Chapter 4

International investment issues and Australia’s international investment position

Introduction

One of the Government’s principal policy objectives is to generate and capture benefits for the Australian community through international trade and investment liberalisation. This is pursued through a multi-faceted trade policy involving complementary multilateral, regional and bilateral engagements.

The Treasury’s Foreign Investment and Trade Policy Division (the Division) is responsible for ensuring effective representation of Australia’s foreign investment policy and negotiating position on international investment issues. This includes multilateral forums, such as the Organisation for Economic Co-operation and Development (OECD) and the World Trade Organization (WTO); regional forums, such as Asia-Pacific Economic Cooperation (APEC); and bilateral forums, such as free trade agreements (FTAs), investment protection and promotion agreements (IPPAs) and other bilateral partnerships.

The Division also supports the Executive Member of the Board in his role as the Australian National Contact Point (ANCP) for the OECD Guidelines for Multinational Enterprises (the OECD Guidelines) and related corporate social responsibility issues. The role of the ANCP is to ensure the effective administration and promotion of the OECD Guidelines in Australia.

Over the past two decades growth in worldwide flows of foreign direct investment (FDI) has been particularly strong. This growth in FDI largely reflects the worldwide relaxation of trade and investment controls, together with advancements in information technologies, communications and transport.

Australia has traditionally relied on inward FDI to meet the shortfall between domestic saving and the level of domestic investment. Foreign investment supplements local savings thereby supporting higher rates of economic growth and employment levels which in turn delivers higher wellbeing for Australians. Inward FDI also continues to play a significant role in making Australian industry internationally competitive, and thereby contributing to export growth, facilitating access to new technologies, financing new and often risky innovations, and providing opportunities for global integration and networking.

Over the past 15 years Australian outward FDI stocks have grown more strongly than inward FDI stocks. This trend of Australian firms increasingly investing abroad has added another dimension to the contribution that FDI makes to Australia’s economic growth. Outward FDI enables Australian firms to expand their business beyond the potential constraints imposed by the limited size of the domestic market. By extending their market presence and access to resources, expertise and technology in other markets, Australian firms are able to become more efficient and competitive in global markets. Outward FDI furthermore has a multiplier effect through stimulating the demand for goods and services provided by component and other input suppliers.

The strong growth in global cross-border FDI activity is also linked to the recent increase in government-to-government investment-related negotiations in multilateral, regional and bilateral forums. Given the importance of FDI flows to Australia and the positive role that investment-related agreements can play in enhancing international investment flows, Australia pursues a broad agenda on investment in international forums.

Multilateral investment issues

While at the multilateral level, there is not a comprehensive instrument covering foreign investment, an international legal framework for FDI has begun to emerge. The Division’s role in negotiating international investment agreements and the investment chapters in Australia’s free trade agreements allows it to contribute to the further development of an international rules-based system that takes appropriate account of both the interests of foreign investors and the wellbeing of Australians. The Division’s involvement in the OECD Investment Committee and promotional work on the OECD Guidelines domestically supports Australia’s other contributions to the international policy framework for investment. By promoting the OECD Guidelines, the Division seeks to encourage good corporate behaviour and the positive contribution of multinational enterprises to sustainable development.

While the Division has primary responsibility for the OECD Guidelines and the Government’s engagement on international investment issues in the OECD, the Department of Foreign Affairs and Trade (DFAT) has direct responsibility for Australia’s involvement in trade-related forums such as the World Trade Organization (WTO) and Asia-Pacific Economic Cooperation (APEC). The Division provides advice and briefings on foreign investment issues to the Treasurer and DFAT.

Organisation for Economic Co-operation and Development (OECD)

The Division represents Australia on international investment issues in the OECD Investment Committee. The Investment Committee’s mission is to provide a forum for international cooperation, policy analysis and advice to governments on how best to enhance the positive contribution of investment worldwide.

OECD Investment Committee

The Committee provides a well-placed forum for addressing the policy challenges facing OECD and non-OECD countries as they seek to attract investment and maximise its benefits to host societies. The Committee represents the community of policy makers, including treaty negotiators and National Contact Point representatives for the OECD Guidelines, from countries which are the source of more than 80 per cent of global investment flows. It is responsible for the OECD Codes of Liberalisation of Capital Movements and Current Invisible Operations. The Investment Committee also has primary responsibility for the OECD Declaration on International Investment and Multinational Enterprises (the Declaration). The Declaration was adopted by OECD Governments in 1976 to facilitate direct investment among OECD Members. It represents a broad political commitment to open and transparent investment policies and encourages the positive contribution of multinational enterprises. Since adoption, the Declaration has been the basis for extensive inter-governmental cooperation on developing best policy practices and peer review-based approaches to outreach activities. The text of the Declaration is at Appendix F.

The Committee’s work programme falls into five main categories: promoting transparent and non-discriminatory investment policies; encouraging the positive contribution of multinational enterprises to sustainable development; cooperating with non-Members to mobilise investment for development; monitoring developments in international investment agreements; and monitoring foreign direct investment trends.

