Jeffrey Robertson, Foreign Affairs, Defence and Security Section

Background

Australia is currently in Free Trade Agreement (FTA) negotiations with China, Japan and South Korea, which in 2009 together accounted for 49 per cent of Australian merchandise exports and 33.3 per cent of Australia’s total trade.

Depending on progress, negotiations towards the Korea-Australia (KorAus) FTA are likely to be completed in time for an announcement in 2011, which has been designated as a bilateral Year of Friendship, commemorating 50 years of diplomatic ties between Australia and Korea.

North Asia in the FTA debate

Opinion has always been divided on the benefits of FTAs. Opponents contend that FTAs reduce participant interest in multilateral liberalisation, reduce efficiency through trade diversion, endanger cultural diversity and primarily serve non-economic interests. Supporters contend that FTAs prepare participants for multilateral liberalisation, create trade through ‘head-turning’ effects and benefit consumers through increased competition.

Recent studies highlighting the disparity between the estimated benefit to economic well-being set out in government feasibility studies, and the actual results, has buttressed opposition to FTAs. Supporters contend that these studies are based on models, which cannot be expected to account for external changes (such as the global financial crisis) and that without an FTA, bilateral trade may be affected even further.

Joint feasibility studies commissioned or undertaken by the Department of Foreign Affairs and Trade (DFAT) estimate that the achievement of comprehensive FTAs in North Asia could substantially add to Australia’s economic well-being:

• China—joint feasibility study undertaken in March 2005 estimated that a comprehensive FTA could contribute A$24.4 billion over the period 2006–15.
• Japan—joint feasibility study published in December 2006, estimated that a comprehensive FTA could, at the lower end of the range of Australia’s potential GDP gains, equate to A$39 billion in net present value terms.
• South Korea—joint feasibility study published in April 2008, estimated that a comprehensive FTA could contribute up to US$22.7 billion in the period 2007–20.

However, in the context of FTAs with North Asia, another factor is becoming increasingly relevant— competitive liberalisation. This occurs when a country is forced to enter into an FTA in order to avoid competitive disadvantage due to a trade rival’s market access obtained through another FTA.

Australian beef in the South Korean market is a good example. Australia currently holds a historically high 58 per cent of the Korean beef import market, after consumer fears regarding Bovine Spongiform Encephalopathy (BSE, or ‘mad cow disease’) in US beef led to a substantial decline in US imports. In June 2007, Korea and the United States signed an FTA (KORUS FTA). When (and if) implemented, Korean tariffs on beef imports will decline from the current 40 per cent to zero in 15 equal annual reductions. Accordingly, Australia needs to obtain an FTA which provides an equivalent degree of market access in order to avoid competitive disadvantage.

Current status of negotiations

Australian and Chinese negotiators undertook the 15th round of negotiations towards an FTA in Beijing from 28–30 June 2010. FTA negotiations with China have been particularly slow, with both sides demonstrating a degree of frustration at the lack of progress. Negotiations are now in their fifth year. There remains a large number of difficult and sensitive issues, with significant progress in the short-term unlikely, unless the negotiations attract a greater degree of political interest in China.

Australian and Japanese negotiators undertook the 11th round of negotiations towards an FTA in Canberra from 19–23 April 2010. Progress has remained steady since the commencement of negotiations in April 2007. However, the current economic and political situation in Japan has reduced the willingness of its government to face the increased opposition that would result from an FTA with Australia.

FTA negotiations with Japan are particularly difficult due to the political influence of its rural sector. Australia, in particular, is perceived as a threat. While the Australian Government continues to emphasise the complementary nature of Australia’s rural exports, there remains a widespread perception that Australia presents an inherent risk to the rural sector’s viability. In addition, the decision to address the whaling issue at the International Court of Justice has attracted criticism from key coastal rural districts.

A political boost to FTA negotiations with Japan may come from the meeting between the Japanese Prime Minister and the Australian Prime Minister at the November 2010 APEC Leaders’ Summit in Yokohama.

Australian and South Korean negotiators undertook the fifth round of negotiations towards an FTA in Canberra from 25–28 May 2010. Progress has been steady with a strong degree of political support demonstrated by both sides.

The KorAus FTA is likely to be the first North Asia FTA under consideration by the new parliament. Both sides have clearly stated their desire for a rapid conclusion to negotiations.

In addition to the economic benefits, there are also a wide range of non-economic benefits that will accrue from a KorAus FTA. These include:

• Head-turning effect—perhaps because of its complementary nature and overall success, the Australia-Korea relationship has long suffered from a degree of complacency and disinterest on both sides. The media attention that could result from an FTA would potentially increase public and ultimately political interest in the relationship.
• Multilateral cooperation—Australia and Korea are widely considered to share a degree of interest as regional middle-powers. FTAs provide for ongoing interaction through annual reviews and consultation. This can increase understanding and facilitate further cooperation on wider multilateral issues, such as multilateral trade liberalisation, regional financial cooperation and economic regionalism.

Competitive liberalisation also plays a role in achieving Australia’s aims. The implementation of an FTA with Korea could provide an impetus for Australia’s negotiations with China and Japan. Similarly, an FTA with Australia would aid Korea by placing further pressure on US lawmakers to pass the KORUS FTA, which is currently stalled in the US Congress.

Library publications and key documents

Department of Foreign Affairs and Trade, Composition of Trade Australia 2009, Commonwealth of Australia, Canberra, May 2010.

M Priestley, Australia’s Free Trade Agreements, Background Note, 2008–09, Parliamentary Library, Canberra, 2008, http://www.aph.gov.au/Library/pubs/BN/2008-09/AustFreeTradeAgreements.htm

J Robertson, Time for an Australia-South Korea FTA?, Research Note, no. 31, 2005–06, Parliamentary Library, Canberra, 2006, http://www.aph.gov.au/library/pubs/rn/2005-06/06rn31.pdf