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Land of the rising FTA
Since the end of the Second World War, the General Agreement on Tariffs and
Trade (GATT), and its post-1995 successor the World Trade Organization (WTO),
has served as the preferred forum for liberalizing international trade.
Multilateral agreements reduce trade distortions, maximize global efficiency
and ensure non-discrimination with potential benefits for all parties. Eight
rounds of multilateral negotiations have been successfully concluded since
1946, making major contributions to worldwide economic growth and living
standards. The Uruguay Round, for example, adopted after 12 years of
negotiations in 1994, led to the establishment of the WTO and inclusion of
agriculture and services within the multilateral trade regime. It has also
provided numerous other benefits that help to facilitate trade flows around the
world.
Given the slow and laborious nature of multilateral trade negotiations,
however, many nations, including Japan, are now moving to supplement these
multilateral mechanisms with regional and bilateral agreements. Traditionally,
these agreements have been seen as divisive, given the belief that they can
cause trade diversion and distortions, undermining the multilateral system
through the preferential treatment given to the parties incorporated within
such agreements.
Nevertheless, since the passage of the North American Free Trade Agreement
(NAFTA) in 1994, interest in regional trade agreements has accelerated. The
GATT and WTO have been notified of over 160 of these arrangements so far, and
over 100 new agreements are anticipated by the end of 2005. Regional or
bilateral trade agreements are seen to allow faster results, enable trading
partners to address specialized issues, and to achieve liberalization beyond
what is possible through multilateral consensus alone. Properly drafted and
implemented, they can provide building blocks that can be incorporated within
the multilateral trade agenda.
Japan has traditionally emphasized multilateral mechanisms within its trade
policies. In fact, the nation has been a leader in trying to break the deadlock
in negotiations that has prevented the current Doha Round from moving forward.
The Japanese Minister of Economy, Trade and Industry (METI), Shoichi Nakagawa,
emphasized this commitment in a recent Financial Times interview following
meetings with six Asian WTO members that sought to advance current multilateral
trade talks. Nakagawa noted: "The benefits to be reaped from these negotiations
could help contribute to global economic growth and alleviate poverty...we are
taking an offensive stance that can bring benefits to member countries."
Combined with domestic pressure to protect its uncompetitive agricultural
sector, Japan has traditionally been circumspect about FTAs as these
arrangements generally require a comprehensive elimination of customs duties.
The worldwide trend toward a greater reliance on bilateral and regional
negotiations, however, as well as the need to navigate an increasingly complex
multilateral trade agenda, has caused this attitude to change. Former METI
Vice-Minister for International Affairs Tadakatsu Sano commented on this trend
following the collapse of talks during the 2003 WTO ministerial-level meeting
in Cancun, Mexico: "Japan will now shift a major portion of its focus to FTAs."
FTAs are valued in Japan, as in the United States, for their ability to expand
market access. Indeed, many Japanese private companies are calling for FTAs as
a vehicle that will facilitate their international activities and provide them
with the same terms and access to third countries as those enjoyed by other
trading partners who have established FTA/EPAs (Economic Partnership
Agreements) in these markets. Equally important, however, is the ability of
FTAs to serve as a liberalizing force. This is due to their ability to
introduce market forces into sectors that have not been challenged sufficiently
in the past through true and open international competition.
This sentiment is reflected in a 2002 article by Visiting Brookings Institution
Fellow Naoko Munakata. She stated: "By gradually adopting FTAs, Japanese
leaders hope to break the policy deadlock inside the country - by demonstrating
that special interests (such as the agricultural sector) can face competition
and reform." In addition, Munakata noted: "By carefully crafting a set of free
trade agreements, Japan's policymakers are slowly forcing the economic powers
that be at home to face reality - and loosen their stranglehold on economic
policymaking."
Japan's major trading partners are East Asia, North America, and Europe. These
three regions account for approximately 80% of Japan's trade. Since North
America and Europe are industrialized countries, which possess generally low
tariff rates, Japan initially emphasized the development of FTAs in East Asia,
where the potential benefits are much greater. According to Japan's Ministry of
Foreign Affairs, as of 2002, tariff rates in the US averaged 3.6% and in the
European Union, 4.1%. In comparison China possessed an average 10% tariff;
Malaysia, 14.5%; the Republic of Korea, 16.1%; the Philippines, 25.6%; and
Indonesia, 37.5%.
