A dry run for a Japan-US FTA

Posted in Japan | 27-Apr-07 | Author: Hisane Masaki| Source: Asia Times

TOKYO - Japan has kicked off negotiations with Australia on concluding a free-trade agreement (FTA), in a desperate bid to play catch-up in the ever-intensifying regional and global FTA race. The negotiations with Australia, launched this week, are particularly significant because they are Japan's first with a major agricultural exporter and are widely seen as a dry run for possible future talks with the United States.

Despite being the world's second-biggest economy and racking up huge trade surpluses for many years through robust exports of automobiles and other high-tech products, Japan is notorious for its heavily protected agricultural market.

It would be fair to note, though, that Japan is the largest net food-importing country in the world, buying from abroad 60% of its food consumed domestically on a calorie basis. Japan has defended its farm protectionism, citing the need for food security.

Pressure has been growing from other domestic industries for Prime Minister Shinzo Abe's government to move toward FTA negotiations with the US as soon as possible. The pressure has increased since the US and South Korea reached an agreement early this month.

Abe is expected to raise the possibility of concluding an FTA with the US in his talks with President George W Bush in Washington on Friday during a two-day US visit, his first since taking office last September.

Japan's recently revved-up FTA drive has been largely fueled by an intensifying rivalry with China, a rapidly ascending economic as well as military power, over leadership in regional economic integration - and political clout - and also by increasingly tough global competition for oil, gas and other resources.

China became Japan's largest trading partner in fiscal 2006, which ended on March 31, replacing the US, according to preliminary figures released on Wednesday by Japan's Finance Ministry. Japan's trade with China, excluding Hong Kong, rose 16.5% in fiscal 2006 from a year earlier, totaling 25.42 trillion yen (about US$213.6 billion), while that with the US increased 10.3% to 25.16 trillion yen ($211.4 billion)

Until the turn of the century, Japan was the only major industrialized country that had not concluded an FTA with any of its trading partners in accordance with its traditional policy of only pursuing multilateral free trade under the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO).

Japan was even slower than its East Asian neighbors, especially China, in jumping on the global FTA bandwagon. This drew criticism at home that the Japanese government tested the waters for too long and allowed the nation's influence in the region, especially over economic integration, to be eroded significantly by China. In a desperate attempt to turn the tables, Japan is now going all out to conclude deals with as many countries as possible.

Alarmed by stubbornly high prices for oil and the intensifying global rush for oil, gas and other resources, led by China and India, resource-poor Japan has also recently begun to place priority on concluding FTAs with resource-rich countries outside of the region as a foreign-policy tool to beef up relations with them and thereby ensure its energy security through stable, long-term supplies.

In the past month or so alone, Japan has reaped two harvests of its accelerated FTA drive. Japan signed an agreement with Thailand early this month, only a week after doing so with Chile. Japan has also signed FTAs with Singapore, Mexico, Malaysia and the Philippines, the first three of which have already taken effect. Japan has also reached basic agreement in negotiations with Indonesia and Brunei.

Japan and South Korea launched negotiations in December 2004, but they were suspended because of sharp differences over farm trade. South Korea has strongly criticized Japan for its refusal to open its fishery market. Japan has also been negotiating FTAs with the 10-member Association of Southeast Asian Nations (ASEAN) as a whole, the oil-rich Gulf Cooperation Council, Vietnam, and India. Japan and ASEAN are expected to reach an agreement next month.

For its part, Australia has FTAs with the US, Singapore, Thailand and New Zealand and is in negotiations with ASEAN, Chile, China and Malaysia.

Japan's strategic partner
Japan has been Australia's largest trading partner for nearly 40 years, and it has long been, by far, Australia's largest export market. Japan is also the third-largest source of foreign investment and tourists to Australia. Meanwhile, Australia is Japan's seventh-largest trading partner and 12th-largest export market. Australia is Japan's second-largest export market for automobiles and auto parts and is also a key market for many other industrial goods.

At present, tariffs are levied on more than 70% of Japanese goods imported into Australia and about 20% of Australian goods imported into Japan. Australia's tariff rates average 3.5%, Japan's 7.1%. The results of a joint feasibility study between the two governments, released last December, found that freer trade would boost Australia's gross domestic product (GDP) by at least A$39 billion (US$33 billion) and Japan's by a minimum of A$27 billion over a 20-year period.

As it has done in negotiations with energy-resource suppliers such as Indonesia and Brunei, Tokyo plans to ask Canberra to include in the proposed bilateral FTA an energy clause specifying Australia's commitment to ensuring stable supplies in the long term.

Australia is a major supplier of coal, iron ore and liquefied natural gas, which together account for nearly 60% of its Japan-bound exports. With the world's largest uranium deposits, Australia is also an important potential source of uranium for Japan's civilian nuclear policy.

Biggest stumbling block
Agriculture will certainly be the biggest obstacle to a successful conclusion of FTA negotiations between Tokyo and Canberra, which is why Tokyo wants to use Australia as a kind of trial run before approaching the United States.

Japan has refused to put many of its agricultural products on the table with other trading partners. Under the basic agreement with Indonesia, for example, Japan will cut tariffs on nearly all industrial and forestry products while removing gradually those on tropical fruits. The pact excludes so-called sensitive products such as rice, wheat and meat.

Japanese farmers have long been part of the ruling Liberal Democratic Party's (LDP's) traditional support base, even though agriculture accounts for a paltry 1% of the nation's GDP and farm households are rapidly aging and shrinking. Nevertheless, farmers have wielded disproportionately strong political influence.

