Peter Gallagher

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?