1221 Avenue of the Americas, NYC, NY 10020April
Free Trade Agreements Strengthen Domestic Reform Efforts in Japan
was late to accept the need for the bilateral and regional
free trade agreements (FTA) and economic partnership agreements
(EPA) that have been rising in prominence in recent years.
Seeing, however, that these mechanisms can enhance global trade
as well as drive domestic reform, Japan has joined other
nations in seeking these arrangements.
Motivated by both a desire to improve market access and increase
domestic efficiency through imported products and services,
Japan entered into its first FTA with Singapore
in 2003 and a second agreement with Mexico this month. Japan
has also completed negotiations with the Philippines and is
currently active or considering FTA talks with ASEAN as
a whole, South Korea, Malaysia, Thailand, Chile, Indonesia, India
and several other
To build on this success, Japan is now seeking to enter into
additional FTAs with advanced economies. Progress toward
reaching this objective may be seen this week during Australian
Prime Minister John Howard’s visit to Japan on April
21st. At this time, he is expected to press for the start of
Japan-Australia Free Trade Agreement negotiations. As an advanced
economy with a highly competitive agricultural and service
sector – this can be a serious test of Japan’s
FTA/EPA involvement -- and Japan’s ability to utilize
FTAs as a reform tool.
The Japan External Trade Organization (JETRO) provides the
following information, which examines these issues and other
in greater detail.
Rising Importance of Bilateral Trade and Economic Partnership Agreements
end of the Second World War, the General
Agreement on Tariffs and Trade (GATT), and
since 1995, the World
Trade Organization (WTO)
has served as the preferred forum for liberalizing international trade.
Multilateral agreements reduce trade distortions, maximize global efficiency
and ensure non-discrimination with potential benefits for all parties.
Eight rounds of multilateral negotiations have been successfully concluded
since 1946 -- making major contributions to worldwide economic growth
and living standards. The
for example, adopted after twelve years of negotiations in 1994, led
to the establishment of the WTO and inclusion of agriculture and services
within the multilateral trade regime. It has also provided numerous
other benefits that help to facilitate trade flows around the world.
Given the slow and laborious nature of multilateral trade negotiations,
however, many nations, including Japan, are now moving to supplement
these multilateral mechanisms with regional and bilateral agreements.
Traditionally, these agreements have been seen as divisive, given the
belief they can cause trade diversion and distortions, undermining
the multilateral system through the preferential treatment given to
the parties incorporated within these agreements.
Nevertheless, since the passage of the North
American Free Trade Agreement in
1994, interest in regional trade agreements has accelerated. Today
of these arrangements have been notified under the GATT and WTO. In
addition, over 100 new agreements are anticipated by the end of 2005.
Regional or bilateral trade agreements are seen to allow faster results,
to enable trading partners to address specialized issues, and to achieve
liberalization beyond what is possible through multilateral consensus
alone. Properly drafted and implemented, they can provide building
blocks that can be incorporated within the multilateral trade agenda.
FTA/EPAs Can Serve as an Engine
to Promote Domestic Growth and Reform
traditionally emphasized multilateral mechanisms within its trade policies.
In fact, the nation, has been a leader in trying to break the deadlock
in negotiations that has prevented the current Doha
from moving forward. Japanese Minister
of Economy, Trade and Industry
(METI),Shoichi Nakagawa emphasized this commitment
in a recent Financial Times interview following meetings with six Asian
WTO members that sought to advance current multilateral trade talks.
Minister Nakagawa noted “The benefits to be reaped from
these negotiations could help contribute to global economic growth
and alleviate poverty, …. We are taking an offensive stance that
can bring benefits to member countries.”
Combined with domestic pressure to protect its uncompetitive agricultural
sector, Japan has traditionally been circumspect about FTAs, as these
arrangements generally require a comprehensive elimination of customs
duties. The worldwide trend toward a greater reliance on bilateral
and regional negotiations, however, as well as the need to navigate
an increasingly complex multilateral trade agenda, has caused this
attitude to change. Former METI Vice-Minister for International Affairs,
Tadakatsu Sano commented on this trend following the collapse of talks
during the 2003 WTO ministerial-level meeting in Cancun, Mexico, stating, "Japan
will now shift a major portion of its focus to FTAs."
