Japan’s FTA strategy

Japan’s FTA Strategy (Summary)

October 2002
Economic Affairs Bureau
Ministry of Foreign Affairs

1. Why Free Trade Agreements?

(1) Amid the advance of economic globalization, it is important to maintain and strengthen the free trade system. While the World Trade Organization continues to play an important role in this effort, free trade agreements (FTAs) offer a means of strengthening partnerships in areas not covered by the WTO and achieving liberalization beyond levels attainable under the WTO. Thus, entering into FTAs is a highly useful way of broadening the scope of Japan’s economic relationships with other countries.

(2) The European Union and the United States have pursued policies oriented both toward negotiations under the WTO and the creation of large-scale regional trade frameworks. The current round of WTO negotiations could be the last multilateral trade negotiations prior to the creation of these large-scale integrated regional frameworks. It is necessary for Japan as well to address not only WTO negotiations but also FTA trends in strengthening its economic relationships with other countries.

2. Specific advantages of promoting free trade agreements

(1) Economic advantages
FTAs lead to the expansion of import and export markets, the conversion to more efficient industrial structures, and the improvement of the competitive environment. In addition, FTAs help reduce the likelihood of economic frictions becoming political issues, and help expand and harmonize existing trade-related regulations and systems.

(2) Political and diplomatic advantages
FTAs increase Japan’s bargaining power in WTO negotiations, and the results of FTA negotiations could influence and speed up WTO negotiations. The deepening of economic interdependence gives rise to a sense of political trust among countries that are parties to these agreements, expanding Japan’s global diplomatic influence and interests.

3. Points to bear in mind in promoting free trade agreements

(1) Conformity with WTO agreements
Three points must be ascertained. First, the duties and other regulations of commerce should not be higher or more restrictive than the corresponding duties and other regulations of commerce prior to the formation of the FTA. Second, they must eliminate duties and other restrictive regulations of commerce with respect to substantially all the trade. Third, they must ensure completion of RTAs within a 10-year period, at least in principle. The reference to "substantially all the trade" implies that countries must achieve a standard of liberalization that compares favorably to international standards in terms of trade volume (based on the figures reported, the NAFTA average is 99%, while the average for the FTA between Mexico and the EU is 97%).

(2) Impact on domestic industries
Japan cannot secure the advantages of FTAs without enduring some pain arising from the opening of its markets, but this should be regarded as a process that is necessary for raising the level of Japan’s industrial structures. Unavoidable issues will emerge concerning various areas of regulatory control, including movement of natural persons, as well as the opening of markets and the implementation of structural reforms in the agricultural sector. With due respect for political sensitivities, unless we take a stance linking FTAs to economic reforms in Japan, we will not succeed in making them a means of improving the international competitiveness of Japan as a whole.

4. The type of free trade agreement Japan is aiming for (what to negotiate)

(1) Comprehensiveness, flexibility, selectivity
At present one option would be to base future agreements on our economic partnership agreement with Singapore, but we should maintain flexibility and explore the possibility of taking a "Singapore-plus" or "Singapore-minus" approach. It may be possible to have specific areas (such as investment and services) agreed in advance or to conclude an economic partnership agreement limited to covering such areas.

(2) Matters for consideration in realizing the Japan-ASEAN Comprehensive Economic Partnership
In order to ensure that such partnership be comparable to economic integration in other regions, it should offer the greatest possible liberalization in a broad range of areas.

(3) Possibility of utilizing FTAs to assist developing countries
Conclusion of FTAs with developing countries could also serve as a political device for promoting economic development in these countries, including those in Africa.

5. Strategic priorities for free trade agreements

(1) Criteria for judgement
These include (a) economic criteria, (b) geographic criteria, (c) political and diplomatic criteria, (d) feasibility criteria, and (e) time-related criteria.

(2) Japan’s FTA strategy—specific matters for consideration
Japan’s major trading partners are East Asia, North America, and Europe, three regions that account for 80% of Japan’s trade. In comparison to FTAs with the countries of North America and Europe, which are all industrialized countries, FTAs with East Asia will produce the greatest additional benefits through further liberalization. As is apparent from the simple average figures for tariff rates (the United States, 3.6%; the European Union, 4.1%; China, 10%; Malaysia, 14.5%; the Republic of Korea, 16.1%; the Philippines, 25.6%; and Indonesia, 37.5%), East Asia, the region where Japanese products account for the highest percentage of trade, has the highest tariffs. Liberalization of trade with East Asia will help facilitate the activities of Japanese businesses, which are facing competition from ASEAN and China and which, in many cases, have shifted their production bases to locations in East Asia.

