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Australia’s trade surplus with Japan set to top China

When commodity prices were running hot three years ago, Australian companies raced to supply China with raw materials and forged trade links that eclipsed decades-old ties with Japan and South Korea. Now, plunging commodity prices have changed all that. This year, extrapolating from trends in the first four months, the government estimates that Australia’s surplus with Japan this year will reach $24.5 billion, compared with a $19.4bn surplus with China.

The improving trade balance with Japan is partly due to dwindling Australian imports of car parts, as the domestic auto industry shuts down. However, the main factor influencing the shifting trade balances is iron ore, Australia’s biggest export in dollar terms. The decline in commodity prices has reinforced the importance of Australia’s trade ties with Japan, its pre-eminent trading partner for decades prior to China’s rapid expansion, and raised questions over whether the relationship’s significance is being underestimated.

To be sure, Japan is also a big buyer of Australian commodities, with coal, iron ore and beef topping the list. However, Japan imports a broader range of Australian goods than China does. Since the 1980s, Japan has also been a key importer of liquefied natural gas, or LNG — exports of which are expected to increase rapidly as new producers ramp up output. Still, it isn’t yet clear whether Japan’s return to the top of the trade balance charts is a blip or a trend. While the nation’s demand for Australian LNG is expected to rise to 40 per cent of its total intake over the next five years from about a fifth, exports to China are also expected to grow substantially — to 18 billion tonnes a year by 2020 from 5 billion tonnes.

The trade balance isn’t the only measure of the relative importance of Australia’s trade relationships. For instance, China will likely remain Australia’s biggest trading partner this year according to the value of goods exported, which is expected to continue running close to $80bn in 2015 — twice the value of Australian goods destined for Japan. How things play out also may be influenced by how quickly recent free trade agreements with both Asian countries are implemented. Australia reached pacts with Japan, China and South Korea, its third-biggest trading partner, in 2014.

Encouraged by the free trade deal with Tokyo, Marcello Colosimo, chief executive of microbrewer The Australian Brewery, acted last year to build a beachhead in Japan, linking with supermarkets to sell pilsener and Pale Ale beers. “Our consumption figures are growing steadily, which is always a good indication,” Mr Colosimo said. “The FTA is a great win for businesses who weren’t sure how to expand their trade offshore.”

 Source: Wall Street Journal