US has stake in Japan-Mexico FTA

JOSEPH P. WHITLOCK | Journal of Commerce | June 6, 2005

US Has Stake In Japan-Mexico FTA

The Japan-Mexico free-trade agreement came into force on April 1 after more than two years of negotiations. The broad agreement not only provides for liberalization of trade in goods over 10 years, but covers investment protection, competition law, bilateral safeguard measures and dispute settlement.

The agreement deserves particular attention in the U.S., not only because it offers insights into future Japanese FTAs, but also because of its long-range implications for integration of North American and Japanese markets.

The FTA may offer opportunities for U.S. companies that operate in, or export to, Mexico. These companies stand to benefit from increased access to the Japanese market as a result of Japan’s trade liberalization in sectors as diverse as industrial goods, chemicals and processed foods. U.S. companies may benefit from the FTA through:

- Indirect benefits from increased Mexican exports to Japan: U.S. companies that export materials to Mexico for use in finished products made there may benefit from increased sales of the finished products in Japan.
- Increased exports of Mexican production to Japan: Benefits will be even greater for U.S. companies with Mexican operations that produce goods qualifying as "originating goods" under the FTA, because their operations will benefit from the chance to export at reduced- or zero-duty rates to Japan.
- Reduced costs of materials from Japan: U.S. manufacturers operating in Mexico may derive additional benefits if they source materials from Japan, because the cost of these materials will drop as Mexican tariff levels decline.

At the same time, to the extent that the FTA helps eliminate costs currently borne by Japanese exporters and investors in Mexico, it will produce greater market efficiencies and savings for these companies. As a result, U.S. companies in certain sectors may face increasing competition.

U.S. companies will face a more competitive marketplace as Mexican trade restrictions on Japanese products are eliminated. The FTA grants Japanese companies a tariff-free quota of 5 percent of the total number of automobiles sold in Mexico in the previous year. Trade in automobiles will be completely liberalized after seven years.

Some U.S. agricultural exporters may face more competition in Japan, as Mexican agricultural exporters start to benefit from special preferences negotiated under the FTA. Nevertheless, these preferences remain relatively limited for certain commodities - notably pork, beef, chicken, oranges and orange juice. Japan’s preferential tariff rate quota for Mexican oranges provides special access to 10 tons of oranges during the FTA’s first year, increasing gradually to 4,000 tons during the fifth year.

Finally, U.S. companies may face imports of increasingly competitive Mexican-origin goods produced by Japanese manufacturers. Although Mexico has long been an attractive investment site because of its proximity to the U.S. market, low labor costs and participation in the North American Free Trade Agreement, the Japan-Mexico FTA makes it even more so. Producers in Mexico will be allowed to import Japanese materials at lower duty rates, use them in their Mexican manufacturing operations, and export finished products to the U.S. or other markets. Depending on the nature of their production processes, these exports may qualify for NAFTA preferences.

As with Japanese companies seeking to obtain NAFTA preferences for their products manufactured in Mexico, U.S. companies seeking preferential access to the Japanese market for their Mexican production should pay particular attention to the specific rules of origin and documentation requirements under the Japan-Mexico FTA.

Rules of origin under the Japan-Mexico FTA are similar to those established in NAFTA. Goods obtained or produced entirely in Japan and Mexico are eligible for preferential treatment if they are made exclusively from originating materials. When goods are produced using non-originating materials, the FTA generally requires that the goods satisfy a "tariff shift" rule, a rule governing regional value content, or both. The FTA also contains special provisions that allow regional value content to be averaged for multiple goods, and for multiple producers’ goods to be lumped together to determine if particular goods qualify for FTA preferences.

Documentation requirements under the Japan-Mexico FTA are more stringent than those found in recent U.S. FTAs. Exporters must obtain certificates of origin from the competent governmental authorities and show that the product to be exported qualifies for FTA preferences. Failure to obtain or properly complete certificates of origin can result in increased audit scrutiny and assessments of significant back duties and penalties.

Joseph P. Whitlock is an attorney with Miller & Chevalier Chartered in Washington. He can be contacted at jwhitlock@milchev.com.

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