Commentary Type

Japan's New Regional Trade Policy--Which Country Comes Next After Singapore?

Noboru Hatakeyama (Japan Economic Foundation)

Second annual Whitman Lecture
Washington, DC


It is my great honor to speak before such a distinguished audience here in the Institute for International Economics.

Over 8 years ago, on January 1, 1994, the North American Free Trade Agreement (NAFTA) was launched. As you well know, this is an FTA between the United States, Canada, and Mexico.

What is an FTA? An FTA is an agreement among member countries to substantially eliminate trade barriers such as tariffs and quantitative import restrictions among themselves.

An FTA, being an agreement to eliminate trade barriers just among member countries, has a discriminatory aspect against nonmember countries. As you know the General Agreement on Tariffs and Trade (GATT) prohibits discrimination, requiring each member country to give Most Favored Nation (MFN) treatment to the other member countries. In light of this principle, the US and Japanese governments often criticized the EC as "Fortress Europe" when the EU was trying to strengthen its FTAs through the so-called "EC 92" initiative. However, EC 92 was successfully launched in 1992 despite our criticism. This was a big blow for the multilateralism represented by GATT.

In addition, in December 1990, just about 2 years before EC 92 was implemented, ministerial negotiations at GATT's Uruguay Round in Brussels failed to reach a conclusion. This failure also cast a dark shadow over the smooth development of multilateralism for which we cherished GATT as opposed to FTAs, which were often categorized as bilateralism or regionalism.

I think that two events, namely the launch of EC 92 and the failure of the GATT ministerial talks in Brussels, greatly contributed to the shift in US trade policy from multilateralism alone to multilateralism plus bilateralism or regionalism.

Thus the United States has started formulating FTAs and now is taking a hard look at the feasibility of expanding NAFTA to cover all of Latin America, except Cuba, by 2005.

As you know, the EU is also trying to expand eastward to cover Poland, Hungary, Czech and the other former communist countries.

There are many FTAs already in existence in Asia and Africa. In Asia, the ASEAN Free Trade Agreement (AFTA) was born in 1992 covering Indonesia, Thailand, Malaysia, Philippines, Singapore, and Brunei. In Africa there are also many FTAs such as SADC (or Southern African Development Community), consisting of 14 countries including South Africa, Tanzania, Angola, and Mozambique, and UEMOA (or the West African Economic and Monetary Union) consisting of 8 countries including Senegal, Ivory Coast, and Burkina Faso. As of now, there are as many as 138 FTAs in the world.

Therefore, the only large economies in the world that have not participated in any FTAs are Japan, Korea, China, and Taiwan. In the summer of 1998, I had lunch with the then Mexican Commerce and Industry Minister Herminio Blanco who had been the vice minister of commerce and industry between 1988 and 1994 except for the period when he had been the Mexican government's chief negotiator for NAFTA between 1990 and 1993. I was also vice minister for international affairs of MITI (Ministry of International Trade and Industry) around that time, and we have cultivated our friendship since then. At this lunch, Minister Blanco kind of boasted that he had concluded in December 1997 negotiations with his counterpart in the EU on the framework agreement of an FTA between Mexico and the EU and invited me to Mexico City to discuss a possible FTA between Japan and Mexico if I was interested.

I accepted this invitation and sacrificed part of my summer vacation to visit his office in August 1998. He kindly arranged a meeting attended by Minister Blanco himself and three vice ministers in his ministry. They kindly explained the framework agreement for an FTA between Mexico and the EU and the possibility of such an agreement between Japan and Mexico. Upon my return to Japan, I visited then MITI Minister Yosano to convey the message from Mexico about a possible FTA between Japan and Mexico. Minister Yosano told me that since it would represent a big change in Japanese government policy if MITI started negotiations on a Japan-Mexico FTA, he would like to have his staff study it. In due course, this study was completed with the conclusion that a bilateral "study," not necessarily a "negotiation," could be started. Shortly thereafter, in the autumn of 1998, the Korean government offered an FTA study with Japan and JETRO's IDE (Institute of Developing Economies) was assigned to do the study for Japan with KIEP (Korean Institute of Economic Policies), a Korean governmental think tank, for Korea.

Then in February 1999, JETRO and SECOFI, Mexico's Ministry of Commerce and Industry headed by Minister Blanco, were assigned to do a study on a Japan-Mexico FTA. Both studies conducted by JETRO and its counterparts in Korea and Mexico were concluded in favor of FTAs. The results of both studies were announced in the spring of 2000.