The main projects being undertaken by the Investment Committee include:

• Business integrity in weak governance zones. This project has been on the Committee’s agenda since April 2004 and is now nearing completion. The aim of the project is to assist companies in responsibly managing their investments in weak governance zones through the development of a risk management tool. The tool is non-prescriptive and consistent with the objectives and principles of the OECD Guidelines. During the course of the project the Committee considered the generic challenges that emerge from investments in weak governance zones, based on a case study of investments by OECD companies in the Democratic Republic of the Congo. In preparing terms of reference on conducting business with integrity in weak governance zones, the Committee largely focused on issues raised by the OECD Guidelines and six other OECD integrity instruments. This work has been subject to extensive consultation with stakholders and the draft text is currently available for public comment. The risk management tool is scheduled for finalisation in the first half of 2006.
• Investment for development — Policy Framework for Investment (PFI). The PFI is being developed by a Task Force established by the Investment Committee, which involves OECD and non-OECD Governments, civil society representatives and other international organisations. The objective of the PFI is to promote a shared view among OECD and non-OECD Governments and business of what constitutes ‘good policies’ in a range of areas bearing on investment. The PFI provides a comprehensive, evolving and non-prescriptive operational guide on a broad range of policies relevant to the investment climate, such as trade policy, competition policy, taxation policies and corporate and public governance. It has been designed for governments engaged in domestic reform, regional cooperation or international policy dialogue and aims to create an investment environment that is not only attractive to investors but enhances the benefits of investment. The PFI is scheduled to be completed by the May 2006 OECD Ministerial Meeting.
• Analysis of key obligations and emerging issues in international investment treaties. Against the background of a proliferation of international investment agreements, the emergence of a ‘new generation’ of bilateral and regional agreements and a growing body of jurisprudence, the Committee has committed to undertaking in-depth analysis of the core provisions and arbitration procedures included in international investment agreements. To date, the work has largely focused the legal literature, evolving arbitral jurisprudence and state practice in relation to the implications of ‘Most-Favoured-Nation’ provisions, interpretations of ‘fair and equitable treatment’ and ‘indirect expropriation’. The Committee has progressed this work during the reporting period by analysing the coverage of FDI by OECD investment agreements and undertaking a stocktake of the novel features that have recently been included in such agreements. In early 2005, the Committee commenced a new strand of work on the improvements to investor-state dispute settlement mechanisms.
• Investment for development — outreach. The Committee’s aims in this area are to increase the capacity of non-Members (China, Russia, India, Africa, Middle East and North Africa (MENA), Asia, Latin America, South East Europe and Eurasia) to attract more and higher quality investment by engaging in dialogue and sharing best practice advice for promoting a favourable environment for both foreign and domestic investment. The Committee undertakes its outreach work in a number of forums including, ad hoc working groups, regional roundtables, peer reviews and background reports. The OECD Global Forum on International Investment (GFII) has been established as a vehicle for the continuing policy dialogue with non-Members. Investment policy programmes with Russia, China and other major players have continued over the period and initiatives in Africa, Asia and the Middle East have also been launched recently.

As part of its responsibility to oversee Member and non-Member countries’ adherence to the Declaration, the Committee also has broad responsibility for the OECD Guidelines and is the reporting post for National Contact Points on their activities relating to the promotion and implementation of the Guidelines. In addition to the recommendations contained in the OECD Guidelines, the Declaration deals with three related instruments aimed at:

• providing national treatment to foreign-owned enterprises on a best endeavours basis;
• promoting cooperation among governments in relation to international investment incentives and disincentives; and
• minimising the imposition of conflicting requirements on multinational enterprises by governments of different countries.

OECD Guidelines for Multinational Enterprises

The OECD Guidelines provide voluntary principles and standards for responsible business conduct consistent with applicable domestic laws.

The OECD Guidelines are recommendations by governments to multinational enterprises (MNEs) operating in or from the 30 OECD Member countries and nine non-Member adhering countries (Argentina, Brazil, Chile, Estonia, Israel, Lithuania, Slovenia, Latvia and Romania). They are the only comprehensive and multilaterally-endorsed code of conduct for MNEs that governments are committed to promoting.

The Guidelines apply to MNEs activities in OECD and non-OECD countries alike. They establish principles covering a broad range of issues including information disclosure, employment and industrial relations, environment, combating bribery, consumer interests, science and technology, competition, human rights and taxation. The Guidelines were last reviewed in June 2000.

The Australian Government has established a National Contact Point to implement and promote the Guidelines to Australian businesses and other interested parties. The Australian National Contact Point (ANCP) is the Executive Member of the Foreign Investment Review Board.

An important aspect of the OECD Guidelines is its formal review mechanism, which provides for an examination of a multinational enterprises’ conduct where that conduct is claimed to be contrary to the Guidelines. Such an examination is termed a ‘specific instance’ and it is conducted by the relevant National Contact Point. In accordance with the OECD’s procedural guidelines for National Contact Points, the ANCP has committed to contribute to the resolution of issues relating to the implementation of the Guidelines in any such specific instances. In June 2005, the ANCP received a submission from several Australian and overseas non-government organisations alleging that the Australian operations of a UK-controlled multinational enterprise were inconsistent with the Guidelines. At the end of June 2005, the specific instance was still under examination.

