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Parliamentary Joint Committee on Foreign Affairs, Defence and Trade
14/03/2012
Australia's trade and investment relationship with Japan and the Republic of Korea

COOPER, Mr Brett John, Group Manager, Austrade

ADAMS, Ms Jan, First Assistant Secretary, Free Trade Agreement Division, Department of Foreign Affairs and Trade

ROWE, Mr Peter, First Assistant Secretary, North Asia Division, Department of Foreign Affairs and Trade

Subcommittee met at 11:00

CHAIR ( Ms Saffin ): I open this hearing into the trade and investment relationship with Japan and the Republic of Korea by the Trade Subcommittee of the Joint Standing Committee on Foreign Affairs, Defence and Trade. Trade between Australia and the North Asian giants is worth more than $78 billion annually, making Japan and South Korea Australia's second and fourth largest trading partners respectively. I am not telling you anything you do not know; I am doing this for the public record. It is important for Australia's productivity to ensure that we build on our already strong trading partnerships with these two countries and look at the role of the government in identifying new opportunities and assisting Australian companies to access existing and potential opportunities. The subcommittee will also inquire into a range of issues pertaining to the nature of Australia's trade and investment relations, emerging and possible future trends in these relations, and barriers and impediments to trade and investment with Japan and the Republic of Korea for Australian businesses.

Today we will hear from the Department of Foreign Affairs and Trade and Austrade. I remind witnesses that, although the subcommittee does not require you to give evidence under oath, this hearing is a legal proceeding of parliament and therefore has the same standing as proceedings of the chambers themselves. The giving of false or misleading evidence is a serious matter and may be regarded as contempt of parliament. The evidence given today will be recorded by Hansard and will attract parliamentary privilege.

I thank you for your submissions and for appearing today together. It is a nice mix and it is good that you can be here together. Welcome. Mr Rowe, I invite you to make an opening statement.

Mr Rowe : On behalf of Austrade, DFAT welcomes the committee's inquiry into Japan and Korea. With all the excitement and sensation of the rise of China and the opportunities it poses, it is very easy for us all to forget just how big the contribution of Japan and Korea is to Australia's prosperity and wellbeing looking into the future.

CHAIR: There is not so much noise around them.

Mr Rowe : That is right. If you look at the two countries together, Japan and Korea take almost one-quarter of all of the goods and services that we export. That is about 24.6 per cent, still slightly more than our largest market, China, at 23.7 per cent. If you look at that on a per capita basis, Japanese and Korean imports of Australian goods and services amount to something like $389 per Japanese and $486 per South Korean. If you compare that with China at $52 a head, it is an enormous statement about the maturity and complementary nature of the Japanese and Korean economies. We are working hard to develop these relations. We are trying to look forward to how we do it. We are probably at the limit and we need to go up another level in our relations with both Japan and Korea if we are to expand.

CHAIR: To what level? Sorry, I will wait and let you finish.

Mr Rowe : In a sense, we can only get to the level we need to get to, through a liberalisation of trade, which we are seeking to pursue through free trade agreements with both countries. That is, as Ms Adams will be able to explain much better than me, the liberalisation of agriculture and services and particularly encouragement to invest. Those will be the ways through which we can move to another level in the relationship with both countries. I could go on with a lot of facts about it but I think you know them so I just wanted to make those few points at the beginning as a nice comparison of where we are. I will leave it to the committee to ask us anything you would like to.

Mr BRUCE SCOTT: Thank you to the department. Unfortunately we are going to be interrupted. What stage are we at with the liberalisation—moving towards a free trade agreement—with these two countries? From your comments, Mr Rowe, I think that is what is going to underpin the opportunity of the future. Obviously, the liberalisation of agriculture in those cultures in going to be very difficult. Is that the key to unlocking the door? I will add to that. I understand America has recently signed an agreement with Korea. Are we still in line for making progress or are there still other difficulties?

