Failure of FTA Negotiation with Mexico Signals Trouble for Japan

Noboru HATAKEYAMA (Chairman, Japan Economic Foundation)

Japan's Free Trade Agreement (FTA) negotiation with Mexico fell apart on October 16, 2003. Why could the FTA not be concluded with such an accommodative country as Mexico? If we were to stay on the same track, Japan would be left behind China in negotiations with Asian countries and Japan's industry will collapse. If "structural reform" is truly considered necessary, Japan must make a prompt political decision to promote FTAs on the trade front.

The effect of this for the future of Japan is far more serious than meets the eye. The core phase of FTA negotiations for Japan is only beginning. Negotiations with South Korea and ASEAN countries are forthcoming. Failure to conclude an agreement with Mexico where hurdles were low indicates a rough road of negotiations ahead with other countries. Japan was supposed to forge a set of criteria through the negotiation with Mexico that would serve as a benchmark in negotiations with ASEAN countries. Japan is standing at an important turning point where failure this time would delay the overall FTA negotiation process with other countries.

Why FTA with Mexico?

FTA is an agreement where participants would mutually eliminate tariffs and other import barriers and restrictions on trade of goods and services. Then why is an FTA with Mexico important? Japanese products that compete in the Mexican market are mainly those made in the U.S. and Europe. Products of the US can enter the Mexican market without tariffs thanks to NAFTA. The same is also true with European goods because of an FTA between Mexico and the E.U. But Japanese goods are taxed when imported to Mexico because there is no FTA between the two countries. Mexico is not a large farming country. Volume of domestic grain production is insignificant, and Mexico was in a defensive position throughout the NAFTA negotiation with the US and Canada. Production of pig meat, which was a major factor in the collapse of the negotiation with Japan, is currently limited. For Japan, where the largest domestic factor upon such negotiations is always the farming sector, Mexico should have been relatively easy to deal with.

Mexico was in fact the country that opened Japan's heavy doors to FTAs. In mid-June of 1998, when I was Chairman and CEO of Jetro, Herminio Blanco, the then Minister of Trade and Industrial Development of Mexico and former chief negotiator of NAFTA, came to Japan. He told me that Mexico had concluded, at the end of the previous year (1997), an FTA framework agreement with the EU, and suggested that Japan as well seek the possibility for a similar arrangement with Mexico. Being invited by the minister, I visited Mexico in August of 1998 and reported the findings to Mr. Yosano, the then Minister of Trade and Industry, including Mexico's intention to go ahead with an FTA with Japan. Minister Yosano instructed his staff to form a project team to study FTAs in general within the ministry, which marked the very first step for Japan's quest for FTAs.

The policy stance of Japan until then was rather negative toward FTAs, as FTAs by nature discriminate against non-members of the accord. So FTAs were thought to contradict the basic principle of GATT, where free and non-discriminatory trade was envisaged. Minister Blanco's intention at the time had been to have the heads of the two states announce the commencement of FTA negotiations between the two countries upon President Ernesto Zedillo's visit to Japan scheduled in mid November 1998. An irony was that the positive report for FTA by MITI study team could have not been finalized by the time of the visit of President Zedillo, but rather was ready to be announced two weeks later when a ministerial conference between Japan and South Korea was held. Trade Minister Yosano thus gave instructions to study an FTA with South Korea first, immediately followed by Mexico. Singapore, the only country with which Japan currently has an FTA now, approached Japan toward the end of 1999 upon realizing such studies were being carried out. It is worth noting that the agreement with Singapore could have been delayed if not for Mexico's original initiative.

Why did the negotiation with Mexico fail?

An agreement with Mexico seemed almost imminent when it collapsed. There were tactical mistakes as well as strategic missteps. The largest tactical mistake on Japan's part was that its concessions were offered bit by bit in small fragments throughout the negotiations. Mexico has an industry organization called COECE where almost every sector of industry is represented. They are in the position to always be referred to when the government engages in trade liberalization negotiations. Representatives of this COECE were with the government's team of negotiators for the meeting with Japan. The leader of the Mexican negotiation team was informally saying that they would not be able cope with it if Japan were to concede at the very last moment. He was referring to the fact that it would take some time to confer with COECE and relative industries before making formal replies on their part. But Japan's adopted tactic was to hang on to the case and concede at the very last moment. And the concession itself was not significant, either.

If Mexicans were advised in advance of the bottom-line Japan could give, they might have had ways to persuade their domestic industries. The timing of the negotiation was unlucky one. Since negotiations were being made during the period of general election campaign in Japan, Mexicans, suspected more concessions could be made by Japan after the general election.

Why were there three head negotiators?