The promotional activities of the ANCP during the period have been focused on finalising the upgrade of the ANCP website, promoting the Guidelines to business groups and developing a more targeted approach to the consultation process with government agencies, non-government organisations (NGOs), business, and other social partners. This has involved:

• Consultation sessions with social partners in Canberra in November 2004 and in Melbourne in May 2005. These sessions provide a forum for interested parties to raise issues relevant to the Guidelines with the ANCP, facilitate discussion on OECD working papers and provide ideas and assistance with the promotion of the Guidelines.
• Finalising the review and upgrade of the website dedicated to the ANCP and the Guidelines (www.ausncp.gov.au). The upgrade has improved registered users’ access to the secure section of the site and has thereby enhanced the ability of the ANCP to consult with social partners electronically.

  – The website provides: the text of the Guidelines; a secure section for registered social partners to access and comment on ‘for official use’ Investment Committee and Guidelines related OECD material; the ANCP’s Service Charter; procedures for lodging specific instances and the ANCP’s procedures for handling them; frequently asked questions about the Guidelines and specific instances; and a notice board publicising upcoming events.

• Outreach to the business community in relation to promoting the Guidelines and efforts to establish a network of business contacts to consult on the Guidelines and related issues. This included:

  – a presentation on the OECD Guidelines and OECD Corporate Governance Principles to the Australian Stock Exchange Corporate Governance Council at its September 2004 meeting; and

  – increased business attendance and participation at the November 2004 ANCP community consultation.

• Providing for the inclusion of an attachment providing information on the OECD Guidelines and the ANCP in all letters advising the outcome of non-real estate foreign investment proposals subject to the operation of the Foreign Acquisitions and Takeovers Act 1975.
• Chairing an interdepartmental meeting on the Guidelines and the specific instance that was raised with the ANCP in June 2005.
• Attending regular interdepartmental committee meetings chaired by the Attorney-General’s Department on bribery and the OECD Bribery Convention. The ANCP has also met separately with the Attorney-General’s Department to explore increased cooperation between the agencies on raising awareness of the OECD Guidelines and the OECD Bribery Convention.
• Continued efforts to promote the Guidelines through embassy and consular networks. This has included the ANCP personally briefing senior DFAT officials prior to them taking up postings.
• Attending corporate social responsibility conferences hosted by other organisations (for example, the 2004 Prime Minister’s Community Partnership Conference and Awards and the bi-annual Department of Foreign Affairs and Trade and NGO Human Rights Consultations).

More information on the OECD Guidelines and the activities of the ANCP can be found at www.ausncp.gov.au.

World Trade Organization (WTO)

Australia also pursues its interests on international investment through involvement in the WTO Working Group on the Relationship between Trade and Investment (WGTI). The WGTI was formed following the Uruguay Round at the WTO Ministerial Conference in Singapore in 1996.

Following the Fifth Ministerial Conference held in Cancún in September 2003, where developing countries expressed particular resistance to negotiating on the ‘Singapore Issues’ (that is, investment, competition policy, transparency in government procurement and trade facilitation), Ministers decided, at the July 2004 General Council Meeting, not to proceed with negotiations on multilateral rules on investment under the current WTO round. While investment has since been referred back to the WGTI for further consideration, the future work programme of the WGTI remains uncertain.

The Division provides investment policy advice and briefings to the Department of Foreign Affairs and Trade, which represents Australia at the WGTI meetings.

Asia-Pacific Economic Cooperation (APEC)

APEC was established in 1989 in response to the growing interdependence among Asia-Pacific economies. Its goal is to advance Asia-Pacific economic dynamism and sense of community. APEC has become the primary regional vehicle for promoting open trade and practical economic cooperation. APEC Members aim to meet the Bogor Goals of free and open trade and investment by 2010 for developed economies and 2020 for developing economies.

Australia continues to participate actively in the work of APEC, including in relation to foreign investment. Australia’s main investment interest in APEC is to encourage APEC Members to enhance the environment for investment liberalisation in their economies and to improve transparency.

In the lead-up to Australia hosting APEC in 2007, the Division has taken on a more active and strategic role in APEC’s work on investment liberalisation and facilitation by accepting the convenorship of the Investment Experts Group (IEG). The IEG is tasked with taking forward APEC’s investment liberalisation objectives. As convenor, Australia is developing a more comprehensive work plan focussed on:

• both general and sectoral investment liberalisation;
• increased transparency of investment regimes in the APEC region;
• work to increase coherence and convergence in the approach to investment chapters in free trade agreements of APEC Members; and
• increasing policy dialogue with business and international organisations to improve analytical outputs and deliver more projects directed at demonstrated capacity building needs.

