Japan and Australia: leading Asia Pacific regionalism in uncertain times

Speaker: Simon Newnham, Ambassador for APEC, First Assistant Secretary, Investment and Economic Division, Department of Foreign Affairs and Trade.

[Check against delivery]

Distinguished guests, ladies and gentlemen, good afternoon. In my presentation today I would like to cover three main areas:

First, a quick tour of the history of Australian and Japanese ties

• one that has been forged both as bilateral partners
• but also as regional leaders, in wider circles

Second, the fact that there is a bright regional outlook, despite the amount of negative noise

Third, an outline of some of the major trade and economic challenges ahead that our partnership will need to face.

A history of close ties

Japan and Australia can rightfully claim to be regional economic success stories.

And the modern histories of both countries are inextricably linked.

A little over 60 years ago, courageous and forward-looking leaders from both countries signed the 1957 Commerce Agreement, laying the cooperative foundations for our strong and vital partnership.

The decision to normalise trade relations between our countries was not without its critics.

It required courage and a determination to look to the future, rather than being constrained by the past.

Just one decade after signing the Agreement, Japan had overtaken the United Kingdom as Australia's largest export market.

Now, some of Australia's largest export industries, such as iron ore, coal and LNG, are underpinned by significant and sustained Japanese investment.

Most recently, INPEX's investment into the Ichthys LNG project was the single biggest investment by a Japanese company into Australia

And it is the largest ever overseas investment by a Japanese company.

Continuing the bold steps taken towards closer economic integration, was our historic and ambitious Economic Partnership Agreement (JAEPA), which entered into force in early 2015

Both economies are buoyant, and the outlook for both is strong.

Little needs to be said about the success story of the Japanese economy.

Japan's highly industrialised market economy is the third-largest in the world.

Manufacturing has perhaps been the most remarkable success, and an internationally renowned feature of Japan's economic growth.

And, like Australia, Japan's services sector (including financial services) now plays a prominent role in the economy, accounting for about 70 per cent of GDP.

Australia's Prime Minister Turnbull, a champion of the opportunities in our digital future, when visiting Japan was struck by the enthusiasm with which Japan embraces technological innovation and change.

The medium-term outlook for the Japanese economy remains positive.

As it does for Australia.

While home to only 0.3 per cent of the planet's population, Australia has sustained 26 years of uninterrupted economic growth.

And is the world's 13th largest economy.

Australia has the capacity to provide high-quality natural resources, food, education, tourism and financial services to the world.

Japan is Australia's second largest trading partner, with two-way trade between our countries worth almost $70 billion.

A recent PWC study found Australian exporters are making extensive use of arrangements agreed through our Economic Partnership Agreement

At around 95 per cent utilisation, the highest among all recent agreements

And in a few weeks the fifth round of tariff cuts will take effect.

Japan is Australia's fourth-largest foreign investor and sixth-largest inbound tourism market in terms of short‑term visitor arrivals

The strength of the investment relationship was underscored again with the 2017 launch, by Minister Ciobo, of the 'Japanese investment in Australia partnership' report

Which showed that interest from Japanese companies in Australia was growing and diversifying, into areas such as digital technology, infrastructure and financial services

Some might be surprised to hear this, given the stereotype of Australia's key strengths – mining and resources and agriculture.

But Japanese companies are incredibly sophisticated and well researched.

They take notice of global rankings on issues such as global creativity, web participation, global dynamism, entrepreneurship, and indexes on global talent competitiveness.

All areas where Australia has ranked as one of the world's very best performers - in the top 5 or higher on all these fronts in the latest studies.

About 2,300 Australian undergraduate university students have chosen to live, study and undertake work experience in Japan in the first five years of our New Colombo Plan.

Japanese remains the most widely studied foreign language in Australian schools and universities.

But it would be a mistake to characterise this history of economic success and close collaboration as simply a bilateral story – only one on one.

It is far deeper than that.

A big part of the story is our close cooperation and leadership in regional and global bodies.

Foremost among our objectives is the welfare and stability of our Indo‑Pacific region, underpinned by open economies and the rule of law.

Australia and Japan are two of the biggest anchors for peace and prosperity in the Indo-Pacific.

As Special Adviser to PM Abe, Kentaro SONOURA said at an event at Sydney University last week, Japan and Australia are flag bearers for free trade and investment in the region.

We are natural partners on this front.

