Assessing Quality and Impacts of Major Free Trade Agreements

In this session, a presentation was made concerning the issues noted below. The presentation undertook empirical and qualitative ex-post assessments of Japan's EPAs with Singapore and Mexico.

What were the early-stage impacts of the Japan-Singapore EPA and the Japan-Mexico EPA?

What are the policy implications for future FTAs/EPAs?

The Ando Presentation addressed the subject of "Impact of Japanese FTAs/EPAs." The presentation featured a detailed analysis of the real effects of tariff reduction and a quantitative analysis of the impact of trade liberalization using a gravity model. It also touched on the impact on factors other than trade liberalization.

Regarding the trade liberalizing effect of EPAs, in the case of the Japan-Singapore EPA, the real reduction in tariff rates was extremely small and there was almost no measurable impact. In the Japan-Mexico EPA, a marked impact was observed in the export of finished cars from Japan. However, at this point in time, there has been very little direct impact of tariff reduction on other items. Greater trade liberalization effects can be expected in the future, particularly after the problem of tariff-rate reversals has been resolved.

Regarding the impact on factors other than trade liberalization, some improvements have been seen in the business environment and government procurement.

When considering future FTAs/EPAs, it will be necessary to pay attention to the abuse of gradual tariff reduction, which can generate tariff-rate reversals. This phenomenon is a source of confusion for exporters, and definitely delays the emergence of the impact of EPAs. If the use of EPA tariffs involves high administrative costs in material and temporal terms, this will reduce the level of utilization. In this regard, it is better for EPAs to have simpler tariff structures.

A Committee for the Improvement of the Business Environment has been established in the Japan-Mexico EPA. It is important to establish and to effectively utilize similar channels in EPAs with countries in which Japan is a large investor.

As in the case of Mexico, trade liberalization through the conclusion of EPAs/FTAs may lead to multilateral trade liberalization in developing countries attracting foreign direct investment by maintaining high MFN tariffs.

Professor Schott responded to the Ando Presentation with the following comment.

It is very difficult to quantify announcement effects. But companies do respond to government FTA policies and will invest in partner countries before the conclusion or enforcement of an FTA on the expectation of future competitive benefits. In the case of NAFTA, investment in Mexico increased before the agreement went into force. Future research should take this perspective into account.

The following response was given to the above comment.

The announcement effect is not mentioned very much in the text of the paper, but the appendix table does point to an increase in investments in Mexico by Japanese companies before the Japan-Mexico EPA went into effect. In future research, I would like to place some more emphasis on investment, including the purpose of investment.

The following questions were received from the floor.

One of the reasons for concluding EPAs with Singapore and Mexico was the anticipation of a gateway effect. That is, Singapore would serve as a gateway to the ASEAN countries, while Mexico would be a gateway to NAFTA and to Central and South America. Did this gateway effect actually materialize?

Many FTAs contain mechanisms for maintaining tariff margins. Why doesn't Japan adopt such a mechanism?

The following responses were given to the above questions.

In the case of the Japan-Mexico EPA, Japanese investments in Mexico increased in response to growing U.S. demand. This itself may be form of gateway effect. But Mexico does not seem to function as a gateway to the countries of Central and South America. There is no information available for the Japan-Singapore EPA, and I cannot comment.

When EPA tariffs are being eliminated in stages, tariff-rate reversals may occur for items whose MFN tariff rate is lower than the basic EPA tariff rate. This problem cannot be totally prevented unless EPA tariffs are immediately eliminated.