Integration of East Asia: Non-economic benefits deserve greater attention

Faculty Fellow, RIETI

In promoting economic partnership agreements (EPAs) and free trade agreements (FTAs) as policy tools for achieving East Asian integration, greater attention should be given to the pursuit of non-economic benefits, for instance in the areas of diplomacy. It should be kept in mind that seeking excessive liberalization commitments from potential EPA/FTA partners in order to pursue profit may turn out counter-productive, and delay the negotiations.

Security relationship at forefront of U.S. FTAs

A full seven years have passed since Japan began its efforts to conclude EPAs/FTAs. At the beginning, some raised concern about potential conflicts between such arrangements and the key principle of the World Trade Organization (WTO) of equal treatment (non-discrimination) between members. These voices of concern, however, have mostly vanished.

Instead, calls have grown for quicker conclusion of EPAs. The Council on Economic and Fiscal Policy of Japan has pointed out the need to consider concluding an EPA with the U.S., an unthinkable prospect seven years ago, while Japan began EPA negotiations with Australia with an aim of securing a supply of natural resources. Today's situation is strikingly different from what it was. In this article, I would like to discuss some of the key questions in the ongoing arguments on EPAs.

The first question is whether the pursuit of profit should be the sole objective of Japan's EPAs. EPAs cover a diverse scope of areas; ranging from trade in goods and services to investment rules, intellectual property rights, and competition policy. Naturally, Japan must discuss what kind of agreements would have the greatest likelihood of leading to growth and development of its economy. At the same time, however, it should be remembered that the nation's economy greatly impacts people's social lives, domestic politics, and diplomatic relations, as evidenced by how economic conditions often become a key issue in elections. Therefore, there is nothing mysterious about the major impact an EPA can have on the diplomatic relationships between its parties.

In fact, U.S. FTAs, in which the security relationship is front and center, are often seen in marked contrast to Japan's EPAs, which are primarily driven by economic motives. Considering how a nation's economy relates to its society, politics, and diplomacy leads to the idea that a desirable EPA should be able to promote congenial relationships between the EPA's parties apart from increasing their economic efficiency. That is the view of an EPA as a diplomatic tool.

Say that Japan, in the course of negotiations for an EPA with a certain country, successfully elicits commitment to a high degree of liberalization. If this then leads to increasingly wide economic disparities within that country, the EPA with Japan may be blamed and the bilateral relationship undermined. Should this happen, the EPA does not benefit Japan, especially not the Japanese companies operating in that country. Indeed, this is why the U.S., which tends to demand a high degree of liberalization in FTA negotiations, has often provoked anti-American sentiment from its FTA partners.

If the WTO is the law, an EPA is a contract

Based on the notion of EPAs as a means of promoting congenial relationships between or among its parties, Japan could feasibly moderate its demand for liberalization commitments from its potential EPA partners depending on their specific circumstances. This is a matter of political judgment. In fact, the Japanese government has adequately incorporated elements of economic cooperation into its recently completed EPAs. Thus, Japan is not as liberalization-driven as the U.S.

The second question concerns the prevailing notion of agriculture as a stumbling block. Generally, liberalization of agriculture is seen as the primary obstacle in the conclusion of EPAs. Indeed, the Japan-Singapore Economic Partnership Agreement - Japan's first EPA - provoked strong opposition from Japanese farmers in the course of negotiations. Opposition arose even though the agricultural sector was not subject to any substantial liberalization; as if farmers were voicing concern that Japan would eventually seek EPAs with major agricultural countries. Meanwhile, one of the major causes of the prolonged negotiations for Japan's second EPA, with Mexico, was liberalization of Japan's agricultural markets, particularly those such as for pork and oranges.

More recently, however, sensitive issues for Japan have taken a backseat to those of other parties - small cars and steel in the case of Thailand and automobiles (national car program) in the case of Malaysia - that hampered progress in negotiations for EPAs. In the negotiation for the Japan-Philippines EPA, the issue of a mechanism for investment dispute arbitration remained unresolved till the last minute. How to proceed with liberalization of the agricultural sector is said to be the direct cause for suspension of negotiations for an EPA with South Korea. However, both Japanese and South Korean negotiators agree that the true cause of the suspension is the lack of mutual understanding of South Korea's trade deficit with Japan expected to widen as a result of the proposed EPA. In contrast, at an early stage of their EPA negotiations, Japan and Thailand had reportedly reached an agreement on the liberalization of agricultural trade. Meanwhile, resistance by the Association of Southeast Asian Nations (ASEAN) to Japan's demand for liberalization is the primary reason behind stalled negotiations between these two parties.

