Chile-Australian FTA also constitutes an entryway into the Asia-Pacific

According to 2007 figures from the National Customs Service, Chilean exports to Australia totalled approximately $279 million, an increase of 109% over 2006.

From a statistical standpoint, Australia is a major investor. It is also, however, an attractive growth market for Chilean exporters. From a strategic-trade point of view, alongside Hong Kong, it seems to be an interesting springboard into the Asian market. After more than 40 years of building trade links to the east, China is currently its largest trading partner. This explains why its economy has not been hit harder by the current financial crisis.

 

Its workforce, highly skilled and multicultural (more than 200 different languages are spoken, Mandarin Chinese being second after English), and its network of contacts and experience in the Asian business community, makes Australia an attractive operations centre and an excellent test market for products. This is what Apple thought when it launched its store in downtown Sydney, which is second only to the cube in New York in order of importance.

The FTA signed with Australia is a comprehensive agreement that governs, among other issues, investment, market access for goods and services, government procurement, intellectual property and financial services.

With regards to investment, the FTA improves the regulation established in the Agreement between the Government of Australia and the Government of the Republic of Chile on the Reciprocal Promotion and Protection of Investments, currently in force. Particularly includes, as in other agreements signed by Chile, a detailed investor-State disputes settlement mechanism. This mechanism regulates the arbitration procedure applicable to the disputes settlement, preliminary objections to existent disputes, frivolous claims, transparency of arbitral proceedings and consolidation of claims, among others.

The Australian regulatory framework for investments is of particular interest to Chile. This regulatory framework is made up of two legal bodies: a) The Foreign Acquisitions and Takeovers Act 1975 (FATA); and b) Foreign Acquisitions and Takeovers Regulation 1989 (FATR).

 

FATA grants the government the faculty to prevent the entrance of foreign investment subject to the FATA. Thus, a foreign investor acquiring control of a corporation or an Australian business, or an interest in real estate in Australia, which is determined to be contrary to the national interest, can be rejected.

 

The Foreign Investment Review Board (FIRB), which is made up of 4 members, undertakes this screening process. The FIRB is authorized to ask for comments to be obtained from relevant parties and other government agencies when considering whether larger or more sensitive foreign investment proposals are contrary to the national interest. What is contrary to the national interest is determined arbitrarily by the FIRB, by taking into consideration the community concerns of Australians. These concerns are reflected in restrictions on foreign investment in sensitive sectors such as the media and developed residential real estate.

 

Approval of foreign investment is given for a specific transaction, which is expected to be completed in a timely manner. If an approved transaction by FIRB does not proceed at that time and/or the parties enter into new agreements at a later date, or if a transaction is not completed within 12 months, further approval must be sought for the transaction.

Approvals for share acquisitions involving a full or partial bid under the Corporations Act 2001 only apply to the shares acquired during the bid period. For example, if approval is given for a full bid and the bidder only acquires 60 per cent of the shares, but then subsequently wishes to proceed to acquire further shares on market using the ‘creep provisions’ of the Corporations Act 2001, or if they want to acquire the balance of the shares through a subsequent bid, further prior approval must be sought. Normally, approvals for options will also extend to the exercise of those options, provided the option is exercised within 12 months of approval.

 

The lack of objective criteria and the FIRB’s high degree of discretionary leeway, in the name of national interest, constitute a bad sign for foreign investors. This point of view was share by nearly every participant at the recent Australia-China Financial Services Summit 2008, held in October in Sydney. Even Australia’s Senior Investment Commissioner for Greater China, stated that there is a need to clarify the concept of ‘national interest’ during his summit presentation. The Commissioner was quoting Mr Wayne Swan, Australia’s current minister of finance, who made a similar statement during a June 4 Australia-China Business Council conference.

 

As such, Chile’s approach to its FTA with Australia seems odd. Upon reviewing the text on investment (Chapter 10), and specifically Section B on investor-State disputes settlement, it becomes clear that the pre-establishment phase of investment is expressly excluded. According to the agreement, this section applies where there is a dispute between a Party and an investor of the other Party relating to a covered investment made in the territory of a Party in accordance with its laws, regulations and investment policies.

In Chile, there are two principal ways in which capital enters the country; through the DL 600, or Chapter XIV of the Compendium of International Foreign Exchange Rules of the Central Bank of Chile.

 

Through the DL 600, a foreign investor voluntarily signs a contract with the State of Chile, who is represented by the Foreign Investment Committee, which authorizes the transfer of capital or other forms of investment into Chile. In return, the investor receives a series of guarantees and rights. This contract is legally binding for both parties and cannot be modified unilaterally by the State. If an investor does not want to sign it, they may use the aforementioned Chapter XIV. The figures indicate, however, that the vast majority of Australian investments have been materialized via the DL 600.