When Japan promotes FTAs, we must pay attention to securing political and economic stability within the larger context of the construction of a regional system. Priority should be given to concluding FTAs with countries and regions where, despite close economic relationships, relatively high trade barriers exist that pose obstacles to the expansion of Japan’s economy. From this standpoint, East Asia is the region with the most promising counterparts for negotiations, and in light of the feasibility criteria and political and diplomatic criteria cited above, the Republic of Korea and ASEAN are the most likely partners for negotiations.

At the same time, an FTA with Mexico should be concluded expeditiously where Japanese businesses have to pay relatively high tariffs, in comparison to those of NAFTA and the European Union that have already concluded FTAs with Mexico.

(a) Economic partnership in East Asia revolving around Japan, the Republic of Korea, and China, plus ASEAN

To begin with, Japan should pursue FTAs with the Republic of Korea and ASEAN, and, based on these foundations, efforts should be made over the mid to long-term to conclude FTAs with other countries and regions in East Asia, including China.

- Republic of Korea: In view of Korea’s political importance, wide-ranging contacts between respective citizens, deep relationship of economic interdependence, and joint proposals by business leaders in both countries for a comprehensive economic partnership agreement or FTA, negotiations should begin as soon as possible after the new administration of the Republic of Korea takes office next February. Discussions should be started on a common vision for economic relationships in East Asia revolving around Japan, China, and the Republic of Korea.

- ASEAN: While our aim is to ultimately strengthen an economic partnership with ASEAN as a whole, we should, to begin with, rapidly make efforts in creating bilateral economic partnerships individually, based on the framework of the Japan-Singapore economic partnership agreement, with major ASEAN member states (including Thailand, the Philippines, Malaysia and Indonesia) that have expressed a positive interest in concluding a bilateral FTA with Japan. Taking into account the progress of bilateral agreements, we should start a process of expanding those agreements to the one between Japan and ASEAN as a whole.

- China: While the possibilities for an FTA could be considered from the standpoint of ultimately working out economic partnership in East Asia centering on Japan, China, and the Republic of Korea, plus ASEAN, for the present we should continue to closely monitor China’s fulfillment of WTO obligations, trends in China’s economy, the status of overall relations between Japan and China, and progress in the new round of WTO negotiations as well as in negotiations on concluding FTAs among other countries in Asia before determining our policy.

- Hong Kong: In the context of the ongoing process of expanding the relationship of economic interdependence between Japan and China, the possibility of concluding an FTA with Hong Kong should not be excluded.

- Taiwan: Taiwan is a separate customs territory under the WTO Agreement, and while the possibility of concluding an FTA with a WTO member is theoretically and technically a potential subject for consideration, Taiwan’s tariff rates are already low, so tariff reductions achieved through an FTA would not produce major benefits for both sides. It would be more appropriate to consider strengthening economic relations in specific relevant areas.

- Australia and New Zealand: While the handling of agricultural products is a sensitive issue in relation to these two countries, Japan shares many common values and interests with them. Australia, in particular, is a major supplier of natural resources to Japan. One useful approach would be to proceed in two stages as jointly proposed by business circles of both countries, i.e. pursuing economic partnership in areas of mutual interest over the short term while attending to the longer-term task of concluding a comprehensive FTA.

- Mexico: As stated above, we need to launch negotiations as soon as possible.

(b) Preliminary considerations regarding other countries and regions

- Chile: In light of Chile’s tariff structure, its volume of trade with Japan, and its major exports to Japan, the conclusion of an economic partnership agreement or FTA with Chile could be considered a mid to long-term task, rather than an urgent task of the highest importance.

- Mercosur: This customs union is a driving force for economic integration in Latin America, and we must pay attention to its movement toward a Free Trade Area of the Americas and negotiations on concluding an FTA with the European Union.

- Russia: Any comprehensive move to strengthen economic relations, such as through an FTA, would be considered after the strengthening of relations through realization of individual projects.

- South Asia: We should continue to explore the best approach to partnership while watching to see how India is integrated into the international economy.

- Africa: While it is theoretically possible to employ FTAs as a means of assisting developing countries, we must also consider whether or not there would be any advantages for Japanese businesses.

- North America and the European Union: The conclusion of an FTA with either would be a very difficult task in light of issues such as the handling of agricultural, forestry, and marine products. An FTA between Japan and the United States would bring about a major trade conversion effect. For the present it will be beneficial to strengthen the bilateral relationship through formulating frameworks in specific areas (such as mutual recognition) and promoting dialogues in such areas as regulatory reforms.