Australia’s Ambitious Free Trade Agenda

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Australia’s Ambitious Free Trade Agenda

Canberra wants to conclude deals with three East Asian giants, starting with Korea. It faces some significant hurdles.

The current hot topic in foreign and trade policy out of Canberra seems to be the conclusion of long-anticipated free trade agreements with the northeast Asian giants of China, Japan and Korea.

Shortly after her appointment as foreign minister, Julie Bishop confirmed that “[e]xpediting the conclusion of free trade agreements with South Korea, Japan and China is a first order priority of the Abbott Government.” Such enthusiasm has manifested itself in the form of proactive, economic diplomacy, as Bishop completed a whirlwind tour of the region where she met with counterparts in Japan, Hong Kong and Korea. She will head to China in the new year.

While the Coalition government's objective of concluding FTAs with Japan, Korea and China within a year is admirable, the ability for the government to conclude negotiations with the three countries – which between them have been in talks with Canberra for more than two decades – is in question. Some observers worry that its tight deadline is too ambitious and risks producing FTAs that only partially fulfill the interests of the signatories.

As FTA negotiations between Australia and Korea fast approach their fifth year, attention is now turning to Canberra's ability to conclude a deal with Seoul. Given Korea's recent success in signing FTAs with the U.S., EU and ASEAN heavyweights, a mutually satisfactory agreement with Australia is not beyond the realms of possibility. Korea's enviable collection of active FTAs already covers 60 percent of the global economy, not to mention the agreements still being negotiated that are expected to ultimately cover approximately 90 percent of the country’s trade activity.

The Time Is Right

Both Australia and Korea are enthusiastic about expanding their free trade networks and the benefits of a FTA between the two countries are readily apparent.

Korea is currently Australia’s third largest export market and Australia’s fourth largest trading partner. In the last decade, Korean investment in Australia has grown exponentially as Australia increasingly ranks as one of Korea’s top investment destinations. Since 2011, the value of investment proposals by Korean companies in Australia has reached more than $5.3 billion across the mining and resources, renewable energy, infrastructure, commercial property and agribusiness sectors.

More and more, Australian companies are also turning to Korea to unlock a range of investment and growth opportunities. In recent years, reputed Australian brands such as Macquarie Bank, ANZ, Rio Tinto, BHP Billiton and Blackmores have all established operations on the peninsula.

Australia's strong economic relationship with Korea also translates into political familiarity. As one of the first countries to come to Korea's aid at the outset of the Korean War, Korea and Australia continue to operate as important middle power partners sharing similar values and interests on the world stage. Numerous state visits to Korea by former Australian Prime Minister Julia Gillard, the recent hosting of the Foreign and Defence Ministers' (2+2) Meeting in Seoul, and Minister Bishop’s prioritizing of an early visit to Korea, all testify to successive Australian government visions for an enlarged role for Australia–Korea relations.

So why, then, almost five years from the commencement of the first round of negotiations, has a mutually satisfying FTA yet to be formalized?

Pressure Points

While a range of barriers preventing the conclusion of an agreement have been cited by commentators, overwhelmingly, problems relate to fundamental differences between Australia and Korea's economies themselves.

Given the abundance of natural resources in Australia, it is unsurprising that Australia wants to ensure the best deal for its profitable agricultural and other raw export goods. Australian beef remains consistently popular with Korean consumers, and its beef importers now enjoy approximately 52 percent of Korean market share. This is in contrast to US beef – another favorite with Korean consumers—which trails Australia occupying 36 percent of the country's beef market.

Though Australian farmers are relishing stable and lucrative Korean beef exports, the tide seems to be gradually turning for the profitability of Aussie beef. As Korea fast negotiates FTAs with major global economies, Australia’s product is becoming less competitive. Tariffs continue to artificially increase the price, meaning that other major beef importers, assisted by low negotiated tariffs, outperform Australian imports on a cost basis. Following the recent conclusion of the Korea–United States Free Trade Agreement (KORUS FTA), U.S. beef imports are gaining an edge in Korea as U.S. cattlemen enjoy a 5.32 percent tariff advantage over Australian beef and veal products.

True to its strength in farming and agriculture, Australia is also intent on negotiating the best deal on sugar and dairy exports. Like beef, Australia’s sugar and dairy products and by-products are fast becoming uncompetitive compared to the prices secured by other importing powers, such as the U.S. and the EU, with whom Korea has signed FTAs following aggressive negotiations.

While Australia ensures its agricultural and other primary industry exports receive the best treatment under any FTA with Korea, it’s not just Australia that is hitting walls in the trade negotiations for an Australia–Korea FTA.

Korea’s insistence on the inclusion of an Investor State Dispute Settlement (ISDS) clause in an Australian FTA has proven to be a particularly sensitive topic for negotiators in Seoul. Such a clause would expose Australia to legal action if, for example, it were to make a policy decision or enact a law contrary to the terms of an in-force FTA. It is understandable, however, that Australia’s largest trading partners like Korea (and the U.S. before the conclusion of the Australia–United States FTA) would want some form of surety that their trade activity with Australian companies will not be disrupted by adverse government decisions. 

