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No.4 ,Politics  Jan 26, 2011

FREE TRADE AGREEMENTS: AN URGENT PART OF JAPAN’S AGENDA

Emerging countries are enjoying robust growth that contrasts sharply with the increasingly uncertain outlook among advanced countries. In relation to this, we need to remind ourselves that Japan occupies a very favorable geopolitical position, given its location on the eastern edge of the East Asian region, which is at the center of the global growth among emerging nations.

Today Japan requires a strategy that will allow it to incorporate the demand arising from the enormous population of the Asian market, which numbers around 3.5 billion, as well as the broader Asia-Pacific market, with some 4 billion people, as one part of what might be called its own domestic demand. During its modern history, Japan has faced two great moments of opening up to the rest of the world: the period beginning with the Meiji Restoration in 1868 and the period following World War II. Prime Minister Kan Naoto is now stressing the need for Japan to embark on a third period of active engagement with the world.

Despite this pressing need, Japan lags behind when it comes to economic partnership agreements and free trade agreements. Worldwide, around 200 FTAs between countries and regions have already come into effect. In the midst of this trend, Japan has concluded FTAs with 11 countries and regions starting with its first such agreement in 2002, with Singapore, but it has yet to sign any agreement with such countries and regions as Australia, the European Union, and the United States.

Japan’s current situation contrasts with that of South Korea, which has made the building of FTA ties a part of its national strategy and has been steadily expanding those ties. South Korea has already concluded an FTA with the EU and with the United States, and is outpacing Japan in its negotiations with India as well. The FTA between South Korea and the EU, scheduled to come into effect in July 2011, provides for the staged reduction of the tariff on Korean automobiles, eliminating it completely over a period of five years. In contrast, Japanese automobiles exported to the EU are subject to a 10% tariff that puts them at a clear disadvantage.

A comparison of South Korea and Japan in terms of their respective “FTA coverage ratio,” which indicates how much of a country’s overall trade consists of trade with FTA partners, shows that South Korea is at 36%, compared to Japan’s 16%. And the gap between the two countries grows even wider, at around 60% for South Korea and 30% for Japan, if the ratio includes countries with which they are currently negotiating FTAs. If Japan continues to shut itself off from the world, the hollowing out of domestic manufacturing will only get progressively worse as the result of Japanese companies being forced to move production sites overseas along with the added pressure of the current strong yen. Reviving Japanese companies’ competitive power, which in turn will revive Japan’s economic power, clearly requires Japan to speed up the pace of establishing economic partnerships that promote a high degree of trade liberalization with its main trading partners.

The Government Is Not Procrastinating

With the situation outlined above as the backdrop, Japan’s industrial sector has been calling for participation in the Trans-Pacific Strategic Economic Partnership (TPP). The starting point of the TPP was an FTA signed in 2006 between Brunei, Chile, New Zealand, and Singapore. Since then negotiations have moved forward on expanding the agreement, with Australia, Malaysia, Peru, the United States, Vietnam, and others pledging to join. If Japan does join the TPP, it should be able to quickly make up for its tardiness in pursuing FTAs up to now.

As state minister for national policy, I was tasked with drawing up the Basic Policy on Comprehensive Economic Partnerships, which was approved by the cabinet on November 9, 2010. The policy stated, with regard to the government’s fundamental stance on the TPP, that it is “necessary to act through gathering information” and that “Japan, while moving expeditiously to improve the domestic environment, will commence consultations with the TPP-member countries.” Some have criticized the cabinet decision as procrastination for not clearly stating that Japan will participate in the TPP, but here I want to fully clear up that misconception.

First of all, the fact is that Japan faces a large array of problems that prevent it from immediately joining the TPP. Our immediate aim should rather be to use the discussions on joining the TPP as a golden opportunity for pushing ahead on extensively opening up Japan’s bilateral economic ties, which have been languishing up to now.

To better understand the need for this approach it might help to make an analogy. If Japan’s current trade arrangements are compared to a city boulevard, we could say that bilateral economic agreements are like a two-lane highway. The TPP, in turn, might be described as a four-lane expressway; it is intended to eliminate all tariffs on trade–including, in principle, even tariffs on agricultural products.

Whether the principle of removing tariffs without exception is indeed applied will depend on the outcome of the negotiations among the TPP-member countries, and there is some room for considering alternatives. But if Japan does join the TPP it is said that cheap agricultural goods imported from the United States and Australia will inevitably expand. This has led some to a worry that it would be disastrous for Japan, unaccustomed as it is to free trade, to immediately join the TPP.