Preliminary work is underway to develop the relationship with the United Nations Conference on Trade and Development (UNCTAD) in the area of dispute settlement. UNCTAD has indicated a strong willingness to contribute to a regional workshop to discuss key substantive and procedural issues in 2006.

Business is also sharing its ideas concerning improvement of the regional investment environment, with particular focus on financial services’ liberalisation. Discussions with IEG hold the promise of work targeted at the further reduction of impediments to foreign direct investment flows, and improved evaluation of offers in the financial services sector in both the WTO and preferential trade agreements.

The IEG is forging closer working relationships with other APEC trade and investment facilitation working groups to draw on their areas of expertise. It is also actively seeking greater participation by member economies in taking on the hosting of investment seminars, and in using their own expertise to drive particular projects. Australia, as a member economy, has taken on responsibility for the publication of the sixth APEC Investment Guidebook.

Bilateral investment issues

With the slow rate of progress in multilateral negotiations on trade and the decision not to negotiate multilateral rules on investment in the WTO, Australia has significantly increased its participation in bilateral trade and investment agreements. In addition to the long-standing and successful Agreement with New Zealand (the ANZCER announced in 1983), Free Trade Agreements (FTAs) with Singapore, the United States and Thailand have entered into force. In the first half of 2005, Australia commenced FTA negotiations with the United Arab Emirates (UAE), China, Malaysia and the Association of South-East Asian Nations (ASEAN), in partnership with New Zealand. A feasibility study into a possible FTA with Japan is also underway.

Bilateral agreements can play an important role in improving investment climates, reducing regulatory barriers to international trade and investment and enhancing the benefits that can be derived from FDI. Recent evidence indicates a link between the quality of the overall investment climate and the quality of productive investment that is ultimately attracted. Bilateral agreements can provide greater security, certainty and opportunities for outward FDI from Australia, and at the same time, ensure that Australia is a desirable destination for overseas investors. This includes by reducing existing compliance costs faced by investors and the cost of capital for Australian businesses.

In contrast to multilateral forums, bilateral agreements are less cumbersome to initiate and maintain, and they may be tailored to meet the needs of unique relationships between nations. They can secure practical results for Australian businesses and establish a high benchmark for the multilateral system. However, they can also introduce complexity and hence new compliance costs where each agreement contains slightly different provisions and exemption thresholds or triggers.

Bilateral agreements can be complementary to regional and multilateral efforts by providing momentum to our wider multilateral trade objectives. They can provide precedents, examples of best practice and ensure that progress in improving the global environment for FDI continues particularly when multilateral measures are incomplete or slow to develop.

Investment Promotion and Protection Agreements

Investment Promotion and Protection Agreements (IPPAs) are bilateral investment agreements between governments, which aim to stimulate the flow of investment by providing investors with guarantees relating to non-commercial risk. IPPAs guarantee non-discriminatory treatment and set out rules governing restrictions on the right to expropriate investments, transfer funds and repatriate profits, and access dispute settlement procedures. Australia’s IPPAs apply at the post-establishment stage of the investment cycle, that is, Australia’s sovereign right to admit investments (either through acquisitions or the establishment of new businesses) is unaffected by the provisions included in such agreements.

Australia negotiates its IPPAs on the basis of a Cabinet-approved model IPPA text. Australia’s IPPAs provide a standard of fair and equitable treatment for investors and ‘most-favoured-nation’ commitments (that is, investors of the Party must not be treated any less favourably than investors from any other foreign country). Australia’s IPPAs also provide undertakings about expropriation/nationalisation (including the nature of compensation for any such actions) and establish mechanisms for resolving disputes over investment matters.

To date, Australia has signed IPPAs with Argentina, Chile, the Czech Republic, Egypt, Hong Kong, Hungary, India, Indonesia, Laos, Lithuania, Pakistan, Papua New Guinea, the Peoples’ Republic of China, Peru, the Philippines, Poland, Romania, Uruguay and Vietnam. Agreements with Sri Lanka, Mexico and Turkey have also been signed, but are not yet in force. Australia is currently negotiating IPPAs with Iran and Lebanon.

Other agreements involving investment

Australia-New Zealand Closer Economic Relations

The Closer Economic Relations Agreement between Australia and New Zealand (ANZCER) has been in force for over 20 years (since 1983) and represents a comprehensive bilateral free trade agreement. The main objective of ANZCER is to expand free trade by eliminating barriers to trade and promoting fair competition. The Agreement has assisted in building momentum for trade liberalisation between Australia and New Zealand. By 1990, five years ahead of schedule, all tariffs and quantitative restrictions had been removed from trans-Tasman trade in goods. While the ANZCER does not include a specific chapter on investment, it has facilitated cooperation between Australia and New Zealand on this issue.

In 1999, the Joint Prime Ministerial Taskforce on Australia New Zealand Bilateral Economic Relations (ANZBER) was established to address a number of issues including impediments to trans-Tasman investment. The review resulted in significant liberalisation of the investment regimes of Australia and New Zealand.

