Accurate Understanding of FTAs is Essential! - In Response to Breakup of WTO Ministerial Talks in Cancun -

Faculty Fellow, RIETI

The 5th World Trade Organization (WTO) Ministerial Conference in Cancun, Mexico, ended without consensus, clouding the prospects for the ongoing negotiations over the Doha Development Agenda. Against such a backdrop, calls for prioritizing bilateral and/or regional initiatives to form free trade agreements (FTAs) are growing across the world. How can and should we define the relationships between the WTO and FTAs?

WTO and FTAs

Initiatives to be taken under the WTO and FTAs both include the implementation of trade policy measures though they take a different form of framework with the former being a multilateral one and the latter being either bilateral or regional. However, simply because both schemes strive for the same goal, is it possible to switch over to an FTA as a substitute when the WTO does not work? Within the framework of the Doha Development Agenda, negotiations are being held regarding tariffs on both agricultural and non-agricultural products. Here, WTO members do negotiate tariff reductions but they rarely go so far as to discuss an across-the-board abolition of tariffs. In contrast, countries seeking an FTA would have to eliminate tariffs on at least about 90% of their trade in goods within a 10 year period. This alone indicates that the substance of negotiations under the WTO and an FTA differ in nature. In its negotiations with the United States over the North American Free Trade Agreement, a regional framework established in 1994 (or its predecessor, the U.S.-Canada Free Trade Agreement), Canada demanded the imposition of stricter discipline on countervailing measures against subsidies and antidumping measures, but hardly achieved its goals. On the other hand, under the WTO, a multilateral system launched in 1995, both antidumping rules and subsidy restrictions were strengthened. Thus, the Geneva-based trade watchdog has been successful, at least to some extent, in bringing unilateral actions by the U.S. government under control. The WTO Dispute Settlement Mechanism, which almost routinely deals with various disputes brought by member countries, is surprisingly powerful. The three countries constituting the NAFTA - the U.S., Canada and Mexico - have been frequently turning to the WTO mechanism to resolve disputes among them, for instance, those between the U.S. and Canada as well as those between the U.S. and Mexico. In contrast, procedures for settling interstate disputes set out under the NAFTA have been used only once in the past 10 years. (Those for resolving complaints between an individual and a government have been used relatively frequently.)

The implication of these examples is that the WTO and FTAs differ in their actual functions. Currently, Japan is negotiating an FTA with Mexico, a country that has concluded FTAs with more than 30 countries (or regions) - including the U.S. and the European Union - and imports their products, in principle, free of custom duties. In addition, Mexico provides its FTA partners with a preferred status in government procurement. Japanese companies have been, all the while, subjected to import duties and discriminated against in government procurement, resulting in an estimated \400 billion loss in earnings every year. Concluding an FTA with Mexico would be about the only way for Japan to change this situation. If Japan wants to see the implementation of stricter antidumping laws in Mexico, however, the WTO is the only way to achieve that end.

Characteristics of FTAs and Reasons Behind Them

What benefits can Japan expect from an FTA? Economically, an FTA would enable Japanese companies to export free of custom duties. With regard to countries that have yet to sign the WTO Government Procurement Agreement, an FTA would ensure that Japanese companies have a fair chance to participate in government procurement. Furthermore, the scope of sectors subjected to investment restrictions may be reduced. Although some people voice expectation of an FTA as a vehicle for accelerating rulemaking - for instance, reinforcement of antidumping laws and regulations - we had better give up any hope of this because most rules are being applied to foreigners in a uniform manner. Many people would be surprised at just how little Japan has achieved by concluding the Japan-Singapore Economic Partnership Agreement but actual changes brought by this agreement include: (1) an increase in the number of zero-tariff items, (2) mutual recognition of standards, and (3) the establishment of a prompt procedure for approving Japanese patent applications (MSE) in Singapore. Other measures included in the agreement are those simply confirming the basic stance of each country or a sort of standstill provision aimed at preventing backpedaling in liberalization efforts; but these are just to provide an assurance and not to change the situation. Compared with this, just how much has Japan benefited from its membership in the WTO and what commitments have been derived from China in the course of negotiations on its accession to the WTO? The WTO plays an incomparably greater role in changing institutions than an FTA does.