Japan's unskillful negotiation could also be seen in the way the team was set up, in that there were three Ministers: from Foreign Affairs; Economy, Trade and Industry; and Agriculture, Forestry and Fisheries, all supposedly representing Japan. The Mexican counterpart, at least at the beginning, was only one, the Minister of Trade and Industrial Development. As a general rule, when there are a multiple number of officers in charge, no one will take the risk of bearing the final responsibility. There should only be one officer leading the team, and it may be natural to choose between the Foreign and Trade ministers, as it is, after all, about trade with foreign countries. However, there are very few countries in which the Foreign Minister bears the responsibility for trade negotiations. In both the US and EU, the task is borne by the ministers responsible for trade: the Trade Representative in the case of the US and the Trade Commissioner for the EU. It seems natural for the Trade Minister to lead trade negotiations for Japan also.

Ignorance about support for structural reform

It seems there were two important aspects of FTA overlooked by Japan's government, and as a consequence, lack of leadership in handling this issue.

First is a lack of recognition that an FTA could expedite the process of structural reform. There was no reference to FTA in the concept of structural reform Prime Minister Koizumi is promoting. There have been no media-reports to the effect that the Prime Minister has demonstrated his leadership roll to conclude the agreement with Mexico, taking the risks accompanying it.

The second point is that there may have been lack of awareness that the FTA with Mexico would form a precedent to similar arrangements with other countries to follow. There was no sign of determined leadership for Japan to construct an entire FTA mechanism with Asian countries building on this Mexican agreement.

There are two aspects to the Asian FTA for Japan, defensive and creative. In defensive terms, the FTA planned to be activated between China and ASEAN in 2010 would provide a good thought experiment. If that materializes, ASEAN countries would accept Chinese goods freely, while goods from Japan would be taxed. If that happens, Japanese manufacturers would shift their manufacturing base to China, and export to ASEAN countries from there. This would accelerate the already ongoing hollowing out of Japan's industry. Therefore, Japan must not lag behind China in forming FTA relations with other countries, especially in Asia. The other side of the coin is that an FTA is effective in protecting factories in Japan. For example, after the FTA with Singapore, a major Japanese brewery, which until then produced beer in Shenzhen for export to Singapore, began to produce and export from Japan. By exporting from Japan, the brewery was able to save 10% tariffs imposed by Singapore on goods from China.

The creative side of an FTA is that once trade barriers are lifted, what economists call optimum allocation of resources could be achieved. This, in other words, means that ultimate structural reform could be realized. As Japan is heading for a society with less working people, it is very important for the workforce to be assigned to the most productive areas.

Political leadership is indispensable in promoting structural reform. Leadership in this context is an ability to make necessary decisions for the sake of the country in the long run in spite of it perhaps being unpopular. While most politicians are affected by the "wanting to be liked by everybody syndrome", Mr Koizumi should be commended for making some unpopular decisions. But thus far it seems the present regime lacks a vision for achieving structural reform through liberalization of agricultural trade.

Japan's government has recently been active in reforming such areas as public works, and capital and labor utilized inefficiently are being reallocated. Releasing the workforce tied up with inefficient industry through agricultural trade liberalization and reassigning them to more productive areas is effectively similar to the policies that led to the reform of public works. But the decision to adopt the policy has not been made.

Political leadership in China

Chinese leaders are well aware of the effects of trade liberalization on structural reforms, be it by means of FTA or WTO. Former Prime Minister Zhu Rongji initiated a revolutionary plan to restructure domestic industry by joining WTO and inducing foreign investment. Last year, when I met Zhu Rongji in Beijing as the head of a delegation and asked about the possible framework agreement for an FTA between China and ASEAN, he was able to respond in detail immediately without referring to notes or his aides. This indicates how highly the subject of trade liberalization is recognized at the very senior level of leaders in that huge country. He even referred to the difficulties Japanese leaders face in persuading the domestic agricultural sector, and predicted Japan would lag behind China in concluding FTA with ASEAN. It may be true that drastic measures could be implemented in China because of the political structure allowing for such initiatives. But difficult and unpopular political decisions are made in democratic countries as well when their leaders deem it truly necessary.

"Good comes out of evil"

Following the collapse of the negotiation with Mexico, Prime Minister Koizumi expressed in a news conference that "we can't avoid agricultural issues," and " should spare no efforts for achieving agricultural reform." Following the Prime Minister's lead, the Trade Minister has reportedly said that "although there are sensitive areas including agriculture, Japan could not avoid those issues while other countries in the world are going ahead with FTAs." Since these statements were made after the collapse of Japan-Mexico FTA negotiations, a special attentions should be paid to them.

Thus Japan may finally begin to see political leadership tackling FTA through true "structural reform without exception." I hope that the trend would start with immediate re-negotiation with Mexico, which should lead to a start of FTA negotiations with South Korea and major ASEAN countries, and eventually to the conclusion of the Doha round of WTO by the end of next year.

(This is an abridged translation of the original Japanese article that appeared in the December, 2003 issue of Chuokoron.)