FTAs are valued in Japan, as in the United States, for their ability
to expand market access. Indeed, many Japanese private companies are
calling for FTAs as a vehicle that will facilitate their international
activities and provide them with the same terms and access to third
countries as those enjoyed by other trading partners who have established
FTA/EPAs in these markets. Equally important, however, is the ability
of FTAs to serve as a liberalizing force. This is due to their ability
to introduce the market forces into sectors that have not been challenged
sufficiently in the past through true and open international competition.
This sentiment can be seen in a 2002 article by Visiting Brookings
Institution Fellow Naoko Munakata. She stated “By gradually adopting
FTAs, Japanese leaders hope to break the policy deadlock inside the
country -- by demonstrating that special interests (such as the agricultural
sector) can face competition and reform.” In addition, Munakata
noted “By carefully crafting a set of free trade agreements,
Japan's policymakers are slowly forcing the economic powers-that-be
at home to face reality—and loosen their stranglehold on economic
Japan's major trading partners are East Asia, North America, and Europe.
These three regions account for approximately 80% of Japan's trade.
Since North America and Europe are industrialized countries, which
possess generally low tariff rates, Japan initially emphasized the
development of FTAs in East Asia, where the potential benefits are
much greater. According to Japan’s Ministry
of Foreign Affairs, as of
2002, tariff rates in the United States averaged 3.6% and in the European
Union, 4.1%. In comparison China possessed an average 10% tariff; Malaysia,
14.5%; the Republic of Korea, 16.1%; the Philippines, 25.6%; and Indonesia,
Japan also moved to expeditiously negotiate an FTA with Mexico. This
became a priority as Japanese businesses had to pay relatively high
tariff rates, especially in comparison to those countries within NAFTA
and the European Union, which had already concluded FTAs with Mexico.
As Ms. Munakata noted in her previously referenced article “Countries
that do not have an FTA with Mexico, however, face a stiff 16.5% average
tariff on imports to that country. In other words, if you don't have
an FTA with Mexico, you are at a severe disadvantage. That (wa)s a
real problem for Japan’s exporters—and create(d) significant
momentum in Japan for achieving an FTA with Mexico.”
Inefficiencies Have Influenced Japanese FTA/EPA Negotiations
The shift toward
a greater reliance on FTA/EPAs has not been easy. Nor has it been without
problems and pain. Many analysts cite the case of Japanese farmers
and agricultural producers, who have traditionally been able to exert
strong influence to protect their interests. These analysts note this
resistance to change has impinged on the nations ability to remove
the inefficiencies that constrain growth and the overall competitiveness
of Japan’s domestic economy. Notwithstanding these, and other
barriers within sectors that lack international competitiveness, Prime
Minister Koizumi and his government understand that Japan’s long-term
competitiveness is at least partially predicated on the benefits that
can be realized through free trade and economic partnership agreements.
On the other hand, it should be noted that Japan’s accord with
Mexico, which was signed last year following more than 24 months of
particularly hard negotiations became the first FTA to affect Japan’s
agriculture sector. Bridges,
a news digest published by the U.N.-affiliated International Centre
for Trade and Sustainable Development (ICTSD) reported this agreement
lowers tariffs on Mexican exports including pork, chicken, and oranges.
It notes within the next ten years, this agreement is scheduled to
phase out tariffs on 90 percent of goods traded between these two nations,
at which time, 98 percent of Japanese exports and 87 percent of Mexican
ones will receive duty-free market access. This includes immediately
lowering tariffs on Mexican pork through the establishment of a low-tariff
import quota. Japanese pig farmers have never faced competition before.
Similar quotas have been established for chicken, beef, oranges, and
orange juice. Tariffs on Mexican mangoes and avocados have been eliminated.