Why are there such differences? The reason can be found in the process of China's accession to the WTO. China held a series of bilateral negotiations with Japan, the U.S., the EU and many other WTO members over the terms and conditions of its entry to the WTO. Of those terms achieved in the respective negotiations, the most favorable - those offering the greatest concessions from China's point of view - have been applied to all the WTO members. To be more specific, let's say that Japan fails to persuade China to accept certain conditions in bilateral negotiations. If either the superpower U.S. or the EU, a skillful negotiator, succeeds in drawing out the same conditions from China, however, Japan is entitled to the same benefits under the WTO framework. But this is not the case with an FTA. Even if the U.S. obtains more favorable conditions in its FTA negotiations with China following the conclusion of Japan-China FTA negotiations, the results of the U.S.-China talks bring no benefits to Japanese companies. Rather, Japan and Japanese companies would be handicapped compared to the U.S. and American companies in dealing with China. In FTA negotiations, a country's conceptual ability and bargaining power is put to the test.

It is often said that negotiations under a bilateral or regional framework can be more easily brought to a conclusion because participating members - limited in number - tend to have more common interests than in talks under a multilateral framework where conflicting interests among a number of countries must be reconciled. However, we must not forget that a multilateral framework enables Japan to obtain greater benefits by riding on the bargaining power of the U.S. and the EU. The terms and conditions that China accepted for its accession to the WTO would have been far out of the reach of Japan in two-way negotiations with China. The same can be said about negotiations with the U.S. That is, it is possible to draw concessions from the U.S. if many countries join forces. It is important to understand the difference in mechanism between the WTO and an FTA.

FTAs and Their Position in Multi-layered Trade Policy

Although it is rarely pointed out in Japan, the conclusion of an FTA often results in a substantial improvement in political relations with the partner country. Indeed, immediately after the signing of the Japan-Singapore Economic Partnership Agreement, Japan's first ever FTA, some people in Singapore said that the two countries had entered into a quasi-alliance with each other. The FTA has surely improved Japan's overall image in Singapore and helped create a more favorable business environment for Japanese companies. Such an effect is unique to an FTA and this is the reason why I believe that Japan should strive to realize an FTA with South Korea.

In implementing its multilayered trade policy, the Japanese government needs to fully understand the fundamental difference between an FTA and the WTO as well as the difference between these two mechanisms that we have come to learn through experience. In Japan, discussions tend to center on what economic effect can be expected by concluding an FTA. In considering the effect of an FTA, however, we should not overemphasize the possibility of integration among member countries, such as the integration of East Asian economies including Japan. It is hard to believe that the U.S. and Mexico have been unified as a result of the formation of the NAFTA. Meanwhile, it must not be overlooked that an FTA does help improve political and diplomatic relations among member countries, going beyond institutional changes.

In promoting an FTA with the Association of Southeast Asian Nations (ASEAN), it would be realistic for Japan to expect an improvement in its political and diplomatic relations with these countries, while at the same time preparing itself for the prospect that the elimination of tariffs, greater access to government procurement, and investment opportunities in some additional sectors would be about all that Japan can expect in terms of institutional changes, that is, setting aside Japan's reform of its own economic structure. (Structural reform is something that a country should undertake on its own will. It is deplorable that Japan needs to rely on an FTA with other countries whose economies are far smaller to put "external pressure" on itself to press forward its own internal reform!) As a natural consequence of this, the Japanese government is required to look squarely at the roles that can be fulfilled only by the WTO and make strenuous efforts to accelerate WTO negotiations without yielding to difficulties in the process.

November 18, 2003

November 18, 2003

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