What Abbott's business delegation can learn in Asia

Lowy Interpreter

Prime Minister Abbott's team for his current visit to Japan, South Korea and China is certainly business-heavy. So too was his warm-up speech,  which one observer suggested might be seen as 'a tad too mercantilist'.  Nothing wrong with that. Concentrating on trade seems sensible given the many pitfalls on the security side, though let's not forget that this bright trade future depends on keeping the security issues under control.

The focus is on pending free-trade agreements (FTAs). These FTAs should properly be called bilateral preferential trade arrangements (PTAs), but if just about everyone else is ignoring the multilateral distortions involved, you have to follow along.

New Zealand has done particularly well out of its pioneering FTA with China. Fonterra's huge success in selling milk, riding in on the melamine scare, should be a case study on the premium that can be obtained by having a 'clean and green' reputation in Asia's middle-class food markets.

The Korean FTA has already been agreed, ready for signing. If the Prime Minister can resist the temptation to rush the unfinished negotiations with Japan and China, this will send a useful message to the negotiators on all sides.

For Japan, delay might allow better coordination with the Trans-Pacific Partnership. This is not the moment to undermine Prime Minister Abe's attempts to break down agricultural protectionism by signing up to an agreement which makes no progress in this area. For China, fuzzing the earlier commitment to finish the FTA by year-end might help our negotiators to get a better deal. 

Delaying these two FTAs would be no great loss. The biggest 'take-away' from the visit might instead be the 'being there' educational dividend for the participants themselves: the Prime Minister, the state premiers and the 600 businesspeople accompanying him. Of course, most already have exposure to Asia, some substantially so. But what contrasts there are among these three countries, what lessons are there to be absorbed and what opportunities to be imagined!

First port-of-call is Japan. Here is a reminder that economic success can suddenly turn into stagnation and deflation. But the story is complex and nuanced. Allowing for Japan's demography, per capita GDP growth has not done so badly, and growth per worker looks better still. The visiting Australians might also observe how a society copes with the complex pressures of an aging population.

This sclerotic economy still managed a fundamental transformation by transferring much of its manufacturing capacity to cheap-labour neighbouring countries. It was the early mover in establishing the multi-country supply chains that have come to characterise manufacturing trade in Asia, a revolution largely missing in Australia's economic links with Asia.

South Korea should stun the visitors by the sheer audacity of its development achievement (which so besotted Joe Studwell). Anyone who sees a large-scale manufacturing future for Australia should check out the competition.

In China, what lessons should the visitors absorb?  Relevant to the FTA negotiations (where China is looking for less discriminatory treatment for its investment in Australia), the central focus should be on the specific and idiosyncratic characteristics of the China-Australia investment relationship. This should not be an argument about differential treatment for state-owned enterprises (how do we think the SOEs will damage us?) but should aim to reach a common understanding on where the sensitivities lie and how to deal with them.

The overwhelming long-term issue is that we are small and they are big.

Both sides want to get the benefit of the synergistic natural comparative advantage between our two economies, but resource security for China has to be reconciled with the Australian people's sensitivity about 'selling the farm' (and the house as well) to foreigners. Over time, we may well want to re-balance the terms of investment (one day we will want to return to the idea of a counter-cyclical super-profits tax on resource exports). Global commodity price setting and transfer pricing issues will emerge. We need an adaptive framework if we are to maintain smooth relations.

The first stop of the visit provides relevant history. Japan had the same natural comparative synergy which led it to promote, fund and act as reliable customer for the first great Australian resources boom in the 1960s. This not only required vision and persistence, but also a recognition that there would be non-economic sensitivities on the Australian side. The 'one size fits all' investment clauses typical of FTAs will not cover these subtle issues, but dealing with them effectively will determine whether, in half a century, we will judge the China-Australia investment relationship to be as satisfactory as the Japanese relationship.

What might be the main 'take-away' from this visit? Given Australia's half-hearted mental engagement with Asia so far, at least some of the tourists might come to recognise the enormity of the Asian economic relationship. In our trade and investment flows, China occupies first place, with flows nearly twice America's, and Japan just behind America.

Asia's heft in global growth might come as an eye-opener on where the economic future lies. Even at its more moderate post-2008 pace, China is growing six times as fast as Europe and three times as fast as America. China accounts for nearly half of global growth. The 2008 global crisis demonstrated that Australia, whose GDP formerly cycled in lock-step with America, now depends more on Asia in general and China in particular.

And this is just three of our 'near north' neighbours. The members of Tony Abbott's business delegation should soon be re-packing their bags to visit the rest of Asia.

Originally published by The Lowy Institute publication The Interpreter. Republished with permission.