Australia, Japan take a ‘domino approach’ to regional integration

Author: Takashi Terada, Doshisha University

The recently signed Australia–Japan economic partnership agreement (EPA) is an example of the dynamic domino effect of regional trade and investment. This is where the benefits an FTA brings to one country, such as eliminating tariffs, generally disadvantages a third country not included in the agreement. This third party is thereby pressured to engage in seeking FTAs of their own. Australia’s regional integration strategy has adjusted itself well to this environment — in which big economies, each with different rules and ambitions, struggle with each other for trade advantages.

For Australia, Japan’s concession on some key agricultural products, such as beef, is particularly important. Under the deal, Japan’s frozen beef tariff will fall from 38.5 to 30.5 per cent in the first year, before being reduced to 19.5 per cent over the following 18 years. The tariff on refrigerated beef will also be reduced to 32.5 and 23.5 per cent in the first and second year, respectively.

This is the first time that Japan has preferentially reduced its tariff on beef.

The move was hailed as an unexpectedly good result by Australia’s Minister for Trade and Investment Andrew Robb. But sugar liberalisation — which invited a backlash from Australian industry organisations when it was excluded from the US–Australia FTA — was again excluded. In Japan sugar is produced by small-scale farmers in Hokkaido and Okinawa, where the unemployment rate is relatively high.

But, with tariffs on both sugar and wheat being immediately removed by the South Korea–Australia FTA, signed in April, the discontent of the Australian sugar industry has been substantially mitigated. So, when considering the combined effects of the FTAs with Japan and South Korea, Australia’s trade policy tactics — at least domestically — have been a success.

The wider effects of Australia’s FTA tactics can also be observed in the US–Japan market access negotiations under the TPP. The Japan–Australia EPA attracted significant attention in Japan primarily due to expectations that a preemptive deal with Australia would lead to a US compromise on beef tariffs, which the US has demanded Japan substantially reduce.

The United States has a 35 per cent share of the Japanese beef market, while Australia maintains 54 per cent. But, if only Australian beef enjoys a lower tariff — as under the EPA with Japan — American beef will be at a disadvantage and the difference in market share would increase. It was thought that this would motivate the United States to quickly compromise on its tariff reduction demands on beef and other agricultural products, to Japan’s advantage in the negotiations. Even if TPP negotiations were concluded quickly, it would take a long time for all countries involved to ratify and implement the agreement. So, members of the American beef industry began to prepare for a disadvantage that would last several years.

But, with the mid-term elections looming and interest groups to appease, the Obama administration instead demanded a five per cent tariff on beef, much lower than what Japan promised to offer Australia. A bigger cut over a shorter timeframe was presumably needed to get concessions from the US during the bilateral market access negotiations. Yet Japan has continued to use negotiation tactics by offering other TPP members, such as New Zealand, a limited level of agricultural liberalisation.

Australia also had an eye to the TPP while working up to the agreement with Japan. As indicated by Andrew Robb’s statement that ‘our competitors are not Japan’s producers, they’re producers from other countries’, Australia believed, with a quickly negotiated deal with Japan, it could gain an advantage in Japan’s agricultural market over other TPP participating countries, including the United States and New Zealand.

Presently 11 per cent of Australia’s agricultural products are exported to Japan, which is also its largest export market for beef and cheese. Importantly, a most-favoured-nation clause for beef and dairy products in the EPA means that if tariffs for these are brought down even further within the TPP, they are guaranteed to apply to Australian products, too. In this negotiation game, the United States has, in effect, become Australia’s proxy negotiator, as US–Japan negotiations will always benefit Australian beef and dairy products.

In this way, FTAs can set off a political game — like dominoes — where deals cannot be ended with a single agreement due to the exclusive nature of FTA benefits. It is this political game that also led Australia to quickly conclude the South Korea–Australia FTA. At that point Australia had already suffered two years of harm due to the South Korea–US FTA. Equally, Australia is Japan’s second-largest automobile market, thus the removal of tariffs on South Korean automobiles under the Australia–South Korea FTA was one of the key drivers pushing Japan to quickly conclude the Australian EPA.

The only major Northeast Asian player left in Australia’s FTA game is now China, which accounts for as much as 35 per cent of Australia’s total exports. The Sino–Australian trade negotiations will surely catalyse another round of domino politics in regional integration. The question that remains is: who else may strike preemptively to minimise their own disadvantage under a Sino–Australian FTA?

Takashi Terada is Professor of International Relations at Doshisha University and was previously Japan Scholar at the Woodrow Wilson International Center for Scholars and a Professor at Waseda University.

A longer version of this article was first published here in USJI Voice.