Bridges reports the quotas will be expanded in 2009. In addition, Mexico
established a tariff-free import quota for Japanese automobiles. It
is to eliminate these tariffs altogether in seven years.
Further Movement Toward Structural Reform in Japan Now in Progress
Despite continuing resistance from domestic special interests who would
suffer from increased international competition, the general trend
toward a greater reliance on FTAs is providing reformers with an
opportunity to accelerate change in Japan’s domestic economy.
Many analysts also point out the Koizumi Administration’s reform
policies have the full support of urban voters, who must bear the higher
prices that must be paid for protected Japanese agricultural products.
This provides another important force for change. The Prime Minister’s
commitment to reform can be seen in his appointments of Agricultural
Ministers -- who have been entrusted with the mission of promoting FTAs
and agricultural reform. Former Agriculture Minister Kamei and the current
minister, Mr. Shimamura, are both from urban areas. So are their primary
constituencies. Minister Shimamura, in particular enjoys the support
of Japan’ restaurant industry, which has increased its revenues
and profitability, partially through the use of inexpensive imported
In another significant development, Japan’s Ministry
of Agriculture, Forestry and Fisheries (MAFF)
now developing a new agricultural policy, which will be announced in
the near future. It will constitute a change from the maintenance of
prices through high customs duties, to one that implements a system for
supporting the incomes of farming families. The originations of this
policy change were described in a December 2003 Nihon
Keizai Shimbun column by Kazuhita Yamashita, a MAFF official
serving as a Senior Fellow at Japan’s Research Institute of Economy,
Trade and Industry. In this article, Yamashita comments “If agricultural
land is concentrated in the hands of farmers through direct payments,
the nation will foster
farming households that can take responsibility for supplying food, as
well as cut expenses by increasing the size of farms. Such a move will
reduce costs and transform the fiscal burden imposed by current agricultural
policy into benefits for consumers. This is an agricultural policy that
puts consumers first. Isn't it time to return agricultural policy to
the long-ignored reformist roots of the former Agricultural Basic Law?”
In addition, the Council
on Economic and Fiscal Policy,
which reports directly to Japan’s Prime
has repeatedly said, through Toyota chairman, Hiroshi Okuda that serious
attention should be given to domestic structural reform in areas such
as agriculture, services, and the mobility of people.
Indeed, this sentiment can be seen in an editorial published last January
in the Nihon Keizai Shimbun. It emphasized the relationships between
FTAs and structural reform, concluding: “With more FTA negotiations
ahead, Koizumi will have to make a major political push to achieve significant
structural reform in agriculture.”
with Australia Would Facilitate Structural Reform Efforts as Well
Prime Minister, Mr. John Howard, who views passage of an FTA with
Japan as a priority, is scheduled to visit Japan on April 21st to
attend the Expo
in Aichi. Facing pressure from Australian farmers, he is expected
to push hard to establish a date to begin FTA negotiations with Japan.
Two-way trade between Australia and Japan totaled approximately $44.3
billion last year, and goods imported into Japan from Australia include
steel, but just as importantly, wheat, sugar, beef, and dairy products.
At the same time Australian companies and consumers provides a ready
market for Japanese firms.
An FTA with Australia could in many ways be regarded as having the potential
to impact Japan more than any other agreement to date. That is because
this would be its first agreement with an advanced economy -- which possesses
highly competitive agricultural and service industries. Progress in these
areas will serve to introduce efficiencies and structural reform into
sectors that have lacked free and open competition. Closer relations
with Australia would also help to strengthen Japan’s
energy and food security and provide it with a closer relationship
with a nation that shares its strong commitment to the modern values
of democracy, constitutionalism and capitalism.
While the benefits of an FTA is clear – Australia is a major agricultural
exporter. It is therefore not likely to be satisfied with Japan’s
practice -- utilized in previous FTA negotiations -- of freeing up small
portions of its agricultural products market in the expectation a transition
can take place gradually over time.