Mr Rowe : Jan is at the coalface of negotiations with the FTA so I think she is best placed to answer those questions.

Ms Adams : I am very happy to. I will start with Korea. As you say, the United States has now concluded and ratified their bilateral agreement and it is due to come into effect on 15 March. They started, I think, in 2005 and the original agreement was concluded during the Bush administration. It has taken quite some years after the original agreement was concluded to get to this stage of implementation. The agreements take some time to get done, from beginning to end. Australia started our bilateral negotiation with Korea in 2009. We had a very intense negotiation with the Koreans to try to conclude very quickly because we were very conscious of the impact of the United States-Korea agreement; the Korea-European Union agreement, which came into effect on 1 July 2011; and other agreements that Korea has implemented. The United States and European Union were the big ones.

Where are we up to? We actually got quite close to the end during the latter part of last year. We are close to the end and want to finish as soon as we possibly can. The reality is, however, that the political fallout in Korea from the very contentious debates that were held over the finalisation and implementation of their agreement with the United States has really held us back in that the Korean side has been very preoccupied with the processes with the United States agreement. Then the political environment, after very difficult debates in their assembly and demonstrations in the streets, have made it quite difficult to just get that last bit done. However, we are still in very close contact at all levels of government with the Koreans and we do want to get that agreement completely done and implemented as soon as possible.

Mr ADAMS: The issue is that Korea seems to be doing pretty well in very important areas, as Mr Rowe said—our relationship and our trading have grown enormously when you look at figures—but they have a status by being a developing nation which gives them some advantages and they certainly use that in the agriculture sector and imports. On the tariff levels, I know I had one honey producer in my electorate who was pretty angry some years ago because of the level of 250 per cent on honey, but I understand there are culture issues and everything else. There are these issues on dairy products and beef; I think it is 40 per cent on beef. Would the free trade agreement help us right through that, do you think? We have not got to the negotiation stage, but do you think we will rectify some of those issues?

Ms Adams : Thanks very much for your questions. You are absolutely right: in the WTO context, the developed/developing country definition does have an impact in that the developing countries have more flexibilities in the negotiation. However, in the bilateral context there is no such thing. We do not operate on that basis at all. The very clear objective of the bilateral negotiation is to eliminate the tariffs and quotas, whereas in the WTO they are not really eliminating them; they are winding them down. You are right that the agriculture products that you mentioned have very high protection in Korea—honey in particular. The beef tariff is 40 per cent. Dairy depends on the product, and there are quotas as well as tariffs. We are well advanced on those negotiations; that has been the heart of it all along. Yes, the agreement that is almost within reach would offer very substantial liberalisation, particularly on beef and dairy. On honey I do not want to make you a promise yet; there is a particular issue there with bee producers in Korea. But, yes, the agreement that is in prospect with Korea is a very high-quality, liberalising agreement that would offer Australian agriculture exporters significant new market access into Korea along the lines of the agreements that have been concluded with the EU and the US. Korea has made very substantial commitments in those agreements to liberalise its agriculture markets. It takes time; they are over time and you do not get it in the first bite, but—

Mr ADAMS: It liberalises.

Ms Adams : Yes.

Mrs GASH: I will roll two questions into one, if I could. Can you tell us a bit more about the emerging trends in Korea to address the issue of resource, energy and food security—which is of extreme importance to us, of course—and the opportunities which this could represent for Australia. At the same time I note that Australia's service exports to Korea have grown at an average annual rate of 15 per cent since 2000, with education and tourism comprising 91 per cent of service exports. What has caused this, and will it continue to grow?

Ms Adams : On food resource security, yes, of course these are central preoccupations for Korea, as you would expect. They have, in the area of food imports, made quite a lot of temporary tariff reductions to facilitate imports, particularly after the FMD, foot and mouth disease, outbreak, to ensure that there were continued reliable supply and to control inflation from the domestic production constraints. On resources, of course we have had very long term traditional coal and iron ore trade there. Peter might talk about LNG a little bit. On services, yes, there is a very important education and tourism market there. The working holiday scheme that we have with Korea is part of that story. Maybe Peter wants to talk about that.