Australia and New Zealand continue to enjoy a close relationship with high levels of investment flowing between the two countries. In February 2005, the Australian Treasurer and the New Zealand Minister for Finance agreed to investigate the possibility of adding an investment component to ANZCER.

Australia-Singapore Free Trade Agreement

The Australia-Singapore Free Trade Agreement (SAFTA) entered into force on 28 July 2003. SAFTA is the first bilateral FTA to be concluded by Australia since ANZCER.

SAFTA contains a comprehensive investment chapter that provides for investment liberalisation and protection against expropriation. Under the Agreement, Singapore treats Australian investors like its domestic investors, except in areas specifically exempted. The Agreement also provides for greater transparency in relation to the de facto investment restrictions in Singapore’s government-linked companies.

SAFTA also provides for a review of the Agreement every two years after entry into force. The first SAFTA Ministerial Review Meeting took place in July 2004. As part of this Review, Australia extended its schedules of reservations for services and investment to include a listing of State and Territory measures.

Australia has also established a Help Desk to assist Singaporean business investors with applications for direct investment in Australia. The Division has primary responsibility for the operation of the Help Desk. Further information is available at: www.firb.gov.au/content/singapore/welcome.asp.

Australia-Thailand Free Trade Agreement

The Australia-Thailand Free Trade Agreement (TAFTA) entered into force on 1 January 2005. TAFTA is the first FTA that Thailand has negotiated with a developed economy.

Under the Agreement, both countries have made market access commitments on investment that go beyond their respective obligations in the General Agreement on Trade and Services (GATS). The Agreement also provides for further negotiations on market access in services and investment to be undertaken three years after its entry into force.

The Investment Chapter of TAFTA also provides investors and their investments with fair and equitable treatment, full protection and security, the free transfer of funds, and ensures that prompt and adequate compensation for any losses incurred through expropriation and strife is received.

Australia-United States Free Trade Agreement

The Australia-United States Free Trade Agreement (AUSFTA) entered into force on 1 January 2005.

Australia and the US have a strong bilateral investment relationship. The US is the largest country source of foreign investment in Australia, with US investment accounting for nearly 30 per cent of the stock of foreign investment in Australia.

Under the AUSFTA, Australia has significantly liberalised its foreign investment regime, as it applies to US investors. The following changes to Australia’s foreign investment policy have been made under the AUSFTA:

• exemption from the Foreign Acquisitions and Takeovers Act 1975 (FATA or the Act) of acquisitions of interests in financial sector companies as defined by the Financial Sector (Shareholdings) Act 1998 and therefore subject to the national interest test applying under the latter legislation;
• introduction of an exemption threshold of $800 million for the calendar year 2005, indexed annually to the GDP implicit price deflator, of acquisitions of interests in Australian businesses in non-sensitive sectors (see below);
• introduction of a exemption threshold of $50 million for the calendar year 2005, indexed annually to the GDP implicit price deflator, of acquisitions of interests in Australian businesses in prescribed sensitive sectors. These are:

  – media;

  – telecommunications;

  – transport (including airports, port facilities, rail infrastructure, international and domestic aviation and shipping services provided either within, or to and from, Australia);

  – the supply of training or human resources, or the manufacture or supply of military goods or equipment or technology, to the Australian or other defence forces;

  – the manufacture or supply of goods, equipment or technology able to be used for a military purpose;

  – the development, manufacture or supply of, or the provision of services relating to, encryption and security technologies and communications systems; and

  – the extraction of (or holding of rights to extract) uranium or plutonium or the operation of nuclear facilities;

• introduction of an exemption threshold of $50 million for the calendar year 2005, indexed to the GDP implicit price deflator, for acquisitions subject to the FATA by entities in which a United States government holds a prescribed interest;
• introduction of an exemption threshold of $800 million for the calendar year 2005, indexed annually to the GDP implicit price deflator, for acquisitions of interests in non-residential developed commercial property (other than accommodation facilities); and
• removal of existing policy-based notification requirements for the establishment of new Australian businesses other than where the investment involves a United States government.
• than the commitments on developed commercial property, the AUSFTA does not provide concessions to US investors in relation to the acquisition of interests in Australian real estate.

Australia-China Free Trade Agreement negotiations

On 18 April 2005, Prime Minister John Howard and his Chinese counterpart agreed to launch negotiations on a bilateral FTA. The decision to proceed to FTA negotiations follows the completion of a joint feasibility study, which found that an FTA would provide substantial economic benefits to both countries. As part of those arrangements Australia formally recognised China as a market economy.

As at 31 December 2004, Australia’s total stock of investment in China was $1.25 billion (of which only $466 million was FDI), making China the 23^rd largest destination for Australian outward investment. The stock of Chinese investment in Australia totalled $1.98 billion, making China Australia’s 17^th largest source of foreign investment.

Australia-Malaysia Free Trade Agreement negotiations

On 7 April 2005, the Prime Minister and his Malaysian counterpart announced that Australia and Malaysia would enter into negotiations for an FTA. The announcement followed the completion of parallel scoping studies by the two Governments into the likely impacts of a bilateral agreement.

