Free trade: Japan and ... Switzerland?!TOKYO - Geographical proximity, sizable trade and investment volume, and resource wealth are Japan's key criteria for selecting potential partners for free-trade agreements (FTAs). Switzerland has become a rare exception.
During a telephone meeting last Friday, Japanese Prime Minister Shinzo Abe and Swiss President Micheline Calmy-Rey agreed to launch negotiations soon on concluding an FTA, which would eliminate import tariffs on almost all goods. The two countries aim to conclude the accord by the end of the year.
If realized, this would be Japan's first such agreement with a European country, and as Tokyo has no plans to pursue agreements with other European countries, including such trading powerhouses as Germany or France, the question then naturally arises: Why Switzerland? One could respond: Why not?
The trading relationship is fairly small. Combined trade totals only a little more than US$7 billion annually, although Japan is Switzerland's third-largest trading partner and its largest in Asia. Generally, the goods are high-value products. There are relatively few major trade disagreements between them, so it may be fairly easy to negotiate.
But more important, Switzerland fits neatly into Japan's overall strategy to use FTA to enhance its trading position in East Asia, especially vis-a-vis China, and is seen as a potential ally at the Doha Round of international trade talks under the auspices of the World Trade Organization (WTO).
Since Tokyo and Bern tend to see eye-to-eye on agricultural protectionism, concluding a free-trade agreement with the Swiss can be seen as a kind of warm-up for the next round of international trade negotiations. At the same time, anticipated agreements on intellectual-property protection and investments can provide a template for further regionwide negotiations.
As the WTO's Doha Round of trade talks falters because of sharp differences among 150 member economies, especially over farm trade, countries all over the world are pursuing their own separate FTAs with trading partners. Bilateral or regional integration has popped up all over the world since the early 1990s, including the North American Free Trade Agreement, the European Union, and Mercosur in South America.
Japan was slow to join the bandwagon, concluding its first FTA, with Singapore, in 2002. It signed its second, with Mexico, in 2004, and a third, with Malaysia, in December 2005. Having lagged far behind most other countries in negotiating FTAs, Japan is now fast trying to catch up.
An agreement with the Philippines was signed last September. The world's second-largest economy has also reached basic agreement in negotiations with Chile, Indonesia and Brunei since last November. The Japanese FTAs with the Philippines, Chile, Indonesia and Brunei are all expected to go into force by the end of this year.
Tokyo also completed negotiations with Thailand in August 2005, although the signing of the agreement, originally set for last April, has been delayed by Thailand's prolonged political instability, which culminated in a military coup in September. Japan has also been negotiating FTAs with South Korea, the 10-member Association of Southeast Asian Nations as a whole, the oil-rich Gulf Cooperation Council (GCC), and Vietnam. Soon to come: India and Australia.
Japan has put the priority on fellow East Asian countries in building its FTA network. The percentage of trade with the rest of East Asia in Japan's overall foreign trade has risen to about 45%, and Japan is vying with China, a rapidly ascending economic as well as military power, for the leadership role in the world's fastest-growing region.
In recent months, however, resource-poor Japan has also turned to FTAs as a foreign-policy tool to strengthen relations with countries rich in oil, natural gas and other resources to ensure stable supplies. Japan imports almost all of its oil and natural gas.
The GCC - which groups Saudi Arabia, the United Arab Emirates, Bahrain, Oman, Qatar and Kuwait - accounts for more than 70% of Japanese crude-oil imports. Indonesia is the biggest natural-gas supplier to Japan. Brunei is also rich in oil and gas. Australia is a major supplier of coal, iron ore and gas, as well as uranium. Chile is rich in such mineral resources as copper.
Mexico is a major oil producer. But the biggest motive for Japan to conclude the FTA with Mexico was to eliminate its disadvantages vis-a-vis the United States, Canada and the EU in the Mexican market in such areas as tariffs, service, investment and government procurement. When the pact was signed in 2004, the bilateral trade volume was relatively small, about $7.3 billion.
But at the time, Mexico had already negotiated FTAs with 42 countries, including the US, Canada and the EU, and Japan estimated that its export businesses would lose 400 billion yen (about $3.3 billion) annually in trade with Mexico without the FTA. In 2005, two-way trade between Japan and Mexico rose to nearly $9.5 billion. Of the $2.2 billion increase, about $1.8 billion came from Japanese exports to Mexico, which soared to $6.9 billion in 2005 from $5.1 billion in 2004.
So why Switzerland?
To be sure, Switzerland does not fulfill any of Japan's key criteria for choosing its potential FTA partners. Japan and Switzerland are far away from each other, the volume of two-way trade between them is relatively small, and the European country is resource-poor. Nevertheless, there are good reasons for Japan to covet an agreement with Switzerland.