In the meantime, the Prime Minister of Singapore, Mr. Goh Chok Tong visited Japan in December 1999 and agreed with then Prime Minister Obuchi of Japan to start an FTA study between both governments. This study was completed in September 2000. Then, at the beginning of last year, FTA negotiations between the two governments commenced and were signed by Prime Ministers Koizumi and Goh Chok Tong on January 13, 2002, when Prime Minister Koizumi visited Singapore.

As I explained above, trade policy in Japan has changed since a few years ago, from seeking WTO multilateralism alone to pursuing dual courses for multilateralism and bilateralism or regionalism. There are four reasons for this change.

First, if Japan keeps pursuing multilateral trade policy alone, Japan will be isolated. As I mentioned before, Japan, Korea, and China are the only major countries that have not entered into any FTAs yet with other countries. Almost all of our trade partners are engaged in FTAs. As you know, if a country enters into an FTA with the other, these two countries become close and friendly with each other.

Second, Japan can carry out vigorous structural reforms through implementing firm commitment imposed upon it by an FTA. This would be a sound form of peer pressure to promote structural reform. For example, it is said that the Canadian wine industry was weak before NAFTA and the US-Canada FTA. But after being exposed to foreign competition through FTAs, the Canadian wine industry has become a very competitive industry producing high quality ice wine and so on.

Third, FTAs can induce ambitious trade reform faster than the WTO. The number of WTO members stands at 144 as of now, including China and Taiwan. It is fairly difficult to get a consensus there quickly. In the case of FTAs between two or several countries, however, there are fewer difficulties in reaching a consensus. Therefore, in the near future, if for example even a clause to introduce rules on competition and trade, which might be too ambitious for the WTO at this moment, can be incorporated into an FTA.

Fourth, actual damage has started being felt by Japanese companies due to the FTAs of the other economies. For example, US companies can export goods to Mexico free of tariff in principle thanks to NAFTA. Also EU companies can do the same, thanks to the EU-Mexico FTA that started in July 2000. However, Japanese companies have to pay a 16.2 percent tariff on average when they export goods to Mexico. If an FTA between Japan and Mexico were concluded, this disadvantage for Japanese companies would disappear.

As I told you already, the FTA negotiations between Japan and Singapore will be approved by this summer by both diets and this FTA will go into effect next year.

Which country will be next? I am personally guessing it will be Mexico. In January last year, Minister Hiranuma of METI (Ministry of Economy, Trade, and Industry, formerly MITI) visited Mexico and agreed with Economic Minister Derbez to explore the possibility of beginning a governmental FTA study between the two countries. Then Mexican President Fox visited Japan in June last year and agreed with Prime Minister Koizumi to launch the study. The first meeting of this study was held in Mexico last September. The fourth meeting took place in Tokyo just last week. Following this study, I am hoping formal negotiations on an FTA between Japan and Mexico will begin this autumn with the intention to complete it next year or so.

Regarding Korea, after the positive conclusions of studies announced in the spring 2000 by JETRO and KIEP, a business forum consisting of businesspersons and scholars of both countries was established to discuss a Japan and Korea FTA. The forum's report, announced at the end of January this year, said that this FTA should be a comprehensive economic partnership agreement including tariff reduction, harmonization of business systems, and economic cooperation in many areas. This report also added that necessary consideration should be taken to those industries possibly damaged by FTA although this issue must be judged from broad perspective. The ball of Japan-Korea FTA is now on the courts of the two governments, which have yet to decide how to hit the ball again. Prime Minister Koizumi is supposed to visit Korea later this month to see President Kim Dae-jung mainly for exchanging views on World Cup Football this summer cosponsored by Japan and Korea. In this meeting, there might be some development for Japan-Korea FTA.

On this occasion, I would like to mention China's moves toward an FTA. As you know, on November 4, 2001, Chinese and ASEAN leaders agreed to start negotiating an FTA between them with a timetable to conclude this within the next 10 years. This is a big change on the part of China, which had been very cautious about FTAs. Two weeks or so after this agreement, I met China's trade minister, Shi Guang-sheng, and asked him about the background of this change. He mentioned two points as the reasons for change.

First, in the past, China was too busy trying to enter the WTO. But once China's accession was approved, China could afford to think about FTAs. The second reason was the recent increase of FTAs, especially after the failure of the WTO talks in Seattle. He also said that this China-ASEAN FTA would contribute greatly to the development of the Asian economy as a whole, and that someone said that an Asian FTA will become the third FTA, after NAFTA and the EU.