The more likely disaster to befall Japan, however, would result from failing to forge a domestic consensus on trade liberalization. Strong concerns about Japan joining the TPP are now being voiced by those in the agricultural sector. This poses the danger that if the government hastily presses forward on joining the TPP, it will only make it more difficult to put the needed domestic preparations in place. The repercussions of this could in turn even jeopardize Japan’s ability to implement bilateral economic agreements.

This understanding of the situation was the precise basis for my decision that the government’s basic policy moving forward should be to aim for comprehensive EPAs and FTAs on a bilateral basis, rather than immediately trying to surmount the high hurdle of joining the TPP. Such bilateral agreements are easier to accommodate domestically because some allowances can be made for maintaining tariffs on certain products.

Indeed, the tariff on rice has not been eliminated under the FTA between the United States and South Korea. Even for the FTA between the United States and Australia, which introduces a very high degree of trade liberalization, tariffs on some products remain, in line with the particular situation in each country.

The arrangements between the United States and Australia that exempt certain products will possibly remain even after the two countries join the TPP. Similarly, if Japan first makes progress in advancing economic ties with its key trading partners, it will be in a more advantageous position, should it join the TPP, to negotiate for some products to be exempt from tariffs or for tariffs to be eliminated in stages. This strategy can be envisaged as getting used to the pace of trade liberalization on a two-lane highway before trying to keep up with traffic on a four-lane expressway.

The Ministry of Agriculture, Forestry, and Fisheries released an estimate on October 27, 2010, that if the tariffs involving all countries were immediately eliminated for 19 key agricultural goods, including rice, wheat, and meat, and no countermeasures put in place, the value of Japan’s annual domestic agricultural production would decrease by ¥4.1 trillion. Rice would account for roughly half of that loss, at around ¥2 trillion. Thus, even if Japan manages to only exempt rice from its bilateral trade agreements, it would greatly alleviate the impact on farmers in the event that the TPP negotiations move forward.

Bearing in mind Japan’s current situation, its best option–both in terms of national interests and the livelihoods of the Japanese people–is to adopt the policy of first pushing forward with bilateral economic partnerships.

Switching from Defense to Offense

Which countries should Japan first negotiate with on economic partnerships? My view is that in the Asia-Pacific region the first step is to promptly conclude the current negotiations with Australia and reopen the stalled talks with South Korea. Japan also needs to actively promote initiatives involving the key countries and regions with which it has yet to begin trade negotiations, while at the same time trying to foster the appropriate domestic environment.

However, the questions of which countries to negotiate with and the order for moving negotiations forward should be treated as confidential strategic matters. In negotiating an agreement with another country Japan cannot afford to show its hand by revealing which countries it prioritizes. I would like to see Japan make progress in establishing economic partnerships that put it at an advantage with regard to global competition, while at the same time carefully forging a domestic consensus regarding its sensitive products–which is to say, those products that are of particular importance to the nation, to the point where an increase in imports poses the risk of a negative economic and social impact domestically.

My reasons for describing the promotion of high-level bilateral EPAs as the best option also apply to agriculture, which is the sector that will be most impacted by trade liberalization. Even if rice is exempt from tariff cuts, an expansion of Japan’s network of FTAs with other countries will invariably result in Japanese agricultural goods facing competition from imports. Regardless of this outside competition, however, the future of Japanese agriculture is already imperiled by such factors as the aging of the farming population and lack of younger people to take over, plus the low profitability of farming. For Japanese agriculture to achieve sustainable development it will be necessary to view the unfolding of free trade as an opportunity, rather than a threat, and adopt an agricultural policy that looks to overseas demand.

Already most Japanese fruits and vegetables are only protected by minimal tariffs yet manage to be quite competitive against imports. The problem, rather, is agricultural goods involving the more extensive use of fields, such as rice, livestock, dairy products, wheat, starch, and sugar cane. Even if Japan enters bilateral FTAs with all its trading partners, tariffs on such goods will be eliminated gradually–over a period of 10 or 15 years–so prices will not suddenly plummet. For this reason, excessive concern is unwarranted. What Japanese agriculture requires, moving forward, is a policy that takes the offensive by aiming to transform agriculture into a growth industry.

At present, agricultural output in Japan totals around ¥8 trillion, of which roughly ¥450 billion is destined for exports. One possible way to further expand those exports would be to adopt a policy that seeks to market Japanese agricultural goods among affluent consumers in Asia. I think that the level of Japanese farmers is unsurpassed worldwide. No country elsewhere in the world is producing agricultural goods that are as safe and delicious as those produced in Japan. This means that Japanese agricultural goods have the potential to become a key asset that contributes to Japan’s current account surplus.

