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Comprehensive and Progressive Trans-Pacific Partnership – winners and losers in Australian agriculture (part two)

Agribusiness Bulletin

This edition of the Agribusiness Bulletin looks at the impact of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) agreement on the Australian agriculture industry, particularly on key products and markets.

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Comprehensive and Progressive Trans-Pacific Partnership – winners and losers in Australian agriculture (Part two)

In the last edition of the Agribusiness Bulletin, we introduced the CPTPP and focused on how the CPTPP impacts on one of Australia’s major export markets – Australian beef to Japan. In this edition, we look further into the effect of the CPTPP on other key products and markets – namely cereals and grains, dairy and wine, as well as Australia’s domestically focused producers

Cereals and grains

Cereals and grains are among Australia’s largest export commodities by value (second only to beef), averaging $7.8 billion per annum over the three years 2014-15 to 2016-17.1  20% of these exports ($1.5 billion) are to CPTPP countries of which Japan and Vietnam are the largest markets. These two countries accounted for 66% of CPTPP country grain exports over the last three years, and reached $1.2 billion in 2016-17.

ABS (2018) International Trade in Goods and Services, Cat. no. 5368.0
Click image to enlarge

Source: ABS (2018) International Trade in Goods and Services, Cat. no. 5368.0

Unlike beef, where Australia holds a dominant market position, the Japanese export market for cereals is more hotly contested. The USA, Brazil and Canada are the three largest suppliers (across all cereals and grain products) with the USA being Japan’s largest supplier of wheat, rice and corn.

Wheat and barley are Australia’s strongest performing grain exports to Japan. The chart below shows that Australia holds a dominant position for barley exports and a lesser (although still significant) market share for wheat.

UN comtrade data. Retrieved from: https://comtrade.un.org/
Click image to enlarge

Source: UN comtrade data. Retrieved from: https://comtrade.un.org/

With respect to wheat and barley, the Japan-Australia Economic Partnership Agreement (JAEPA) means Australia currently has a tariff advantage over the USA and Canada. Australia’s tariff for wheat will be 9.8 yen per kilo in 2019 (when the CPTPP takes effect) while USA and Canada are currently levied at 55 yen per kilo.

Under the CPTPP, tariffs on wheat and barley will be equalised with both Australia and Canada receiving ‘Most Favoured Nation’ (MFN) status. A country that has MFN status has the best tariff levels on offer (i.e. no other country with MFN status can have more favourable tariffs or quotas). This represents a clear downside for Australia, as Australia gives up its current advantage over Canada. Given Canada is a strong exporter of cereals and grains (particularly wheat), this loss of a tariff advantage is more pronounced.

The upside of the CPTPP for wheat and barley is that tariffs for Australian exports will fall even further than under JAEPA, and Australia will further strengthen its position against the USA.  Given USA’s withdrawal from the CPTPP, they will continue to face current tariffs of 55 yen per kilo. Furthermore, new quota volumes will come into effect in Japan increasing the size of the export pie.

Country

Tariffs prior to CPTPP for wheat

Base rate CPTPP tariffs (2019) for wheat

CPTPP tariffs after base year (2019) for wheat

USA

55 yen per kilo

55 yen per kilo

55 yen per kilo

Australia

9.8 yen per kilo

9.8 yen per kilo (under JAEPA)

Most Favoured Nation (MFN) onwards

Canada

55 yen per kilo

55 yen per kilo

Most Favoured Nation (MFN) onwards


Dairy

44% of Australia’s dairy exports are to CPTPP countries. Of these countries, Australia’s major dairy export markets are Japan (46%), Singapore (21%), and Malaysia (16%)2. Currently Australia enjoys a slight tariff advantage in Japan (over key CPTPP countries such as New Zealand) but not in Singapore or Malaysia (where tariffs are currently 0% for all CPTPP countries). Therefore, the CPTPP represents mostly gain for Australian dairy with respect to improving its position over non-CPTPP dairy exporters such as European countries and the USA, which continue to face current tariffs.

Wine

21% of Australia’s wine exports are to CPTPP countries. Of these, Australia’s major wine export markets are Canada (41%), New Zealand (18%), Malaysia (10%) and Japan (10%).

There is not a lot of gain from the CPTPP in the Canadian or New Zealand markets as tariffs are already minimal (at 0.03% and 0% respectively).3

Malaysia currently has a 34% tariff on wine4 from all countries (except China). Australia holds a dominant market share in Malaysia, and the CPTPP is set to strengthen this further – with France (its strongest competitor) staying on the 34% tariff rate. This will take some time, however, with Malaysian tariffs on Australian wine phasing to 0% over 15 years.

For Japan, the export wine market is currently dominated by France (around 50% market share), with Chile, Italy, USA and Spain making up a further 40%. Australia is a minor player at around 3%. It currently enjoys a tariff advantage under JAEPA (at 6.9% compared to 15.3% for other main countries). The CPTPP will reduce Australian wine tariffs to 0% over 8 years, meaning Australian wine exports to Japan will be more favourable. However, given Australia’s small market share, the CPTPP gain is likely to be minimal and it will take more than tariff reductions to increase Australia’s wine footprint in Japan.

Australian domestically focussed

The most widely reported benefits of the CPTPP are around improving market access for export. There is little discussion on how domestic industries are affected when trade barriers to imports into Australia are removed. One potential reason for the silence is that, on the whole, Australian agriculture is already largely exposed to global competition with little to no tariffs on imported food and fibre (exceptions are some small tariffs on dairy of 3%, cotton 4% and wool 2.8% to 5%). Therefore, industries focused on the Australian domestic market are not likely to be materially affected by the CPTPP. While this may seem like a disadvantage, in comparison to countries with more protectionist policies, some believe that this exposure has meant Australian agriculture has become more innovative as a result of standing on its own two feet and competing on the global stage without protection.5

Conclusion

On balance, Australia’s inclusion in the CPTPP represents a win for Australian exporters and does not appear to materially impact domestically focused industries. Over the past two editions of the Agribusiness Bulletin this has held true for Australia’s key markets in beef, cereals and grains, dairy and wine. While Australia did concede some tariff advantages, that it held under current FTAs (namely JAEPA), it gained against many other competitors – namely the USA and European countries. Effectively, the CPTPP will result in prices for Australian produce becoming cheaper in end markets (than those non-CPTPP countries) generating greater demand for Australian produce and increasing the size of agricultural exports. It is worth remembering, however, that the CPTPP does not deal with the majority of Australia’s agribusiness trade – far more significant for Australia would be any bilateral or multilateral agreements China might sign, such as the Regional Comprehensive Economic Partnership (RCEP).

Authors
Nathan Smith

Reference:

1. ABS (2018) International Trade in Goods and Services, Cat. no. 5368.0
2. ABS (2018) International Trade in Goods and Services, Cat. no. 5368.0
3. Product code HS2204 International Trade Centre. (2017). Market Access Map.
4. Product code HS2204 International Trade Centre. (2017). Market Access Map.
5. http://www.ausfoodnews.com.au/2018/03/28/australias-advanced-agriculture-industry-positioned-for-success.html

Published: April 2018

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