In addition to these reasons, I think there are several more reasons for this China-ASEAN agreement.

China might have been feeling left out, especially because of Japan's FTA with Singapore. Also, ASEAN countries have envied China for attracting much more FDI than they have recently.

Therefore, China might think that it is good for China to show good gesture toward ASEAN. Practically speaking, however, China has been suffering from excessive supply capacity in its domestic market, so it is looking for export outlets for its products. Of course, the FTA would enable China to attract even more FDI as a tariff-free window to the ASEAN market.

On the ASEAN side, they might feel that they can attract more FDI through an FTA with China. The thinking is that some investors would prefer to have their factories in the ASEAN region where living conditions are more comfortable, while still enjoying free access to the Chinese market.

Also, as was alluded by Rizal Ramli, Indonesia's former coordinating minister, in the Herald Tribune, ASEAN might prefer Japan to China as an FTA partner because ASEAN products complement Japanese products, whereas they compete with Chinese products. However, Japan will not be able to conclude an FTA with ASEAN eventually because of its concern over ASEAN agricultural products, they think. Therefore, it is inevitable for ASEAN to sign an FTA with China and gain free access to its huge market.

But now, Japan has also started to study an FTA with ASEAN. Last September in Hanoi, METI Minister Hiranuma agreed with his ASEAN counterparts to start a joint governmental study on an Economic Partnership Agreement between Japan and ASEAN. Of course, the EPA would include an FTA. Prime Minister Koizumi proposed his idea of a comprehensive economic partnership with ASEAN when he visited the ASEAN region and met with its leaders in January this year. His concept is to include not only trade and investment, but also science and technology, education, and tourism. The first meeting of the study group was already held at the end of January.

Therefore, for the next several years at least, Japan and China might be competing with each other trying to complete EPA or FTA with ASEAN although they would not be exclusive.

Finally, I would like to comment on questions I think some of you might want to ask.

First, how does the movement toward FTAs by many countries including the United States and Japan impact the multilateral trading system, such as the millennium round that just started as a result of the successful meeting in Doha, Qatar, last November?

I personally think the answer is that there would be a kind of competition between the WTO and FTAs in pursuit of further liberalization. The WTO or FTAs per se are not the target. They are routes for arriving at a goal. The goal is further liberalization of trade in goods and services and investment. If we had only the WTO route, then it could become a bottleneck preventing further liberalization if WTO negotiation stalls. We should have an alternative route. This is what FTAs represent. Of course, if further liberalization could be achieved smoothly only through the WTO, that would be ideal. In that case, we wouldn't need to pursue FTAs.

Secondly, what is Japan's most important policy in terms of facilitating FTAs with other countries? I personally think agricultural reform is the answer. There are strong oppositions to FTAs in Japan because of concerns about the possible liberalization of agricultural products. Of course, agricultural trade has to be distinguished from manufactured trade, because it embodies the crucial concept of food security. So, it should be admitted to protect few very important items for security reasons. But I personally think it is not good for Japan to try to protect other food items also just for protecting important items. Prime Minister Koizumi's motto is structural reform without sanctuary. I hope this motto also applies to the agricultural sector.

Last but not least, what is the chance of an FTA between Japan and the United States? I think many of us share this dream, but frankly speaking, not all dreams easily come true. The United States is the number one agricultural supplier to Japan. The Japanese agro industry is weak, so there is a concern over your agricultural goods flowing freely into the Japanese market. On the other hand, the United States has tariffs as high as 25 percent on imported trucks for example. Also just last week, the US government announced safeguard measures for steel, which exempts FTA partner countries. Although these safeguard measures for steel violate WTO rules, some Americans surely have concerns about Japanese industrial products freely entering this market.

But I have my own personal idea about how to make part of our dream come true. That is to have an FTA between Japan and the United States covering the services sector only. Under WTO-GATT rules, which deal with trade in goods, substantially all products should be covered in an FTA for trade in goods. Likewise, under the WTO-GATS rules, substantially all sectors of services should be covered in an FTA for trade in services. An FTA for trade in services can be separated from an FTA for trade in goods. In other words, an FTA covering only trade in services between Japan and the United States is feasible. By further interconnecting our countries this way, in addition to our security treaty, which just marked its 50th anniversary with celebrations in Tokyo and San Francisco last September, our bilateral relationship would become much stronger, even if we cannot achieve an FTA for trade in goods.

So my personal proposal is as follows. Let's explore the possibility of having a US-Japan FTA for trade in services, as a follow-up to the successful visit of President Bush to Japan last month.

Thank you.

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