BRISBANE, AUSTRALIA – History was made on April 7 when Prime Minister Shinzo Abe shook hands with Australian Prime Minister Tony Abbott on a free trade deal, Japan’s first with a major agricultural exporter.
At a press conference in Tokyo, Abe said: “I’m really glad that the broad agreement was reached in the [economic partnership agreement (EPA)] negotiations. The Japan-Australia EPA [JAEPA] is an extremely important framework to promote trade and investment.”
Abbott agreed, saying in a statement that Australia had “broken new ground” in the deal reached after seven years of negotiations. “This historic agreement is good for the Australian economy, good for jobs, good for farmers and good for consumers,” Abbott said in welcoming the deal with the nation’s second-largest trading partner.
For Japan, Australia constitutes its third-largest source of imports, making it an important source of agricultural products, minerals and energy in exchange for Japanese automotives and other manufactured goods in a highly complementary relationship.
While words such as “historic” are often overused, this time it accurately describes the significance of an agreement with far-reaching implications.
Abe is following in the footsteps of his grandfather, Nobusuke Kishi, who inked the groundbreaking 1957 commerce agreement with Australia’s Robert Menzies. In doing so, Australia became the first Western nation to open its doors to trade with Japan after World War II.
Like Abe, Abbott has a keen appreciation for history and he remarked upon the significance of the earlier treaty during his Tokyo visit. “When I was young, there were ex-soldiers’ clubs in Australia that wouldn’t let Toyotas into their car parks because of bitter memories. Even then, statesmen in both our countries were looking forward, not backward,” Abbott told a business audience.
The 1957 agreement set the foundations for Japan becoming Australia’s top trading partner for an extended period as well as its third-largest foreign investor, while Australian exports to Japan helped the nation’s emergence as an industrial giant.
While this year’s pact will not be officially signed until Abe’s visit to Australia in July, both nations have much to gain from stronger ties. Two-way trade totaled around A$70 billion in fiscal 2013, while Japan has more than A$123 billion invested in Australia.
Economically the big winner from JAEPA is Japanese consumers, who can look forward to cheaper Australian beef, cheese, sugar and other foodstuffs. There is also the potential for lower energy costs, with Tokyo to remove tariffs for all Australian resources products, including coking coal.
Japanese investors in Australia can also look forward to improved access, with enhanced protection for bilateral investment. Under the agreement, the threshold for regulatory review of Japanese investment in “nonsensitive” sectors has been raised from A$248 million to more than A$1 billion, while there are also commitments on intellectual property and services. Australia represents Japan’s 10th-largest export market and there are benefits for Japanese automakers and other manufacturers from Canberra’s agreement to eliminate 5 percent tariffs on Japanese cars, electronic and household goods.
For Australia, the big winner is the beef industry, which expects lower Japanese tariffs to boost exports by A$5.4 billion over 20 years.
The cost of imported Japanese cars is expected to fall by $1,500 on average, giving Australian consumers more buying power in a deal worth tens of billions of dollars to the Australian economy, the world’s 12th-largest.
According to a 2006 joint study, full trade liberalization between the two nations could generate a windfall of A$68 billion to Japanese consumers and A$19 billion to Australians over a 20-year period, with Japanese gross domestic product (GDP) rising by up to 0.13 percent and Australian GDP by 1.79 percent. While JAEPA is far from completely free, Tokyo’s willingness to concede on agricultural protectionism led to Australian trade officials describing it as “the best deal ever.” “Seven years is a long time, but I think we’ve got the best deal that we ever could,” said Melanie Brock, chair of the Australian and New Zealand Chamber of Commerce in Japan.
The statement was echoed by Japanese entrepreneur Ko Nagata, founder of the Queensland Business Center in Tokyo, who said the agreement could “spur Japanese investment in new areas such as services, as well as the traditionally strong sectors of resources, agriculture and property”.
Australian trade minister Andrew Robb said the agreement “builds on the trade treaty of 1957 which was the foundation for so much of our great relationship, our great business and cultural relationship since then, and it will take that relationship to another level”.
But for Abe, JAEPA demonstrates his ability to deliver on his promised “third arrow” of structural reforms to boost growth, even against opposition from his own political constituency.
Failure to achieve tariff reductions on the nation’s sheltered farm sector would have sparked concern over the more ambitious Trans-Pacific Partnership (TPP) talks, but now Tokyo has shown it means business.
The agreement’s broader significance was shown in a commitment by the two U.S. allies for improved defense ties, including joint development of weapons and equipment. The agreement reportedly followed Tokyo’s decision to ease restrictions on arms exports, with Australia potentially considering Japanese technology for its next generation of submarines. Defense talks are planned in June, with increased cooperation envisaged in training, disaster relief, technology, and cyber and space security.
But for analysts, Australia’s public support for Japan is significant amid increasing regional tensions. “This is a logical progression in building ties, and [Britain] signed a similar agreement with Tokyo in 2012 without raising eyebrows in Bejing,” the Institute of Southeast Asian Studies’ Malcolm Cook told the Australian Financial Review.
Questioned over China’s reaction, Abbott told ABC radio that JAEPA “is not against any specific country … what we want to see is more democracy, more freedom, more respect for the rule of law. We say there should be no change to the status quo which is brought about by force or the threat of force.”
The Australian prime minister has set a deadline for October 2014 on agreements with the nation’s top trading partners of China, Japan and South Korea. Yet while deals have recently been agreed with Tokyo and Seoul, talks with Beijing have dragged on for nine years despite pressure from Australian business groups.
Abbott’s ability to push through trade deals has delivered significant benefits for Australia, which has seen growth slow due to the cooling of the China-driven mining boom.
For Abe though, the drive toward a freer Japanese economy promises a far bigger dividend than his grandfather might ever have imagined.
Anthony Fensom, a freelance writer and consultant, is a committee member of the Queensland Japan Chamber of Commerce and Industry.