Yomiuri Shimbun | Apr. 17, 2007

Japan needs new FTA strategy

South Korea-U.S. trade pact could leave Japan lagging in world market

Yoshikuni Sugiyama

A shock wave has been rolling through the top echelons of the nation’s bureaucratic nerve center and the business world.

It came from the successful conclusion of a free trade agreement between South Korea and the United States.

Under the pact, South Korea has dared to open up its agricultural market to foreign competition. There has been strong opposition in South Korea from certain groups, much like there is in Japan, to farm trade liberalization.

The start of the U.S.-South Korean FTA is certain to affect Japan, both in trade and economically.

Now is the time for this country to thoroughly overhaul its conventional FTA strategy, which has been slow at making progress.

Domestic home appliance manufacturers will probably be hit hardest by the Seoul-Washington FTA. South Korean products such as flat-screen TVs, so far subject to 5 percent duties when exported to the United States, will become duty-free under the agreement reached April 2.

Japan and South Korea are in a fierce battle for world market share in crystal liquid flat-screen TVs. Sony last year was the top flat-screen TV exporter to North America with a 19 percent market share. South Korea’s Samsung had 13.5 percent. The elimination of duties on South Korean products will undoubtedly give them a leg up in the cutthroat pricing wars.

The agreement will also affect the automobile industry.

Vehicles shipped to the United States are usually subject to a 2.5 percent tariff. Under the FTA, tariffs on South Korean cars with engines of less than 3,000cc will be eliminated. Vehicles with engines of 3,000cc or more will become duty-free within three years.

But analysts in Japan say the elimination of tariffs on autos will have no major adverse impact on Japanese automakers, as Japanese automobiles produced at U.S. factories account for more than 60 percent of sales of Japanese vehicles in the United States.

Japanese cars, however, are being chased by South Korean ones.

According to a U.S. polling firm’s research on quality and customer satisfaction released in June 2006, the Hyundai car brand was third in overall rankings, while Toyota ranked fourth.

For South Korean carmakers, duty-free exporting to the United States is a great advantage.

The Japan Business Federation (Nippon Keidanren) made a proposal in November calling for the early conclusion of an FTA between Tokyo and Washington. The business world is keen to see the trade relationship between the two countries reinvigorated by having bilateral tariffs and nontariff barriers lowered.

Farm groups and politicians working on behalf of the farming sector, however, are dead set against the idea of further opening the nation’s agricultural market to foreign competitors.

Because of such protectionist pressures, the government finds itself unable even to express its intention to launch FTA talks.

With the latest round of multilateral trade negotiations of the World Trade Organization in stalemate, many countries have embarked on concluding regional trade pacts, including numerous FTAs.

As of autumn last year, there have been 199 regional trade agreements reported to the WTO. In 1970, there were only six such agreements.

In spite of this global trend, Japan has lagged far behind other countries in striking FTAs.

Considering that Japan benefited greatly from trade liberalization since the end of World War II, this country, by redoubling efforts to conclude as many FTAs as possible, will be able to rejuvenate its business activities. To attain this, Japan must change its basic approach to FTA talks.

Currently, the government’s trade negotiations have been made by a number of ministries and agencies, mostly under the Economy, Trade and Industry Ministry, the Foreign Ministry and the Agriculture, Forestry and Fisheries Ministry.

There have been many times in which talks have fallen apart because differences between the ministries took too much time to fix, or could not be mended at all.

In creating the South Korea-U.S. FTA, the top South Korean trade negotiator held tete-a-tete talks with the U.S. trade representative.

Using this as an example, the Japanese government should study the advisability of integrating bodies in charge of trade talks into a single unit.

As the government is considering revamping the bureaucratic machinery once again, attention should be paid to ways of beefing up arrangements for trade negotiations, including the creation of a Japanese version of the USTR.

Prime Minister Shinzo Abe also should declare his resolve to accelerate FTA negotiations, and the government needs to bolster the competitiveness of domestic farm industries and also come up with a comprehensive blueprint for crafting a new strategy for trade talks.

Sugiyama is economic news editor of The Yomiuri Shimbun.