Japan FTA merits are lost in translation

Views on the Australia-Japan FTA are sharply divided, but deciding if it's a net win for Australia puts the spotlight on bilateral agreements and their impact on the development of regional trade blocs.

The Australia-Japan free-trade agreement clinched by Prime Minister Tony Abbott in Tokyo on Monday night was initially greeted with such applause by Australian news media that one might very well have suspected we'd entered a cheese-led export recovery.

Yes, cheese exports, worth a whopping $372 million, will now be duty free. Why, that's nearly double the value of “animal oils and fats” ($211 million) that we export to Singapore, according to DFAT figures.

It's as if the Japanese flag has become a tariff-free edam rising against a white, white background of pure intentions. (Actually, the concession only adds a "preferential, duty-free Australia-only quota growing to 20,000 tonnes" to Australia's 27,000 tonnes exported as part of Japan's "global quota".)

But delving into the detail of the FTA, it's extremely hard to work out whether it's a net win or loss for the Australian economy – economists, and industry lobbies, disagree violently on that score.

For instance, one of the great selling points for Australian consumers is that a Japanese car will now be $1500 cheaper, due to the scrapping of the 5 per cent tariff that previously applied.

Except that it won't.

Many Japanese-marque cars imported into Australia are made in Thailand – a nation with which we've had an FTA since 2005, under which imports have been tariff-free since 2010.

Indeed, trade economists point out that a big motivation for Japanese firms setting up in Thailand was to take advantage of its favourable trade status.

Moreover, if $1500 off an imported car sounds like a good deal, the government could have done that unilaterally, at any time, by removing the tariffs on cars from other countries too.

While that would have been politically difficult when we had an auto manufacturing industry of our own, it got a lot easier after Treasurer Hockey told GM Holden to make up its mind on whether or not to stay in Australia and both Holden and Toyota then decided not to do so.

There are some big wins in agriculture, but again the FTA is seen as salvation, or the great satan -- depending on which sector you're in.

The National Farmers' Federation said it recognised "the historical significance of the agreement. However, we are disappointed with the overall outcomes for agriculture with a number of sectors ... The agreement does not improve -- or marginally improves -- market access and terms of trade for a number of sectors such as dairy, sugar, grains, pork and rice."

Labor's trade spokeswoman, Penny Wong, said the deal "locks in high tariffs on Australian beef for nearly two decades, that’s what it does. And the reduction that comes is very slow and stops with very high tariffs -- still up to nearly 20 per cent in 18 years’ time. That isn’t free trade, and it’s not the sort of market access beef producers in Australia were expecting".

Well, yes, but it's a lot more than US beef exporters get. They are stuck with tariffs at 38.5 per cent.

Cattle Council president Andrew Ogilvie noted that "the finalisation of the AJFTA will have benefits for both Australia and Japan; creating opportunities for increased Australian beef sales into Japan ... however, Cattle Council is disappointed that substantial tariffs still exist on Australian beef after the phase-out period, unlike in previous free trade agreements, and also that different tariffs apply to chilled and frozen beef".

Labor has accused the Coalition of being "focused on getting a deal in order to make an announcement, not on getting the best deal for Australia", and some pretty acerbic comments have come from the US as well.

The US National Cattlemen's Beef Association said this: "This bilateral agreement undermines the long-standing goals and principles that are the base of the Trans-Pacific Partnership.

"This development only pushes the high-standing ideals of TPP further out of reach for all countries involved, and it is not a move that US beef producers can support. The TPP has been referred to as a twenty-first century agreement, but this bilateral agreement is from the twentieth-century playbook, and will not serve to foster open trade and certainly will not benefit consumers and producers globally."

Actually, those cowboys are onto something. The real crux of whether or not this is a good deal for Australia is to be found in the broader trade context.

International trade negotiations have been painfully slow ever since your columnist studied the Uruguay Round of GATT negotiations at university in the early 1990s. That morphed into the World Trade Organisation framework that kicked off with the painful Doha Round, which is still not concluded.

The turgid WTO progress, amongst other things, has led to the evolution of regional trade blocs, such as the North American Free Trade Association which many Pacific Rim nations hope can be extended into the Trans-Pacific Partnership, including: Australia, Brunei, Chile, Canada, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam.

Such a grouping, though excluding China, would really invigorate cross-border trade -- so much so that China would be tempted to join in the longer term according to Andrew Stoler, a former deputy director-general of the World Trade Organisation.

But do bilateral deals really undermine the creation of such a super-bloc? Stoler doesn't think so, and said as much when he was seconded to be an associate commissioner of the Productivity Commission when it produced its 2010 report Bilateral and Regional Trade Agreements.

However, Stoler was the lone dissenting voice at the PC. He sees bilateral deals as leading to a complex, but more free trade environment that ultimately makes it easier to forge over-arching regional deals such as the TPP.

The other Productivity Commission experts disagreed -- you can read their recommendations, and Stoler's dissenting responses to them, in an appendix at the end of their 2010 report. In short, the PC doesn't like bilateral deals.

After "considering" Stoler's views: "...the Commission found little evidence that Australia's recent bilateral agreements had provided substantial commercial benefits. The main factors that influence decisions to do business in other countries are likely to lie outside the scope of such agreements. The study concluded that while preferential trade agreements could increase national income, the net effect is likely to be modest.

"The study also found that some provisions included in Australia's recent preferential trade agreements -- including investor-state dispute settlement mechanisms, government procurement requirements, intellectual property protections and provisions affecting areas traditionally the province of domestic policy, such as culture -- potentially entail significant costs or risks."

The investor-state dispute settlement provisions included in some FTAs are central to their gripes. The South Korean FTA signed last year included such provisions, which the PC argues allows foreign-owned firms to sue the Australian government in ways Australian-based firms would not be able to do.

Philip Morris, for instance, is suing the government from Hong Kong - with which we have an FTA with an ISDS provision -- for damaging its interests with the recently enacted plain-packaging laws for cigarettes.

The debate over FTAs is huge, technical and hard for politicians, let alone voters to understand. Besides, until the full details of the Japan FTA are released, we still don't know whether it includes nasties such as an ISDS provision.

In the meantime, have another slice of edam, and try not to worry too much.