 

At first glance, this screening mechanism for the inflow of capital to Chile seems to work similarly to the prior approval mechanism existent in Australian law, which is implemented by the FIRB. However, there are significant differences. The DL 600 contains no subjective selection criteria, such as national interest constituting grounds for the approval of a given investment. Under DL 600, rejection of an investment is limited to the degree of transparency of the capital, that is, the investor’s ability to substantiate the origin of it. Finally, the DL 600 is a voluntary mechanism and constitutes only one of the ways in which investment capital may enter Chile.

 

Therefore, it is hard to explain the inclusion of an annex related to the DL 600, but the exclusion of a “mirror” annex which deals with the FIRB, which is responsible for regulating and applying the concept of national interest. This situation reflects an asymmetry in the agreement, thus placing the Australian investor in a better position than their Chilean counterparts for the reasons stated below.

 

The exclusion of the pre-establishment phase of an investment, in the FTA, makes all investments subject to applicable laws in force when the investment is made. In other words, an investment is subject to the laws in force at the time of its materialization. As such, if the Chilean government amends legislation, investments materialized prior to said amendment continue to be regulated by rules that are applicable when the investment is made. On the other hand, investments materialized after new legislation is passed, would be regulated by the new legislation.

 

However, once the FTA is implemented, and according to DL600 Annex, Chile gives Australian investors, or their investment materialized through DL 600, the better of the treatment under Section A of investment chapter (substantive regulation) or the investment contract. It will also allow an Australian investor to amend the investment contract in order to make it consistent with this better treatment.

 

Beyond mere legal dispute, mutual benefits are obvious.

 

After the entry into force of the FTA, a major part of the tariffs will be eliminated covering nearly 98% of the trade between both countries. All remaining tariff on both sides will be eliminated by 2015, except for one component of Chile’s sugar tariff, which will remain subject to its current price band system.

 

The chapter that regulates government procurement ensures that each party’s goods, services and suppliers (excluding financial services), have non-discriminatory market access for public purchases by the other party. In other words, it gives preferential treatment to suppliers and their products to participate in public tenders for the supply of goods and services to the government of each party. Thus, Chilean vendors will be able to access the tendering process for the provision of goods or services at the Commonwealth level of government, as well as that of the six states and territories that make up Australia.

 

With regards to intellectual property, the agreement contains specific obligations on protection of copyright, trademarks, patents and geographical indications. Chile agreed to ratify the “International Convention for the protection of New Plant Varieties” and to make all reasonable efforts to ratify the “Patent Cooperation Treaty” (PCT).

 

The chapter regulating financial services reached the same level of trade liberalization as its Chile-US FTA counterpart, and constitutes an excellent step towards facilitating the internationalization of Chilean banking.

 

Australia has one of the soundest financial regulatory and supervisory structures in the world.

 

Sydney is the financial capital of Australia. The last report, published in September this year by City of London Global Financial Centers Index (GFCI 4), ranked Sydney tenth worldwide and fourth in Asia. Of the 20 global banks, 18 have operations in Sydney.

 

This FTA will undoubtedly bring about new business opportunities. In fact, the mining and forestry sectors are full of interesting opportunities, just to name a couple. Much of the Australian investment is concentrated in the mining sector. This indicates the existence of capital for exploration or the exploitation of minerals in Chile, mainly through joint ventures. Unfortunately, one negative point related to access to capital is the lack of mining projects listed on the Chilean stock market, compared to other important mining markets such Canada or Australia.

In the forestry sector, Chile competes with producers from Asia, New Zealand and Brazil. However, radiata pine and eucalyptus fiber, which is mainly used in tissue paper, paper towel and toilet paper production, is currently imported by Australia and therefore has great opportunities for growth. 

However, there is still much to be done in order to move forward, both in the private and public sectors.

For example, the lack of a double taxation agreement acts as an inhibitor to the investment flow between both countries. It is hoped that in the short term, and with Chile entering the OECD, the discrepancies about banking secrecy that have hindered the signing of this agreement, will clear up.

The creation of the Chilean Bicentennial Fund for the Development of Human Capital and its implementation through its scholarship program is a necessary stimulus to increase the flow of Chilean students to Australia. It is also an incentive for professionals who are looking to expand their network of contacts outside the United States or Europe and at the same time receive a first-rate Anglo-Saxon education.