Japan also moved expeditiously to negotiate an FTA with Mexico. This became a
priority as Japanese businesses had to pay relatively high tariff rates,
especially in comparison to those countries within the NAFTA and the European
Union, which had already concluded FTAs with Mexico. As Munakata noted,
"Countries that do not have an FTA with Mexico face a stiff 16.5% average
tariff. In other words, if you don't have an FTA with Mexico, you are at a
severe disadvantage. That was a real problem for Japan's exporters - and
created significant momentum in Japan for achieving an FTA with Mexico."
Domestic inefficiencies as catalysts
The shift toward a greater reliance on FTA/EPAs has not been easy. Nor has it
been without problems and pain. Many analysts cite the case of Japanese farmers
and agricultural producers, who have traditionally been able to exert strong
influence to protect their interests. These analysts note this resistance to
change has impinged on the nation's ability to remove the inefficiencies that
constrain growth and the overall competitiveness of Japan's domestic economy.
Notwithstanding these, and other barriers within sectors that lack
international competitiveness, Prime Minister Koizumi and his government
understand that Japan's long-term competitiveness is at least partially
predicated on the benefits that can be realized through free trade and economic
partnership agreements.
On the other hand, Japan's accord with Mexico, which was signed last year
following more than 24 months of particularly hard negotiations, became the
first FTA to affect Japan's agriculture sector. Bridges, a news digest
published by the UN-affiliated International Center for Trade and Sustainable
Development reported that the agreement lowers tariffs on Mexican exports,
including pork, chicken, and oranges. It notes that within the next 10 years,
this agreement is scheduled to phase out tariffs on 90% of goods traded between
the two nations, at which time 98% of Japanese exports and 87% of Mexican ones
will receive duty-free market access. This includes immediate low tariffs on
Mexican pork through the establishment of a low-tariff import quota. Japanese
pig farmers have never faced competition before. Similar quotas have been
established for chicken, beef, oranges and orange juice. Tariffs on Mexican
mangoes and avocados have been eliminated. Bridges reports the quotas will be
expanded in 2009. In addition, Mexico established a tariff-free import quota
for Japanese automobiles. It is to eliminate these tariffs altogether in seven
years.
Structural reforms
Despite continuing resistance from domestic special interests that would suffer
from increased international competition, the general trend toward a greater
reliance on FTAs is providing reformers with an opportunity to accelerate
change in Japan's domestic economy.
Many analysts also point out the Koizumi administration's reform policies have
the full support of urban voters, who must bear the higher prices that must be
paid for protected Japanese agricultural products. This provides another
important force for change. The prime minister's commitment to reform can be
seen in his appointments of agricultural ministers - who have been entrusted
with the mission of promoting FTAs and agricultural reform. Former Agriculture
Minister Kamei and the current minister, Shimamura, are both from urban areas.
So are their primary constituencies. Shimamura, in particular enjoys the
support of Japan's restaurant industry, which has increased its revenues and
profitability partially through the use of inexpensive imported products.
In another significant development, Japan's Ministry of Agriculture, Forestry
and Fisheries is now developing a new agricultural policy, which will be
announced in the near future. It will constitute a change from the maintenance
of prices through high customs duties to one that implements a system for
supporting the incomes of farming families. The origins of this policy change
were described in a December 2003 Nihon Keizai Shimbun column by Kazuhita
Yamashita, a ministry official serving as a senior fellow at Japan's Research
Institute of Economy, Trade and Industry.
In this article, Yamashita said: "If agricultural land is concentrated in the
hands of farmers through direct payments, the nation will foster farming
households that can take responsibility for supplying food as well as cut
expenses by increasing the size of farms. Such a move will reduce costs and
transform the fiscal burden imposed by the current agricultural policy into
benefits for consumers. This is an agricultural policy that puts consumers
first. Isn't it time to return agricultural policy to the long-ignored
reformist roots of the former Agricultural Basic Law?"