Mr Rowe : On education and tourism, Korea has followed a rather similar trajectory to Japan on that. With the increase in disposable family income there has been a natural impulse to travel. There is money there to allow kids to go on working holidays that Jan mentioned and to take a year off to do that. Australia is an attractive destination because it is clean and green and safe, which is a big factor. On education, Korea, like Japan and China, places an enormous emphasis on education, not always terribly efficiently, but they spend a lot of time putting their kids in coaching colleges after hours to get them a good grade for entry into a first-grade university. They also identify English as extremely important to getting a good job and Australia, probably until the time that the dollar started rising inexorably, was both a quality and a cheap destination for education. I think we have more of a battle now that the dollar rivals the US dollar and the UK in cost structure.

CHAIR: I am sorry, but we have to attend a division in the chamber.

Proceedings suspended from 11:17 to 11:40

ACTING CHAIR ( Senator Ian Macdonald ): We will resume. Some of our colleagues are still absent on a division.

Could you explain to us where we are at with our free trade agreement and, where other agriculture-producing countries have free trade agreements with Korea, what impact that has on us? Why are they there and we are not? Could you give us a general answer to that?

Ms Adams : As I said before, Australia started negotiating with Korea in 2009. We are very close to concluding that agreement. Korea has been very focussed of late on the processes and the politics associated with implementing its agreement with the United States. They started negotiating with the United States in 2005 and it is about to come into effect on 15 March 2012. We started in 2009. We are not doing too badly, really. Actually, we are doing remarkably well. We are now looking for the political space, particularly from the Korean perspective, to get that last little bit done. Most of the negotiation is very far advanced.

ACTING CHAIR: Is there anything in particular that is holding it up? Just repeating Mr Murphy's question, as he left before the division: is there anything that a delegation of this committee that is going to Korea later this year could focus on?

Ms Adams : I think the major point is to urge rapid conclusion, and to do that last bit and get the agreement concluded and entered into force. The major agriculture item that is still under negotiation is the exact terms of the liberalisation for beef, but we are very close. It is not the kind of thing that you would want to get into detailed negotiations on.

Mr Rowe : In Korea, now, it is a matter of political will. There are not really obstacles—no particular items—in the agreement that are holding it up; I am sure we can come to a conclusion on those. It is the fact that getting through the United States free trade agreement has been so politically debilitating. And the Korean government is facing two major stress points this year: the National Assembly elections and the presidential elections. It is all looking very hard—I do not want to say it is too hard—politically. The line we are taking at the moment bilaterally is the need to get this done in the interest of the bilateral relationship. Now that the US agreement is in force and the EU agreement is in force, Australia will start to be disadvantaged. We are not ready yet, are we?

Ms Adams : Not too much.

Mr Rowe : But we will be very quickly, so it is important that, now that we have got so far, we need to get it completed. I think that is the message, basically. On why the other countries have been able to do it, the biggest one is the United States one, I think, and that was really a strategic decision by Korea. Their defence depends upon the United States and they wanted to complement that security relationship on the trade and economic side, so the US was the biggest one to embark on. The EU is a very big market for Korea and one that they could not ignore. We are not such a big market, but I think it is a tribute to the strength of the relationship that when the President, Lee Myung-bak, came into office he took a very positive attitude to Australia and the importance of the relationship with Australia. It was his decision to go into a free trade agreement. The atmosphere changed completely when he became President and it got our agreement going.

Senator STEPHENS: I was listening, Ms Adams, to your time frame. I thought you said 15 March; that is tomorrow. Did you say March?

Ms Adams : That is right. It happens to be tomorrow.

Senator STEPHENS: So that is very imminent.

