Japan and Mexico agree on conclusion of free-trade agreement

Foreign Press Center Japan

March 31 2004

Japan and Mexico Agree on Conclusion of Free-Trade Agreement

On March 12 Japan and Mexico reached virtual accord on the conclusion of a bilateral free-trade agreement following 16 months of negotiations. The two countries had been seeking to conclude an FTA ever since a visit to Japan by Mexican President Vicente Fox in June 2001. It will be Japan’s second FTA and the first that is a comprehensive agreement in which the opening of the market for agricultural products is a key provision. The pact could be put into effect as soon as January 2005. (The two countries will sign an agreement after deciding on the details of the proposed document.) In addition to the trade of goods, the agreement includes provisions concerning services, investment, coordination of competition policies, improvements to the business environment, the training of human resources, and support for small- and medium-sized enterprises. As such, it goes far beyond a simple FTA and is being described as an economic partnership agreement that will promote a complementary relationship between the two countries and strengthen economic relations.

Mexico already has free trade with the United States and Canada via the North American Free Trade Agreement, which went into effect in 1994, and with the European Union through an FTA that went into force in July 2000. One aim of the Japan-Mexico agreement is to eliminate the disadvantageous position of Japanese industry that arises from Mexico’s other FTAs and to restore the competitiveness of Japanese companies in comparison with their rivals in North America and the European Union. It is also hoped that the agreement will give a boost to Japan’s negotiations to conclude bilateral FTAs with Malaysia, the Philippines, and Thailand within the year and a bilateral FTA with South Korea by the end of 2005.

First Comprehensive Agreement to Include Agricultural Products

In principle FTAs eliminate tariffs on commodity trade and barriers to service trade between countries or regions. In this sense, FTAs differ from the rules of the World Trade Organization, which hold that the liberties gained by one country apply to all members; FTAs make no such guarantees. The WTO places certain conditions on FTAs, such as (1) when one of the parties is a developed nation, at least 90% of the traded goods must be liberalized, and (2) tariffs and other barriers to trade must be eliminated within 10 years. As of October 2003, there were 189 such agreements in the world. Japan’s first FTA, which was concluded with Singapore, went into effect in November 2002.

In the agreement between Japan and Mexico, the two countries will eliminate tariffs on almost all industrial products within 10 years. In certain areas (electronics, household electric appliances, capital goods, and automobiles), tariffs will be eliminated immediately. Japan made the following pledges concerning agricultural products, which was an area of particular interest:

(1) Tariffs will be eliminated or tariff-free quotas established for roughly 300 types of products, including coffee beans and wine. (Some other agricultural products, such as rice, wheat, apples, tangerines, dairy products, and blue-fin tuna, will not be subject to tax-free measures.)

(2) A special framework will be constructed to handle pork and orange juice as privileged imports; in the fifth year after the FTA takes effect, annual exports of some 80,000 tons and 6,500 tons, respectively, will be permitted.

(3) A framework will be established to develop the market for imported beef, chicken, and oranges; during the fifth year of the FTA, annual import quotas will be set at 6,000 tons, 8,500 tons, and 4,000 tons, respectively.

As of 2001, the total value of Japanese imports from Mexico was ¥ 240 billion, 30% of which was subjected to tariffs and 70% of which was not. Of the products subjected to taxation, farm, forestry, and marine products accounted for 19% (pork products accounted for 10% of this share), crude oil for 9%, and industrial products for 3%.

The agreement was reached after persuading Japanese agricultural groups and related Diet members opposed to liberalization, and the contents reflect this fact. It may be possible to use the experience gained and to employ the contents of the agreement as a model case in future negotiations for FTAs with countries that have also expressed interest in the agricultural sector, such as Thailand (rice, chicken, starch, and sugar), Malaysia (lumber and plywood), the Philippines (bananas and pineapples), and South Korea (marine products). Many observers believe that by reaching an agreement with Mexico, Japan has created the foundation that will allow it to take the lead in negotiations with other Asian countries, as this is a region with little experience in the FTA area.

