Back to the future: an Australia-Japan FTA

The Aus­tralian Finan­cial Review car­ried an op-Ed piece from me on 30 Sep­tem­ber argu­ing that there is plen­ty of evi­dence in our past eco­nom­ic rela­tion­ship with Japan of how we could joint­ly find a more pros­per­ous future. For more details, read on h4. Aus­tralia-Japan FTA—leapfrog­ging growth

Japan and Aus­tralia are each try­ing in dif­fer­ent ways to improve their eco­nom­ic engage­ment with the East Asian region. It will help both to reex­am­ine what worked so well in their own past rela­tions. Last April, when Prime Min­is­ter Howard told Junichi­ro Koizu­mi that Aus­tralia had no greater friend in Asia than Japan, the Japan­ese press read it as an admis­sion that being a US ‘deputy’ did not offer Aus­tralia diplo­mat­ic entree in Asia. It seemed to acknowl­edge that Aus­tralia need­ed Japan’s spon­sor­ship, even more than China’s, to secure broad­er region­al accep­tance; a seat, for exam­ple, at the East Asian Sum­mit. Japan, too, is engaged in a project to rebuild it’s region­al image as the role mod­el for Asian eco­nom­ic pros­per­i­ty. The ‘East Asian Eco­nom­ic Com­mu­ni­ty’ idea rep­re­sents part of Koizumi’s response to rapid­ly grow­ing Chi­nese eco­nom­ic and strate­gic influ­ence in the region. But the ‘new eco­nom­ic part­ner­ship’ trade agree­ments Japan has reached with Sin­ga­pore and Thai­land (agree­ments with Malaysia and Philip­pines are still under nego­ti­a­tion) con­tain too much that is old and too lit­tle evi­dence of part­ner­ship to change region­al per­cep­tions. Japan has main­tained high bar­ri­ers to agri­cul­ture and ser­vices imports from its East Asian trad­ing part­ners. They, in turn, have rebuffed Japan­ese requests for access to the auto­mo­biles and ser­vices sec­tors. If it real­ly wish­es to reassert a cen­tral role in the region­al econ­o­my, and take greater advan­tage of region­al growth to sus­tain its recent recov­ery, the Koizu­mi gov­ern­ment will have to allow East Asian coun­tries to use the giant Japan­ese econ­o­my as a plat­form for ‘leap-frog­ging’ growth. That’s what the small­er, but rel­a­tive­ly open and boom­ing Chi­nese econ­o­my already offers them. Trade with Chi­na is the spring­board for a region-wide growth ‘bounce’ and a spur to struc­tur­al changes in pro­duc­tion and invest­ment. That’s also what Japan offered to Aus­tralia in the 1960s and 1970’s. We got not only the growth bounce of a min­er­als boom but also a rapid change in the struc­ture of our out­put that point­ed the way to four decades of pros­per­i­ty. Leap-frog­ging works for both play­ers: Japan’s econ­o­my boomed in those years to the same extent as China’s does now. One rea­son was rapid gains in Japan’s pro­duc­tiv­i­ty as as resources moved—pulled and pushed in part by trade includ­ing with Australia—out of the post-war rur­al econ­o­my into ser­vices and into the world’s most mod­ern indus­tri­al plant. Prob­a­bly the most strik­ing sto­ry to emerge from the Joint Eco­nom­ic Study pre­pared for the cur­rent ‘fea­si­bilty study’ of a free trade agree­ment between Japan and Aus­tralia is that the oppor­tu­ni­ty for ‘leap-frog­ging’ growth is far from exhaust­ed. The joint stud­ies demon­strate that an FTA with Aus­tralia offers Japan not only a growth bounce (small in com­par­i­son to the val­ue of it’s total out­put) but would also move it’s econ­o­my fur­ther along the path that it took four decades ago, dur­ing it’s boom years, to still high­er lev­els of pro­duc­tiv­i­ty. An FTA would boost Japan­ese con­sumer buy­ing pow­er, for exam­ple by cut­ting astro­nom­i­cal food import duties (equal to a tax of more than 700 per­cent on rice, more than 500 per­cent on some dairy prod­ucts, 250 per­cent on durum wheat). It would also raise Japan­ese val­ue added by mov­ing labor and invest­ment out of farm and relat­ed indus­tries into high­er-val­ue man­u­fac­tur­ing and ser­vices and leave in place a small­er, but more pro­duc­tive and com­pet­i­tive farm­ing sec­tor. Australia’s gain? Access to a wealth­i­er, more open mar­ket for agri­cul­ture and ser­vices. Would Japan real­ly open its food mar­kets in a deal with Aus­tralia when it resist­ed the same requests from it’s East Asian part­ners? At least two big ‘ifs’ are need­ed to answer that ques­tion in the affir­ma­tive. If the WTO nego­ti­a­tions con­clude next year with a sub­stan­tial deal and if the Koizu­mi reform agen­da is broad­er than he’s admit­ted, the out­look for an FTA that intro­duced cuts in food trade bar­ri­ers over (say) a decade would improve enor­mous­ly. Both are live options, but they would not nec­es­sar­i­ly lead to exclu­sive gains for Aus­tralia: if Japan opens its mar­ket to Aus­tralia it would like­ly open to the rest of the world as well. The only way to secure exclu­sive advan­tage in a more open Japan­ese mar­ket is by com­mer­cial means: build­ing sup­ply chains that inte­grate Japan­ese food sup­ply back into Aus­tralian pro­duc­tion. Many Aus­tralian food indus­tries have the con­nec­tions in Japan to start explor­ing this pos­si­bil­i­ty now, while the idea of an FTA is in the ‘fea­si­bil­i­ty’ stage. The Aus­tralian gov­ern­ment could help by imme­di­ate­ly offer­ing Japan the more lib­er­al invest­ment rules con­tained in our FTA with the Unit­ed States, lift­ing the noti­fi­ca­tion thresh­old for direct invest­ments to $800 mil­lion. Why ask Japan to ‘pay’ for some­thing that would address the long stag­na­tion in Japan’s stock of direct invest­ment in Aus­tralia and help, pos­si­bly, to relaunch the ‘leapfrog’ game? 

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