Ms Adams : Yes. Under the terms of the agreement some tariff cuts will happen on that day and some will be phased over many years, but it starts tomorrow. Dramatic, isn't it!

Senator STEPHENS: Well, well—we will light the fireworks! I was at another committee meeting earlier. Have we covered the most contentious issues for Australia in relation to this?

ACTING CHAIR: I have only just come before you, so I will have to ask the secretary.

Ms Adams : The usual sensitivities on the Australian side, which mirror the export strengths of our negotiating partners, are on the industrial side. Korea, of course, is a very major exporter of automobiles to Australia, so you would have to say that the issue of car tariffs is a sensitive one for Australia. It is the case with other industrial products to some extent as well. Korea is a very strong exporter. It is already, of course, a very large supplier of all sorts of items to Australia, including electronics, phones, steel, plastics, chemicals as well as automobiles. So those sectors that are globally competitive in Korea, and are under pressure in Australia, would be the sensitive areas.

The purpose of the bilateral free trade agreements is to eliminate the tariffs and the trade barriers with appropriate phasing periods, so it is a question of how long it takes and what the phase-out periods are, rather than whether they are or are not included. Everything is included.

ACTING CHAIR: What is Australia's tariff on motor vehicles? Do you know that off the top of your head?

Ms Adams : Five per cent.

ACTING CHAIR: Does Australia export any Holdens to Korea?

Ms Adams : It has done so in past years—the Caprice model. I do not have the data with me, but there were exports of cars as well as engines between Holden and Daewoo through their strategic alliance.

ACTING CHAIR: What is the Korean tariff on Australian imported manufacturers?

Ms Adams : I do not know that off the top of my head.

ACTING CHAIR: Substantially more than five per cent, I would imagine.

Ms Adams : Not substantially more, but I do not want to hazard a guess.

ACTING CHAIR: Perhaps on notice you could let us know that, just as a matter of curiosity.

Senator STEPHENS: I wanted to go to issue of the plant quarantine.

ACTING CHAIR: Could I just finish this. What is the reason for barriers to things like accounting and taxation services, education, financial, services, legal services, news services and telecommunications and broadcasting? Is there an explanation for that?

Ms Adams : It covers all sorts of things. Mostly it is to do with legislated limitations on foreign investment in particular sectors. If you are talking particularly of limitations on rights to practise as foreign lawyers and accountants it is quite limited. It is more limited than, say, in an Australian jurisdiction, but not uncommonly. Most countries have limitations, and so does Australia, on the right of accountants, lawyers and foreign professionals to come and practise. It is those sorts of issues.

ACTING CHAIR: That applies to education as well?

Ms Adams : With education it is more about things like access to scholarships. Do national scholarships apply? Which Australian institutions, if you are a Korean student and have a scholarship, can you attend under the terms of those scholarships? The ability to market directly—things like that. It is not hard restrictions, it is more a question of domestic regulation.

Mr Rowe : I think the simple answer is protection. The legal profession and the accountancy profession are like our own. They have great solidarity and individual protection and support, so they do not really want to see outsiders muscle in to their area.

Mr Cooper : It is perhaps not an obvious point but there are also non-regulatory barriers such as linguistic barriers. So with the legal profession, for example, the vast bulk of their work would be conducted in Korean. Even if all regulatory barriers were eliminated tomorrow, it would not be an easy market to enter for many legal service providers because there is no pool of linguists.

Senator STEPHENS: I have a question about section 3.4 of your submission, which is about the quarantine issues. I am really interested in knowing whether that is significantly contentious and difficult in terms of the negotiations, or is it just one of the many issues that you are carrying forward and will find a way through? Given Senator Macdonald's interest in biosecurity issues—the whole issue of quarantine comes up in many of our trade agreements—some comments on that would be helpful.