Behind this agreement was the fact that NAFTA and Mexico’s FTA with the EU had placed Japanese companies in an extremely disadvantageous position. Specific problems included (1) differences in tariff rates, (2) calculations of the rate of local procurement, and (3) exclusion from bidding on public-works projects in Mexico. Even though Mexico gave ground on the complete elimination of tariffs on farm, forestry, and marine products, the agreement has benefits for both countries. Mexico will be saved from Japanese industry having to retreat and cut back on operations in that country, and the FTA will promote increased investment in Mexico from Japan, which will lead to the creation of new employment, expanded exports to Japan, technology transfers, and strengthened competitiveness. FTAs inherently discriminate against countries outside of the agreement, and in order to overcome this discrimination, Japan had no recourse other than to reach an agreement with Mexico.

Economic Exchange Expected to Increase

The virtual agreement with Mexico includes provisions for areas that were of great interest to Japan, such as steel and automobiles. Tariffs on all steel products will be eliminated within 10 years, and tariffs on steel products for four sectors, including automobiles and electric appliances, will be abolished immediately. Trade in automobiles will be completely liberalized during the seventh year of the agreement, and, in addition to the existing framework allowing the annual duty-free export of 30,000 vehicles, Japanese automobile exports to Mexico will be duty-free for up to 5% of all the vehicles sold in that country. Without the FTA, Japanese exports to Mexico at present are subject to an average tariff of 12% (2002 figures), which greatly affects the competitiveness of Japanese companies in comparison with their counterparts in countries that have concluded FTAs with Mexico, such as those in North America and the EU. The Ministry of Economy, Trade and Industry has estimated that the lack of an FTA between Japan and Mexico cost the Japanese side some ¥ 1.6 trillion in lost profits between 1994 and 1999. While Mexico’s domestic auto market exploded from 110,000 vehicles per year in 1995 to 1.02 million in 2002, the number of Japanese cars exported to Mexico in 2003 stood at just 37,000. Thus, the Japanese auto industry is now abuzz, and Nissan Motor Co. President Carlos Ghosn has noted that it will become easier to develop operations in Mexico. In the steel industry as well, the news that duties would be immediately dropped on such goods as the steel plates used in automobiles was welcomed. A spokesperson for one major steel company stated, "Business opportunities will increase." Commenting on the opening of Japan’s domestic market to farm products from Mexico, a spokesperson for a major trading company said, "The supply of things like pork and orange juice will expand." Also, Mexico has indicated that its market for public-works projects will be opened to Japanese companies within eight years. There had been growing calls within industrial circles for an FTA to be concluded because of a number of occasions in which Japanese firms have been excluded from the public-works market in Mexico.

As of 2003, Mexico had a population of 150 million, the eleventh largest in the world, and a gross domestic product of roughly $620 billion, which ranks tenth globally. Japan’s conclusion of an FTA with Mexico is expected to spur greater economic exchange and contribute to stable economic growth in both countries.

Agreement May Give Boost to Stalled WTO Talks

Outside of their negotiations with Japan concerning farm products, other Asian nations also have a keen interest in the opening of Japan’s labor market, which will likely become a focus of attention. Thailand is particularly interested in jobs for cooks and masseuses, while the Philippines hopes for opportunities for nurses and caregivers. With the severe employment situation continuing in Japan, Japanese labor groups are firm in their demands that Japan take a cautious stance. But Prime Minister Junichiro Koizumi has argued in favor of using FTAs to create broader economic partnership agreements, including rules for protecting investments. His vision is to create a web of EPAs embracing East Asia, and eventually China, to form an East Asian economic zone on a par with NAFTA and the EU. A report titled "Structural Reform and Medium-Term Economic and Fiscal Perspectives," approved by the cabinet in January, stated that FTAs will play an important role in the recovery of the Japanese economy and the promotion of structural reform. While planning to pursue economic partnership through FTAs with other Asian countries, the report confirmed the need to open Japan’s labor market.

China’s economic diplomacy in the region is heating up. It has already begun negotiations with the member states of the Association of Southeast Asian Nations (ASEAN) concerning an FTA with the goal of reaching an agreement by 2010, and it is also aiming to conclude a three-way agreement with Japan and South Korea. Some analysts have said that there is an aspect of competition with China in Japan’s FTA negotiations with other countries in Asia and that Japan is being forced to quickly decide on a strategy of how far to go on the newly emerging issue of opening its labor market. It is hoped that by taking a more active stance toward opening its domestic markets, including the labor market, Japan will be able to soften opposition to the new round of multilateral WTO talks among developing countries, which believe that only developed nations benefit from free trade, and thereby help to accelerate the stalled round of talks.

source: FPCJ