After an extended engagement of seven years, Japan and Australia consummated their relationship by signing a trade pact. It is a milestone in the sense that it is Japan's first trade agreement with a significant agricultural producer.
The big prize, however, is not this, it is the Trans-Pacific Partnership--the multilateral trade agreement including a dozen countries. Japan (mistakenly) hopes that the agreement with Australia demonstrates its willingness to compromise, including the relaxation of protection of Japan's agriculture sector. This has been a particularly vexing issue for US negotiators.
However, in most of the press coverage, what appears to be a more significant obstacle to getting more concessions out of the negotiators, is hardly included, and when it is, it is almost an afterthought. For example, in the Financial Times coverage of the TPP at the end of last week, one does not learn until the second to last sentence in a piece that discusses US criticism of Japan's trade stance, that members of President Obama's own party are blocking an essential part of all successful modern trade deals. This is, "trade promotion authority" also known as "fast track authority."
The TPP negotiations were struggling at the end of last year, when it was initially hoped that a deal could be finalized, but this often happens with such negotiations. The months, if not years, of hemming and hawing, are quickly resolved in a couple of weeks. This time it is proving elusive, not so much, we would argue, because of the tough negotiating position Japan took, especially in terms of protecting its agricultural sector, but because of doubts that the US was sufficiently serious. The inability of Obama to secure trade promotion authority just about dooms the TPP, almost regardless of the concessions from other countries, including Japan.
The lack of Congressional support for Obama undermines the US negotiating position and makes other countries more reluctant to antagonize domestic constituencies without being able to show concessions by the US. By striking an agreement with Australia, even though it is not as ambitious as the US seeks, Japan sends a strong signal that it can compromise.
Both houses of Japan's Diet had instructed negotiators to exclude beef, poultry, rice, wheat, sugar, and dairy from concessions. Yet in the bilateral agreement with Australia, Japan made some concessions in these areas. To be sure, they are not as dramatic as the US is pushing for, but they are in the right direction.
For example, Japan's tariff on frozen beef imports from Australia will be immediately cut in half to 19.5% from 38.5% presently. The tariff on fresh beef will be cut to 23.5%, but over the next 15 years. Until the US and Japan reach an agreement, US beef exports will be at a disadvantage to Australian producers. Cheese, which is Australia's largest dairy export to Japan, will no longer have any tariff. Japanese tariffs on fruit, vegetables, nuts, canned fruits and vegetables and their juices, will be eliminated.
Australian livestock farmers wanted larger cuts in Japan's tariffs on imported meet. However, reports suggest that a clause was inserted into the agreement that got their reluctant support. The clause essentially guarantees Australian farmers as good of a deal from Japan as anyone gets. In effect, Japan will have to match any deeper concession that might be granted to the US under the TPP negotiations, for example.
In return, Australia will eliminate tariffs on Japanese cars, electronics and electronics. Australia also concluded a trade agreement with South Korea. Korea will eliminate tariffs on Australian beef over 15 years. Australia will reduce tariffs on all Korean cars within three years though some gasoline-fueled models will be scrapped immediately.
The other point that does not come out in most of the press coverage that what is at stake with the TPP is not simply about the trade particulars. For Japan, it is part of Abe's reform efforts. Japan's Economic Minister Amari acknowledged this: "Japan's agriculture is now regarded as a fresh growth industry and stands at a point where it needs to reform the way it thinks."
There is arguably even more at stake for the United States. The purpose of the trade agreement was not just about economics. There is a large, if not larger, political component. It complements the US "Asia pivot." It is meant to address the rise of China. It is to demonstrate the US engagement and commitment.
The failure to conclude an agreement will deal the US a significant setback. Some US politicians have argued that if Japan is not sufficiently ambitious, the US should complete TPP without them. This seems particularly short-sighted as the US pressed hard for Japan to join and Abe, reluctant at first, conceded and in some ways, is a good example of the old saw about the converts sings loudest in choir.
Tactically, it may be self defeating for the US to make the good the enemy of the perfect. A failure would unhinge the US Asian strategy. It would raise questions about the US commitment. It would weaken the reform efforts in Japan. It would have a cooling effect on other trade agreements. It would create new opportunities for China.
Yet the political realities suggest that there is little chance that Obama will be given trade promotion authority before the November election. If the Democrats lose the Senate, which is possible, there is little reason for the Republicans to help Obama complete his agenda. If the Democrats win, there is no guarantee that they will concede the authority to Obama.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.