According to a report released by the two governments on the findings of their joint study on the possibility of concluding an FTA, "Japan and Switzerland share similar interests in upholding high standards in different economic policy areas, such as investment and protection of intellectual-property rights, as well as cooperation in such fields as tourism and science and technology."
In addition to facilitating the flow of goods between the two countries through the elimination or reduction of customs duties on both sides, the report listed some benefits of the yet-to-be-negotiated FTA.
Japan expects that the yet-to-be-negotiated FTA rules on investments and anti-piracy measures will serve as the model for future trade pacts. Japan believes that it will be able to gain the upper hand in the race with China for the leadership role in the economic integration of East Asia if it continues to spearhead efforts to realize a high-level regionwide FTA some time in the future that contains commitments in many areas, especially in investment and protection of intellectual property.
Another - and perhaps more important - reason for Tokyo's selection of Switzerland as a new FTA partner is agriculture.
The Doha Round of trade negotiations was suspended last July after the US, the EU and other powerful countries were unable to narrow differences over farm subsidies and tariffs. The negotiations are facing a deadline of July 1, when US President George W Bush is widely expected to lose his fast-track authority to negotiate trade deals. After that, trade talks will be harder to pursue as the now Democrat-controlled US Congress will very likely take a harder line on opening markets to foreign competition.
In negotiations to liberalize trade in non-farm products such as automobiles and electronics, Japan is on the offensive, but it is on the defensive when it comes to agriculture. Japan has dug in its heels on agricultural trade in the Doha Round. Japan's agreement to enter FTA negotiations with Switzerland, a close ally in the fight against farm-market liberalization in the Doha Round, is apparently part of its efforts to strengthen its negotiating position at the WTO.
Japan and Switzerland are both members of the Group of 10 (G10) countries considered vulnerable to farm imports, which also includes South Korea. Tokyo and Bern both stress the importance of non-trade concerns, including food security and the "multi-functionality" of agriculture, such as land conservation and socio-economic viability of rural areas.
Strong pressure has been placed on Japan to liberalize its heavily protected agricultural markets. It is vehemently resisting a proposal supported by many WTO members to set a ceiling of 75-100% on the import tariffs for farm products. Tokyo wants to keep those tariffs, especially for politically sensitive rice, as high as possible to shield weak and uncompetitive domestic farmers from a flood of cheaper imports.
Japan is also seeking to have a greater percentage of farm products exempted from sharp tariff reductions that many other countries demand. The US wants to limit that percentage to only 1%, while the G10 countries, including Japan and Switzerland, are demanding exemptions of 10-15%.
A new tactic: Food exports
Japan, the world's largest net food importer, began to try a new tactic a couple of years ago to breathe life into its ailing agricultural sector: plying foreign consumers with its own foods. To that end, Japan is boosting government funding to help domestic growers and businesses with market-cultivation and export-promotion programs.
The country is also beefing up efforts to eliminate the increasingly rampant proliferation of pirated produce varieties grown more cheaply abroad, especially in neighboring countries, from prized seeds developed and cultured by Japanese farmers. Unless such cases of agricultural piracy are nipped in the bud, not only could the growth in a promising source of income for Japanese farmers be stunted, but the government-led export drive could stall.
The cabinet of then-prime minister Junichiro Koizumi set a goal of doubling Japanese exports of agricultural and marine products to 600 billion yen (about $5 billion) by 2009 from about 300 billion yen in 2004. His successor, Abe, unveiled in his first parliamentary policy speech last September an even more ambitious goal of increasing such exports to 1 trillion yen by 2013.
Japanese food exports, especially marine products and fruit, are on the rise, amid the growing popularity of Japanese cuisine, which is widely perceived as healthy as well as exotic. Among the most promising products are apples, pears, salmon and scallops. In 2005, Japan exported agricultural and marine products worth 331 billion yen (about $2.8 billion). This export figure is dwarfed by the country's import volume of agricultural and marine products, worth about 7 trillion yen in 2005.
Last Thursday, China agreed in principle to resume imports of Japanese rice that had been suspended since 2003. The agreement came during a meeting in Beijing between Japanese Agriculture, Forestry and Fisheries Minister Toshikatsu Matsuoka and Li Changjiang, director of China's General Administration of Quality Supervision, Inspection and Quarantine.
China placed an import ban on Japanese rice in 2003, citing the risk of harmful insect pests. China had imported several tons of rice annually before that. Still, Japan is expecting China's decision to resume rice imports to give a momentum to the government's drive to expand exports of farm produce.
China's basic agreement to resume Japanese rice imports came amid a thaw in relations, which had plunged to their lowest point by Koizumi's repeated visits to Yasukuni Shrine. According to the Japanese farm ministry, the two countries will decide on when to resume imports before a visit to Japan by Chinese Premier Wen Jiabao, scheduled for April.
Hisane Masaki is a Tokyo-based journalist, commentator and scholar on international politics and economy. Masaki's e-mail address is [email protected]