Media  Global Economy  2014.05.23

Negotiations for the Japan-Australia Economic Partnership Agreement

English translated version of "Business Prospect" on NHK Radio Channel 1 on April 1, 2014

1. Bilateral talks between Japan and Australia on the Economic Partnership Agreement (EPA) seem to have entered the final stage. Would you explain the EPA and bilateral economic relationship between Japan and Australia?

An EPA is intended to eliminate tariffs, promote service trade and liberalize investment between two or more countries. The Trans-Pacific Strategic Economic Partnership Agreement, known as TPP, is one example of an EPA. They are usually known as FTAs (Free Trade Agreement) overseas, but Japan uses the term EPA as they involve non-trade issues as well.

Economic ties between Japan and Australia are very important. While Australia mainly exports coal, crude oil and iron ore to Japan, Japan exports automobiles and other industrial products to Australia. So, for Japan, Australia is an important source of natural resources and energy. This is especially true of coal as Japan imports about 60% of the coal consumed domestically from Australia.

Japan and Australia started negotiations on the EPA in 2007 when Prime Minister Shinzo Abe formed his first cabinet. Seven years have passed since then, but no conclusion has been reached yet.

2.Why has it taken so long?

The main reason is that Japan has problems in liberalizing agricultural trade. In the TPP negotiations, many objections were raised because the TPP involves not only trade liberalization of agricultural products but also liberalization of investment and service trade. Some objections were made based on the mistaken assumption that the TPP will break down Japan's universal health insurance system; that it will cause a rise in the price of medicines and that good regulatory systems, such as food safety regulation, may be dismantled by foreign companies investing in Japan who may sue the Japanese government under the so-called ISDS clause. None of these issues were relevant in the Japan-Australia EPA because Australia maintains a universal healthcare system basically identical to Japan's system, it opposes the enhancement of patent rights for medicines as it may increase drug prices, and the government (at least the previous Labour Party government) was against the ISDS clause. In other words, the only controversial issue in the EPA negotiations with Australia is agricultural trade.

Diet committees of Agriculture, Forestry and Fisheries adopted the resolution that "The Government of Japan exerts due diligence in dealing with bilateral and multilateral economic partnership agreements with other countries and ensures ...... that sensitive agriculture, forestry and fisheries products - including rice, wheat and barley, beef and pork, dairy products, sugar and starch crops - are either to be excluded from the negotiations or to be subject to renegotiation, ...... and the government should not hesitate to withdraw from negotiations if it judges that ...... five sensitive agriculture, forestry and fisheries products ...... could not be protected." An almost identical resolution was also adopted in the same Diet committees against the TPP.

Legally speaking, these resolutions of the National Diet do not have any binding effect. During the negotiations of the GATT Uruguay Round, the plenary sessions of the Upper and Lower Houses of the National Diet on four occasions adopted resolutions that the Diet members would not tolerate even one grain of foreign rice to enter into the Japanese market. Despite such resolutions, the Japanese rice market was eventually opened up partially in order to prioritise the larger national interest, specifically that the GATT Uruguay Round negotiations needed to be concluded. This time agricultural groups argue that the resolutions of the National Diet must be complied with not only in the TPP negotiations but also in the EPA negotiations with Australia. In accordance with the resolutions, even the reduction of tariff rates for sensitive agricultural, forestry and fisheries products such as beef, dairy products and sugar would not be allowed since they require the exclusion of sensitive products from the EPA negotiations.

3. What are the notable issues in the negotiations?

The most controversial issue is to what extent the import duty on beef is to be reduced from the current rate of 38.5%. Under the EPA, the elimination of the tariff is normally required. However, Australia has compromised and not demanded tariff elimination. It has, however, requested the duty rate on beef to be halved. The Japanese agricultural industry is against the reduction of duty rates, and wants to minimize the level of reduction as much as it possibly can, if it accepts it all.

There are two different kinds of beef in Japan. One is Japanese beef (wagyu), which is not affected by an import of Australian beef. The other one is beef produced from cows (such as Holstein cows) which are bred by dairy farmers to produce milk. In order to produce milk, cows need to be pregnant and deliver calves. Half of calves are male and the other half are female. Female calves are raised by dairy farmers to become cows, while male calves are fed by cattle farmers with corn imported from the US and raised as beef cattle. The beef from these cows is in competition with Australian beef.

However, since 1990 when beef trade was liberalized by abolishing quantitative restriction, the Japanese beef industry has exerted itself to improve the quality of beef by producing cows which are crossbred between wagyu cattle and cows. Recently, the technique of implanting a fertilized egg of a wagyu cow in another breed's uterus has been widely adopted to make female cows deliver wagyu calves. In this way cows produce wagyu beef which does not compete with Australian beef. This has been one countermeasure to cope with the opening up of the Japanese beef market.

In addition, the Yen-Dollar exchange rate has changed to around 105 yen per dollar, from a level of around 70 yen per dollar up to 2012. Such a depreciation in the exchange rate almost equates to a cancellation of the 38.5% duty rate on beef. The Japanese Yen has also depreciated by about 20% against the Australian dollar. Japanese beef was competitive with Australian beef even when the Japanese Yen was high against the Australian Dollar. So, with the Yen at its current level, Japanese beef is able to compete with Australian beef by means of 18.5% tariff rate on Australian beef. If Japanese farmers still experience any disadvantage, the government can make a direct subsidy to farmers from a fund just as the US and the EU are doing. Tariffs are not the only means available to protect farmers.

4. How do you see exports from Japan to Australia under the EPA?

South Korea has recently signed an EPA with Australia. Under this EPA, Korea's import duty on Australian beef, currently at a level of 40%, will be gradually reduced and eliminated totally after 15 years. In return, Australia has promised to completely eliminate a tariff of 5% on Korean automobiles with effect from January 2015. I would imagine that, as it did with Korea, Australia would not demand an immediate and significant reduction of Japanese tariffs on beef. Australian exports of beef to Japan amount to 130 billion yen annually while Japan exports automobiles to Australia to the amount of 700 billion yen. If Japan takes a tough and inflexible position in negotiations and as a result import duties on Japanese cars are not eliminated, Korean cars may come to dominate the Australian market at the expense of Japanese makers.

The Australian Prime Minister will soon be arriving in Japan. He highly values the Japan-Australia relationship. Prime Minister Shinzo Abe should not be bound by the Diet Committees' resolutions, and is expected to take a broader view. I would think that it is the time for him to conclude the EPA with Australia which he himself initiated.

(This article was translated from the Japanese transcript of Mr. Yamashita's speech in the "Business Prospect" session of the radio program "First in the Morning News" broadcast by NHK Radio Channel1 on April 1, 2014.)