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Interviewer

Regarding Japan-Australia relations, what do you expect towards the new government?

Minister

Well, they obviously understand the significance of the relationship. In discussions that I had, interestingly, now with Prime Minster Kan, when I met him in January of 2008, it was just after we were elected, and before they were elected; I was the first Minister to come to Japan as part of the Rudd government. We got elected at the end of 2007.  I came here in January 2008; I met with Mr Kan who was then the acting Secretary-General of the DPJ. So I was meeting with LDP Ministers but also meeting with the Opposition. We had a very good discussion, and in those discussions, he expressed very strong support for the development of the FTA with Australia. So I would think that, given the strong support by Ministers Okada and Naoshima, to strengthen the relationship and develop the FTA, the fact that that’s already been signalled to us by now Prime Minister Kan, I see opportunity to continue to try and bring this agreement to fruition.

Interviewer

The Japanese people are very worried that their national image is deteriorating because of the Prime Ministers changing so quickly. So do you think this will influence Japan’s diplomacy? Giving a minus effect?

Minister

No, well I can’t comment on the thinking of the Japanese people. I’ll leave it to them and reporters such as you to report on that. But I don’t think that’s what’s influencing diplomacy. I think that there are people in this government that are genuinely reform-minded. And I know this from discussions that I have had over the past year and a half, on a number of occasions with Minister Okada and Minister Naoshima. And we know this, from constructive engagement, not only in terms of the bilateral relationship, but engagement on a similar page, similar message, similar approach in the region, and of course to concluding Doha.

So I don’t think their diplomacy can be put down to being reactive to how people perceive them about a change of Prime Minister. After all, this is a government that has only been in power for eight months. So it’s only had one change of Prime Minister. That’s the other way to look at it. The fact that the people voted out a Prime Minister, that’s the people’s choice.

Interviewer

I would like to talk about the economic integration in East Asia. What is the most desirable framework for a free trade zone in East Asia for Australia? For example, if a trade bloc is to be formed in Asia, should it start from ASEAN plus three or ASEAN plus six?

Minister

I don’t use the word "trade bloc", but I do very strongly argue that the most desirable basis for economic integration in the region should be based around the plus six rather than the plus three. Not just because it’s a bigger grouping of countries, larger populations etc, but because all of the six have signed Free Trade Agreements with ASEAN.

The next logical step is to get closer integration around that grouping.

And the closer economic integration can be driven by the CEPEA, the Closer Economic Partnership in East Asia, based on the ASEAN plus six, plus APEC.

Because APEC has really developed a strong reform agenda itself — through the Bogor Goal — but just as importantly, it has important on-going agenda items covering investment facilitation, services, trade in services, not just in goods, but also in logistics and trade facilitation, reducing the costs of doing business.

So I think the grouping is best built around the plus six rather than the plus three. And I think we’ve also got to build on the agendas for APEC beyond the Bogor statements.

Interviewer

If the US is included in Asian-Pacific economic integration, I think there will be lots of disputes, And it would be hard to advance. Would it be better for gradual expansion?

Minister

Again I think that’s for the countries themselves to decide. I think that the US has expressed a desire under the new Administration for closer engagement with Asia. And that’s to be welcomed because the previous Administration didn’t engage until very late in its term with the importance of Asia.  So the US engagement with Asia is, I think, terribly important. How that proceeds, that still remains to be seen.

Given the concepts for structures going forward in the region, such as the one that was proposed by former Prime Minister Hatoyama, and the one that our Prime Minister has been talking about, there is still a lot of discussion that needs to take place. But I don’t consider that we should stop continuing to advance EAS, the East Asia Summit, or CEPEA while that assessment is being made. Nor do I think that we need to stop strengthening the agenda and the strategies for going forward for APEC. These things will all evolve, but we have some really solid foundations. APEC is by far the strongest foundation, because it’s institutionalized, the leaders meet annually, and they do discuss issues beyond just economic issues. But there isn’t a forum for which there can be discussions of strategic issues.

That’s where people are looking at this question, at something of a new structure that can enable those broader discussions. On the economic front, APEC is a solid foundation; EAS can be built into a solid foundation. And if you build on EAS or variations out of APEC, time will tell how they develop.

Interviewer

Talking about the Japan-Australia FTA negotiations, how do you view the current situation and what kind of steps do you expect for the Japanese to boost the negotiations?

Minister

Well, I think that agriculture still remains a difficulty, and that difficulty can be partly addressed if we conclude Doha. But I think, quite frankly, that as much as the difficulties remain, they can be addressed. I am convinced that they can be addressed. And the reason they can be addressed is that we addressed difficult agriculture issues at the time we concluded a Free Trade Agreement with ASEAN. That’s ten countries that have sensitivities in agriculture. Being able to deal with those sensitivities, we’ve demonstrated our capacity to deal with sensitivities.

Beyond the issue of resolving the difficulties and sensitivities in agriculture, there are huge opportunities, particularly in the services sector, and also particularly in investment flows. I mean the trading relationship between Australia and Japan, it’s our second biggest trading partner, but in terms on Asia, of course it’s the largest investment flows between the two countries; Australia is Japan’s third ranked investment destination for FDI.

This is significant, because this is not just goods flows; the interesting thing about Japan’s investment, which has seen enormous growth despite the economic downturn, is that the nature of this investment has been very much more diversified: it’s not just in iron ore and coal and natural resources; it’s in energy, clean energy; property development; it’s in food, food processing; it’s in pharmaceuticals. This is more diversified engagement.