To make matters more complicated, in the past, Australian trade negotiators have approached the issue of including such ISDS clauses in FTAs it negotiates in an ad hoc manner. Indeed, in her address at the AustCham Business Breakfast in Seoul last week, Bishop admitted that “[t]hey [ISDS clauses] exist in some of our FTAs and not in others. … they should be negotiated on a case-by-case basis.”

Despite Bishop claiming that “Australia will consider how [it] can negotiate the Investor State Dispute Settlement clause” with Korea, any inclusion of a clause runs the risk of souring relations with Australia’s existing trading partners, like the U.S., who do not enjoy the protections offered by an ISDS clause in their FTAs with Australia. While including an ISDS clause would highlight the importance that the new Australian Government places on its relationship with Korea, the inclusion of such a term also risks establishing a dangerous precedent for the inclusion of a similar dispute resolution framework in Australia’s future FTAs.

It is unsurprising that Korean negotiators have also pushed for the raising of the foreign investment review threshold to AUD$1 billion ($951 million), up from the current AUD$248 million, after Washington secured an increased threshold with the signing of the AUSFTA in late 2004. This would enable Korean investors to acquire interests in Australian companies and assets to a value of up to AUD$1 billion, after which they would have to seek approval from Australia’s Foreign Investment Review Board and ultimately, the Australian Treasurer.

Nevertheless, if Australia’s Coalition government extended the privilege of a U.S.-style raised investment review threshold to Korea, it may prompt a domino effect of demands with other countries yet to finalize an agreement with Australia (cue China). Such a decision by the government would further risk upsetting its coalition partner, the Nationals, who baulked at a recent suggestion by Treasurer Joe Hockey, a Liberal, in Washington that an Australia–China Free Trade Agreement could be expedited by the Government relaxing its election promise of further lowering Australia’s foreign investment threshold.  

The last thing Australia wants is a situation where it is forced to choose between friends. Yet Canberra’s often incoherent approach toward negotiating issues like dispute settlement and foreign investment has the possibility of pleasing some and offending others to Australia’s economic and political detriment.

Other factors have also prompted calls for Australia to be more circumspect when negotiating FTAs, particularly with Asian countries. These include differences in levels of concern for the environment, health and safety regulations, labor conditions and lower quarantine standards. For the most part, though, given its status as a well-developed country with a high standard of living, such concerns do not apply as much to Korea as they might to other far less-developed countries in the region.

Action to Match Rhetoric

Australia and Korea enjoy a shared political agenda, cooperating as natural partners and true friends to advance democracy, prosperity and stability in the world generally, and within the Asia-Pacific and Korean peninsula more specifically.

This political camaraderie translates into a mutually supportive and highly complementary trade relationship. Australia’s strength in producing raw goods continues to please Korea’s ever-growing appetite for high-quality Australian food, while a steady flow of Korean technology and vehicle exports to Australia supplements a slumping Australian manufacturing industry weighed down by high operating costs and a comparatively small population.    

Several options are available to Canberra’s negotiators in seeking to conclude an Australia–Korea FTA.

One option is to pursue a FTA for particular sectors rather than a comprehensive FTA. Nevertheless, finalizing a comprehensive bilateral FTA, while leaving little left to negotiate in the future, would be a long and protracted undertaking which risks the further erosion of Australian exporters’ profits, not to mention the strong market position Australian goods still enjoy in Korea.

As former Australian Ambassador to China Geoff Raby has recently proposed, Australian negotiators may make better progress toward the conclusion of its Asian FTAs by limiting the areas in which they seek greater market access, say to lamb, beef and dairy products. While potentially expediting the finalization of an agreement, work in the area of sugar, wool and some service exports would be likely to remain on the agendas of Australian negotiators in the future.

Alternatively, Australia’s might lessen its focus on the formation of bilateral FTAs, instead choosing to preference the negotiation of multilateral agreements in which it is momentarily engaged including the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP).

While forecast benefits of joining the TPP include the improvement of regional access arrangements in countries without an active FTA with Australia, like Canada, Mexico, Peru and Vietnam, Australia has a comparatively smaller voice in those negotiations, where it runs the risk of having its views sidelined on critical issues like services and agricultural exports.

Though the task of prioritizing trade agreements is ultimately a job for Canberra, it is imperative that it does not let its regional and free trade negotiations devolve into a zero-sum game whereby truly beneficial and complementary trade deals, like the Australia–Korea FTA, stumble on issues like agriculture, dispute settlement and investment review.

Indeed, it is time for hard words to be met by hard actions as both countries focus their negotiations on doing a deal that has been nearly half a decade in the making.

Jarrad Harvey is currently a postgraduate in the Department of Government & International Relations at the University of Sydney. The views expressed here are his own.