In fact many predicted Japanese special interests, would move to block
these negotiations. Prime Minister Howard, however, is said to have invested
a lot of time and political capital in developing a close relationship
with Japan. This is perhaps best exemplified in his moving last February,
to break a two-year policy not to increase Australia’s military
in Iraq, following a request by Prime Minister Koizumi that Australia
provide increased security in Samawah, Iraq, where Japanese Self-Defense
forces are stationed.
Australia’s commitment to place 450 troops in harm’s way – doubling
its military presence in Iraq to help protect Japanese forces -- should
not be seen as a factor in these trade talks. Australian Foreign Minister
Alexander Downer emphasized this point in a recent comment that "We
don't put people's lives on the line to get access to markets".
Nevertheless, this firm and caring gesture on the part of the Australian
people will make it very difficult for Japan to reject the prospect of
an FTA with Australia without serious consideration.
Whether the Japanese Government will enter into these negotiations is
still unclear, however, it is inevitable that should negotiations begin,
the use of technical support mechanisms to avoid opening Japan’s
domestic market will not prove acceptable to Australia. Japan’s
ability to implement domestic structural reform policies through more
comprehensive and rapid trade liberalization will then be put to the
Should high customs duties be removed on grain, meats, and other products
in an FTA relationship with Australia, other nations will be interested
in gaining the same benefits as well.
In addition, Australia is also known for its strong service sector. This
includes businesses such as the media group managed by Mr. Rupert Murdoch,
while Japan’s services – among them, telecommunications,
broadcasting, transportation, and construction – lack competitiveness
as they have not been exposed to same degree of international competition.
A Japan-Australia FTA, therefore, may be expected to also impact Japan’s
Additionally, there is growing sentiment in Japan for the need to further
diversify its trade, so it is not so reliant on Asian markets. An FTA
with Australia, would therefore constitute a major additional step toward
a new stage in Japanese trade policy and a valuable opportunity to improve
competitiveness and transparency within its economy.
It might be fair to say the development of a Japan-Australia FTA/EPA
could pave the way to a future Japan-US FTA/EPA. One interesting point
to note is Thomas Schieffer, the new U.S. Ambassador to Japan, was the
U.S. Ambassador to Australia. During his tenure there, the U.S.-Australia
FTA was negotiated. As a result, he might also be expected to push for
a Japan-U.S. FTA.
In any case, with negotiations of an ASEAN-Australia-New Zealand FTA
and a China-Australia FTA already underway, building an FTA relationship
with Australia is essential if Japan is to maintain its role as a leader
in developing an FTA structure in the Asia-Pacific region.
Obstacles, There is Substantial Reason for Optimism
in moving Japan toward the negotiating stage with Australia was achieved
last month during talks between Foreign Minister Downer and Japanese
Prime Minister Junichiro Koizumi. Melbourne Australia’s “The
Age” newspaper reported on these talks, noting Mr Downer view
that he had received "positive signs" about a free trade
agreement with Japan.
In this article, Mr. Downer commented "We already have free trade
agreements with other countries in the region and the United States
and we thought it would make good sense for there to be a feasibility
study done into a free trade agreement with Japan and he agreed with
me." As a result, The Age went on to state “The stage is
now set for Prime Minister John Howard and Mr. Koizumi to announce
the feasibility study next month during a visit by Mr. Howard to Tokyo.”
Irrespective of any progress with Australia -- it is clear, as stated
in another article by Naoko Munakata that, “Japan has its own
circumstances pressing for quick actions (in implementing Free Trade
Agreements). As China and other Asian neighbors continue their economic
development to compete with Japan in many more sectors, Japan has little
time left to upgrade its economic structure and regain its vitality.
statistics and the reference materials presented within this newsletter
have been compiled by JETRO from
publicly-released media and research accounts. Although
these statements are believed to be reliable, JETRO does not guarantee
their accuracy, and any such information should be checked independently
by the reader before they are used to make any business or investment
||For additional information on economic
and financial trends in Japan, please contact Akihiro Tada, Executive
Director of JETRO NY at Tel: 212-997-0416, Fax: 212-997-0464, E-mail:
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