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What Canada Can Learn from Free Trade Down Under

Posted April 15, 2014

Despite being located in different hemispheres of the world and having radically different climates, Canada and Australia otherwise have much in common. Aside from being members of the Commonwealth with a legacy of shared cultural traditions stemming from being part of the former British Empire, the two countries are also alike in having small populations (just 23.4 million in Australia and 35 million in Canada) relative to their massive size.

Economically, both countries depend heavily on exports; more than 21 percent as an equivalent to GDP in the case of Australia and 30 percent in that of Canada. Both countries are rich in natural resources, so it follows that both economies are dominated by the primary sector: 55 percent of Australia’s exports are in the form of raw materials compared with 46 percent for Canada. In terms of agri-food exports, both countries are world leaders with exports of $46 billion and $34 billion for Canada and Australia, respectively.

In recent years Canada and Australia have been actively working to forge greater free trade links with the rapidly growing Asia-Pacific market with both countries key parts of of the ambitious multilateral U.S. led Trans-Pacific Partnership (TPP) trade initiative. On the bilateral trade front, in March Canada concluded negotiations on a free trade agreement with South Korea, its first with an Asian market. Australia also signed a FTA with South Korea last week, after five years of negotiations. Korea’s trade ministry said the FTA will help the country secure a stable source mineral resources while enabling it expand its car exports in the competitive market among Asian rivals. Last month also marked the fifth round of negotiations towards a free trade agreement between Canada and Japan, a process that has been ongoing since 2012.

Last week in Tokyo, Australian Prime Minister Tony Abbott and his Japanese counterpart Shinzo Abe concluded seven years of negotiations by reaching an “historic” free trade accord. Under the new Japan-Australia Economic Partnership Agreement (JAEPA) Japan agrees to cuts its tariffs on Australian beef, while Australia will abandon its tariff on Japan’s automotive exports. The two sides look to sign the JAEPA this summer and make it enter into force by the end of 2015. “Australia has broken new ground as the first major agricultural exporting economy to conclude such a liberalizing agreement with Japan,” boasted a government press release.

As another major farm products exporter, Australia’s breakthrough trade pact could offer Canada some insights concerning what it may expect to achieve as it bargains to reach a free trade agreement with Japan, though these might not be entirely positive. First of all, the JAEPA is not a comprehensive FTA and is “is significantly less ambitious than leaders agreed to seek in the Trans-Pacific Partnership,” according to a USTR spokesman quoted by the Wall Street Journal. JAEPA does not cover trade in rice at all, for example. Even where it cuts some tariffs with significant “frontloading” in the first year and gradual elimination over the next 18 years, many tariffs and import quotas remain in place.

It should also be noted that the decision the Australian government made to scrap tariffs on Japanese car imports in order to gain greater access for some of its agricultural exports was doubtless made somewhat easier by the fact that auto manufacturing in Australia has been suffering a slow death for many years. With companies like Holden (GM), Ford and Toyota having recently announced they are shutting down production in Australia, the entire industry could soon be a thing of the past. With a still thriving auto manufacturing sector in Canada, it is unlikely the Canadian government would be willing to make the same sacrifice for the benefit of ranchers and farm products exporters. On the other hand, the recent free trade agreement with South Korea that will reduce tariffs on that country’s car exports could incentivize Japanese automakers to pressure the Abe government to strike a similar deal with Canada.