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USJI Voice Vol.1

Australia and Regional Integration Politics among Japan, the United States, and China

2014.07.04
Dr. TAKASHI TERADA
Doshisha University

Australian Prime Minister Tony Abbot visited Japan in early April 2014, and a broad agreement was reached regarding the Japan-Australia Economic Partnership Agreement (EPA), which is aimed at furthering a comprehensive free trade and investment environment between the two countries. Abbott’s visit also saw Japan’s first application of the new “Three Principles on Transfer of Defense Equipment and Technology”, which replaced the long-serving “Three Principles on Arms Exports,” to promote bilateral cooperation on defense equipment. These economic and defense deals led him and Japanese Prime Minister Shinzo Abe to hail the strong linkages between Japan and Australia. Although the Australia-Japan EPA required seven years of negotiations, this is Japan’s first free trade agreement with a major agricultural exporter, challenging Japan’s trade policy taboo of heavy agricultural protection. As seen in the table below, Japan promised to make a set of unprecedented concessions to Australia in terms of its agricultural liberalization despite that some Australian farmers, who hoped for the removal of tariffs, remained discontented with the deal.

Prime Minister Abbot took office in September 2013, and is the first Liberal/National coalition leader since Prime Minister Howard left office six years ago. The change of government paved the way for the almost deadlocked Australia-Japan trade deal to move forward. During those six intervening years, the Labor Party, with strong support from Australia’s labor unions, continued to provide assistance to the automobile industry, which long served to sustain Australia’s employment, by keeping the highest level of tariff ratio, 5%, on imported vehicles, as well as with industrial subsidies.

The Abbot administration has sought a small government with reduced public expenditure, and made clear its intention to cut automobile subsidies, which totaled as much as 30 billion Australian dollars (during the five years up to 2012). As the subsidies functioned to offset the high Australian dollar and high wages, the possible eradication insinuated by the Abbott government led General Motors to announce that it would withdraw from Australia in 2016, and Toyota, which had just built a new factory only two years ago, also announced its withdrawal in 2017. This means the demise of automobile production in Australia, limiting the argument for tariffs to protect the automobile industry.

Australia is Japan’s 10th largest trading partner and Japan’s second-largest automobile market, and automobiles account for more than half of Japan’s total exports to Australia. The removal of tariffs on automobiles is one of the key demands that Japan had for many years as a prerequisite for the conclusion of the EPA, proving the change of administration to be pivotal in removing a major obstacle toward the EPA’s successful conclusion.

Table: Concessions included in the Japan-Australia EPA concerning items of interest to Japan

Japan’s
Concessions
Refrigerated beef ・Tariff rate: Presently 38.5% → down to 23.5% 15 years after the agreement comes into effect (6% reduction in first year)
・Level at which safeguards come into effect: 130,000 tons in the first year → 145,000 tons in the tenth year
Frozen beef ・Tariff rate: Presently 38.5% → down to 19.5% 15 years after the agreement comes into effect (8% reduction in first year)
・Level at which safeguards come into effect: 195,000 tons in the first year → 210,000 tons in the tenth year
Pork ・Gate price tariffs will be maintained while a tariff quota will be introduced: 5,600 tons → increased over 5 years to 14,000 tons
Rice Excluded
Sugar ・Ordinary crude sugar, refined sugar: To be reviewed at a later date
・High sugar content crude sugar: Tariffs removed for crude sugar used to produce refined sugar / adjustment payment levels will be established
Butter, powdered skim milk To be reviewed at a later date
Cheese ・Natural cheese used as raw materials for processed and shredded cheese: Tariff quota will be introduced (within the limit no tariffs – domestic products: imported products=1:3.5)

  • For use in processed cheese: 4,000 tons → 20,000 (to be increased over 20 years)
  • For use in shredded cheese: 1,000 tons → 5,000 tons (to be increased over 10 years)

・Processed cheese, etc.: Tariff quota to be introduced

  • Processed cheese: 50 tons → 100 tons (to be increased over 10 years)
    (In-quota tariff rate will be reduced by half over 10 years)
  • Grated and powdered cheese: 200 tons → 1,000 tons (to be increased over 10 years) (In-quota tariff rate will reduced by half over 10 years from 30% of the out-of-quota rate)

・Blue cheese: Tariffs will be reduced by 20% over 10 years
・Frozen yoghurt: 100 tons → 200 tons (to be expanded over 10 years)(In-quota tariff will be reduced over 10 years to half of the out-of-quota rate)
・Ice cream: 180 tons → 2,000 tons (to be increased over 10 years)(In-quota tariff will be reduced over 10 years to half of the out-of-quota rate)

Wheat ・For human consumption: To be reviewed at a later date
・For animal feed: Tariffs to be removed
・An agreement has been made to expand the Simultaneous Buy and Sell (SBS) system
Australian
market-access
concessions
Midsize automobiles Presently 5% → To be removed immediately after the agreement comes into effect
Other fully assembled automobiles Presently 5% → To be removed 3 years after the agreement comes into effect