Comparing Prime Minister Abe's Free and Open Indo-Pacific Strategy with Australia's Foreign Policy White Paper reveals a remarkably close alignment of our two countries' interests.

In our first White Paper for some 14 years, launched in December last year, we distilled our goals down to some core principles, including:

• the welfare of our Indo-Pacific region
• pursuit of our interests via open economies, core national security interests, global multilateral cooperation and a stable South-Pacific.

Japan is integral to achieving every single one of those goals.

Japan and Australia are clearly major players in international economic forums.

This includes especially the multilateral trading system and its core principles

Japan and Australia's commitment to open markets, their active membership of the WTO, APEC and G20, and network of FTAs, all contribute to our position as leading trading nations and partners.

In January this year, our Prime Ministers announced the establishment of a Ministerial Economic Dialogue, to enhance exchanges on strategic economic priorities – bilaterally and in the region

And we are working with METI, and especially Tanaka san, on arrangements for the first meeting later this year.

And we continue to support the East Asia Summit as the region's premier political and security forum.

Through the EAS and other forums, including the ASEAN Regional Forum, we promote an agenda that:

• promotes regional cooperation
• reinforces international law
• encourages full and active engagement by the United States, and
• ensures all regional countries have a voice on regional issues.

Australia's efforts to bolster even further our close ASEAN ties will be on display this week as we host the ASEAN-Australia Special Summit in Sydney.

Looking ahead

While the outlook for relations between our two countries is bright, the overall landscape is, justifiably, cause for concern.

A report by the Marshall Business School recently described it this way

"The sky is not falling, but it has changed colour".

Many believe support for globalisation is now more contested.

Whether it be on immigration, on investment or on trade flows.

Many commentators point to political outcomes in the 2016 US Presidential election, and the Brexit vote in the UK, as evidence of a shift in sentiment on globalisation.

They cite the negative polls on trade sentiment, including during the US election campaign.

They cite either a predicted or actual move to more protectionist trade policy in some parts of the world

Including use of trade remedies, greater scrutiny of foreign investment and heightened restrictions on people movement.

Some blame wage stagnation, unemployment and deindustrialisation on unfair trade practices

And cite the uneven benefits flowing from globalisation.

All of which has arguably been leading us towards the prospect of major shifts in policy, which some fear could lead to damaging cycles of retaliation.

But is important to keep things in perspective.

There are a number of compelling arguments for why things may not be as dire as they are often described.

First, the global economic landscape is in good shape.

The IMF's latest World Economic Outlook continued a recent trend of upgrading forecasts for world economic output and for global trade volumes.

The IMF sees near-term economic growth expectations for the United States, Canada, Europe, China, Japan and the larger ASEAN economies

And it predicts global trade volumes again growing faster than total output.

Findings that were reinforced just this week with the OECD's Interim Economic Outlook

And the sense of a protectionist contagion is sometimes overblown.

Public support for key elements of globalisation, including trade policy, is robust.

In Asia where people have witnessed first-hand the benefits of trade-fuelled growth as hundreds of millions of people have attained a level of prosperity.

In Japan where there is wide public support for the government trade agenda.

In some key constituencies in the US where the majority of the young, minorities, and low and high-income earners alike, all maintain a positive view of trade.

In the UK, where Brexit is actually being used as justification to engage on an ambitious trade negotiating agenda.

And in Australia, where research suggests around two in three Australians see the clear benefits of free trade - to themselves and to their country.

Second, the dire consequences of a global shift to protectionism are well known, and we are better prepared.

As Prime Minister Turnbull said in Washington last month, protectionism is not a ladder to get anyone out of a hole.

It is a shovel to dig it deeper.

Today's challenges are not the first time the world has seen protectionist policies.

There is near consensus that the 1930 Smoot-Hawley tariffs were particularly damaging to the US and global economy.

Plenty of relevant historical lessons mean the world is now far better prepared against these currents than previous generations.

Targeted social safety nets in many countries – including Australia and Japan – can build community support for open economic policies.

And well-developed global institutions can now provide strong scaffolding for cooperation when it most needs building.

To flip this over and focus on the positive side of the equation, as we said in Australia's Foreign Policy White Paper released last December:

"innovative, outward looking and well-governed countries will enjoy advantages in a competitive and interdependent world".

Like research in other economies, all our research points to considerable gains from increased trade and investment flows.

Exports are shown to create jobs through higher sales, effects of scale, diversified sales markets and transfer of knowledge.

Also leading to higher paying jobs and higher productivity.

