Toward an EPA for Japan and the US: Revisited

Keikichi HONDA (Chairman, EFI Japan)

It seems that the word "EPA" (Economic Partnership Agreement) or "FTA" (Free Trade Agreement) has become a key word in business these days. As it now appears rather difficult to achieve comprehensive multilateral trade agreement such as those in WTO negotiations any time soon, bilateral arrangements are now considered a kind of "second best" solution to international trade problems, especially for Japan. Conclusion of an FTA between South Korea and the US this spring has stimulated discussions about the possibility and necessity of such a bilateral agreement between Japan and the US.

Last September, I wrote an article "Toward an Economic Partnership Agreement for Japan and the US" (9/19/2006) and argued for such an agreement between the two countries. To reiterate my points, there are at least three reasons for a Japan-US EPA.

First, such an agreement would provide a solid foundation for political stability for the Asia-Pacific region as well as a leading model for sustainable and mutually beneficial relationships among individuals, firms, cities and nations in the region.

Second, it could officially capture post-war bilateral economic arrangements between the two countries for the last six decades, and thereby preventing "dilution" in Japan-US relations due to generational as well as geopolitical changes in the region.

Third, we should look beyond an EPA to form an economic union between the two countries which share political, economic and social values, where the EU model might be a useful guide with key concepts such as "minimum harmonization" for regional integration and "mutual recognition" of national differences.

Although this kind of strong argument for an EPA between the two countries has been voiced for some time now, the actual move toward such an agreement, if any, seems to be extremely slow and frustrating. This is mainly due to long-standing agricultural problems, which are currently being reviewed under the Abe administration. The key problem with agricultural reform relates to what should be reformed and how? In order to see this, let us compare Japan's agriculture with its American counterpart.

While Japan's agriculture is based on small-scale family farming operations consolidated by agricultural cooperatives in each locality, the US has a completely different industrial structure with a number of agents playing key roles in agricultural business. In the case of the "corn belt" in the Midwestern prairie region the key players include (1) "land owners," who owns agricultural fields, (2) "operators," who are engaged in actual field work, (3) "elevators," who provide storage services, and (4) "grain majors," who specialize in large-scale distribution. "Land owners" can be individuals, pension funds, or even ex-aristocrats in Europe, while "operators" are mostly large-scale farming enterprises using more than 100 hectares of land, rather than small-scale family farmers. "Elevators" buy grains directly from operators and store them in the silos that they own along Mississippi River, and "grain majors" are global players in distribution such as Cargill, Dreyfuss, ADM, Bunge etc., including big Japanese trading companies.

With these global players, US agricultural products are quite competitive in the world market, whereas agricultural land is often traded for investment purposes. Obviously this situation is entirely different from Japan's agricultural industry in terms of size, organization and market. Therefore, comparisons between the two in the same dimension would be meaningless, and even using the same word "agriculture" to describe the both may be inappropriate.

Then what should Japanese agriculture do for survival? In terms of productivity, American agriculture is in no doubt much superior for the same kind and quality of product. Therefore, we should consider "product differentiation" between Japanese and American agriculture before discussing productivity. In fact, there used to be strong concern about Japanese oranges and cherries, which faced market liberalization some time ago, but they are surviving by finding their niche markets in Japan as well as in the US. As for rice, even though it might eventually be liberalized, it should be up to the market and consumers' taste whether imported rice would become a dominant food in Japan. It would be conceivable that some of the Japanese farmers who are enabled to exchange their farmland for cash thanks to future agricultural reforms could become the owners of US farmland or even migrate to California or Arkansas to produce rice for exports to Japan.

In the age of globalization, "differentiation" and "specialization" are becoming prevalent in almost all industries, because localities and endogenous tastes cannot be overcome by globalization. So, there must exist a kind of high-value added agriculture that makes full use of Japan's favorable natural conditions. In fact, Japan's agriculture and food industry are now quite high-tech oriented, and can be internationally competitive, if technology is fully applied. The same is true with fishery, where Japan's aquaculture (fish farming) is most technologically advanced. Innovation holds a key in this field as well.

Another important point is the concept of "food self-sufficiency." This is nothing but an issue of national security for citizens' living, and should be evaluated carefully and objectively along with other risks such as energy problems and natural and human disasters. Furthermore, risk evaluation has many aspects such as the probability of occurrence, duration, impacts, after effects, etc. In none of these aspects, food could be considered exceptionally high risk or fatally important. But rather it is closely related to other risks, and also somewhat similar to energy problems, which could be met with storage.

Having considered trade, risks, and storage together, we might as well reach a conclusion that what Japan needs is a reliable partner after all. Japan and the US can be such reliable partners to benefit each other on the equal footing basis. However, since Japan's strong points are naturally different from those of the US, an EPA for the two countries should be considered from the "comprehensive" viewpoint. That is why some US specialists are proposing the word "CEPA," that is, "comprehensive economic partnership agreement."

Although a CEPA may be ideal for Japan and the US, we should not be too ambitious, but rather try to combine give-and-take relations one by one to reach a reasonable agreement. In fact, such bilateral arrangements between the two countries in the past have formed a "de facto" EPA environment. Therefore, what we need to do now is reexamine and reevaluate those existing arrangements, and conclude and incorporate new agreements for what both Japan and the US want at this point. Hopefully this will eventually lead to a CEPA between the two countries, if we follow a guiding principle of "minimum harmonization" and "mutual recognition of differences."