Prime Minister Abe has been aware of the strategic importance of Australia since his first administration in 2006-07, and as one of the measures to make the Japan-Australia relationship closer, he pushed for the EPA in addition to bilateral defense cooperation. Aware of Abe’s commitment to the Australia-Japan partnership, Abbott also positively responded to his Japanese counterpart’s strategic intention. For instance, despite China being Australia’s largest economic partner, he called Japan Australia’s “best friend in Asia,” and criticized China’s establishment of a new air defense identification zone; conversely he refrained from commenting on Abe’s visit to Yasukuni Shrine. Abe then invited Abbott to a special session of the National Security Council, which he established as a chief defense and security policy coordination apparatus, as the very first foreign leader. These cases demonstrated that they were both on similar wavelengths diplomatically as conservative politicians.

Abbott has also shown a flexible stance toward the investor-state dispute settlement (ISDS) clause, about which the previous Labor administration had expressed reservations, contributing to the significant progress of Australia’s trade strategy. The Labor Party’s opposition to the ISDS clause was viewed as delaying its FTA negotiations with Japan, Korea and China, as well as with the Trans Pacific Partnership (TPP). Minister for Trade and Investment Andrew Robb stated that “if there is a substantial market access offering, and if we can also succeed in getting exclusions and protections to safeguard certain public policy measures, then we will be prepared to put (ISDS negotiations) on the table”. This is clearly indicative of a change in stance. Although the Australia-Japan EPA shelved the ISDS clause as a future negotiation subject, it was included in the Australia’s FTA with Korea. This illustrates the possible inclusion of ISDS in the agreement with Japan whose FTAs usually include the ISDS clause to protect against political risks associated with investing overseas.

The primary significance of the Japan-Australia EPA from Australia’s viewpoint is that, combined with the Korea-Australia FTA, agreed on in December 2013, that was signed immediately after Abbott’s visit to Japan, the administration has moved substantially closer to achieving its trade policy goal of concluding FTAs with three Northeast Asian trading partners: Japan, Korea, and China, within a year of coming to office. These partners account for two thirds of Australia’s total exports. In addition to those arrangements, an FTA with the United States came into effect in 2005, followed by one with ASEAN in 2010. This means that even if the TPP negotiations fail to reach a conclusion for the time being, Australia can negate the discrimination Australian exporters faced in some of its major export markets.

Another significant benefit is Japan’s concession on some key agricultural products, such as beef. Under the Japan-Australia EPA, Japan’s tariff on frozen beef will be reduced during the first year from 38.5% to 30.5%, and then over the following 18 years it will be reduced to 19.5%. It has been decided that the tariff on refrigerated beef will be reduced during the first year to 32.5%, and will be reduced over the following 15 years to 23.5%. This will be the first time that Japan has preferentially reduced the tariff on beef, and since the tariffs will drop in the first year by 8% for frozen beef and by 6% for refrigerated beef, Minister for Trade and Investment Robb said it was an unexpectedly good result for Australia. Then again, liberalization of sugar, which was excluded from the U.S.-Australia FTA, thereby inviting a backlash from industry organizations, was also excluded from the agreement with Japan where sugar is produced by smaller scale farmers in Hokkaido and Okinawa. However, since tariffs on sugar as well as wheat will be immediately removed within the Korea-Australia FTA, the discontent of the Australian sugar industry came to be mitigated. Australia’s trade policy tactics can be portrayed as a success domestically, when seeing the combined effects of the two FTAs that Australia concluded with Japan and Korea.

This correlation mechanism of Australia’s FTA tactics can also be observed in the U.S.-Japan market access negotiations under the TPP. The primary reason the Japan-Australia EPA attracted much attention in Japan was an expectation Japan expressed to get the United States to compromise over tariffs on beef, which the United States was demanding Japan to substantially reduce, by concluding an FTA with Australia ahead of the negotiations with the United States. The United States has a 35% share of the Japanese beef market, while Australia maintains a 54% share. If only Australian beef enjoys a lower tariff, a key benefit gained from the FTA with Japan as mentioned above, American beef will be at a disadvantage pricewise, and the difference in Japanese market share would increase even more. It was thought, therefore, that this would provide motivation to the United States to quickly compromise with Japan over its tariff reduction demands on beef and other agricultural products, thereby giving Japan an advantage in the negotiations. Even if TPP negotiations were concluded quickly, it would take a long time for all countries involved to ratify the agreement and bring it into effect, so members of the American beef industry began to say “we’ll need to be prepared to be at a disadvantage for several years.” However, the Obama administration aspired to maintain the support from other relevant interest groups for the midterm elections to be held in the autumn, and ended up demanding a much lower tariff on beef (5%) than the level Japan promised to offer to Australia, showing no sign of compromise. A more substantial tariff cut under a shorter time frame was presumably needed to function as a means of getting concessions from the United States during the bilateral market access negotiations, but this level of tariff concession was not surely politically feasible in Japan.

