Japan Economic Foundation

Chairman's Speech

11 . Japan's Movement toward FTAs

Free Trade Agreements and Japan's Trade Policy
Columbia Business School New York
Noboru Hatakeyama Chairman and CEO Japan Economic Foundation

For Columbia University

Thank you, Mr. Chairman. It is my great honor to be invited to this timely symposium as a speaker.
When I was with MITI, the then EC was trying hard to materialize the so-called EC 92 by strengthening integration of member countries. At that time, I often complained to the EU that we were concerned about a possible Fortress Europe should the EC92 come into being. This concern was actually directed against strengthened FTAs or Custom Unions that discriminate against non-member countries. In the first place, this apprehension was also shared to some extent by my US colleagues. However, EC92 was implemented as scheduled, and the US formulated NAFTA with Canada and Mexico, thereby isolating Asian countries, including Japan. So after retiring from MITI, I wrote an article for the Japan Times in February 1997 that the only logical scenario would be the establishment of an FTA between Japan, China, South Korea and Taiwan – all of which were the only economies among the 30 biggest economies in the world not then covered by an FTA, although it would be extremely difficult to conclude such an FTA. However, the government of Japan was still opposed to FTAs, preferring to subscribe to the WTO or a multilateral system alone, leading to the further isolation of Japan in this respect.
It was Dr. Herminio Blanco, the then Trade Minister of Mexico and the chief negotiator for NAFTA, who in a sense rescued Japan from this deadlock. In the summer of 1998, I had lunch with him. At this lunch, Dr. Blanco proudly told of how he had concluded negotiations with his EU counterpart in December 1997 on a framework agreement for an FTA between Mexico and the EU, and invited me to Mexico City to discuss a possible FTA between Japan and Mexico.
I accepted this invitation in August 1998. Dr. Blanco kindly arranged a meeting attended by himself, three vice ministers in his ministry and myself. They explained the framework agreement for an FTA between Mexico and the EU and the possibility of such an agreement between Japan and Mexico. Upon my return to Japan, I visited the then MITI Minister Kaoru Yosano to convey the message from Mexico about a possible FTA between Japan and Mexico. Mr. Yosano told me that since it would represent a sea change in the Japanese government's trade policy if MITI started negotiations on a Japan-Mexico FTA, he would like to have his staff study the matter. Thus, a team of MITI officials was established within the ministry to study FTAs. Ironically, the positive report from this team on FTAs had not been completed in time for the visit by Mexican President Ernesto Zedillo to Japan in mid-November 1998. However, the report was prepared in time for the Japan-Korea ministerial meeting which was held in Kagoshima in late November 1998. Mr. Yosano then responded in the affirmative to the request made by Dr. Han Duck-Soo, then Minister for Trade in South Korea, for a joint study into a possible FTA between Japan and Korea. Thus JETRO's Institute of Developing Economies (IDE) and the Korean Institute for Economic Policies (KIEP), both governmental think tanks, were assigned to jointly study ways to strengthen the economic relationship between Japan and South Korea, including the possibility of an FTA.
Then in February 1999, JETRO and SECOFI, Mexico's Ministry of Commerce and Industry headed by Dr. Blanco, were assigned to carry out a study on a Japan–Mexico FTA. Both studies conducted jointly by JETRO, whose Chairman and CEO was myself, and its counterparts in South Korea and Mexico were in favor of FTAs. The results of both studies were announced in April 2000 for Mexico and May of the same year for South Korea.
Noting this development towards FTAs in Japan, the Prime Minister of Singapore, Goh Chok Tong, visited Japan in December 1999 and agreed with Mr. Obuchi, the then Prime Minister of Japan, to start an FTA study between both their governments. This study was completed in September 2000. Then, at the beginning of 2001, FTA negotiations between the two governments commenced and an FTA called the "Japan-Singapore Economic Partnership Agreement (JSEPA)" was signed by Prime Ministers Junichiro Koizumi and Goh Chok Tong on January 13, 2002 when Mr. Koizumi visited Singapore. JSEPA came into effect at the end of November last year. This is the first free trade agreement Japan has ever entered into. Not only that, this is the first FTA which has been concluded in the so-called "Far East" area. So, although some Chinese professors tend to assert that China is taking the initiative regarding FTAs in Asia by starting negotiations on a China-ASEAN FTA, in fact JSEPA should be given the credit for having taken such an initiative. ?
Which will be the second country to conclude an FTA with Japan after Singapore? It will be Mexico. The governments of Japan and Mexico agreed to establish the "Japan-Mexico Joint Study Group" to strengthen bilateral economic relations on June 5, 2001. This study group presented its final report on July 25 last year. Prime Minister Koizumi and Mexican President Vicente Fox held a meeting in Los Cabos on October 27, 2002, and decided to launch negotiations to conclude an FTA agreement, taking into account the report submitted by the joint study group. The supposedly last meeting for such official negotiations was held during the second week of this month in Tokyo. President Fox is now visiting Japan. I hope he and Prime Minister Koizumi will sign the FTA between Japan and Mexico before he leaves Japan, thereby making it the second FTA for Japan.
