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Economics of free trade agreements not always black and white

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FTA 'big win for Abbott'

What does Australia get out of the free trade agreement with Japan? Gareth Hutchens and Chris Hammer take a look.

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In striking a free-trade agreement with Japan, the Australian government has struck another blow to the budget.

By agreeing to remove the 5 per cent tariff on Japanese car imports, the Abbott government will lose billions of dollars in revenue over the forward estimates, or $400 million a year.

But on the flip side, the average Japanese car will be about $1000 less for Australian consumers, so it is a good thing from that perspective.

Prime Minister Tony Abbott meets Japanese Prime Minister Shinzo? Abe.

Prime Minister Tony Abbott meets Japanese Prime Minister Shinzo? Abe. Photo: Alex Ellinghausen

Economists like to talk about the costs and benefits of free trade agreements in two ways.

The first way, called “trade creation,” describes the extra trade that will occur after you have made it easier to trade.

And the Australian government has a positive story to tell in this regard after winning big concessions from Japan for local beef and dairy producers worth hundreds of millions of dollars.

These concessions will result in dramatically increased exports of local agricultural exports to Japan in coming decades, with the Japanese government agreeing to cut the tariff on frozen beef to 19.5 per cent, from 38.5 per cent, and the tariff on Australian fresh beef to 23.5 per cent.

Both cuts will be phased-in over 15 years or more.

Australian cheese producers have also had a big win. They will now get additional and immediate duty-free access for cheese such as cheddar.

They will also benefit from a preferential duty-free Australia-only quota.

Quotas will grow for ice cream and frozen yoghurt exports.

Australian milk products such as protein concentrates and casein will also get immediate duty-free access to Japanese markets.

Meanwhile, tariffs on canned products such as tomatoes, peaches and pears, and fruit and vegetable juices will be eliminated.

These things are all positives for Australian farmers.

However, economists also like to talk about free trade agreements in terms of how much trade they divert. Called “trade diversion,” this refers to the amount of trade that won’t take place as a consequence of any free trade agreement.

Dr Mark Melatos, a senior lecturer in trade economics at Sydney University, says there will usually always be economic costs from trade diversion.

But the problem is, it is very difficult to quantify because it is largely counter-factual.

“The world is a complicated thing right? So if I do a deal with one person it will have implications for my relationships with other countries,” Dr Melatos said.

“With Japanese cars becoming cheaper that means we will import fewer cars from somewhere else. That means another country will miss out on potential exports to Australia. What will that mean for trade relations with other countries?”

But Prime Minister Tony Abbott and Trade Minister Andrew Robb are keen to emphasise the positives.

They issued a joint press release on Monday hailing the agreement as a historic one.

“[It] sends a strong message to Japanese investors that Australia is open for business,” they said.

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