On top of this, Japan has the option of being able to export to the world food products manufactured domestically using agricultural goods. In other words, the primary producers involved in agricultural production can expand their operations to also include the secondary processing industries and pursue further development in the tertiary industries of sales and distribution. This new type of industry, which achieves synergy by combining those three types of operations, has the potential to create jobs in nonmetropolitan areas of Japan and attract younger workers.

In any event, the future of Japanese agriculture looks dim if we stick to the current path. The average age of farmers is 65.8 and their incomes are only half of what they were at their peak. Currently there are 2.6 million farmers in Japan, but that number is expected to drop by 1 million over the next 10 years. Facing this situation, the Headquarters to Promote the Revival of the Food, Agriculture, Forestry, and Fishery Industries–chaired by Prime Minister Kan and sub-chaired by the minister for national policy and the minister of agriculture, forestry, and fisheries–was established to devise a basic policy on agriculture by around June 2011 that will move Japan from a defensive posture to an offensive one.

Sticking to the status quo, rather than opening Japan up to the world, poses the danger that towns across the country might even lose both their factories and their farms. Now is the time for Japan to come up with assistance measures that encourage Japanese farmers to begin playing a bigger role on the world stage.

Japan-China FTA Also Feasible

Outside of agriculture other tasks remain in order to open up Japan. Both the ruling and opposition parties have commented on the decline in economic benefits for Japanese companies doing business in China because of the movement to boycott Japanese goods that swept the country following a Chinese fishing trawler’s collision with two Japanese Coast Guard patrol boats off the Senkaku Islands in September 2010, combined with the rise in Chinese workers’ wages. A worsening of relations with China, needless to say, poses the greatest overseas risk to Japan.

Bearing this perspective in mind, what foreign policy strategy will Japan need to adopt? Our country must maintain its alliance with the United States as the cornerstone of its foreign policy and at the same time pursue a relationship of cooperation and economic interaction with China. Protecting our own country is of course the first priority, but it goes without saying that the Japan-US alliance is the cornerstone of our foreign policy strategy. While maintaining this Japan-US cornerstone, we also need to cooperate and do business with China. Granted, these days China has become a more assertive country. China also has disagreements with Japan over maritime interests, which means that Japan needs to always have preparations in place to deal with such matters. Yet it is also a fact that the development of the Japanese economy requires incorporating the demand from China’s domestic market. Currently, 20% of Japan’s overall trade involves China, making it our largest trading partner.

China has also shifted from being primarily a food exporter to an importer, so it likely to become a main destination for the high-quality food that Japan exports. As Prime Minister Kan has pointed out, Japan will be hard-pressed to expect economic development unless it manages to build a mutually beneficial strategic relationship with China.

Given this factor as well, in considering how Japan should comport itself in the maritime areas of the Asia-Pacific, it is possible that China will be a country with which to negotiate a bilateral economic partnership. In other words, the conclusion of a Japan-China FTA falls within the category of the strategies for Japan to pursue in the future.

Finally, when it comes to thinking about diplomatic issues, the words of former Prime Minister Nakasone Yasuhiro often spring to mind. He pointed out that in the realm of diplomacy no country can go beyond the limits of its own national power. This perfectly expresses the reality. What does national strength mean in the case of Japan? One could point to various elements that constitute national strength, whether defense capability or cultural influence, but the overriding factor without doubt is economic power.

However, Japan has now slipped all the way down to twenty-seventh place in the International Institute for Management Development’s survey of world competitiveness–after having once occupied the top spot. Similarly, Japan’s per capita gross domestic product has slipped from number two in the world to its current position in nineteenth place. Japanese people share the sense of crisis that the economic status of our country is trending downward in this way.

The economic decline of Japan seems to underlie the territorial disputes that have come to the surface recently. Japan had once negotiated with Russia on the Northern Territories from a position of strength because the Russian economy was in a state of exhaustion. Today, however, the international presence of Russia as a resource-rich country is on the rise, allowing it to achieve sustainable economic growth regardless of Japanese economic assistance. In contrast, Japan’s own economic power is on the wane, which in turn has diluted its global presence. This same dynamic seems to be at play in the recent friction between Japan and China over the issue of the Senkaku Islands.

For Japan to be able to restore its national strength and diplomatic power it will be vital to revive its strong economy, as Prime Minister Kan has emphasized. The impetus for this revival will be for Japan to step up its negotiations on bilateral economic partnerships.

Translated from “TPP wo kika ni FTA koshō wo kasokuka suru,” Voice, January 2011, pp. 96-101. (Courtesy of PHP Institute) [January 2011]

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