"Arial Unicode MS" size="2">The Australia-Japan Free Trade Agreement (AUJA-FTA) is already in the process of negotiation by the two governments. The success of this FTA will depend on the manner in which it deals with the problem of agricultural trade between the two countries. This paper analyzes the economic effects of the proposed FTA between Australia and Japan on both economies and on their trading partners. The Global Trade Analysis Project (GTAP) model and its version 6 database is used to simulate the effects of AUJA-FTA. The paper offers some preliminary evidence concerning the welfare impact of the FTA with special reference to the sensitivity of the decision to include agricultural trade into the proposed FTA. The responses of various production sectors to the FTA show the structural changes that may take place in the two economies. The results reveal that the inclusion of agricultural trade into the FTA is essential for Japan to maximize its gains. The benefits from the FTA will outweigh the costs.

On May 9, 2002, Prime Minister Junichiro Koizumi of Japan formally announced during his official state visit to Canberra that Japan sought a Free Trade Agreement (FTA) with Australia and was willing to negotiate towards that end. The Australian Prime Minister John Howard responded positively to this proposal. This initiated a complex negotiation process from September 2002 to June 2003, that culminated in the signing of an Australia-Japan Trade and Economic Framework Agreement on July 17, 2003 in Tokyo. The Economic Framework Agreement formally obliged both the countries to `work for the liberalization of trade and investment' on a `balanced and comprehensive basis' through an ongoing Joint Consultative Committee (JCC) comprising representatives of both countries (Australian Department of Foreign Affairs and Trade, 2003, p. 1). The JCC, as part of its commitment, completed its comprehensive study in April 2005. Following the report, Prime Minister Howard and Prime Minister Koizumi further agreed to carry out a joint study covering various policy options to enhance economic relations between Japan and Australia. This included a feasibility study of an FTA between the two countries.

The joint government study report was published in early December 2006. It concluded that a comprehensive WTO-consistent FTA between Australia and Japan would produce substantial benefit to both the countries. The Australian Prime Minister Howard and the present Japanese Prime Minister Abe welcomed the findings in the report towards finalizing an FTA. Consequently, both the Prime Ministers agreed on December 12, 2006 to commence negotiations on an FTA in early 2007. The first round of negotiations was held in Canberra from April 23-24, 2007 (Department of Foreign Affairs and Trade (DFAT), 2007).

Thus, a protracted period of negotiations between the two countries began in order to eventually draft a mutually satisfactory bilateral FTA. An FTA between Australia and Japan would represent a part of the broader `hub-and-spokes' of the Growing East Asia Community strategy developed by Japan (Scollay, 2001). In this sense, it would augment the existing FTAs with Singapore, Malaysia, Philippines, Mexico, and Chile. Under this strategy, Japan would cement its role as the dominant economy at the centre of Asia and strengthen its ties with the surrounding nations in the Asia-pacific region.

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