In addition, the Council on Economic and Fiscal Policy, which reports directly
to the prime minister, has repeatedly said, through Toyota chairman Hiroshi
Okuda, that serious attention should be given to domestic structural reform in
areas such as agriculture, services, and labor force mobility. This sentiment
is echoed in a January editorial in the Nihon Keizai Shimbun. It emphasized the
relationships between FTAs and structural reform, concluding: "With more FTA
negotiations ahead, Koizumi will have to make a major political push to achieve
significant structural reform in agriculture."
Banking on Australia
Australian Prime Minister John Howard views an FTA with Japan as a priority.
Two-way trade between Australia and Japan totaled approximately $44.3 billion
last year; goods imported into Japan from Australia include steel, but just as
importantly, wheat, sugar, beef, and dairy products. At the same time,
Australian companies and consumers provide a ready market for Japanese firms.
An FTA with Australia could impact Japan more than any other agreement to date.
That's because this would be its first agreement with an advanced economy,
which possesses highly competitive agricultural and service industries.
Progress in these areas will serve to introduce efficiencies and structural
reform into sectors that have lacked free and open competition. Closer
relations with Australia would also help to strengthen Japan's energy and food
security and provide it closer relationship with a nation that shares its
strong commitment to the modern values of democracy, constitutionalism and
capitalism.
While the benefits of a Japan-Australia FTA are clear, Australia is also a
major agricultural exporter. It is therefore not likely to be satisfied with
Japan's practice - utilized in previous FTA negotiations - of freeing up small
portions of its agricultural product market and leaving the rest of the
transition to a gradual process. In fact, many Japanese special interests would
move to block these negotiations. Howard, however, is said to have invested a
lot of time and political capital in developing a close relationship with
Japan. This is perhaps best exemplified in his move to break a two-year policy
not to increase Australia's military in Iraq, following a request by Koizumi
that Australia provide increased security in Samawah, Iraq, where Japanese
Self-Defense forces are stationed.
Australia's commitment to place 450 troops in harm's way - doubling its
military presence in Iraq to help protect Japanese forces - should not be seen
as a factor in these trade talks. Australian Foreign Minister Alexander Downer
emphasized this point in a recent comment: "We don't put people's lives on the
line to get access to markets." Nevertheless, this gesture on Australia's part
will make it very difficult for Japan to reject the prospect of an FTA with
Australia without serious consideration.
Whether Japan will enter into these negotiations is still unclear. However, it
is inevitable that should negotiations begin, the use of technical support
mechanisms to avoid opening Japan's domestic market will not be acceptable to
Australia. Japan's ability to implement domestic structural reforms through
more comprehensive and rapid trade liberalization will then be put to test.
Should high customs duties be removed on grain, meats, and other products in an
FTA relationship with Australia, other nations will be interested in gaining
the same benefits as well.
In addition, Australia is also known for its strong service sector. This
includes businesses such as the media group managed by Rupert Murdoch, while
Japan's services - including telecommunications, broadcasting, transportation,
and construction - lack competitiveness as they have not been exposed to the
same degree of international competition. A Japan-Australia FTA, therefore, may
be expected to also impact Japan's service sector.
Additionally, there is growing sentiment in Japan for the need to further
diversify its trade so as to end its reliance on Asian markets. An FTA with
Australia would therefore constitute a major step toward a new stage in
Japanese trade policy and a valuable opportunity to improve competitiveness and
transparency within its economy.
A Japan-Australia FTA/EPA could also pave the way to a future Japan-US FTA/EPA.
Thomas Schieffer, the new US ambassador to Japan, was incidentally the US
ambassador to Australia. During his tenure there, the US-Australia FTA was
negotiated. So he might be expected to push for a Japan-US FTA. In any case,
with negotiations of an ASEAN-Australia-New Zealand FTA and a China-Australia
FTA already under way, building an FTA relationship with Australia is essential
if Japan is to maintain its role as a leader in developing an FTA structure in
the Asia-Pacific region.
Compiled by the Japan External Trade Organization (JETRO) in New York in
cooperation with KWR International, Inc. |
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