As at 31 December 2004, Malaysia was Australia’s 28^th largest destination for outward investment with the Australian stock of total investment in Malaysia valued at $736 million (the FDI component was $406 million). The Malaysian stock of investment in Australia for the same period was $5.3 billion (of which $2.8 billion was FDI) making Malaysia the 13^th largest source of foreign investment in Australia.

Australia-New Zealand-ASEAN Free Trade Agreement negotiations

On 30 November 2004 at the ASEAN — Australia — New Zealand Commemorative Summit, Prime Minister John Howard, together with his New Zealand and ASEAN counterparts, announced that negotiations would commence on an FTA between Australia, New Zealand and ASEAN in early 2005.

The first two rounds of the FTA negotiations, held in February and March 2005, focused on procedural issues, including modalities for the negotiations and the possible architecture of an agreement. During the third round of negotiations in June 2005, the discussions were progressed on the substantive issues under each of the four Working Groups — rules of origin, services, investment and legal issues.

Two-way investment between Australia and the ASEAN is substantial. The cumulative stock of total investment from ASEAN countries in Australia, as at 31 December 2004, was $27 billion. However, FDI accounted for only $7 billion of this figure. Australia’s investment stocks in the ASEAN countries totalled $19 billion for the same period, of which only $3 billion was FDI.

Australia-United Arab Emirates (UAE) Free Trade Agreement negotiations

At the fourth meeting of the Australia-UAE Joint Ministerial Commission (JMC) in Canberra on 15 March 2005, Australia’s Trade Minister Mr Mark Vaile and the United Arab Emirates’ Economy and Planning Minister, Sheikha Lubna Al Qassimi, announced that the two countries would commence negotiations on a bilateral FTA.

The first two rounds of negotiations, which were held in Canberra in March and Abu Dhabi in June, included Working Group discussions on goods, services and investment, and legal issues. On investment, negotiations have progressed from the substantive information exchange process to discussions on draft text for inclusion in a chapter.

Two-way investment between Australia and the UAE is very modest. At 31 December 2004, the UAE ranked as only the 37^th largest destination for Australian outward investment with the Australian total stock of investment in the UAE valued at $93 million. Of this, only $21 million was FDI. While the statistics for UAE investment in Australia are not available, it can be assumed that they are likewise very modest.

Australia-Japan Trade and Economic Framework

On 20 April 2005, the Prime Ministers of Australia and Japan agreed to commence a joint feasibility study into a possible FTA. The study will analyse the possible implications of a comprehensive FTA to enable both countries to consider whether they should proceed to formal FTA negotiations. The feasibility study is scheduled to be completed by 20 April 2007.

A joint study into the costs and benefits of trade and investment liberalisation between Australia and Japan was finalised and released on 20 April 2005. The study was undertaken under the Australia-Japan Trade and Economic Framework (AJTEF) signed in July 2003. As part of that study, the Division prepared a case study on the bilateral FDI relationship, including a discussion of the possible beneficial impacts of liberalising FDI restrictions in both countries.

The AJTEF commits both countries to work to achieve comprehensive trade and investment liberalisation. It builds on two other formal agreements between Australia and Japan — the Agreement on Commerce between the Commonwealth of Australia and Japan, 1957 and the Basic Treaty of Friendship and Co-operation between Australia and Japan, 1976 — to further strengthen the bilateral economic relationship between the two countries.

Recent developments

Further up-to-date information on Australia’s bilateral and multilateral relationships, can be found in the international section of the Foreign Investment Review Board’s (FIRB or the Board) website located at www.firb.gov.au/content/international.asp.

International investment position

This section summarises trends in foreign investment in Australia and Australian investment abroad using Australian Bureau of Statistics (ABS) and United Nations Conference on Trade and Development (UNCTAD) data.

Foreign investment in Australia refers to the stock of financial assets in Australia owned by non-residents and financial transactions that increase or decrease this stock. Conversely, Australian investment abroad refers to the stock of foreign financial assets owned by Australian residents and financial transactions that increase or decrease that stock.

ABS data on Australia’s international investment position, which are compiled in accordance with the relevant international statistical standards promulgated by the OECD and the International Monetary Fund, are based on different criteria from those used by the Board.

There are substantial differences between the Board’s statistics and ABS statistics. These include differences in coverage, concepts and timing. ABS data are a measure of the actual cross-border transactions that have occurred and the level of foreign investment held at a particular time. The Board’s figures are an aggregation of those proposals submitted for approval, regardless of the source of finance used, along with the proposed associated expenditures. The limitations of the Board’s data are explained in Chapter 2.

Foreign investment levels

As a resource rich country with relatively high demand for capital, Australia has relied on foreign investment to meet the shortfall between domestic savings and domestic investment. Australia welcomes foreign investment and acknowledges that FDI has allowed the Australian people to enjoy higher rates of economic growth, employment and higher wellbeing than otherwise would have been possible. FDI provides access to the latest technology, production techniques and management skills. It also brings added value through commercial links that offer access to new markets.

