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Trade facilitation – the new frontier in Free Trade Agreements

Proliferation of Free Trade Agreements

Free Trade Agreements (FTAs) are ubiquitous in the global trading environment. There are more than 350 FTAs in place and a large number are in the process of being negotiated, including the China-Australia FTA.

The reasons for the extraordinary uptake of FTAs include:

  • Enhanced market access: for FTAs to be meaningful, they have to offer something beyond existing trade liberalisation efforts by providing for enhanced market access in key sectors of importance to the FTA parties
  • Foreign policy objectives: FTAs between strategic foreign partners can help to further foreign policy objectives
  • Impact on domestic policies: requirements contained in FTAs may imply changes to laws and policies in the countries who are signing up to the FTA. In this way, FTAs can influence the domestic policies of trading partners.

FTAs versus multilateralism

The World Trade Organization (WTO) constitutes the institutional framework for the conduct of multilateral trade relations and negotiations between its members. There are now more than 150 WTO members, including developed, developing and least developed nations.

The WTO was established in 1995 as the successor to the General Agreement on Tariffs and Trade (GATT) which was both an agreement to liberalise trade in goods as well as an institution responsible for administering the agreement. The GATT was established in 1947 in the wake of World War II, in an effort to re-establish economic stability.

During their respective histories, the GATT and, subsequently, the WTO have been involved in a series of ‘trade rounds’ to progressively expand the scope of trade liberalisation. As a result, the trade agreements administered by the WTO extend well beyond trade in goods and cover areas including trade in services, trade-related investment measures and trade-related aspects of intellectual property.

FTAs and the WTO Agreements share the common objective of trade liberalisation. However, the former are effectively discriminatory in intent, whereas the latter are not. In particular, whereas FTAs include preferences in favour of the parties to an FTA, all WTO Agreements include the cornerstone ‘Most-Favoured Nation’ (MFN) principle. In practice, the MFN principle means any benefit or advantage extended to one WTO trading partner (for example lower tariffs or reduction of non-tariff barriers), must be extended to all other WTO members.

The difficulties in securing agreement on trade issues that is palatable for all WTO members has led to an apparent preference for FTAs over the multilateral approach. A ‘spaghetti bowl’ of FTAs involving regional partners (for example the ASEAN-Australia-New Zealand FTA 2014) as well as geographically disparate nations (for example Australia-Chile FTA 2009) has resulted.

Treatment of trade facilitation in FTAs

There is broad diversity in the scope of FTAs. The content may depend upon:

  • comparative advantage of the nations that are parties to the FTA
  • political strength of interest groups within each of the parties
  • broader geopolitical context for the FTA.

Trade facilitation (TF) has made a relatively recent appearance in FTAs.

What is TF and why is it important?

The conventional definition of TF can be summarised as the simplification and harmonisation of international trade procedures including the activities, practices and formalities involved in collecting, presenting, communicating and processing data and other information required for the movement of goods across international borders.

TF measures can help to:

  • reduce time required for goods to reach and clear customs
  • make customs clearance procedures more transparent and predictable
  • simplify customs clearance procedures
  • focus border measures on products that pose the greatest risks.

In short, TF involves cutting red tape so trade is less complicated, quicker and cheaper.

TF is important for the following main reasons:

  • Costs of exporters: each day that a product spends making its way through customs clearance procedures will add to the cost of the shipment.
  • Costs to SMEs: burdensome, complex and costly customs procedures may render SMEs uncompetitive in international markets.
  • Possible investors: uncertainty regarding the administration of customs procedures in export markets may act as a disincentive to potential investors.
  • Costs to government: inefficient border procedures add costs to border control operations and delay revenue collection.
  • Costs to consumers: costs to exporters associated with compliance with border control requirements will eventually be passed through to consumers in the form of higher prices.

The emergence of TF in FTAs

In 2004, WTO members decided to launch negotiations on TF. This year also proved a pivotal moment for the treatment of TF in FTAs.

Prior to 2004, the treatment of TF in FTAs was limited. In contrast, virtually all FTAs concluded following the launch of TF negotiations at the WTO include some reference to TF. This demonstrates the symbiotic relationship between developments at the WTO and FTA negotiations.

Despite the fact that TF has featured in many FTAs since 2004, the way in which TF has been treated has varied greatly:

  • Narrow approach: in some cases, FTAs have confined treatment of TF to narrow issues including:
    • transparency about customs procedures and applicable fees and charges.

