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Energy concerns fueling Japan’s drive to pursue free trade pact

Jakarta Post | 8 May 2006

Energy concerns fueling Japan’s drive to pursue free trade pacts

Hisane Masaki, Tokyo

Energy resource-poor Japan is turning to a free-trade agreement, or FTA, with oil and gas-rich trading partners to secure stable supplies to fuel the world’s second largest economy.

In its FTA negotiations with Indonesia, which were launched last summer, Japan has asked Indonesia to pledge stable supplies of resources such as natural gas and oil. Japan also plans to seek a similar pledge from the six-member Gulf Cooperation Council (GCC) in their FTA negotiations to be opened this summer. For Japan, Indonesia is the largest supplier of natural gas, providing about 30 percent of Japanese imports. Indonesia is also a major supplier of oil and coal to Japan.

Japan and Indonesia wrapped up their fourth round of official FTA negotiations in Tokyo recently, with Japan proposing for the first time a draft clause in the FTA which calls for bilateral cooperation on mineral resources.

Under the proposed clause, Indonesia would provide Japan with stable supplies of resources such as natural gas and oil, while Japan would provide technological cooperation on resources development, according to Japanese officials. During previous talks, Japan asked Indonesia to improve its investment climate for energy projects and create a framework for a stable supply of resources.

In an announcement that unnerved Japan, President Susilo Bambang Yudhoyono said in late March that Indonesia would reduce but not halt its exports of gas when long-term contracts expired in 2009 and 2010 in order to help lower costs for local firms. "After the contracts expire there will be a change in policy," Yudhoyono said.

Most of Indonesia’s long-term liquefied natural gas (LNG) supply contracts with East Asian countries, such as Japan, China, Taiwan and Korea, start expiring from 2010. So far, Indonesia exports an average of 12 million tons of gas each year to Japan.

Meanwhile, in FTA negotiations with the GCC Japan plans to seek the inclusion in the proposed FTA a GCC pledge to preferentially supply crude oil to Japan, even in emergencies like war.

Japan and the GCC had agreed to launch FTA negotiations during Saudi Crown Prince Abdullah ibn Abd al-Aziz’s talks with Prime Minister Junichiro Koizumi in Tokyo. Saudi Arabia is the GCC leader.

Japan is revving up its drive toward FTAs with trading partners, largely fueled by an intensifying rivalry with China, a rapidly ascending economic as well as military power. As the World Trade Organization’s trade talks falter, countries all over the world are pursuing their own separate FTAs with trading partners.

Japan joined the FTA competition, concluding its first FTA, with Singapore, in 2002. It signed its second FTA, with Mexico, in 2004, and the third one, with Malaysia, in December last year. Japan also reached basic agreements in FTA negotiations with the Philippines in November 2004 and with Thailand in August last year, and has been negotiating FTAs with South Korea, Indonesia and the 10-member Association of Southeast Asian Nations as a whole in the past year or so.

The biggest obstacle in FTA negotiations is Japan’s staunch resistance to a liberalization of agricultural and labor markets, something that developing countries want most. Tokyo wants to keep import tariffs for agricultural products, including politically sensitive rice, as high as possible to shield weak and uncompetitive domestic farmers from a flood of cheaper imports.

The Japanese government decided in early March to expedite the FTA negotiation process by changing its former policy of giving priority to concluding an economic partnership agreement, or EPA, over an FTA. Unlike an FTA, which is limited to slashing or eliminating import tariffs for products, an EPA is a more comprehensive trade pact that includes elimination of restrictions on foreign investment, a dispute-settlement mechanism and protection of intellectual property rights, as well as an FTA.

While an EPA is a higher-quality trade pact than an FTA, negotiating it is far more time-consuming and laborious. This is one important reason why Japan has lagged behind China and South Korea, in the race to clinch FTAs. Under the new trade policy, Japan will seek FTAs or investment pacts, rather than EPAs, depending on the economic conditions of trading partners.

Japan will also present "model accords" as a basis for discussion, so that the parties need not create an FTA from scratch. Such an approach could be tested in future FTA negotiations with countries such as Vietnam, Brunei and India.

Beneath the recently accelerated Japanese FTA strategy lies an intensifying rivalry with China over energy resources as well as over political and economic influence in Asia. Japan has increasingly been competing over scarce energy resources with China. The two energy-hungry Asian powers have been locked in the simmering dispute over gas reserves in the East China Sea. Furthermore, they have each lobbied hard for alternative routes for a pipeline from eastern Siberia’s oil fields to Pacific Rim nations. The Sino-Japan rivalry over energy resources shows signs of spreading to the Middle East.

In early 2004, Japan and Iran signed a US$3 billion deal to develop Iran’s massive Azadegan oil field. But with international tensions rising over Iran’s nuclear program, there are growing concerns in Japan about how the nuclear crisis will play out. China has recently won rights to the Yadavaran oil field in Iran. Many pundits point out that should Japan be forced to give up the Azadegan project as part of international sanctions against Tehran, China would step in to replace Japan.

China had a head start over Japan in strengthening ties with ASEAN and other trading partners through spreading FTA nets. Alarmed by the prospects of its political and economic influence being eclipsed by China’s, especially in East Asia, Japan is pulling out all the stops in the hope of turning the tables.

Japan has strongly advocated the inclusion of India as well as Australia and New Zealand in the proposed East Asian Community (EAC), an idea opposed by China and several other Asian nations.

The writer is a Tokyo-based journalist, commentator and scholar on international politics and economics. He can be reached at [email protected]

 source: Jakarta Post