In the case of South Korea, on September 23, 2000, at the summit meeting with the then Prime Minister Yoshiro Mori, then South Korean President Kim Dae-Jung proposed the establishment of a Japan-Korea FTA business forum consisting of business persons and scholars.
Mr. Mori welcomed this proposal, and this forum submitted a joint communiqué on January 25, 2002 to the effect that a Japan-Korea FTA should be created soon, and for this purpose consultations between the two governments should start.
Based on this communiqué, at the summit meeting between Japan and South Korea on March 22, 2002, Prime Minister Koizumi and President Kim agreed to launch a government-level joint study group, including business-persons and scholars. They have already met eight times, with the last meeting having been held on the second of this month in Seoul. They came up with a joint report that was positively in favor of an FTA between Japan and Korea. Two leaders of both governments are supposed to have a summit meeting on this sidelines of APEC summit meeting held in Thailand from next Monday and are expected to agree to enter official negotiations soon. Although South Korea had a presidential election on December 19th with President Roh Moo-hyun being elected and its cabinet reshuffled, Trade Minister Hwang Dooyun was the only minister to retain his portfolio, suggesting continuity in their trade policies.
The then Chinese Prime Minister Zhu Rongji proposed the study of an FTA between the ASEAN countries and China on November 22, 2000 at the summit meeting held in Singapore between the leaders of ASEAN and China.
This study for ASEAN and China was completed in the summer of 2001 and on November 6 of the same year, their leaders agreed to enter into negotiations on an FTA between them with the target of concluding it within the next 10 years.
The FTA negotiations between ASEAN and China advanced rather smoothly, and on November 4, 2002, their leaders drew up the Framework Agreement (FA) for comprehensive economic cooperation between ASEAN and China. This FA has many impressive points. According to this FA, the ASEAN-China FTA will cover not only trade in goods, but also trade in services, and even include rules on foreign direct investment.
The second is its schedule. In 2001, when they agreed to enter into FTA negotiations, it was understood by many people that they would conclude negotiations within 10 years. But, according to the FA, the "10 years" turned out to be the implementation period for the FTA and certainly not the negotiating period. They have also agreed in principle to start so-called "early harvest" tariff reductions of some agricultural items from January next year. In this context, China and Thailand have agreed already to bring forward the reduction schedule to October 1st this year.
The third impressive point is the character of the FTA. It was noted that an FTA between ASEAN and China would be based on the so-called "Enabling Clause" of the GATT Decision in 1979 to allow only developing countries rather flexible FTAs which admit simply reductions in tariffs. This contrasts with normal FTAs based on Article 24 of the GATT rules, which requires the elimination of tariffs for substantially all products. Since both ASEAN countries and China are developing countries, they are qualified to use the Enabling Cause. However, according to the FA, they will not use this clause. Instead, they are going to base their FTA on 24 of GATT and on Article 5 of GATS that are supposed to be used between developed countries.
It is truly admirable that China is trying hard to draw up a rather ambitious FTA with ASEAN. I say this because it signifies that China will commit its liberalization not only to WTO multilaterally but also to an FTA with ASEAN regionally, thereby further strengthening their "reform and opening" policy, which is in the interests of all other countries.
Thus, the stimulus caused by JSEPA towards FTAs in the Asian region has led to this reaction on the part of China, which has spurred further action by Japan. If Georg Wilhelm Friedrich Hegel were still alive today, he would surely have called this situation a "dialectic development."
Prime Minister Koizumi visited some ASEAN countries in January 2002, and proposed pursuing a comprehensive economic partnership initiative, covering not only trade and investment, but also science, technology, education, tourism and so on.
In September 2003, in Phnom Penh, Cambodia, the ASEAN Economic Ministers (AEM) and METI agreed to recommend to their leaders that ASEAN and Japan should sign up to a framework that would provide the basis for concrete plans and elements towards realizing an ASEAN-Japan CEP in accordance with guiding principles, such as the comprehensiveness of countries and sectors. Based on the recommendation of AEM and METI, the framework was signed by the leaders of Japan and ASEAN last week at their summit meeting in Bali, Indonesia. According to this framework, consultations between ASEAN as a whole and Japan will begin from next year and negotiations for an FTA between them from the year after next.
