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Free Trade with Korea and Japan – Opportunities for Everyone?

Australia formalised two Free Trade Agreements (FTAs) in April. Outside of the photo opportunity, what do the agreements with Korea and Japan really mean for business and more importantly, are there opportunities for all?

It’s important to remember that FTAs pick winners – so, the answer is no, not every sector is a winner. FTAs open markets and reduce tariffs in certain sectors only. They also create short term losers by removing any protection a sector has from global competition. But where everyone can win is in the millions of dollars of investment opportunities that flow from FTAs as the two economies create closer economic ties.

Opportunities in Korea

Korea is Australia’s third largest export market at $10 billion plus. Korean investment in Australia has grown rapidly since 2001, growing 25 fold to over $12 billion in 2012. The Korea-Australia Free Trade Agreement (KAFTA) is expected to add another $5 billion to the value of exports by 2030.

KAFTA is the broader of the two FTAs – but to be fair there is already a significant level of trade with Japan.

The winners are:

  • Agriculture – beef, sugar, dairy (cheese, butter and infant formula – but not milk), lamb, pork, goat, fruits and nuts not generally produced in Korea or counter seasonal (cherries, almonds, table grapes and dried grapes, macadamia nuts, fruit juice, mangoes, asparagus, lentils, chipping potatoes, oranges, and mandarins), wine, malt and malting barley, and some seafood products (Bluefin tuna, rock lobsters).
  • Industrial – liquefied natural gas, titanium dioxide, unwrought aluminium, automotive parts and sea salt.
  • Pharmaceutical products including vitamins.
  • Services – legal, financial services, accounting, telecommunications, education, film and television, engineering services.
  • Investment – introduction of mechanisms to protect investors, ownership and intellectual property.

While there will be winners from KAFTA, other sectors will face competitive pressures from Korean companies. For some this will be driven by nothing more than the bilateral removal of tariffs from sectors such as manufacturing, energy and resources. This levelling will mean some Australian businesses will become uncompetitive where there are disparate wage and manufacturing costs. General Motors (GM) has stated that when the company stops making cars in Australia in 2017 it is likely that the Australian market will be supplied by product shipped from Korea. While KAFTA was not a factor in GM’s decision, the “sustained strength of the Australian dollar, high cost of production, small domestic market” and fragmented market, was.

Some industries were locked out of KAFTA. Australian rice and honey were excluded from KAFTA. Honey, for example, currently faces tariffs of between 150% and 250% in Korea. Milk was also excluded.

Australia is not the first to formalise a trade agreement with Korea; the US, European Union, Chile and ASEAN nations already benefit from competitive access and the progressive lowering of the barriers to entry.

The details of the FTA with Korea have been available since December 2013 but only ratified with the signing in April this year. FTAs are all about access, to see if your industry has broader access to the Korean market, you can find the details on the Department of Foreign Affairs and Trade website.

Opportunities in Japan

Japan is Australia’s second largest export market at over $48 billion representing 16% of Australia’s overall exports. The winners are:

  • Agriculture – beef, dairy (cheese, milk, ice cream and frozen yoghurt), sugar, wine, fruits, nuts and juices including canned products, seafood (prawns, rock lobsters, abalone, oysters, crabs, Yellowfin and southern Bluefin tuna, sea urchins and fish oils), chocolate, honey and pork.
  • Industrial – Coke and semi coke of coal, petroleum oils, aluminium hydroxide, titanium dioxide.
  • Investment – cross border access for fund managers.

Japan’s tariffs on vehicles, automotive parts and most pharmaceuticals are already set at zero.

If you feel like you need support in making your way through the uncertainties and tough times ahead, or simply have a question or want more information, please contact PJS Accountants on (07) 33903177 or click here to contact us.