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Australia's Free Trade Trophies?

16 Apr 2014
Mike Adams, Nic Brown and Ron Wickes
Source: Tony Abbott's Official Facebook Page

Recent bilateral trade deals will lead to commercial benefits. The next steps are pursuing good multi-party agreements and using the momentum to move the centre of the world trading system back to multilateralism.

From much of the recent commentary on the new free trade agreements (FTAs) with Japan and Korea, one could easily conclude that Australia is collecting ‘trophies for the national mantelpiece: empty vessels engraved with the words Free Trade Agreement that formalise and validate existing trade restrictions’. Such a judgement would be far too harsh. The Japan-Australia Economic Partnership Agreement (JAEPA) and the Korea-Australia Free Trade Agreement (KAFTA) fall well short of what Australia would have liked. That being said, they will lead to some commercially valuable outcomes.

The Benefits

For Australia, the beef industry is a prominent winner. Korea is to eliminate its 40 per cent tariff on Australian beef over fifteen years helping our industry to continue to compete with United States’ producers, for whom tariffs are already falling under a 2012 agreement. Japan has agreed to cut its 38.5 per cent tariff to 23.5 per cent (for chilled beef) over 15 years and to 19.5 per cent (for frozen beef) over 18 years. A range of other agricultural products (but not rice) will benefit from significantly increased access in both markets, including cheese, some horticultural products, wine and seafood. There will be gains as well for manufactures and services. In Korea, for example, tariffs on pharmaceutical products will be eliminated immediately or within three years, while better access will be granted to Australian law firms and accountants.

JAEPA, KAFTA and the Chinese FTA (if it is concluded) will result in more competitively-priced imports for Australian households and industry. For example, JAEPA will see downward pressure on prices for cars, as well as household and consumer goods as Japan takes advantage of tariff cuts on these products. Where there is an import-competing sector in Australia, more competitively priced imports from the North-East Asian economies will in turn help to drive increases in productivity in Australia. Free trade agreements with a wider group of economies are likely to reduce, to some extent, the costs associated with trade diversion from existing free trade agreements to which Australia is a party.

In negotiations with Australia, all three economies have had a strong interest in raising the screening threshold under the Foreign Investment Review Board (FIRB) to the levels for non-sensitive sectors (currently $1078 million) previously granted to the United States and New Zealand. Australia has conceded this in the case of Korea and Japan, though it has reserved ‘policy space’ to screen proposals for investment in agricultural land and agribusiness at lower levels. Higher thresholds are likely to lead to some increase in foreign investment, though to what extent is unclear: there has been a largely inconclusive debate on the impact of FIRB scrutiny on foreign investment flows. In China the investment issue is more difficult given that much investment is undertaken by state-owned enterprises that are subject to FIRB review for any level of investment. Trade and Investment Minister Robb is reportedly exploring creative options that might provide some flexibility on this issue.

Bilateral and Regional Approaches

Rapid growth in the number of bilateral FTAs, both regionally and globally over the past 10-15 years, has increased pressure from business for multi-party agreements to reduce transaction costs arising from inconsistent and overlapping FTAs. Negotiations for agreements like the Regional Comprehensive Economic Partnership (RCEP) and the Trans-Pacific Partnership (TPP) may be the first tangible signs in this part of the world of ‘multilateralisation of regionalism’.

TPP and RCEP have the potential to open up new opportunities for trade-driven economic growth throughout the Asia-Pacific. Outcomes are difficult to predict because there are so many imponderables, including the uncertainties of US–China relations, the deep mistrust that infects China–Japan relations and periodic flare-ups in ASEAN–China relations over territorial issues in the South China Sea.

TPP negotiations are well advanced but could well be delayed by complications over agriculture (particularly between the United States and Japan); services; investment (including investor-state dispute settlement); intellectual property provisions; and competition policy. The negotiations are also hampered by the US Administration’s failure to get ‘fast track authority’ from Congress. The absence of China from these negotiations also adds a fundamental complication that could drive a wedge between parties and non-parties. If not handled well, this could divide, rather than integrate, economies in the region.

RCEP negotiations are less advanced and many things could go wrong. Establishing the ASEAN Economic Community will be testing and parties’ political commitment to significant trade and investment liberalisation is yet to be fully tested. But the sense that outcomes could, on balance, be positive is based on self-interest rather than ideology. There is widespread ASEAN interest in balancing domestic and external integration, and there is strong interest in the wider East Asian region in building stable and durable regional economic architecture.

It is very much in Australia’s (and other parties’) interests to conclude TPP and RCEP successfully and, in doing so, resolve thorny matters such as China’s possible participation in TPP and the level of India’s liberalising ambitions for RCEP.

Three Final Points

JAEPA and KAFTA have the potential both to enhance export opportunities for Australian firms and increase competition in the domestic market with flow-on implications for increasing productivity and therefore jobs and higher living standards. They are not ‘empty vessels’ and nor do they stand apart from other approaches to trade liberalisation.

As a middle sized economy, Australia (along with others) needs to use the momentum from good multi-party agreements to help move the centre of the world trading system back to the WTO. This will not be easy or particularly fast but logically could start with an invigorated dialogue within, say, the G20 Leaders’ process on why trade and the global trading system matters. Over the next decade or so, good multi-party FTAs could establish benchmarks for broader international action that could, in turn, be injected back into the multilateral sphere.  One possibility would be for regional benchmarks to be taken up by a wider sub-group of the WTO membership in sector-specific or issue-specific plurilateral negotiations. Another would be for watered down versions of regional benchmarks to be accepted by the whole WTO membership in forms that would still represent a strengthening of multilateral commitments. However it is done, Australia has a long-term interest in regionalism strengthening the global trading system.

Finally, Australian governments need to be clearer in their public messaging about the strengths and weaknesses of FTAs and why they produce a national benefit. FTAs are second-best options. But this requires neither apologies from government nor over-selling of possible outcomes in mercantilist flavoured media releases.


Dr Mike Adams, Nic Brown and Dr Ron Wickes are former DFAT economists and the authors of ‘Trading Nation’ from which this article is drawn. Dr Adams recently spoke at the AIIA in Canberra on ‘Australian Trade Policy in a MultiPolar world’