule 1 deals with businesses’ record keeping obligations and customs officials’ powers to verify claims of preferential tariff treatment. The main purpose of Part 2 is to provide authorised customs officials with the powers to verify claims when importers of UK goods claim preferential tariff treatment under the FTA.

Tariff Bill

The Tariff Bill has one Schedule that makes amendments to the Customs Tariff Act to implement the preferential tariff rates applicable to UK originating goods.

Article 2.5 of the Australia-UK FTA provides that ‘each Party shall progressively reduce or eliminate its customs duties on originating goods in accordance with its Schedule to Annex 2A (Tariff Commitments).’

Former Trade Minister Dan Tehan said:

Australia will eliminate tariffs on more than 99 per cent of British exports by value entering Australia, saving Australian households and businesses more than $200m a year on tariffs…

About $725m worth of key farming products, including beef, sheep meat, wine and others such as sugar and dairy, will be eligible immediately for duty-free exports to Britain once the agreement comes into force. More than 35,000 tonnes of Aussie beef will be duty-free on entry into force and this will expand to 110,000 tonnes in 10 years.[66]

Commencement dates

Sections 1–3 of both Bills commence on Royal Assent.

Schedule 1 of the Customs Bill will commence on the later of Royal Assent and the day the Australia-UK FTA enters into force. Schedule 1 of the Tariff Bill will commence at the same time as Schedule 1 of the Customs Bill.

If the FTA does not enter into force, then the provisions of the Bills do not commence at all.

Concluding comments

The Customs Bill and the Tariff Bill amend Australian law to implement Australia’s commitments under the Australia-UK FTA.

There are divided opinions about the potential effect of the FTA on Australian jobs and the economy. While some stakeholders support the FTA’s ratification,[67] others argue that doing so will harm Australian workers.[68]