The ABS estimated stock of foreign investment in Australia, as at 31 December 2004, was $1,155 billion. This represents an increase of $165 billion (16.7 per cent) over the level at 31 December 2003. FDI accounted for $343 billion of the total stock of investment, a $76 billion (28.5 per cent) increase from $267 billion in 2003.

The stock of Australian investment abroad, as at 31 December 2004, was $650 billion. This represents an increase of $110 billion (20.4 per cent) over the stock at 31 December 2003. FDI accounted for $254 billion of the total stock of investment, an increase of $53 billion (26.4 per cent) from 2003.

As is demonstrated by Table 4.1, after three years of decline, worldwide FDI inflows rose slightly in 2004 to US$648.1 billion. Despite this rise, global FDI inflows in 2004 amounted to less than 50 per cent of their peak in 2000. While the early 2000s have witnessed a slowing of worldwide FDI activity, flows are still high by historic standards and compare favourably to average annual FDI inflows of US$404.1 billion during the 1990s.

Over recent years, Australian FDI flows have not followed the same path as global flows. While the global economy experienced a slowdown in economic activity in the early 2000s, the Australian economy continued to perform strongly, recently being ranked as the most resilient economy in the world to economic cycles.⁶ This economic strength contributed to record FDI flows in 2004.

The inflow of US$42.6 billion of FDI into Australia in 2004 represents the largest ever annual inflow of direct investment from abroad. The 2004 figure is approximately three times greater than the previous record of US$15.6 billion in 2002. Perhaps even more remarkable is the fact that in 2004 Australia was the fifth largest recipient of FDI worldwide, behind the United States, United Kingdom, China and Luxembourg.

While Australia continues to be a net capital importer, Australian firms are investing overseas in ever increasing numbers. The outflow of US$16.3 billion of FDI from Australia in 2004 was the largest ever outflow of direct investment abroad, and is approximately 6.5 per cent greater than the US$15.3 billion outflow experienced in 2003.

Table 4.2 shows a significant increase in the estimated value of the stock of FDI in Australia. As at the end of 2004, the inward stock of FDI stood at US$253.6 billion, an increase of 35.7 per cent over the 2003 figure. The strength of the Australian economy is also reflected in the 31.8 per cent increase in the stock of FDI overseas, from US$127.1 billion as at the end of 2003 to US$167.5 billion as at the end of 2004.

Table 4.1: Foreign Direct Investment flows in selected countries (US $billion)

(a) For 1999-2001 Belgium and Luxembourg figures are combined.

Source: UNCTAD World Investment Report (2004 and 2005 editions).

Table 4.2: International direct investment position in selected countries (US $billion)

(a) Estimated figures.

(b) For 1999-2001 Belgium and Luxembourg figures are combined.

*** Negative accumulation of flows; value included in global total.

Source: UNCTAD, FDI/TNC database (www.unctad.org/fdistatistics).

Chart 4.1: Level of foreign direct investment by
country at 31 December 2004 ($billion)

Source: ABS Catalogue No. 5352.0 International Investment Position, Australia: Supplementary Country Statistics 2004.

Foreign investment levels by country

Chart 4.1 gives a breakdown of Australia’s inward and outward FDI positions with our major FDI partners (the US, the UK, Japan, New Zealand and the EU) as at 31 December 2002, 2003 and 2004.

The US is the single largest source of FDI in Australia and the largest destination for Australian FDI abroad. The stock of Australian direct investment in the US experienced an increase of 36 per cent in 2004 to an estimated $140.3 billion. The stock of US FDI in Australia grew by 84 per cent in 2004 to an estimated $153.2 billion. The UK is the other major source of direct investment in Australia. However the stock of UK FDI has fallen from $55.4 billion to an estimated $43.2 billion over the last three years.

Japanese direct investment in Australia has risen slightly over the last three years from a stock of $16.6 billion to an estimated $17.3 billion. The level of direct investment from the EU (excluding the UK) also rose slightly over the same period from a stock of $38.4 billion in 2002 to an estimated $42.8 billion in 2004. The stock of FDI from New Zealand has risen 43 per cent over the last three years to an estimated $7.8 billion in 2004.

Foreign investment flows

Foreign investment transactions involve changes in the levels of Australian foreign assets and liabilities (including the creation or extinction of foreign assets and liabilities). A current account deficit is balanced by a surplus on the capital and financial account, after allowing for errors and omissions. The balance on the financial account represents net financial transactions with the rest of the world, that is, the inflow of foreign investment into Australia, minus the outflow of Australian investment abroad.

International investment flows and stocks are divided into ‘direct’, ‘portfolio’, ‘financial derivatives’, ‘other investment’ and ‘reserve assets’. Under the international standards used to compile ABS foreign investment statistics, direct investment represents capital invested in an enterprise by an investor in another country which gives the investor a ‘significant influence’ (either potentially or actually exercised) over the key policies of the enterprise. Ownership of 10 per cent or more of the ordinary shares or voting stock of an enterprise is considered, under the ABS framework, to indicate ‘significant influence’ by an investor. Portfolio investment is cross-border investment in equity and debt securities other than direct investment. Other investment is a residual group that comprises many different kinds of investment. Reserve assets are those external financial assets available to and controlled by the Reserve Bank of Australia or the Australian Treasury for use in financing payment imbalances or intervention in foreign exchange markets.