Japan has also been studying possible bilateral CEPs, EPAs or FTAs {hereafter all bracketed together as FTAs} with the Philippines, Thailand and Malaysia. Japan has already finished expert meetings with each country. Each of these studies began with a request from President Arroyo, Prime Minister Thaksin or Prime Minister Mahathir respectively to Prime Minister Koizumi. Thus far, the Philippines seems to be interested in sending nurses to Japan more freely through an FTA, and Thailand hopes to increase its agricultural exports. Since the expert meetings consisting of governmental officials are over between Japan and these three countries, their studies have entered a new stage where the study team for each is expanded to include not only governmental officials, but also business persons and intellectuals. This year happens to be ASEAN-Japan Year. Therefore a special summit meeting is going to be held in Tokyo in December. I hope the leaders of Japan and a few ASEAN countries declare the commencement of negotiations towards such FTAs between them.
The fact that Japan has been engaged in studying a possible FTA with ASEAN as a whole on the one hand, and similar mechanisms with the Philippines, Thailand and Malaysia on the other, means, of course, that Japan has started exploring both regional and bilateral approaches for FTAs in this area. Which approach would be better? Ideally speaking, a regional approach would be better. First of all, when a bilateral approach is taken, some ASEAN countries may feel Japan is trying to split ASEAN. In addition, in the case of a bilateral approach, Japan would need as many as 10 FTAs if it wishes to conclude them with all ASEAN countries. Trading houses would then be stifled by vast quantities of documents they would have to deal with. However, realistically speaking, if Japan takes a regional approach alone – studying or negotiating just with ASEAN as a whole – individual ASEAN countries can wield a veto against it. Therefore, I think Japan will inevitably need to take a double-track approach.
Now, it seems that a China-ASEAN FTA and a Japan-ASEAN FTA, if any, will coexist in this area in the near future. Perhaps ASEAN countries might feel more comfortable having Japan and China compete with each other by having two different FTAs, one for Japan and the other for China, rather than having them included in a single FTA, in which case the opinions from Japan and China might predominate over those of the ASEAN countries.
However, I think it would be better for East Asia to have a single FTA by the name of EAFTA (East Asian FTA) consisting of Japan, China, Korea, Taiwan, Hong Kong and the 10 ASEAN countries.
Would such an EAFTA be possible in the near future? My personal opinion is that each of the economies concerned should make the maximum effort to formulate such an EAFTA. In particular, it is vital for the development of the Asian economy for Japan and China to cooperate with each other under the same umbrella of an EAFTA. Economic development in this area will lead to sustainable peace in this area. The EU will expand next year to include 10 more countries. The American continent is supposed to be covered by the FTAA by 2005, although it might be delayed. Asia should also have a single FTA. Time is short. We have to move fast to formulate an EAFTA that includes Japan, China and the other important economies in this area, such as Taiwan.
In order to realize an EAFTA as soon as possible, it might be better to insert a special article similar to Article 35 of the General Agreement on Tariffs and Trade (GATT) into the EAFTA. GATT Article 35 covers the non-application of the Agreement between particular Contracting Parties. Even in the case of an EAFTA, a certain economy may not wish to enter into an FTA relationship with another particular economy. For example – although this is purely hypothetical – China may not wish to have an FTA relationship with Taiwan and vice versa. If we can insert a special article to allow the non-application of EAFTA rules between China and Taiwan, we should be able to welcome both China and Taiwan as members of such an EAFTA.
There may be another issue. For example, China may not be ready to enter into an FTA relationship with Japan just yet. China is now working hard to implement its commitments to the WTO. They will be reducing auto tariffs from their current 100% or 80% levels to 25% by July 2006. Their average tariff rates for minerals and industrial goods will be gradually reduced from 16.6% in 1998 to 8.9% in 2010. So it might be a bit difficult for China to grant zero tariffs to substantially all products from Japan in the near future. In that instance, China could enforce this special article against Japan. Of course, Japan could do the same with regard to China if it so wished. Thus this special article of non-application will work to expedite the formation of EAFTA while enabling us to welcome all qualified economies as members.
The latest round of WTO negotiations in Cancun was unsuccessful. As a result, there are an increasing number of voices contending that the FTA approach would be better than the WTO approach. I don't agree with this opinion. It is true that it takes time to conclude WTO negotiations among 148 economies. But it is also true that FTAs have a discriminatory aspect. The WTO and FTAs should complement one another. We should not allow either of them to monopolize the path towards liberalization of trade and investment.

Thank you.