The China-ASEAN FTA (2005) is an example of an FTA where a narrow TF approach was adopted.

  • Broad approach: in other cases, FTAs have taken a much broader approach covering the spectrum of issues, including:
    • simplification of customs procedures
    • border agency co-operation
    • risk management mechanisms to alleviate burden on low risk imports
    • advance rulings to provide certainty regarding product classification and origin assessment prior to entry into the export market
    • appeal rights to allow disgruntled exporters to seek administrative or judicial review of decisions regarding customs treatment
    • express shipments, particularly for perishable goods
    • single window processing for the submission of customs documentation so that such information only needs to be submitted once
    • rapid procedures for rapid release of goods.

The China–NZ FTA (2008) is an example of an FTA where a broad TF approach was adopted.

Impact of WTO TF negotiations on TF provisions in FTAs

The latest round of WTO trade negotiations was launched in 2001 in Doha, Qatar – known as the ‘Doha Development Agenda’ (DDA). TF is but one in a long list of issues included in the DDA.

Despite the limited success of negotiations on the majority of these issues, the WTO members managed to strike an ambitious agreement on TF at the Bali Ministerial Conference in December 2013. The ‘WTO Agreement on Trade Facilitation’ covers a broad spectrum of TF issues. It had been suggested the Agreement would add $1 trillion in new trade globally and create 20 million new jobs worldwide.

The Protocol to adopt the WTO Agreement on Trade Facilitation was due to be adopted by WTO members by 31 July 2014, otherwise it would lapse. However, India backed by Cuba, Venezuela and Bolivia, ultimately declined to sign the Agreement. India’s refusal to sign was linked to concerns over food security and agricultural subsidies – issues that are still outstanding in the context of the DDA. As the WTO operates on a consensus basis, the withdrawal of India’s support for the WTO Agreement on Trade Facilitation means it has not yet entered into legal force.

Although the WTO Agreement on Trade Facilitation is in a state of limbo, it still provides an important backdrop to the treatment of TF in FTAs. It is likely we will increasingly see FTAs mirroring the expansive TF provisions contained in the WTO Agreement.

If you have any questions in relation to this article, please contact Dariel De Sousa on 61 3 9258 3552 or Robert Gregory on 61 3 9258 3770.

Proliferation of Free Trade Agreements

Free Trade Agreements (FTAs) are ubiquitous in the global trading environment. There are more than 350 FTAs in place and a large number are in the process of being negotiated, including the China-Australia FTA.

The reasons for the extraordinary uptake of FTAs include:

  • Enhanced market access: for FTAs to be meaningful, they have to offer something beyond existing trade liberalisation efforts by providing for enhanced market access in key sectors of importance to the FTA parties
  • Foreign policy objectives: FTAs between strategic foreign partners can help to further foreign policy objectives
  • Impact on domestic policies: requirements contained in FTAs may imply changes to laws and policies in the countries who are signing up to the FTA. In this way, FTAs can influence the domestic policies of trading partners.

FTAs versus multilateralism

The World Trade Organization (WTO) constitutes the institutional framework for the conduct of multilateral trade relations and negotiations between its members. There are now more than 150 WTO members, including developed, developing and least developed nations.

The WTO was established in 1995 as the successor to the General Agreement on Tariffs and Trade (GATT) which was both an agreement to liberalise trade in goods as well as an institution responsible for administering the agreement. The GATT was established in 1947 in the wake of World War II, in an effort to re-establish economic stability.

During their respective histories, the GATT and, subsequently, the WTO have been involved in a series of ‘trade rounds’ to progressively expand the scope of trade liberalisation. As a result, the trade agreements administered by the WTO extend well beyond trade in goods and cover areas including trade in services, trade-related investment measures and trade-related aspects of intellectual property.

FTAs and the WTO Agreements share the common objective of trade liberalisation. However, the former are effectively discriminatory in intent, whereas the latter are not. In particular, whereas FTAs include preferences in favour of the parties to an FTA, all WTO Agreements include the cornerstone ‘Most-Favoured Nation’ (MFN) principle. In practice, the MFN principle means any benefit or advantage extended to one WTO trading partner (for example lower tariffs or reduction of non-tariff barriers), must be extended to all other WTO members.

The difficulties in securing agreement on trade issues that is palatable for all WTO members has led to an apparent preference for FTAs over the multilateral approach. A ‘spaghetti bowl’ of FTAs involving regional partners (for example the ASEAN-Australia-New Zealand FTA 2014) as well as geographically disparate nations (for example Australia-Chile FTA 2009) has resulted.

