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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