Research on the impacts of trade generally show lower consumer costs, greater consumer choice and higher levels of innovation within firms.

Same sorts of results on investment, where our capital needs were sourced at 89% domestic, 11% foreign.

Investment that stimulates economic activity and creates jobs.

And has helped build major Australian industries

Like agriculture (especially wool), construction, manufacturing and financial services.

And leads to increased competition, productivity, trade and innovation.

An example of innovation is the Australian research body, the CSIRO, which ranks in the top 1% of world scientific institutions in 14/22 research fields.

And the CSIRO has a particularly strong tradition of partnering with foreign investors.

Third, while others have stepped back, countries like Japan and Australia are stepping forward.

US withdrawal from the TPP was a major disappointment for Australia and its TPP partners.

But like-minded countries have not shrunk back

Instead they are stepping forward together to drive regional integration.

The TPP-11 is a fantastic example of key countries – with particular emphasis on Japan and Australia – rising to the challenge and cooperating to rally others around the beacon of trade liberalisation

As the US was poised to withdraw from the TPP, it was Australia and in particular Japan who increased our resolve to keep the TPP alive.

The signing of TPP-11 marks a watershed moment for open markets, free trade and the rules-based international system.

The TPP is designed to be expandable.

With strong interest already from potential future members

And there is a live option for a negotiated US return in future – a possibility to which the US President has himself referred.

As Prime Minister Turnbull has noted, none of this would have been possible without the unrivalled dedication and leadership of Prime Minister Shinzo Abe and the Japanese Government.

Japan and Australia are also working well together in the RCEP negotiations, which will bring other important economies of the region into what we hope will be another high quality trade agreement.

A number of speakers will discuss the merits of RCEP today.

Let me just say that, like the TPP11, RCEP can be a game changer.

It can complement the TPP-11 in strengthening economic architecture in the Indo-Pacific.

And updating and improving trade rules and market access commitments in countries representing over 30 per cent of global GDP.

Australia is also swiftly progressing trade discussions with the members of the Pacific Alliance.

And there are a range of bilateral deals being struck, negotiated or launched, which we will continue progressing in parallel.

We are focussed, too, on the greater emphasis and attention on principles underpinning rules based systems.

Support for a standstill on protectionist measures.

Support for the WTO and an open and rules-based multilateral trading system.

The focus on these issues was evident right through the suite of global leaders and ministers meetings in 2017 – at APEC, the G20, the OECD and the G7.

Major challenges ahead

We cannot ignore the major challenges that almost certainly lie ahead.

Australia and Japan must prepare ourselves, individually and collectively, to meet this challenge.

There are a number of areas where this will be needed.

First, we need to maintain momentum on the so-called building blocks of trade liberalisation.

Reaching an FTA outcome, or a bilateral investment treaty or liberalisation of migration regulation are not end points in themselves.

They should always be seen as part of a much wider landscape, and one that is hopefully constantly improving.

So a TPP-11 should be celebrated, and then expanded.

An ambitious RCEP deal should be pursued, reached and then used as one of the springboards to an Indo-Pacific wide FTA – a long-term goal outlined in our Foreign Policy White Paper.

The expanded Pacific Alliance should also be seen as a building block to this goal.

We must be constantly striving for forward momentum on better and better economic, trade, investment policy settings.

We should, together, put our shoulder behind the core principles underpinning the WTO.

And behind the G20 – the global leading body on economic and financial reform.

And do so in a way that takes account of the growing economic heft of rising developing economies.

Regional bodies have a big role to play too. And APEC work is well-suited here.

APEC has been a key forum for helping to drive regional economic reform for three decades.

It has the right membership – the only regional grouping that covers the membership of ASEAN and all the major regional trade architecture such as TPP-11 and RCEP.

It takes practical steps to better integrate our economies.

It has made it possible for goods, services and people to move more easily across borders.

It is a voluntary forum, based on non-binding mechanisms – it is not a negotiating forum.

It is a fundamental platform for member economies to consult, discuss, share and deepen integration and liberalisation in a cooperative manner.

For example to strive for a Free Trade Area of the Asia Pacific (FTAAP).

Arguably, the best welfare policy is maximising economic growth and meaningful employment, whether achieved unilaterally or as part of wider deals.

This is core APEC business.

Japan and Australia were instrumental in setting up the APEC body, and supporting it over its [24 year] history.

And will be instrumental in manoeuvring within changed circumstances to keep driving APEC's work.

