The recent trade agreements reached between Australia, the Republic of Korea (South Korea) and Japan enhance the profitability and depth of two of Australia’s most important trade relationships. This strengthened relationship has specific benefits for the resources sector.
The first half of 2014 has seen Australia finalise two separate trade agreements, the Korea-Australia Free Trade Agreement (KAFTA) and Japan-Australia Economic Partnership Agreement (JAEPA). These two trade agreements enhance Australia’s already robust resources and energy trade relationships with South Korea and Japan.
South Korea is Australia’s third largest export market, its total trade with Australia amounting to $30.46 billion in 2012/13. KAFTA, which reduces the trade restrictions between Australia and South Korea, was signed on 8 April 2014. The Australian Department of Foreign Affairs and Trade predicts KAFTA will see Australian exports to South Korea increase by 25% by 2030 which would result in an approximate increase of $653 million a year after 15 years.
Japan is Australia’s second largest trading partner, its total trade with Australia for the 2012/13 financial year equalling $70.8 billion. Japan is one of Australia’s largest destinations for thermal and coking coal and iron ore, with Australia’s exports of iron ore and concentrates and coal equalling approximately
$23.2 billion. JAEPA was signed on 8 July 2014 by Japanese Prime Minister Shinzo Abe and Australian Prime Minister Tony Abbott.
Trade agreement benefits for the resources sector
Many of Australia’s resources and energy exports already enter South Korea tariff free. KAFTA however removes, or requires the removal within 10 years of, the remaining tariffs on products such as LNG and similar gases, titanium dioxide and copper and copper based alloys.
The LNG and other natural gases industry is rapidly growing in Australia, with industry revenue growth for 2013/14 estimated to be 5.2% to reach $11.4 billion. KAFTA removes the current 3% tariff on LNG and other natural gases entering South Korea.
Gold producers also benefit, as the current 3% tariff on gold is to be removed upon South Korea ratifying the KAFTA.
Refined copper and various copper alloys currently have tariffs imposed on their importation into South Korea. These tariffs are to be removed upon the date of entry into KAFTA. Copper ore and copper concentrate exports from Australia for the 2013/14 financial year are estimated to amount to approximately $7.7 billion. Reducing tariffs will assist Australia in competing against other major copper exporters such as Chile, China and the USA.
Similar to South Korea, many of Australia’s energy and resource exports to Japan are already tariff free. JAEPA, however will see an immediate removal of tariffs from coking and semi coking coal, petroleum oils, aluminium hydroxide and titanium dioxide.
For the 2013/14 financial year, coking coal is estimated to have accounted for 44.2% of Australia’s coal exports. With Japan being one of the world’s major producers of steel, a removal of the tariff on coking coal provides significant benefits to coal miners in Australia.
Overall JAEPA will see more than 97% of Australia’s exports receive preferential access or duty free access to Japan, once JAEPA is fully implemented.
Other relevant issues
The Foreign Investment Review Board thresholds for both South Korean and Japanese investors will also increase. The foreign investment review threshold for both South Korean and Japanese originated investment is to increase from $248 million to $1.078 billion for non-sensitive sectors.
This is positive news as in 2013 South Korea and Japan invested $15,059 million and $130,982 million respectively in Australia. This spells further gains for Australia’s emerging natural gas export industry which has received significant investment from Japan in projects such as the $34 billion Ichthys project in the Northern Territory, headed by Japan’s INPEX Corporation.
Timeline for the agreements
KAFTA was referred to the Senate Committee for Foreign Relations, Defence and Trade on 27 March 2014, and submissions closed on 13 June 2014. Once the Committee process is concluded, the bill enacting KAFTA can be passed. This is expected to take place sometime this year.
As noted, JAEPA was signed on 8 July 2014, and will need to undergo the Senate Committee process as well. The bill enacting JAEPA will also likely pass before the end of 2014. With the Japanese Prime Minister due back in Australia for the G20 summit in November, JAEPA is likely to be progressed quickly through the committee process.