Ms Adams : In terms of the free-trade agreement negotiation, we do not negotiate on particular product standards. That is not subject to trade negotiation. There is a completely separate science based process on each side for those quarantine issues. In the free-trade agreement negotiations the subject of sanitary and phytosanitary measures is addressed in more of a process way to make sure that we have got transparency and forum for discussion. We do not negotiate on any particular products. That is completely separate in Biosecurity Australia. From a bilateral point of view we take up these issues at regular opportunities.

Mr Rowe : We have an agricultural councillor in the embassy, a lot of whose time is taken up addressing both animal and plant quarantine issues. Some of them are just practical. It is a constant effort on our part to ensure that phytosanitary standards are not being used as a protection barrier. We have made considerable progress on that but it is quite slow going on capsicums, cherries and things like that.

Senator STEPHENS: I have read about cherries. I saw here that Australia led other WTO members putting forward a submission opposing Korea’s new regulations and I just wondered whether or not that had a big impact on what is happening. Thank you for that, because I think that was quite an interesting part of your submission. The other issue I was interested in is that I am involved in another inquiry which is around defence procurement and the issue of ITAR-related trade and defence materiel. Has that come into this negotiation?

Ms Adams : No. It is not part of the free trade agreement negotiation. Defence procurement is quite separate.

ACTING CHAIR: I am afraid we have to adjourn at 12. I will leave it to the chair, but we might have to get you back. I do not know that we have discussed Japan at all, have we? Sorry about that. We will stick with Korea. How important is the movement of minerals from Australia to Korea? It is a very substantial part of our exports. Does Korea have alternatives? Are they tough customers when it comes to negotiating with our miners?

Mr Cooper : As a general point there are always alternative suppliers in the global marketplace, so the answer would have to be yes; there are always alternative suppliers of minerals and energy resources. The value that Korean customers see in Australian-supplied resources and energy is our stability. We are known quantities in terms of the way that we interact with them. There is great stability in terms of our supply and we have a track record of delivering on our contracts. I am not sure if that answers your question.

ACTING CHAIR: Do we have a transport advantage as against Africa or South America, for example, or is that not terribly important?

Mr Rowe : It is the same for all North Asian countries. Yes, we do. Because of the high quality of our iron ore, we are naturally attractive. Add to that the fact that transport is cheaper than other places. We are reasonably secure at the sorts of prices that minerals attract. There would have to be a very steep decline in prices for us to—

ACTING CHAIR: Are you aware of whether there is substantial Korean investment in Australian mining companies?

Mr Rowe : There is. I can give you some examples. I think they are in the report.

ACTING CHAIR: Yes, I think I had better read that.

Mr Rowe : I think one of the problems is that they often do not get into the ones they really want to get into because there is no equity available. They were not quite there when Japan and the United States were.

ACTING CHAIR: In the Galilee Basin coal areas there seem to be a lot of Australian entrepreneurs, but a lot of the money supporting those Galilee Basin ventures seems to me to be coming from China. There is Korean investment as well? It would not be in your submission, and I do not want to get on to touchy ground, but do things like mining taxes and carbon taxes rate a mention as far as you are aware? You may not be aware but, as far as you are aware, are Koreans looking at that in relation to (a) investment in our mines or (b) buying our products from the mines which might, according to some, be more expensive?

Mr Cooper : My sense is that, as Peter said, there is growing investment in the mining sector in Australia from Korea, but they are not at the same level as the Japanese or, increasingly, the Chinese. However, we are increasingly seen as a favourable and preferred place to invest in the sector, so I do not think there is any sense that that will not continue in the near future. Resource and mineral security is really a key consideration for the Korean government and the Korean state given that they have no, or few, natural resources of their own. As I said earlier, we are a stable supplier and I think that trend will continue to increase.

ACTING CHAIR: Thank you for your attendance. I am sorry that, subject to the chair, we may have to see if you can come back and talk to us a little bit about Japan.

Resolved (on motion by Senator Stephens):

That this committee authorises publication, including publication on the parliamentary database, of the transcript of the evidence given before it at public hearing this day.

Subcommittee adjourned at 12 : 01