Second, we need deeper analysis of, and a better response to, public concerns about elements of globalisation.

A number of commentators have suggested economists and policymakers have underestimated the political fragility of support for globalisation.

In many countries, while a large share of the population understands the benefits of globalisation, there are louder calls of support for protectionism.

Amid an increasingly complex landscape – filled with changing technology changing skills demands, and large-scale movements of people – it is incredibly important that governments retain public confidence in policy positions.

We need to recognise the mixed views on trade agreements.

As mentioned earlier there is clearly strong support in Japan and Australia.

But there is a different story in some other places, including the US.

The findings of the US think tank The Chicago Council on Global Affairs in mid-2016 on Americans views found a majority (59%) saw international trade as 'bad' for creating jobs in the United States.

Scrutiny and criticism of trade agreements continues to reach new heights.

Their economic benefits continue to be queried by commentators and activists.

The job losses, and losses of industries and investment to foreign markets, are understandably prominent and unfair behaviour, or unfair outcomes, are blamed.

There are claims of loss of policy sovereignty – on issues such as intellectual property, product standards and investor-state dispute clauses.

There are criticisms of the apparent secret nature of negotiations.

Whilst trade and globalisation are only weakly implicated in the major economic problems of the day, they are centrally blamed.

Like others, we have already started down the right path in countering this narrative.

Arguably there is now more outreach, more consultation and more transparency of trade negotiations and agreements than ever before.

In Australia, this takes a number of forms, including FTA utilisation studies, FTA portal, advocacy and outreach programs, high level messaging, public briefings and other consultations.

And a recognition of the need to support transitions in our economy.

But sustained global effort is needed.

Third, there will be an increasing premium on the ability of governments to drive economic reform, including through trade agreements, in the face of increasing headwinds.

Both Australia and Japan have done that.

Both have worked their way through considerable opposition to policy liberalisation in sensitive areas.

Both have worked their way into leadership positions, to achieve major outcomes despite considerable odds.

There were major concerns from some sectors about the impact of our bilateral Economic Partnership Agreement [JAEPA].

But the deal was achieved.

Used that to be a major stepping-stone in achieving the TPP.

Japan's role in keeping the TPP alive was not without pressure.

It took courage, determination and leadership from Prime Minister Abe.

Following US withdrawal, members could have then dropped their head and retreated.

But, again, Japan stepped forward.

When things took a surprising turn at Da Nang late last year, Japan and Australia helped pick up the pieces and prepare for another run at conclusion.

At all these moments, most observers wrote obituaries for the deal.

But at all these moments leaders like Japan and Australia did not sway.

And this game changing deal has now been signed and is on the path to ratification.

What an achievement.

A game changer, on many fronts.

A signal that the tide on global trade issues is not one-way.

And a superb blueprint for the future leadership that will be demanded of countries like Japan and Australia, globally, and particularly in our region.

Fourth, some of cornerstones of multilateral trading system are under threat – especially dispute settlement.

Defending, promoting and strengthening the international rules-based order is our highest foreign policy priority.

An order that helps regulate rivalries and behaviour

That supports stability in the region and the world.

Key members of these bodies, countries like Japan and Australia must be able to propose reviews and reforms where necessary.

In a way that strengthens, not undermines, the hard fought principles and norms we have collectively achieved.

We did this with the outcomes at APEC in 2017.

We did this with the launch of the e-commerce initiative at the WTO 11th Ministerial last year.

And we need to keep doing this in future, to stabilise the institutions we have worked so hard to build.

Fifth, we will need to be able to deal with an uptick in trade frictions:

• increased use of trade-enforcement procedures by a US, eager to see more reciprocity to their own highly open trade and investment settings
• concerns at the pace of opening by China of its economy
• and use of tariffs by India, to name a few.

No matter the bilateral frictions that might arise, we should keep our eye on promoting habits of consultation, including via global and regional architecture.

Closing

In closing, I would like to emphasise a number of themes of my presentation today.

First, Japan and Australia can rightfully claim to be regional economic success stories.

A success built on many factors including hard work, close bilateral ties and a natural leadership in global and regional contexts

Second, recent threats to the standing and stability of the global trading system, while real, are not new, and not insurmountable.

Especially if countries like Japan and Australia, step forward into even greater leadership roles.

Leadership we have seen in the domestic context, including on the EPA.

Leadership we have seen in the TPP, WTO and APEC.

Leadership that will be even more deeply needed in future.

Thank you very much for your time.