Agricultural, forestry and fishery products account for about 22% of Japan's overall imports from Australia. The Agriculture, Forestry and Fisheries Ministry estimates that if import tariffs on Australian farm products are eliminated, imports of such main items as wheat, sugar, dairy products and beef could rise sharply, resulting in a reduction in domestic output worth nearly 800 billion yen (about $6.7 billion).

The LDP lawmakers representing farmers, as well as the ministry, are demanding exclusion of those four items, as well as rice, the nation's most politically sensitive item, from any agreement with Australia. But Australia has shown reluctance about the idea, although it agreed to exclude sugar with the US. WTO rules require any agreements to liberalize "substantially all trade" between FTA partners.

Japan and Australia held their first round in Canberra this Monday and Tuesday, four months after Abe and Australian Prime Minister John Howard agreed during telephone conversations last December to launch such negotiations.

The date for the first round of negotiations was apparently delayed out of consideration to Japan's political calendar. The first round was held after unified local elections in Japan ended last Sunday. The two countries plan to hold their second round in Tokyo after the election for Japan's House of Councilors in late July.The first round was procedural; the two sides are expected to start actual haggling over the scope and degree of trade liberalization in the second round.

Japan's farm minister, Toshikatsu Matsuoka, is a leader of those LDP lawmakers with close ties to the farm industry and the most vocal opponent of market liberalization. Before the first round of FTA negotiations, he said, "We will enter the talks but with the commitment to defend key items."

Japan-US FTA
The signing of the US-South Korea FTA has fueled calls from Japanese business leaders for a similar pact between Japan and the United States, the world's two largest economies. There are concerns that as a result of the US-Korea deal, Japanese exporters of some products, especially electronics, might lose out to their Korean rivals, who face zero or lower import tariffs, in the US market.

Mexico and its two northern neighbors, the US and Canada, are members of the North American Free Trade Agreement (NAFTA), which took effect in 1994. But small and medium-sized Japanese companies that cannot afford to avoid tariffs by setting up shop in North America could suffer most. For now, the best way for them to do business might be to set up shop in South Korea and then export to the US to take advantage of the US-Korea FTA, some analysts say.

Fujio Mitarai, chairman of the Japan Business Federation (Keidanren), Japan's most powerful business lobby, said that the US-South Korea FTA made Japan realize once again that the world has 'rushed into competition to form a network of bilateral accords. Japan cannot be allowed to fall behind,' said Mitarai, who is also Canon Inc chairman.

Since last November, Keidanren has called for a Japan-US FTA, saying it would strengthen bilateral economic ties and reinforce the foundation for economic development of East Asia. But both Tokyo and Washington remain reluctant to open FTA negotiations, at least any time soon.

Immediately after the US-South Korea FTA was reached early this month, Abe said Japan must study a Japan-US FTA as a future subject, without giving a specific time frame. Minister of Economy, Trade and Industry Akira Amari said it will be difficult for Japan to enter talks with the US, a big farming nation, unless it draws a successful conclusion from negotiations with Australia over the politically sensitive agricultural area.

'Issues of concern between Japan and the US are larger than those between Japan and Australia," Amari said. "Without using wisdom to be gained from a breakthrough in talks with Australia, I think it will be difficult to win understanding from the public.'

Administrative Vice Foreign Minister Shotaro Yachi also said, "There won't be immediate negotiations [with the US], but there is a need to study the issue." Yachi also said he was concerned that the Doha Round of trade-liberalization negotiations would suffer a setback if Japan and the US, which together account for nearly 40% of the global economy, were to complete an FTA.

Meanwhile, assistant US trade representative Wendy Cutler said recently that her country is reluctant to negotiate with Japan unless it opens up its tightly shut agriculture sector.

Rice is the most politically sensitive item in both Japan and South Korea. The US-Korea FTA is the largest Washington has signed since NAFTA, but like Japan's FTA with Thailand, a major rice producer, the US-Korea FTA did not include rice after Seoul objected to opening up its market.

But Cutler said that although Washington agreed to exclude rice from the deal with South Korea, it will not offer a similar concession to Japan. "Clearly the agriculture sector provides an obstacle to entering into such negotiations with Japan because to date, Japan, unlike Korea, has been - let's be honest - unwilling to put its agriculture sector on the table and negotiate concrete market-opening provisions," she said.

Hiroko Ota, the Japanese minister for economic and fiscal policy, seems positive about an FTA with the US. She said the Abe government will study the pros and cons. "We need to study advantages and problems [of an FTA with the US] from a viewpoint of the entire people's interests."

Concluding FTAs is considered to be the best avenue to cashing in on rapid economic growth in other Asian economies, a main pillar of Abe's growth strategy. But many experts point out that Japan needs to reform its heavily protected agricultural market - which has been left largely untouched despite former prime minister Junichiro Koizumi's reform drive.

Japanese proponents of an FTA with the US agree that Japan should begin talks about such a pact while ensuring competitiveness in the domestic farm sector through such steps as expanding the scale of operation by farmers and letting joint-stock companies enter the agricultural business to raise productivity and create high-value-added products. Belatedly, the Japanese government has actually begun to take such measures to increase the farm industry's competitiveness. But many critics say that so far, these measures are far from sufficient.

Both Japan and the US already have relatively low tariffs on manufactured goods. Any deal between them would probably cover not only elimination of tariff measures and liberalization of investment and services trade but a much wider range of areas, including harmonization of competition and other policies. Otherwise, the merits of concluding such a pact through what would very likely be raucous and hectic negotiations might not be fully realized by many on both sides of the Pacific.

Hisane Masaki is a Tokyo-based journalist, commentator and scholar on international politics and economy. Masaki's e-mail address is yiu45535@nifty.com.