How Australia and Japan keep the “bicycle” moving

JEPAIn the last class we learned about the “bicycle theory” of trade liberalization. Its main point is that trade agreements are absolutely necessary to keep free trade flowing, otherwise the protectionist forces will emerge and throw us back into the “dark ages” of autarky existence. Whether I love bicycling too much or have always been pro free trade, this theory resonates with me. Just a few days ago Australia signed a trade agreement with Japan, finally moving its trade liberalizing “bicycle” forward after seven years of negotiations. Countries did not completely remove the trade barriers, such as tariffs, but significantly reduced them. It is less ambitious than TPP, which is still on hold, however it was another “baby step” in efforts to make Japan to loosen up its protectionism over its agriculture. What is incredible about JAEPA, Japan-Australia Economic Partnership Agreement, is as one of the Japanese reporters put it: “Japan has never given anything away.”

Why Japan is so important to Australia? First of all, being the 3nd largest economy in the world despite the aging population, with $46, 736 GDP per capital, among the highest in the developed countries, Japan’s markets are very attractive for the exporters. Given the geographical proximity between the two countries it is only natural that they conduct so much trade between them. With the Heckscher-Ohlin theorem in mind, the labor-abundant country will export the labor-intensive goods, while the capital-abundant country will export capital-intensive goods.





From the above graph we can see the theorem in action, although some of the Australian agricultural exports to Japan such as fruit, dairy, fish requiring labor-intensive factors are not shown due to the lower dollar amounts. Past year a two-way goods and services trade between Australia and Japan was valued at $71 billion, the amount comparable to Uganda and Tunisia outputs combined in 2012. Japan was Australia’s second largest trade partner outpaced by China last year, while Australia has been the partner number one for Japan in providing major imports.


Australia and Japan place enormous importance to their trade relationship. At the same time, as we know, Japan has been extremely protective of its farming industry. Here is the schedule of some agricultural Japanese tariffs, which will give an idea how protective Japan has been in the past decade.


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According to the new agreement, the tariffs on beef will fall almost twofold from 38.5 to 19.5 per cent in the next 18 years with the immediate cuts of 8%. The amount of duty-free cheese will increase by 20,000 tons per year. The current duty-free quota is 27,000 tons per year. The tariffs on sugar fell by 40% from 184% to 110%. The agreement will reduce tariffs to zero for wool, cotton, lamb and beer. Tariffs on bottled, sparkling and bulk wine will be eliminated in the next seven years. The new agreement is set to eliminate tariffs on Japanese cars; the consumers’ electronics saw tariff cuts of 5%.

Largely, the winners from the new agreement include Australian consumers who will benefit from $1500 price cut on Japanese cars and cheaper electronics; Australian beef and dairy producers; Australian economy which will see the more billions added to the current $71 billion trade with Japan, as well as Japanese investors, for whom the threshold under which they will be inspected by Australian authorities increased by 300%. Japanese buyers also will be able to enjoy more world-renown Australian wines and seafood and pay less. As in any free-trade agreement there are also losers. Among them this time found themselves Australian rice farmers, who were mentioned at all in the agreement, and beet-growers, who are not completely happy with the reduced but still too high 110% tariff on sugar.

It is hard to please everyone, but overall JEPA brings more good, than bad, increasing the welfare of both countries while maintaining its momentum- if you believe in the bicycle theory of trade.


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