Table 4.3: Foreign investment flows ($billion)^(a)7

Note: Figures may not add due to rounding.

(a) In keeping with balance of payment conventions, credit entries are shown without sign and debit items are shown as negative entries. Thus, investment flows going from Australia to offshore destinations are shown as a negative.

(b) Other investment includes all other investment.

Source: ABS 5302.0 Balance of Payments and International Investment Position, Australia, June Qtr 2005, Table 24 — Financial Account (a)(b).

Chart 4.2: Foreign investment flows⁸

(a) The net foreign investment figure has been derived from determining the difference between foreign investment in Australia and Australian investment abroad.

Source: ABS 5302.0 Balance of Payments and International Investment Position, Australia, June Qtr 2005, Table 24 — Financial Account (a)(b).

Table 4.3 provides a breakdown of the flow of foreign investment over the past five years measured by ABS statistics. Chart 4.2 provides a summary of the major trends in foreign investment flows from the same data. These indicate that Australia remains a net importer of capital.

Foreign investment by sector

Over the period 1 July 2004 to 30 June 2005, the percentage of foreign ownership of Australian equity declined for all reported sectors (Chart 4.3). Over the past five years, the aggregate level of foreign ownership has remained relatively stable across all sectors.

Chart 4.3: Foreign ownership of Australian
equity by sector

Source: ABS 5232.0 Financial Accounts, Australia, June quarter 2005, Tables 40 and 41 — Listed and Unlisted Shares and Other Equity Market (a).

Useful references on international investment issues

Websites

Organisation	Address
Asia-Pacific Economic Cooperation (APEC)	www.apec.org.sg
Attorney-General’s Department	www.ag.gov.au
Australian Bureau of Statistics	www.abs.gov.au
Australian Competition and Consumer Commission	www.accc.gov.au
ANCP for the OECD Guidelines for Multinational Enterprises	www.ausncp.gov.au
Australian Prudential Regulatory Authority	www.apra.gov.au
Australian Securities and Investment Commission	www.asic.gov.au
Australia Treasurer	www.treasurer.gov.au
Business and Industry Advisory Committee to the OECD	www.biac.org
ComLaw	www.comlaw.gov.au
Department of Foreign Affairs and Trade	www.dfat.gov.au
Department of Immigration and Multicultural and Indigenous Affairs	www.immi.gov.au
Department of Treasury	www.treasury.gov.au
Foreign Investment Review Board	www.firb.gov.au
International Monetary Fund	www.imf.org
Invest Australia	www.investaustralia.gov.au
OECD Guidelines for Multinational Enterprises	www.oecd.org
Organisation for Economic Co-operation and Development (OECD)	www.oecd.org
United Nations	www.un.org
World Trade Organization (WTO)	www.wto.org

Specific documents

Document title	Available at:
Code of Liberalisation of Capital Movements	www.oecd.org
Economic Round Up (Treasury series)	www.treasury.gov.au
General Agreement on Tariffs in Trade (GATT)	www.wto.org
General Agreement on Trade in Services (GATS)	www.wto.org
Guide to the Investment Regimes of the APEC Member Economies	www.apec.org.sg
International Direct Investment Statistics Yearbook	www.oecd.org
International Investment Agreements (UNCTAD series)	www.un.org
OECD Code of Liberalisation of Current Invisible Operations	www.oecd.org
OCED Declaration on International Investment and Multinational Enterprises	www.ausncp.gov.au
OECD Guidelines for Multinational Enterprises	www.ausncp.gov.au
Policies and International Integration: Influences on Trade and Foreign Direct Investment (OECD Study)	www.oecd.org
The Trade and Investment Effects of Preferential Trading Arrangements — Old and New Evidence (Australian Productivity Commission — Staff Working Paper)	www.pc.gov.au
Treasury Annual Report	www.treasury.gov.au
UNCTAD Series on Issues in International Investment Agreements	www.untad.org
UNCTAD World Investment Directory	www.untad.org
UNCTAD World Investment Report	www.untad.org

⁶ 2005 IMD World Competitiveness Yearbook http://www01.imd.ch/wcc/.

⁷ The figures for 2004-05 have been significantly affected by one particular transaction whereby a major corporate reorganisation was recorded both as a transaction reducing Australian Investment Abroad and also reducing Direct Investment in Australia. The net effect of this transaction was zero.

⁸ The figures for 2004-05 have been significantly affected by one particular transaction whereby a major corporate reorganisation was recorded both as a transaction reducing Australian Investment Abroad and also reducing Direct Investment in Australia. The net effect of this transaction was zero.

Next: Appendix A - Summary of Australia’s Foreign Investment Policy

Previous: Chapter 3 - Overview of the Foreign Acquisitions and Takeovers Act 1975