The Journal The Authority on Global Business in Japan

TRADE | AGREEMENT

June 2014
Aussies edge closer to Japan
JAEPA is first pact with major agricultural country
By Anthony Fensom

Japan’s agreement with mutual US ally Australia on a trade deal in April, days before President Barack Obama’s visit, raised eyebrows in trade circles.
Did the Aussies sabotage hopes of a bigger and better deal in the 12-nation Trans-Pacific Partnership (TPP) talks, or has Tokyo signaled it is finally ready to open up?

Former White House trade policy advisor Matthew Goodman told the Australian Financial Review that Washington was far from happy with the timing of the Japan–Australia pact, officially known as the Japan–Australia Economic Partnership Agreement (JAEPA).

The agreement was announced during Australian Prime Minister Tony Abbott’s visit to Tokyo on April 7, barely two weeks before Obama’s arrival.

“The US Trade Office is a little bit miffed Australia went ahead and settled,” Goodman was quoted saying in the May 8 report, adding, “Australia settled for a quarter when we would have got half or even three-quarters.”

Asked for an official comment on the Japan–Australia pact, Trevor Kincaid, deputy assistant US trade representative, Office of Public Affairs, said: “The outcome in the Australia–Japan agreement is significantly less ambitious than leaders agreed to seek in the Trans-Pacific Partnership.”

Tokyo sources also noted the bemused reaction from US business representatives following the announcement, which came after seven years of negotiations.
Japanese media suggested that Australia’s deal with its second-largest trading partner had put pressure on the United States to make further concessions in the TPP talks, despite growing opposition in Congress.

“Many in Japan are hoping the Japan–Australia free-trade agreement will serve as a template that will persuade Obama, and the United States, to accept a similar deal for the TPP,” The Japan Times’ Eric Johnston wrote in an April 8 report.

Obama’s subsequent failure to achieve a deal during his Japan visit, together with delayed progress on the TPP talks, has left analysts speculating that an accord might not be reached until 2015, after the midterm congressional elections in November.

Double growth potential
However, others viewed Japan’s deal with Australia in a more positive light, particularly over the potential for even bigger gains.

“The key issue is that the Japan–Australia trade deal is the first that Japan has ever successfully negotiated with a major agricultural country. Trade negotiations will always involve compromise. It’s been an arduous process lasting more than seven years and was managed with a great deal of pragmatism,” said Jesper Koll, managing director and head of Japanese equity research for JPMorgan Securities Japan Co., Ltd.

Koll said the deal had strengthened the hand of Prime Minister Shinzo Abe, demonstrating that “actions can be taken, even if they involve politically sensitive agricultural issues.”

“Abe, from day one in office, has made it very clear that the TPP is a key part of Japan’s future prosperity,” the Tokyo-based economist said.

“If you look at the growth potential of Japan right now, most people estimate it at about 0.8 percent. If all the items that Abe has put on the agenda with the third arrow [of Abenomics] were to be implemented, you could boost growth potential to 1.6 percent [and] about half the boost comes from the TPP. It is by far the single most important part of the growth strategy.”

Former US diplomat Christopher J. LaFleur, ACCJ chairman and chair of the ACCJ’s Financial Services Forum, said the Japan–Australia deal “probably has little impact on the US agenda. It could be argued that it now becomes a starting point for the US–Japan negotiations in those areas where there is overlap.”

Commenting on Obama’s visit and its implications for the TPP, LaFleur said: “There were signals ahead of the visit that an agreement was unlikely.

Nevertheless, the lengthy negotiating session during the visit raised expectations. It appears that the visit did help open the way to resolution of some of the toughest issues and, if so, that should be recognized as one of the visit’s accomplishments.”

Best deal ever
Japan has concluded trade deals (officially described as economic partnership agreements) with 13 nations, ranging from Chile to Vietnam, and is in talks with the European Union. But the pact with Australia has a broader significance.

In 2013, US exports to Japan totaled $65 billion, with Asia’s second-biggest economy representing the fourth-largest US trading partner.

For Australia, however, Japan is its second-biggest export market with A$48 billion worth of exports in fiscal 2013, led by coal, liquefied natural gas, and agricultural products such as beef. And with estimates that completely free trade between the two countries could generate a A$68 billion windfall for Japanese consumers and A$19 billion for Australians over a 20-year period, the “Lucky Country” is hopeful of much more.

“Seven years is a long time, but I think we’ve got the best deal that we ever could [get],” said Melanie Brock, chair of the Australian and New Zealand Chamber of Commerce in Japan (ANZCCJ).

Brock gave the Australian negotiators “10 out of 10” for their efforts in negotiating a deal described by Australia’s Department of Foreign Affairs and Trade as “the most liberalizing bilateral trade agreement that Japan has ever concluded.”

For Australia’s beef industry, it is expected lower Japanese tariffs will boost exports by A$5.4 billion over 20 years. Other areas to gain include cheese and additional agricultural products, along with minerals and energy; access to services will also improve (see below).

Brock also cited the benefit of the “most favored nation” status of the deal, meaning Australian exporters would receive the benefits of any further liberalization by Japan.

“Australia was able to negotiate an agreement that will bring about fairly substantial reductions in tariffs very soon. The TPP process is subject to agreement by all nations and all members of the TPP, and is therefore subject to probably quite a lengthy process of approval within the US Congress and other countries as well,” she said.

Nevertheless, a TPP agreement would dwarf any bilateral deal, representing 40 percent of global trade and also the United States’ largest goods and services export market.

“Our former ambassador to Japan, Mike Mansfield, used to say that the US–Japan relationship was the most important in the world, bar none, and that remains valid today,” LaFleur said.

“In addition to the bilateral and multilateral impact, an agreement would also signal that Japan is ready to take decisive steps to address its structural economic issues. The sooner an agreement is reached, the better for all our economies.”

Koll agreed, saying Japan was “ready to do a deal.”

“I think it’s very clear that both the United States and Japan do want to continue to be the key leaders in setting the Asian agenda. From that perspective, failure is not an option.”

Australia–Japan Pact: What It Means

According to Australia’s Department of Foreign Affairs and Trade, when ratified, the Japan–Australia Economic Partnership Agreement will deliver the following benefits for the nation’s exporters.

• Zero tariffs for beer, cotton, lamb, and wool
• Tariff on frozen beef will be cut to 19.5  percent; that on fresh beef to 23.5 percent
• Cheese duty-free quota of 20,000 tons; duty-free access for certain milk products
• Sugar tariffs to be eliminated or reduced
• Zero tariffs for tomatoes, peaches, and pears as canned products
• Reduced barriers on other agricultural products including barley, canola, chocolates, honey, pork, and wine
• All industrial exports to be duty free
• All tariffs on minerals, energy products, and manufactured goods to be eliminated
• Increased access for services, including education, financial, telecommunications, and legal
• Commitments on intellectual property and investment protection

Fensom

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Anthony Fensom is a communication consultant/writer with experience in Australian/Asian financial and media industries, including six years in Tokyo.

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