Strengths and flaws of Japan deal

09 Apr, 2014 06:00 AM

'HISTORIC' was the word that most easily flowed from the pens of the government's spin doctors on Monday.

With business leaders climbing over each other to congratulate Tony Abbott on his trade deal with Japan, who could bring themselves to say anything critical about the Australia-Japan trade agreement?

Yet, there is an obvious and not especially flattering comparison, and it is the benchmark free trade agreement held out by the Howard government at the start of the negotiations with Japan.

Economic modelling for the Australian and Japanese governments by economists Philippa Dee and Kenichi Kawasaki showed that a genuine free trade agreement could increase Australia's economy by 1.8 per cent by 2020. On their figuring, Australian exports to Japan could increase by 54pc, while Japan's exports to Australia could expand by 24pc.

The two economies are highly complementary economies. The Japanese are good at making things we are hopeless at – cars, electronic goods, ships, submarines – and we are rich in natural resources that they are poor in, like iron ore and coal, and we have a vast expanse of arable land. Australia and Japan were made to trade with each other.

We don't have the full details of the agreement signed by Prime Ministers Tony Abbott and Shinzo Abe, let alone a careful evaluation of its likely economic impact. But we know it is not a genuine free trade agreement.

Dee and Kawasaki were working on the assumption of an immediate removal of all trade barriers. The agreement signed by Abbott and Abe contains only a partial reduction of some of Japan's very high trade barriers over several years.

For example Australian beef farmers, who appear to be among the biggest winners from the agreement, still will face tariffs of 20pc or more when the agreed cuts are finally in place.

Australian food producers will get a competitive advantage over other food exporters to Japan, but only for as long as it takes Japan to extend its concessions more generally. The Abe government clearly is cutting trade barriers as part of its program of economic reform. Abbott was either smart or lucky enough to be in the right place at the right time.

But, of course, Japan's other trading partners will demand concessions at least as generous as the ones conferred on Australia. Abe will be only too happy to oblige, because he knows something that Australians also know when it comes to every country except their own: that cheap imports, not exports, are the biggest prize in trade reform.

A close look at the Dee-Kawasaki modelling tells the same story. Almost two-thirds of the potential lift in Australia's national income would come from the increase in Japanese exports to Australia. It would come as a result of the investment and productivity gains generated by more import competition.

We can all see how Japan would benefit if its households had access to cheap, high quality Australian food. However, the authors of the Abbott government's press releases obviously did not dare assume that their Australian readers would grasp the benefit to the economy of our households having tariff-free access to Japanese cars and other manufactured goods. Yet, those imports will generate increased output, higher real incomes, and stronger export industries in Australia.

They will, as Dee and Kawasaki said, force Australian producers to innovate and lift productivity to survive. They will result in the closure of inefficient import-competing industries and cause labour and capital to shift to industries based on our economic strengths. In short, they will make us specialise more in the things we do best.

Tariff-free imports are a key strength of the FTA with Japan, but they also expose the fundamental weakness of all bilateral trade agreements. Australia can have all the cheap manufactured goods it wants, just as Japan can get all the cheap food it likes, by unilaterally tearing down the remaining barriers to trade.

Yet both nations deny their economies the bulk of the benefits of genuine trade reform while they spoon out market access to one trading partner after another, in stupid, long drawn-out negotiations.

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9/04/2014 1:01:38 PM

Craig Emmerson, Labor Minister for Trade from 14.9.10 to 5.3.12. tweeted it was a excellent agreement and congratulated Andrew Robb and Tony Abbott.


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