In sum, agricultural products are not necessarily the "culprit" in the lack of progress in Japan's EPA negotiations. Apparently, the stagnation is more attributable to the other parties' reluctance to accept Japan's demands for what they deem excessive liberalization of industrial products. Of course, in negotiations with the U.S., liberalization of Japan's agricultural imports is undoubtedly the greatest bottleneck. But generally, Japan's tendency to set negotiation hurdles too high, rather than problems in the agricultural sector, seems to be the root cause of drawn out negotiations. Attempting to achieve high liberalization in one shot tends to prolong negotiations.

Third, should Japan seek to reinforce the WTO system or prioritize EPA negotiations? The past seven years of experience have demonstrated that this either-or question is in itself nonsense. Even though Japan's EPAs cover myriad areas, new obligations imposed under such arrangements typically take the form of tariff elimination or investment rules and most of the remaining issues under EPAs concern cooperative relationships between the parties. Setting aside the portion of investment rules not covered under the WTO, EPAs essentially amount to little more than the elimination or reduction of import tariffs seemingly in line with WTO rules. In other words, if the WTO agreements are the "law," each EPA is meant to be a "contract."

In its EPAs with Malaysia and Thailand, Japan has established a dialogue mechanism with these countries in which not only the governments but also the business communities are to take part. This mechanism, intended to foster deeper mutual understanding by improving cooperative relationships both at the government and private-sector levels, is very unique to Japan. This kind of mechanism is truly desirable in the context of promoting congenial relationships with EPA partners and supporting Japanese companies operating in these countries. Such cannot be expected from the WTO.

Seek deeper liberalization in light of surrounding circumstances

Official development assistance (ODA) has long been the core tool of Japan's diplomacy with ASEAN countries and the realization of national interests through cooperation has underpinned the ODA program. Even though the tool of diplomacy has changed from ODA to EPAs, the basic philosophy of diplomacy toward ASEAN does not require changing and emphasis in EPAs is, naturally, shifting toward promotion of cooperative relationships.

The WTO and EPAs have different functions, and are not alternatives to one another; thus promoting one does not eliminate the need for the other. Caution must be taken to neither overvalue EPAs nor undervalue the WTO. This is why Japan must continue to exert serious efforts in the stagnated negotiations under the WTO Doha Development Agenda, apart from proceeding with EPA talks.

Fourth, what are the pros and cons of concluding EPAs as quickly as possible? The relationship with Mexico was one of the motivators for Japan's seeking to conclude EPAs. At the time, Mexico was applying zero-tariffs and other preferential treatment to imports from its FTA partners, including the U.S. and the European Union. Due to the absence of an equivalent agreement between Japan and Mexico, Japanese companies found themselves at a competitive disadvantage in doing business in and with Mexico. Furthermore, due to Mexico's geographic location as a gateway for exports to the U.S., the Japanese business community voiced concern that Japanese companies would also suffer setbacks on their trade with the U.S., which eventually resulted in the conclusion of the Japan-Mexico EPA.

This experience in the negotiations with Mexico increased calls, particularly from the business community, for faster pursuit of EPAs. In reality, however, it is not so simple. In the case of Singapore, for instance, Japan moved ahead of the U.S. in concluding the Japan-Singapore EPA. However, in its subsequent FTA with the U.S., Singapore committed to a higher degree of liberalization, putting Japanese companies at disadvantage relative to their U.S. counterparts. Japan has since renegotiated the terms and conditions of its EPA with Singapore and most of these disadvantages have been resolved. This episode illustrated that a quick conclusion of an EPA does not necessarily bring about a positive outcome. This is a distinct difference from the WTO that mandates the uniform application of liberalization measures to all member countries.

Inevitably, bilateral negotiations are influenced by the balance of power between nations. Thus, a practical approach would be to gradually deepen liberalization in line with changes in the surrounding circumstances, rather than perceiving the conclusion of an EPA as the singular, final goal. More specifically, Japan should seek deeper liberalization with certain countries in light of how other countries, particularly the U.S., deal with and respond to liberalization with that country.

This approach enables Japan to simultaneously pursue the two goals of accelerating negotiations and achieving a high degree of liberalization. Currently, Japan is negotiating with many countries and, if the above approach is adopted, concluding EPAs will not be the end goal. Given the sheer number of countries to deal with and the prospect of seemingly endless negotiations with each, the workload for government officials in charge of EPA negotiations is huge. But that is exactly how it is supposed to be. The WTO mechanism - under which any liberalization measure adopted by a member country must be equally applied to all the other members - is certainly far more efficient and easier to manage. But now that many countries are moving toward EPAs/FTAs, Japan needs to follow suit, and seek EPAs while fully recognizing the lengthy procedures and heavy workload required.

In a diplomatic context, EPA policies should differ based on the type of country being dealt with; for instance with a developing or developed country, or with an Asian or non-Asian country. The WTO and EPAs are quite different though both are a trade policy tool. It takes compound perspectives to develop and implement trade strategies that incorporate EPAs.

>> Original text in Japanese

* Translated by RIETI.

June 6, 2007 Nihon Keizai Shimbun

August 17, 2007

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