ISSN 2201-1064
Vol. 2 March 2014
THINKING ECONOMICS
Author: Mohan Dhall, © Mohannah Education
Japan-Australia Economic Partnership Agreement (JAEPA)
Introduction
Globalisation is said to provide opportunities for households, firms and national governments. Households
in different nations should benefit from the relaxation of trade barriers by being able to access a greater range
of goods and services for lower overall cost. This should lead to a rise in quality of life and living standards.
Firms should benefit, as they should be able to access markets more easily and thus sell their products to
a larger number of buyers. Moreover, some of their input costs should fall – such as the cost of imported
components and of skilled labour brought into a nation to fill skills gaps. National governments should also
benefit as the growth of enterprise can lead to greater taxation revenues, encourage innovation and efficiency
and maximise productivity. Thus, it is widely claimed that the removal of artificial barriers to trade should lead
to many benefits, tangible and intangible to those nations that engage in free trade relationships.
About free trade
Free trade is defined as trade between nations where there are no artificial barriers imposed. In this sense, ‘artificial
barriers’ is a reference to legislative or other government-imposed limits (such as policy choices, regulations, trade
rules and the like) on the capacity for trade to occur unobstructed or unimpeded. For trade to take place without
restriction, an economy should have several features:
The financial sector should be free of controls on the transborder flow of money
The government should allow foreign investment and also the outright ownership of domestic firms by foreign
owners (although, foreign ownership may be subject to two constraints (see Thinking Economics Insight 1 below)
There should be no restriction on the transborder flow of legal goods and services and no system of preferential
trade that excludes nations (unless those nations do not trade in accordance with agreed free trade rules)
There should be a capacity for labour flows between nations, as unhampered as possible
There should be IP protections in nations so that firms do not risk losing moral rights when entering into new/
other nations and so that innovation is encouraged for the benefit of all
Governments should not impose any costs (direct or indirect) on the products entering the nation as this acts
as a disincentive to imports and thus restricts the free flow of goods and services.
Thinking Economics Insight 1
So – SOEs – not so wishy washy…!
The issue of foreign ownership of domestic companies can be a disconcerting political issue that
governments have to deal with as a natural consequence of globalisation. If the free flow of money
is enabled, and there are relaxed investment rules, then a situation can arise where domestic firms
are purchased and controlled by foreign investors. In some industries this can lead to possible future
problems arising as implied by the question ‘who owns what?’ and the related question as to whether
the nation has food security, water security, defence security or whether these sensitive areas have
been compromised by a lack of controls over foreign ownership.
However, a far more serious question arises when the foreign buyer is actually a State Owned
Enterprise (SOE). SOEs are majority owned by governments and thus if an SOE seeks to buy
into an industry in another nation then serious issues of national security can arise. This is
because an industry can become owned by another national government through what
look like independent corporations. In this situation a national government can protect
domestic security by imposing limits on the amount of market share or market power a
corporation can have and, in so doing, can limit the effect a foreign power can have. It can
also place particular limits on the proportion of equity holdings a foreign SOE can have
in the domestic market. Foreign ownership rules are a significant area of concern for
governments globally, as are the rules that pertain to mergers and acquisitions (M&A).
Free trade and trade agreements
In order to encourage the free trade of goods and services, governments will remove
barriers that hamper, reduce or limit trade. They can do this in a number of ways, starting
with the creation of trade agreements.
When governments discuss trade between their nations they do so representing different
businesses, industries and consumers. These parties lobby government trade ministers through
their representative lobby groups. In turn, the government will then represent their interests
when they negotiate with other governments during trade talks.
Thinking Economics Insight 2
Talk, talk, talk’n trade
The theory behind the basis of global trade is that nations can specialise in those industries in
which they have a natural advantage. For example, Malaysia can make palm oil better (cheaper
and more efficiently) than other nations on account of its geographical advantage and soil types.
Similarly, Australia can produce certain high-grade coals (for energy and industry) more cheaply
than any other nation on account of its natural endowment in coal seams. Thus, Malaysia could
negotiate a trade deal with Australia where it would export palm oil to Australia and import coal
from Australia. In this way, both nations would benefit, especially when both nations need what the
other is selling and either cannot produce the product at all, or produce it at significantly higher cost
and with greater inefficiency.
