bilaterals.org | Japan: Red tape, resistance block free trade accords

JAPAN
Red Tape, Resistance Block Free Trade Accords
by SUVENDRINI KAKUCHI
IPS | 8 July 2003

TOKYO, July 8 - Correctly tweaked, the numbers make perfect sense - free trade agreements (FTAs) between Japan and South-east Asian countries could provide a much-needed fillip to the moribund Japanese economy, and will in turn give a boost to a region in which Japan is already the biggest investor.

In practice, however, political compulsions at home, bureaucratic resistance and trade friction are proving to be obstacles on Japan’s road to FTAs with its Asian neighbours.

"Japan is a latecomer in the signing of bilateral FTAs. The going now is rough," said Katsuichi Iwakami, an economist who specialises in Thailand at the Japan Export Trade Organisation (JETRO), a quasi-governmental institution set up to promote trade relations between Japan and Asia.

There is an impressive stream of paper in the FTA pipeline. Thailand, the Philippines and Indonesia - Japan’s strongest trading partners in the 10-member Association of South-east Asian Nations (ASEAN) - are currently negotiating terms for bilateral FTAs with Japan.

But the going is often frustratingly slow. After more than four years of discussions since the FTAs were first proposed, Japan and ASEAN countries are not much closer to concluding separate pacts as was hoped at the start of the process. Thus far, Japan has but a single FTA to show - with Singapore, which has a negligible agricultural component.

In contrast, regional rival China is much farther ahead and in November 2001 agreed with ASEAN to complete a free trade accord by 2010.

The snail’s pace of the discussions does not appear to have slowed the political rhetoric in Japan though.

In June, Japanese Prime Minister Junichiro Koizumi announced that a comprehensive economic alliance with ASEAN would rival the major economic blocs: the European Union and the North American Free Trade Agreement (NAFTA). Indeed, the regional FTA is high on the agenda of the October summit of ASEAN in Bali, Indonesia.

Koizumi’s optimism does not however strike a chord with those negotiating the nuts and bolts of FTAs. The example of Thailand illustrates why. In September 2002, a proposal from Thailand for a bilateral FTA is now mired in bureaucratic resistance - the sticking point being the expansion of farm exports to Japan.

Japanese politicians, dependent on support from the farm electorate, have long resisted moves to open the domestic agricultural market to imports. Tariffs on rice are as high as 200 percent and chicken imported from Thailand is taxed at 11.9 percent.

This is a critical concern for Thailand, because over a fifth of its exports to Japan are food and food products - like fish, rice, vegetables, fruit and meat.

In exchange, if Thailand scraps its tariffs on Japanese industrial imports, experts contend that Japanese automakers and other manufacturers will stand to gain by being able to assemble their products more cheaply thanks to the lower prices of parts exported from Japan.

This is why Japan’s government and the powerful Economy, Trade and Industry Ministry are pushing Thailand and ASEAN governments to reduce tariffs and to change regulations on regional land transport. Their argument is that such steps would stimulate regional exports, thereby paving the way for the sale of Japanese products regionally.

Economist Daisuke Hiratuka of the Institute of Developing Economies said that FTAs between Japan and ASEAN go beyond increasing trade. "FTAs aim to boost investment in each country, leading to technology transfer and thus stimulating trade between Japan and the Asian region," he said. Hiratuka is also a member of a joint study group between ASEAN and Japan on FTAs.

The calculations are appealing. The Japan Centre for Economic Research recently stated that Japan’s real economic growth rate would increase 0.07 percentage points if a Japan-China-South Korea FTA is signed.

Yet from Japan’s point of view, free trade agreements are rare instruments because of the trade pattern with ASEAN - the region was an important export base rather than an equal trade partner.

"Japan’s economy relied heavily on exports and ASEAN was a cheap manufacturing base," said Hiratuka. "But with the long economic recession, record unemployment at 5.4 percent, and current deflation rates at 3 percent annually, Japan is concentrating on steps to promote economic stimulation and jump-start the economy."

The imperatives now are different from those in the 1970s. Then, Japanese private investment poured into the ASEAN region and did so till the 1980s when companies, faced with the high yen, began looking for cheap offshore manufacturing destinations.

Figures released by JETRO indicate that Japanese private investment in ASEAN accounts for a total of 42 billion U.S. dollars until April 2002.

Thailand alone accounts for 27 percent of Japan’s investment in the region, a major consideration for Japanese multinationals supporting bilateral and regional FTAs with ASEAN. In comparison, China has absorbed 15 billion dollars of Japanese investment since the opening up of its economy in the mid-1990s.

That sustained high level of investment has boosted Japan-ASEAN trade. Two-way trade between ASEAN and Japan reached 118 billion dollars in 2002 and that gave Japan a trade surplus vis-a-vis the region of 10 billion dollars.

For Japan, FTAs have geopolitical value too. Kiroku Hanai, international relations commentator, warns that as Japan balks at making concessions, China is bound to gain the "upper hand" in Asia. "FTAs are not only about economic zones," he said. "A regional FTA with ASEAN could boost Japan’s position in Asia as a regional and political power as well." (Inter Press Service)