And similarly, the sorts of interests that Australia is developing in Japan are much more diversified than simply agriculture or natural resources. And the other interesting thing we’re talking about is not just trade between the two countries, but trade together in third markets. That’s quite exciting.

So, I think the relationship is only going to continue to strengthen, and it’s for that reason that we need a framework that encourages diversification in the expansion.

Interviewer

So on the Japanese side, there are concerns about of food security, and I just went to a press conference by Mr Lester Brown, who wrote the book "Plan B", and I asked whether [Free Trade Agreements] would be compatible in terms of food security. And he said no. Do you think that pursuing food security and securing a free trade agreement would be compatible?

Minister

I do. Of course I do. I mean the big challenge for any country, these days, I think there are four key challenges: food security; resource and energy security; water; and skills development. It doesn’t matter whether you are developed or developing. Those issues are true for Australia; they’re true for Japan.

Food security isn’t going to come simply by trading commodities. Food security comes from transferring the technology; improving the productivity; getting greater efficiency in the way you produce and the way you distribute. It’s therefore the services dimension of agriculture that’s critical to developing the food security challenge. Australia has considerable strengths in water management; in farm productivity; in value-added food production - Quality, Nutritional, Safe.

These are all the components that really need to be facilitated, not just in terms of access for the goods moving, but the behind the border issues that might restrict investment, or regulatory restrictions that might restrict investment, behind the border issues that might restrict the freer flow of services that enable this more productive adaption in a country.

So, I think openness in trade is fundamental to addressing the food security challenge. But not just trade in goods, but trade in services and openness of investment flows.

Interviewer

I want to change the topic to Australia’s proposed mining tax. And Japanese companies have been investing and buying huge amounts of natural resources in Australia. How do you think this taxation will affect Japanese trade and investment in Australia?

Minister

It will encourage stronger investment, because at the moment, the way the royalty regime is structured in our country, which is levied by the state governments, there is a disincentive to invest. It’s a disincentive to invest because you’ve got to pay the tax before any profit is turned.

Under the resource rent tax we are proposing, whilst it will tax the profits once they return a significant level, it’s only a tax once you’re significantly profitable. It’s not a tax up front. And in fact, we’re allowing deductions up front before a profit is turned.

So in other words, the royalties that have to be paid to the state governments can be claimed as a deduction before a profit is made. We’ve effectively eliminated the royalty payment up front.

Our modelling suggests this new tax will in fact expand the level of investment in mining. And this has got to be a good thing for countries like Japan, which have to import a lot of raw materials, in a strong global demand, where price continues to get pushed up. The reason the price is high is that the demand outstrips the supply. This is a tax that will address this, and get a better match between the supply of the resources and demand.

Interviewer

There have been reports about companies freezing their investments in Australia. Do you think there is some room for improvement in this taxation system?

Minister

We will consult on the implementation and transition arrangements associated with the implementation of the tax. We have also invited investors that want clarification and want to be involved in that consultation process. We’ve made it very clear of course we are prepared to negotiate.

As for the companies that are freezing, that has to been seen in the context of the campaigning at the moment, that is the way they are trying to force changes in the tax. There are no major developments that are really being held up. And why would they? Look at where the demand is.

We’ve just produced the first trade surplus, monthly trade surplus in thirteen months. Why? Because the demand of iron ore and for coal in particular, and the price that’s been paid for it, has added significantly to the export demand in our country.

So clearly there is continuing demand. Why wouldn’t you invest when that demand is around?  You only have to pay the tax when you’re making a profit. And that’s simply because Australia has until now not obtained a fair share for the nation’s asset. And it’s like any business. If the price of the asset goes up, then the government, on behalf of the people, should get some return for that. It should get a better slice of the action. And that’s what’s pushing us.

Now, what are we using this tax for? The proceeds of this tax will all go back into the economy, it will all go back into infrastructure, to ensure that bottlenecks that have beset the industry in the last decade don’t happen in the future. It will also reduce company taxes, from 30 cents to 28 cents in the dollar, and it will also see the expansion of retirement incomes in our country.

So these are important economic reforms, important competitive reforms, important social reforms. So we’re seeking not to just claim it as additional revenue for the government, but to have a more modern system to reflect the challenges that we must face up to if we want to sustain what we have already achieved. If we want to build on what we have already achieved. And bear in mind that we are the only developed country in the world to have avoided the recession. We want to build on that, strengthen it.

Interviewer

The Japanese and Australian governments have a huge amount of trade in. And since the Australia government has launched a legal action towards Japan, and the national sentiments towards one another are kind of deteriorating.

Do you think this will affect trade?

Minister

No, it won’t. I’m absolutely convinced it won’t. And I don’t think the national sentiments are deteriorating. I think that people have known for some years now that there are strong and fundamental differences of opinion between the Japanese government and the Australian government on the question of whaling.

What I think is important to note is that because of the maturity of the relationship both governments strongly assert that these differences should not impact upon the other dimensions of the relationship. And that was a position reinforced by Minister Okada when Foreign Minister Stephen Smith met with him when he was up here a few weeks ago, and last week in Paris when I met with State Secretary for Foreign Affairs Takemasa. And I’m sure that when we have the discussions this weekend and on Monday in Tokyo that this position will prevail. That has been reinforced at every point.

Despite the differences there has not been any difficulty in any other aspect of the relationship.

ENDS

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