Trade talks
Governments in democratic nations are meant to represent the voters. The trade minister will have
a position on trade that should represent the interests of industries. During trade talks the ministers
will put a position that favours their industries. However, many nations have similar industries, so it is
during trade talks and negotiations that ministers have to decide areas that are non-negotiable. This is
an important factor in trade negotiations.
Though discussions are classified as ‘free trade’ talks, there will be certain industries and areas of economic
activity that will not be covered under trade talks and thus will be remain protected from change.
Preferential or free trade…?
Agreements made between nations are often called ‘free trade’ agreements, however, despite the name or title
of such agreements, there is a question about whether the agreements are ‘free trade’ in nature or whether
they are preferential in nature. In reality, trade agreements are best described as a mix of both. This is explained
in Thinking Economics Insight 3. Free trade agreements (FTAs) are usually negotiated between nations
bilaterally. This means that they typically involve two nations making an agreement between themselves.
Bilateral agreements are much more easily negotiated than multilateral negotiations which involve three or
more nations simultaneously.
Thinking Economics Insight 3
Takes time to be free
When two nations create a free trade agreement (FTA) then the negotiations can take years to
conclude. During this time the nations are finding and clarifying which areas within an economy
will be involved in trade and also which areas are to be quarantined from negotiations. Note that
although the agreements are called ‘free trade’ the movement towards totally unconstrained trade
occurs over many years. Thus for example, the agreement to reduce tariffs in an industry may
be negotiated over a period of five to ten-years (or longer). The idea behind allowing time for
trade to become freer is to enable the affected industries to have time to make the structural
adjustments necessary so that change can be managed and negative impacts minimised.
Thus, for example, if a reduction in tariffs would result in a loss of employment domestically
and also a decline in the size or scale of manufacturing, then time will allow an industry
to find areas where there are competitive advantages which it can exploit or focus on.
The Japan-Australia Economic Partnership Agreement (JAEPA)
In early April 2014 an announcement was made by the Australian Prime Minister Tony
Abbott in a joint press meeting with Japanese Prime Minister Shinzo Abe. Negotiations
had commenced in April 2007 and took seven years to finalise, following sixteen rounds of
formal negotiations. The agreement has several key features that can be read about in Thinking
Economics Insight 4 below. Japan has a population of 127.6 million, the tenth largest in the
world, and is a very significant economic power.
Thinking Economics Insight 4
Japan-Australia Economic Partnership Agreement (JAEPA)
Japan and Australia have signed an historic trade deal that is the most liberalising of all trade
deals ever signed by Japan. Japan has had very high import barriers and the trade deal will see
the reduction of duties and preferential treatment that will affect 97% of Australian exports to
Japan. The agreement is expected to run over a fifteen-year term.
In 2013 the two-way trade between Australia and Japan was valued at $69.3bn. Japan is the
world’s third largest economy behind the USA and China. Australian exports to Japan in 2012-13
were valued at $48.6bn or 16% of total export value. Of this, goods accounted for $46.5bn and
services $2.1bn. The main goods sold are Liquid Natural Gas (LNG) worth $14bn and coal - also
worth $14bn per year. Services exports were composed of recreational travel services and transport
services.
In 2012-13 imports of goods and services from Japan to Australia were valued at $20.6bn. Goods
accounted for $18.3bn and services $2.3bn. In terms of trading importance, Japan is Australia’s
second-largest export market (behind China) and Australia’s second-largest overall trading partner.
JAEPA
The agreement covers all of the following:
Agricultural goods (including beef, dairy, sugar and horticulture)
Industrials, energy and minerals
Services
Investment, intellectual property (IP) and government procurement
Agricultural goods
Agricultural tariffs that have been as high as 219% will be reduced over time. Australia is the first
significant beef exporter to receive preferential access to Japan through a cut to the tariff on beef.
The 38.5% tariff will be reduced. For frozen beef there will be an 8% drop in the tariff in the first
year of implementation, a further 2% in the second year and another 1% in the third year. Over the
15-years the tariff will be reduced to 19.5%. For fresh beef there will be a 6% cut in the first year and
a 1% reduction in the second and third years, eventually reducing the tariff to 23.5%. Moreover, the
quotas for Australian beef, frozen and fresh, will increase.
As regards the other agricultural sectors dairy products will receive increased quotas benefitting
the cheese producers (effectively raising the global quota from 27,000 tonnes to 47,000 tonnes)
and there is the immediate removal of duties on milk products such as protein concentrates.