Treatment of trade facilitation in FTAs

There is broad diversity in the scope of FTAs. The content may depend upon:

  • comparative advantage of the nations that are parties to the FTA
  • political strength of interest groups within each of the parties
  • broader geopolitical context for the FTA.

Trade facilitation (TF) has made a relatively recent appearance in FTAs.

What is TF and why is it important?

The conventional definition of TF can be summarised as the simplification and harmonisation of international trade procedures including the activities, practices and formalities involved in collecting, presenting, communicating and processing data and other information required for the movement of goods across international borders.

TF measures can help to:

  • reduce time required for goods to reach and clear customs
  • make customs clearance procedures more transparent and predictable
  • simplify customs clearance procedures
  • focus border measures on products that pose the greatest risks.

In short, TF involves cutting red tape so trade is less complicated, quicker and cheaper.

TF is important for the following main reasons:

  • Costs of exporters: each day that a product spends making its way through customs clearance procedures will add to the cost of the shipment.
  • Costs to SMEs: burdensome, complex and costly customs procedures may render SMEs uncompetitive in international markets.
  • Possible investors: uncertainty regarding the administration of customs procedures in export markets may act as a disincentive to potential investors.
  • Costs to government: inefficient border procedures add costs to border control operations and delay revenue collection.
  • Costs to consumers: costs to exporters associated with compliance with border control requirements will eventually be passed through to consumers in the form of higher prices.

The emergence of TF in FTAs

In 2004, WTO members decided to launch negotiations on TF. This year also proved a pivotal moment for the treatment of TF in FTAs.

Prior to 2004, the treatment of TF in FTAs was limited. In contrast, virtually all FTAs concluded following the launch of TF negotiations at the WTO include some reference to TF. This demonstrates the symbiotic relationship between developments at the WTO and FTA negotiations.

Despite the fact that TF has featured in many FTAs since 2004, the way in which TF has been treated has varied greatly:

  • Narrow approach: in some cases, FTAs have confined treatment of TF to narrow issues including:
    • transparency about customs procedures and applicable fees and charges.

The China-ASEAN FTA (2005) is an example of an FTA where a narrow TF approach was adopted.

  • Broad approach: in other cases, FTAs have taken a much broader approach covering the spectrum of issues, including:
    • simplification of customs procedures
    • border agency co-operation
    • risk management mechanisms to alleviate burden on low risk imports
    • advance rulings to provide certainty regarding product classification and origin assessment prior to entry into the export market
    • appeal rights to allow disgruntled exporters to seek administrative or judicial review of decisions regarding customs treatment
    • express shipments, particularly for perishable goods
    • single window processing for the submission of customs documentation so that such information only needs to be submitted once
    • rapid procedures for rapid release of goods.

The China–NZ FTA (2008) is an example of an FTA where a broad TF approach was adopted.

Impact of WTO TF negotiations on TF provisions in FTAs

The latest round of WTO trade negotiations was launched in 2001 in Doha, Qatar – known as the ‘Doha Development Agenda’ (DDA). TF is but one in a long list of issues included in the DDA.

Despite the limited success of negotiations on the majority of these issues, the WTO members managed to strike an ambitious agreement on TF at the Bali Ministerial Conference in December 2013. The ‘WTO Agreement on Trade Facilitation’ covers a broad spectrum of TF issues. It had been suggested the Agreement would add $1 trillion in new trade globally and create 20 million new jobs worldwide.

The Protocol to adopt the WTO Agreement on Trade Facilitation was due to be adopted by WTO members by 31 July 2014, otherwise it would lapse. However, India backed by Cuba, Venezuela and Bolivia, ultimately declined to sign the Agreement. India’s refusal to sign was linked to concerns over food security and agricultural subsidies – issues that are still outstanding in the context of the DDA. As the WTO operates on a consensus basis, the withdrawal of India’s support for the WTO Agreement on Trade Facilitation means it has not yet entered into legal force.

Although the WTO Agreement on Trade Facilitation is in a state of limbo, it still provides an important backdrop to the treatment of TF in FTAs. It is likely we will increasingly see FTAs mirroring the expansive TF provisions contained in the WTO Agreement.

If you have any questions in relation to this article, please contact Dariel De Sousa on 61 3 9258 3552 or Robert Gregory on 61 3 9258 3770.