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Japan Needs FTAs

Japan Today

22 May 2004

Japan needs FTAs

Motoshige Itoh

Free trade agreements are now becoming the rule in world trade and Japan is at a big disadvantage if it does not take part in the game.

Economic partnership agreements (EPAs), which cover broader areas than free trade agreements (FTAs), are also important because of what is called "deeper integration." Because the World Trade Organization’s multilateral framework and bilateral or inter-regional FTAs are mutually complementary, it is widely understood that FTAs and EPAs are an effective method of achieving "deeper integration."

All liberalization, including FTAs, has many domestic effects, besides diminishing the barriers of national borders. I personally expect that EPAs will give Japan a major political momentum that will steer the liberalization of food, labor and other issues in a desirable direction. EPAs and FTAs can be an effective means to build new relations in Asia in the wake of Asian currency crisis of 1977.

In Japan the term EPA is more widely used than FTA because not only tariff reduction but other matters such as foreign laborers, economic cooperation, investment and services should also be considered. Japan, which was lagging behind the world trend of concluding EPAs and FTAs, concluded an EPA for the first time with Singapore in 2002.

Prior to that, there were four countries (region) which had no EPAs in any form among the 30 highest-ranking GDP countries, namely Japan, China, South Korea and Taiwan. They are in a very rare situation. There are several reasons why reluctance to conclude EPAs prevails in the government of Japan, in particular.

In the 1930s, Japan exported a large amount of low-price textile goods to the world market. When the General Agreement on Tariffs and Trade came into being after World War II, the U.K. and France, which strongly opposed Japan’s accession to GATT, had to strike a bargain with the U.S., which wanted Japan to join GATT, giving rise to GATT Article 35, which was inserted to make to exclude Japan from the non-discriminatory principle of GATT.

In the post-war history of GATT, only Japan was discriminated against in this way. It was therefore a very important task in Japan’s post-war trade diplomacy to have this discriminatory article removed. Even in the 1960s, about 40 countries including underdeveloped ones such as Chad in Africa applied Article 35 to Japan.

Therefore, before the early 1990s when the North American Free Trade Agreement came into being, the best way that Japan could avoid discrimination was to become a full member of GATT. This background explains why Japan places so much importance on GATT.

After the establishment of NAFTA about 200 FTAs were concluded, and Japan faced a new problem. As developing and newly-industrialized countries imposed extremely high tariffs within the framework of GATT, countries which had no FTAs with these countries had difficulties with exports to them. A typical example is with Mexico.

Mexico has already concluded FTAs with the U.S. and the EU, so that American or European companies can have low-tariff access to Mexican markets. Japanese companies, however, are greatly handicapped as Japan has not yet concluded an FTA with Mexico.

If Japan is not incorporated into the FTA network of Asian countries, its exports to them will be blocked by the high tariff rates of developing countries. This is one of the contributing factors, I think, that urged Japan to conclude FTAs with its neighbors.

The positive effect of EPAs can be discussed in the following three categories: (1) advantages in terms of trade and investment in the narrow sense, (2) economic advantages in the wider sense, and (3) social and cultural advantages surpassing the economic ones.

To see how advantageous FTAs would be to the Japanese economy in trade and investment, we can make an estimate using a CGE model (computable general equilibrium model). According to a trial simulation conducted by the Japanese Government, if Japan concludes an FTA with Thailand, it can enjoy an annual increase of one trillion yen, or 0.2% of GDP, in its national income.

I think the economic merit would actually be even greater. It is said that Thailand would enjoy even more advantages than Japan. Nowadays, we can observe a division of labor in companies across national borders. It is foreseen that this trend will be accelerated, integrating the Asian economy and bringing about advantages and having an impact on Japanese companies.

Generally speaking, many Asian countries were applying protectionism. When a Japanese auto-parts manufacturer operating in the Philippines, for example, was requested by the Philippine Government to export its products in order to earn foreign currency, that Japanese manufacturer was unable at that time to come up with any competitive export products.

Now, however, Asian countries themselves, and ASEAN in particular, have begun to abandon protectionism, integrating the region by, for example, concentrating the electronics industry in Singapore and Malaysia, and automobiles in Thailand. Today in Asia, regional industrial bases are being integrated and EPAs are a very effective means to the end.

When Thailand and India have their expected FTA, Japanese auto-makers manufacturing in Thailand may expect a lot of exports to India. The series of EPAs is playing an important role that could change the division of labor in the Asian region.

The third kinds of advantage are more important than purely economic effects in deepening various exchanges between Japan and Asian countries. I thought that we were at a great turning point in 2002 when Japan was able to conclude an FTA with Singapore.

Whenever Japan tried to conclude an EPA, the issues of food and foreign laborers, agricultural issues in particular, were always a serious political obstacle to negotiations for trade liberalization. However, I may be less pessimistic, and I think the tide is changing little by little. One of the reasons that the National Council (a private council to promote economic partnership to vitalize the Japanese economy) has some members from the agricultural sphere is that they want to make use of this opportunity to change Japan’s agriculture and food production.

Japanese agriculture is in a difficult situation, but liberalization of trade cannot be attributable to it. In the agricultural land reform after World War II, land was subdivided and distributed to the tenant farmers, creating many small-scale landowners. As a result, many farming households lack competitiveness and successors, facing a structural problem of the aging of the farming population.

To improve agricultural policies, a scheme should be built up so that farmland will be integrated into competitive units, and to promote this, a new type of agricultural management will be required by, for example, introducing joint-stock agricultural companies or abolishing various regulations.

There are other possible measures; review of inefficient government expenditures, i.e., stop the construction of unnecessary farm roads and subsidize projects leading to more efficient agricultural production. To carry out reform requires a great change. I hope that at a time when Japan is asked to open its markets, agricultural reform will be made possible. So the domestic issue of reform should be tackled together with cross-border reform.

The writer is a professor of economics at the University of Tokyo.