Sugar will be subject to lower tariffs and tariffs on fruit, vegetables, nuts, juice and canned fruits
will be eliminated over time. Wine producers, crustacean and honey producers will all face
tariff elimination and /or quota increases.
Industrials, energy and minerals - Coal, iron ore and LNG already face no duties however
tariffs will be eliminated on coking coal, petroleum oils, aluminium hydroxide and titanium
dioxide.
Services - Japan has agreed to allow supplier access to the financial sector, educational
sector, telecommunications and legal services.
Investment, intellectual property and government procurement - Australia will
raise its threshold for Japanese investment to allow $1.1bn of private investment to
take place without the need for consideration by the Foreign Investment Review
Board (FIRB) in ‘non-sensitive’ sectors.
Adapted from source: http://dfat.gov.au/fta/jaepa/downloads/jaepa-key-outcomes.pdf; http://dfat.gov.au/
publications/tgs/index.html and http://www.dfat.gov.au/fta/jaepa/
Benefits to consumers in Australia
It should be clear from reading Thinking Economics Insight 4 that Australian producers
will benefit from the JAEPA. It is estimated that the fall in tariffs alone could increase the
value of Australian export trade by several billions of dollars per year.
However, the benefits to Australian consumers are not particularly clear. The average cost
of seventy-five percent of imported Japanese cars will fall by 5% on the wholesale price to
Australian importers. It is not clear whether this cut, which arises from the elimination of a 5%
tariff imposed by the Australian government, will be passed on in whole or in part to consumers
through motor vehicle retailers. The remaining twenty-five percent of imported Japanese vehicles
will have their tariffs phased out over three years.
It is expected that there will be a benefit to consumers arising from the reduction in tariffs on
electronic products and whitegoods such as washing machines, refrigerators, microwave ovens, stoves,
conventional ovens, driers and rangehoods which will all fall in price. There should also be a reduction in
the cost of cameras, televisions, music players and game consoles.
Note that with domestic car manufacturing set to close within three years, the reduction in tariffs in
imported vehicles is unlikely to have a major impact on domestic motor vehicle production.
Precedents and access
The JAEPA has created a new standard for Japanese economic relations with the rest of the world. Australian
producers could feel vulnerable if Japan commences negotiating other bilateral trade deals. However, JAEPA
does provide a layer of protection arising from the notion of ‘most favoured nation (MFN)’ status. This is
explained in Thinking Economics Insight 5.
Thinking Economics Insight 5
Most favoured nation (MFN) status
and protection
A concern to Australian producers is that the benefits that have been negotiated under the JAEPA
may be eroded if other nations, following the precedent, negotiate FTAs with Japan. The World Trade
Organisation (WTO) imposes a requirement to trade without discrimination and, to other nations, it
would appear that Australia has been accorded a preferential status. However, as can be seen from the
excerpt below, the WTO does allow exceptions and the agreement between Japan and Australia would
place some products into the category of exception. Furthermore, if Japan does negotiate a better deal
with another nation then according to MFN rules, Australia must be accorded the same treatment.
Trade without discrimination
1. Most-favoured-nation (MFN): treating other people equally - Under the WTO agreements,
countries cannot normally discriminate between their trading partners. Grant someone a special favour
(such as a lower customs duty rate for one of their products) and you have to do the same for all other
WTO members. This principle is known as most-favoured-nation (MFN) treatment. It is so important
that it is the first article of the General Agreement on Tariffs and Trade (GATT), which governs trade
in goods. MFN is also a priority in the General Agreement on Trade in Services (GATS) (Article 2) and
the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (Article 4), although
in each agreement the principle is handled slightly differently. Together, those three agreements
cover all three main areas of trade handled by the WTO. Some exceptions are allowed. For example,
countries can set up a free trade agreement that applies only to goods traded within the group discriminating against goods from outside. Or they can give developing countries special access
to their markets. Or a country can raise barriers against products that are considered to be traded
unfairly from specific countries. And in services, countries are allowed, in limited circumstances,
to discriminate. But the agreements only permit these exceptions under strict conditions. In
general, MFN means that every time a country
lowers a trade barrier or opens up a market, it
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Source: WTO: “Principles of the trading
system”, from http://www.wto.org/
english/thewto_e/whatis_e/tif_e/
fact2_e.htm
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