With Asia, Japan Leads

Now that Japan and Mexico have agreed upon a Free Trade Agreement (FTA), negotiations with four Asian countries will become the next focal point. All four countries are rather inexperienced in negotiating FTAs, and so Japan, which bears much of the responsibility for the negotiations, will be called upon to find a strategy for the future of East Asia. It appears that once again the crucial point of these negotiations will rest on the "direct payment policy" regarding agriculture.

The FTA with Mexico has essentially been agreed upon. Though both parties had been aiming for a conclusion last October, there was a five-month delay. The Mexico FTA is Japan's second, the first being with Singapore, and expectations are rising that negotiations in progress with Thailand, Malaysia, the Philippines and South Korea will also conclude successfully.

Though the Singapore FTA has economic benefits, its political relevance is greater: being able to show both domestically and internationally that Japan can conclude an FTA. Following fears that negotiations with Mexico would break down over agricultural issues, the parties eventually reached an agreement on the abolishing or lowering of tariffs and the opening of government procurement markets. The markets of both countries were opened, and this was truly an FTA in both name and spirit.

Some say that Japan's industries will benefit by ¥400 billion annually. Others say that in the agricultural field - usually Japan's Achilles heel - substantial concessions were made over pork and oranges. But using the Mexico FTA as a stepping stone, can Japan now conclude agreements with Thailand and the other countries in one sweep?

In assessing the FTA with Mexico, it should not be forgotten that Mexico is an "FTA Veteran," having already concluded FTAs with more than 30 countries and regions, including the United States. In these recent negotiations, it was easy to see Japan's disadvantage compared to Mexico's experience.

As Mexico had concluded FTAs with many countries, without an FTA Japanese industries could not compete with industries from countries like the United States and the European Union (EU). From the perspective of Japanese companies operating in Mexico, there was no alternative but to conclude an FTA. And in fact, there were a number of FTA models appropriate for these conditions. Rather than forming strong economic ties with Mexico, the FTA was intended to level the playing field with many other countries.

The agreement with Mexico is called an "Economic Partnership Agreement," and the focal point was the lifting of tariffs on agricultural goods for Japan, and those on mining and manufacturing goods such as steel and automobiles for Mexico. The Economic Partnership Agreement strove for a wide variety of related economic constructions, the core clearly being the opening of markets through the abolition and lowering of tariffs.

The FTA stumbling block was Japan's agricultural sector, focusing on pork and oranges. Though a complete abolition of tariffs was not agreed upon, a lowered tariff structure agreement was reached. Furthermore, it was possible to reach a conclusion without major changes in Japanese agricultural policy.

Unlike Mexico, the three South East Asian countries have not yet concluded any FTAs. South Korea has finally concluded its first FTA with Chile. The intraregional agreement among the Association of South East Asian Nations (ASEAN) - the ASEAN Free Trade Area (AFTA) - differs from the true FTA that Japan concluded. This is because ASEAN countries are developing countries, and AFTA is a quasi-FTA based on the General Agreement on Tariffs and Trade (GATT) resolution (except for authorized items and protections allowed for developing countries). ASEAN is also currently in negotiations with China, and there is a good chance this will result in a similar quasi-FTA. With a quasi-FTA, there is no need for the abolition of tariffs.

Just as Mexico's tides turned dramatically with the 1994 North American Free Trade Agreement (NAFTA, Mexico's FTA with the United States and Canada), the fortunes of Thailand and others will also shift following an FTA with Japan. Some claimed at the time that Mexico's domestic economy would be liberalized by the conclusion of NAFTA and thus be subject to greater U.S. influence. I foresee Thailand and the other countries being similarly subjected to greater influence from Japan upon the conclusion of an FTA.

That is to say, such an FTA would differ from the Mexico FTA in that, should an FTA be concluded, ties between Japan and the four countries would strengthen (following the establishment of a special relationship), and there is the possibility of an industrial policy being the main framework (making it a strategic FTA). With the establishment of a special relationship, it is possible that anti-Japanese sentiment will grow.

Judging from past experience, it is necessary to be prepared for especially strong anti-Japanese sentiment in South Korea. Furthermore, Malaysia has stated that its FTA objective is cooperation, not liberalization. With Mexico, both sides sought and reached agreement on liberalization; this was a regular FTA negotiation. Are Thailand and the other countries maintaining the same attitude?

According to Malaysia, it will not open its automobile market as a result of an FTA, but can Thailand, Malaysia, and the Philippines expect Japan to open its automobile market if they do not open their own very much? How should Japan respond to these countries? Will Japan simply withhold its push for liberalization on the grounds of improving friendly ties?

As far as the futures of Japan and the ASEAN countries are concerned, Japan cannot approach these negotiations simply eyeing the economic benefits, as was the case with Mexico. It is important for Japan to have a philosophy and vision for the direction these countries' future economic structures should take.

These issues are difficult to address due to the unique characteristics of FTAs. With the WTO, the liberalization gains extracted by a larger country from another country are then applied equally to a third country. If there are upcoming negotiations with the United States, agreements can be made at an appropriate point bearing the forthcoming negotiations in mind. Thus, the gains achieved with the first negotiations can be enjoyed two-fold. (China's WTO accession negotiations are a good example.)

With an FTA, there is no guarantee that gains achieved by one country will be applied to another. Should Japan rush and conclude a disadvantageous FTA with a particular country, the United States may thereafter conclude an FTA with that country under better terms. Japanese goods and industry would thereafter be at a disadvantage vis-a-vis American goods and industries.

In the FTA with Mexico, because NAFTA was already in place Japan was able to use this as a basis and make similar claims. However, Thailand and the other countries do not have such a platform and therefore it is Japan's responsibility to lay the foundation. Will Japan be able to lay a global foundation for liberalization while hammering out an economic cooperation FTA with Thailand and the other three Asian countries? There will be many difficult decisions to make.

Japan will be hit with a wide range of liberalization demands regarding agricultural products in its negotiations with Thailand, Malaysia, the Philippines and South Korea. A lower tariff structure won't be overcome as was with pork and oranges in the Mexico FTA. (Japan's tariff abolition rate did not reach 90% in its FTA with Mexico, and there is a possibility that this will create problems in terms of WTO compatibility.) Japan, with its low-productivity agricultural sector, must consider its response to losing the benefits of tariff protection.

The U.S. and EU protect their agricultural sectors through direct income guarantee subsidies to farms; border protection is only a complementary role. With this sort of structure, the U.S. and EU, in concluding many FTAs, are able to protect their agricultural sectors despite abolishing farm product tariff regulations.

Experts agree that in order for Japan to quickly conclude FTAs with many countries, it needs to resort to farm protection by paying direct subsidies to farms. How would the public - including the farmers themselves - view farms receiving payments directly from the government? Furthermore, if it became clear that direct payments are desirable, how can such funds be raised in these times of shrinking budgets? Japan's agricultural administration is facing a critical stage.

Just because an FTA has been concluded with Mexico, we cannot simply say that similar agreements with Thailand and other countries can be closed within the year. However, even without bringing up the example of Mexico, it is clear that with the conclusion of each FTA, know-how is being accumulated.

The Economic Partnership Agreement concluded with Singapore had no real substance and cannot be called an FTA. The FTA with Mexico was Japan's first real FTA. Looking ahead to the future, perhaps we will assess the Mexico FTA as an FTA with a more strategic role, and a step toward the next stage.

>> Original text in Japanese

* "Keizai Kyoshitsu" column, Nihon Keizai Shimbun, March 16, 2004