Australia also had an eye to the TPP market access negotiations while working up to the agreement with Japan. As indicated by Minister of Trade and Investment Robb’s statement that “our competitors are not Japan’s producers, they’re producers from other countries,” Australia believed it could gain an advantage in Japan’s agricultural market against other TPP participating countries,, such as the United States and New Zealand, by rushing to conclude negotiations with Japan. Presently 11% of Australia’s agricultural products are exported to Japan, and with regards to beef and cheese, Japan is its largest export market. What is particularly important is that, since EPA has a most-favored-nation clause for beef and dairy products, if tariffs for these are brought down even further within the TPP, they are guaranteed to apply to Australian products as well. Thus, if, during the TPP negotiations, the United States gains even lower tariffs, Australia will be able to receive the same level of tariffs. In this negotiation game, Australia can play against the United States and maintain its advantage, signifying that the United States has, in effect, become its proxy negotiator, as the U.S.-Japan negotiations will never fail to benefit Australian beef and dairy products.

In this way, FTAs always develop a political game that cannot be ended with a single agreement due to the exclusive nature of FTA whereby the benefits accrued, such as tariff elimination, come at the expense of the third party countries. It is this political game that urged Australia to rush to conclude the Korea-Australia FTA largely because it had already faced discrimination against the American products in the South Korean market for more than two years due to the Korea-U.S. FTA.

The only major player left in Australia’s FTA game is China. Following his latest visit to Japan, Abbott also visited China where as much as 35% of Australia’s total exports go. The largest obstacle for the conclusion of the China-Australia FTA negotiations is whether or not Australia would allow investment by Chinese state-owned enterprises in resources and agricultural sectors and relax conditions for the acceptance of relevant Chinese workers. As the opposition leader, Abbot used to support the view that such conditions ought to be made more stringent rather than relaxed, but this year he began talking of deregulation, lowering the hurdles for the conclusion of the China-Australia FTA.

For the last 10 years China has been using a strategy that utilizes market access to strengthen economic relations with United States allies in order to exert its influence in the bilateral relations. In fact, the trade dependence on China among American allies in East Asia has skyrocketed. Whereas Japan’s trade with the United States decreased from 27.1% to 13.7% of Japan’s total trade between 1999 and 2009, China’s share of Japanese trade rapidly surged from 9.1% to 20.5%. Likewise, China’s trade as a share of total South Korean trade increased from 8.6% to 20.2%, and in Australia from 5.7% to 19.7%, while the American presence in South Korea declined from 20.7% to 9.6%, and in Australia from 15.8% to 8.1%. In other words, the trade dependence of major American allies in the region reversed between China and the United States in 10 years in the 2000s. In this context, China’s FTAs, which have effectively served to realize China’s such political intention, entail a large number of exclusions and exemptions, so they are not so effective as to profoundly affect the substance of their economic and business environment. The TPP can serve as an effective means to reducing participating states’ heavy reliance on Chinese market, as far as China remains as an outsider, while enabling those TPP members to maintain its voice against China’s political and military problems.

While the Abbott administration would like to maintain its friendly relations with its allies, including the United States and Japan, when considering the massive benefits in its relations with China that will only grow, it is only natural to aspire to build a good relationship with China even if it is largely limited to economic and business relationships. Yet if Australia concludes a FTA with China, following FTAs with Korea and Japan, it will be able to approach the TPP and, to a lesser degree, the Regional Comprehensive Economic Partnership (RECP) negotiations with an advantage gained through having built cooperative relationships based on bilateral FTAs with those countries. In short, Australia will potentially emerge as a key player in politics pertaining to the bilateral and region-wide liberalization movement.

The China-Australia FTA may worry Japan. Japan hopes for Australia’s support for its positions, should Japan and China find themselves at loggerheads on either economic or strategic issues, since the FTA would help increase Chinese influence in Australia by increasing Australia’s trade reliance on China. Japan’s concern comes partly from the experience that when Abe proposed a quadrilateral summit involving the United States, India, Australia, and Japan during the first term of his administration, Australia kept its distance from the proposal by taking China’s anxiety into consideration. Abbott is more inclined to take steps for the FTA with China, which may make Australia more susceptible to China’s position. In response to China’s potential powerful influence, Japan finds it necessary to rush to ratify and validate the EPA, further deepening the mutual economic dependence and increasing Japan’s economic importance to Australia. At the same time, capitalizing closer economic and strategic relations, Japan and Australia need to work together to encourage China to accept a range of so-called 21st century agendas, such as regulatory convergence, treatment of state-owned enterprises, the issue of supply chains, and intellectual property rights, at their FTAs and regional integration negotiations involving China. This approach meets their common business interests.

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