Japan's FTA Policy...Does It Exist?

Yoshihide ISHIYAMA (Professor, Chiba University of Commerce)

Japan signed an FTA agreement with Singapore in January 2002, which went into effect in November 2002. Certainly this move marked the break with the global free trade approach that Japan has been pursuing in the post-war era. In March this year Japan came to basic FTA agreement with Mexico, and its signing is expected to take place by the end of the year. More FTA is in sight now: Japan currently is in preliminary talks or conducting joint study with Korea, Thailand, Malaysia, the Philippines and Taiwan.

Does this move mean that Japan has made a clear decision to go ahead with more FTAs with East Asian countries and the eventual formation of the East Asian economic community? A close look at the reality suggests otherwise. Unfortunately, Japan, particularly the Japanese government, has never developed any coherent policy toward FTAs in East Asia, so we are left in the dark as to the future trade (and investment) framework in East Asia. Japan's ad hoc behavior can be observed in its FTAs with Singapore and Mexico.

Singapore and Mexico FTAs

Singapore is a small country with little agriculture, which is convenient for Japan. At the moment Japan's exports to Singapore are about 4 percent of the total, and imports from Singapore are 2 percent of the total. Imports of agricultural and fishery products are only about \30 billion, or 4 percent of the total. Such a tiny figure is almost entirely insignificant for both consumers and producers in Japan, irrespective of whether there is a FTA or not. Even so, the Japanese government did not accept zero tariffs on these products in the FTA. By contrast, Singapore accepted zero tariffs on all products. At any rate, Japan chose the easiest among possible FTA partners.

The basic agreement with Mexico is more complex and lacks the transparency and simplicity of the FTA, in which all quantitative restrictions and tariffs have to be abolished in principle. Japan was forced, in effect, to conclude an agreement with Mexico. For Japan Mexico is not so important a buyer of Japanese manufacturing goods, with approximately $10 billion in exports from Japan (about 2 percent of total exports). Nevertheless, Mexico imposes the average 16 percent tariff on imports from Japan while imports from the United States and the European Union enjoy free entry through FTAs. As a result, Japan's share in Mexico's imports has been declining, and Japan's business community has been alarmed by this development.

The basic agreement reached in March 2004 stipulates that Mexico expand the current duty-free annual quota of 30,000 Japanese automobiles and eliminate such a quota in 7 years, and that Japan accept annual low-tariff (not zero) quotas of Mexican agricultural products. The product that Mexico was concerned most with is pork, and it is reported that Japan has accepted an annual quota of 80,000 tons with the 2.2 percent tariff. Although Mexico accounts for only 5 percent of Japan's pork imports, Japan has not agreed to eliminate the tariff entirely. (Japan's imports of agricultural products from Mexico are approximately \50 billion.) Again, it was the Ministry of Agriculture, Forestry and Fishery that resisted zero tariffs on agricultural products.

More coherent Japan FTA policy

It is true that Japan has to cope with discrimination against Japanese manufacturers, or the trade diversion effect created by the FTAs concluded by either the United States or the European Union and other countries. According to GATT principles, such a trade diversion effect can be justified only by a larger trade creation effect that emerges in FTA partners. For this to be case, the FTA must be genuine, i.e. it must liberalize substantially all the trade within one year between FTA partners. It is a violation of the GATT principle to keep quotas and tariffs, however low they may be, in place for an indefinite period. Not only Japan but the United States and the European Union are violating the GATT principles, thereby endangering the global free trade framework. Nevertheless, it does not seem to be a good policy for Japan to merely try to jump on the FTA bandwagon, or counter the adverse impact of FTAs of others. The ad hoc approach of concluding FTAs one by one is likely to be either insignificant for Japanese consumers or create substantial trade diversion effects for counters excluded form the FTA. It will also be a distraction from the global free trade approach that Japan can never afford to leave behind.

Thus, it will be quite undesirable to depend on the ad hoc, bilateral approach, even in the presence of the FTA bandwagon worldwide. Can and should Japan formulate a more coherent FTA policy? The answer is definitely yes. If Japan can announce a comprehensive FTA policy and then implement it, it will serve well the candidate FTA partners, other major countries and Japan's consumers and producers. The basic principle for such a policy should be to avoid bilateral FTAs that could be concluded not simultaneously but on rather unknown, staggered dates, creating many trade diversion effects. Clearly the better approach is to proceed to a multilateral and regional FTA for the whole of East Asian countries. FTAs with far-away countries like Mexico need not be ruled out, but should strictly remain an exception.

Toward an East Asian economic community

Is it too dream-like to propose and expound such a comprehensive East Asia-based FTA policy? Not at all. Already in November 2001, the Chinese government announced its intention to conclude an FTA with the whole of 10 ASEAN countries and was received well. In January 2003, China and ASEAN began to lower tariffs on agricultural products, and negotiate on manufacturing goods. East Asia is basically China, Korea, Japan and ASEAN, and ASEAN is on schedule to eliminate all tariffs by 6 more advanced members by 2010 and by4 less advanced members by 2015. China is also positive on the idea of expanding the FTA to include Korea and Japan. China and Japan can be leaders together in such a plan. The East Asian economic community seems to be the ultimate goal to minimize the trade diversion effect and maximize the trade creation effect of the FTA. By achieving free trade simultaneously among all the countries in the region, East Asia can and should demonstrate that they too can form a new economic order there. At the same time, such a large-scale, region-wide FTA will in each country have a clearly visible impact on the domestic industries at comparative disadvantage, like Japan's agriculture. These industries have either to modernize or else disappear sooner or later.