Japan Economic Foundation

Chairman's Speech

9 . What will be brought about by Japan-Mexico FTA

Japan Week Program
A Panel Discussion at The Hall of the Mexican Senate
12 November, 2004
Noboru Hatakeyama Chairman and CEO Japan Economic Foundation

What will be brought about by Japan-Mexico FTA

1 As the results of Japan-Mexico EPA, at least three things will happen.
{1}Firstly Japan's exports to Mexico will increase. Up until now in the Mexican markets Japanese products compete mainly with products exported from the US and the EU. The U.S. companies can export goods to Mexico free of tariffs in principle thanks to NAFTA. Also EU companies can do the same thanks to the EU-Mexico FTA that started in July 2000.
However, Japanese companies have to pay tariffs when they export goods to Mexico that has an average tariff rate of 16.2%. If an EPA between Japan and Mexico enters into force, this disadvantage for Japanese companies would disappear thereby increasing the exports of Japan to Mexico.
{2} Secondly Mexican exports to Japan will increase for sure. Especially exports of meats and fruits will increase. In the case of pork imports Japan's tariff rate is 4.3%. However Japan decided to reduce this rate to 2.2% for Mexico alone up to a certain amount of imports. Last year Mexico exported 34 thousand tons of pork to Japan. According to the JMEPA, 38 thousand tons of pork are allowed to be exported to Japan with 2.2% tariff for the first year and this amount will be expanded to 80 thousand tons for the fifth year. Also last year Mexico exported only 1.1tons of orange juice to Japan. According to the JMEPA, 4000 tons of orange juice are allowed to be exported to Japan with 15% tariff for the first year and this amount will be expanded to 6500 tons for the fifth year. This 15%rate is half the rate applied to other countries than Mexico .
{3} Thirdly Japan's direct investment in Mexico will increase thereby creating more jobs in this country. As of now there are rather Mexican high tariffs imposed upon imported parts and components from Japan necessary for producing final goods in invested plants or factories in Mexico. Before Mexico entered NAFTA, foreign investors registered under the Maquiladora system could enjoy free tariff for the imported parts and components as long as they were incorporated into exported goods. However after NAFTA has come into effect markets of NAFTA countries have become deemed an united market, thereby changing "exports" from Mexico to the US into "domestic" transactions within NAFTA member countries. As a result of this change, those foreign investors registered under the Maquiladora system could no longer enjoy free tariff. To cope with this difficulty, the Government of Mexico has introduced so called PROSEC but the coverage of PROSEC was limited. Because of this inconvenience, some Japanese investors started leaving or were about to leave Mexico. If JMEPA becomes effective, this inconvenience will disappear making Japan's investments increase. Taking advantage of JMEPA in advance, Japan's investment in Mexico already increased by 66% last year.

2 The JMEPA will be the first FTA crossing the Pacific ocean between American continent and Asia except for the US-Singapore FTA .There is a concern that regional FTAs such as the EU, the NAFTA or the possible EAFTA {East Asia Free Trade Area}might develop into economic blocks vertically dividing the world into three or so like American block ,European block or Asian block.
The walls surrounding each FTA are higher than the boarder barriers inside the walls. J-M EPA will be a precious hole of the two walls, namely the NAFTA and the possible EAFTA, with the possibility of breaking those walls in the end. If such holes crossing oceans increase and expand, FTAs can play a role of a building block instead of a stumbling block to WTO.

3 Then who took the initiative of JM FTA originally? It was Dr Hermino Blanco sitting here.
{1} According to my diary, on June 15th 1998, when I was Chairman and CEO at the Japan External Trade Organization (JETRO), I had a lunch with the then Mexican Commerce and Industry Minister Herminio Blanco, who had been the vice minister of Commerce and Industry between 1988 and 1994 except for the period when he had been the Mexican government's chief negotiator for NAFTA between 1990 and 1993. I was also vice minister for international affairs of the Ministry of International Trade and Industry (MITI; now Ministry of Economy, Trade and Industry [METI]) until 1993, and we have cultivated our friendship since then. At this lunch, DR.Blanco kind of boasted that he had concluded in December 1997 negotiations with his EU counterpart on the framework agreement of the FTA between Mexico and the EU, and invited me to Mexico City to discuss a possible FTA between Japan and Mexico if I was interested.
Mexican President Ernesto Zedillo was supposed to visit Japan in the fall of that year. Therefore, Blanco's idea was to have the Mexican President and Japanese Prime Minister jointly declare the kick off of the negotiation on Japan-Mexico FTA in the summit meeting between them.
{2} I accepted this invitation in August 1998. Dr. Blanco kindly arranged a meeting on August 31st attended by himself and 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.
{3} Upon my return to Japan on September 11th, I visited the then MITI Minister Kaoru Yosano to convey the message from Dr. Blanco about a possible FTA between Japan and Mexico. Mr. Yosano told me that since it would represent a big change in Japanese government trade policy if MITI started negotiations on a Japan-Mexico FTA, he would like to have his staff study the matter. Thus, a study team on FTA was established in MITI. This team came up with a positive report on a dual track policy to pursue an FTA as well as the WTO.
{4} But it was historically ironical that this report was not ready for the visit of President Zedillo to Japan, which was in mid-November 1998.
Therefore he refrained from raising the Japan-Mexico FTA issue in a meeting with the then Prime Minister Keizo Obuchi, knowing that P.M. Obuchi was not ready to positively respond on that issue. President Zedillo disclosed this FTA issue just in a meeting with Japanese business people at the Japan Federation of Economic Organizations (Keidanren; now the Japan Business Federation [Nippon Keidanren]).
{5} However MITI's report on FTA was prepared in time for the Japan-Korea Ministerial Meeting which was held in Kagoshima in late November 1998.
Therefore Minister Yosano responded in the affirmative to the request made by Mr. Han Duck Soo, Minister for Trade in South Korea, for the joint study of 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 the way to strengthen the economic relationship between Japan and South Korea, including an FTA.
{6} Then in February 1999, Dr. Blanco representing SECOFI and myself representing JETRO agreed to carry out a study on a Japan-Mexico FTA.
The result of a joint study was announced in April 2000 and in favor of Japan Mexico FTA.
{7} In January 2001, the then Minister Takeo Hiranuma of METI visited Mexico and agreed with the then Economic Minister Luis Ernesto Derbez to explore the possibility of beginning a governmental FTA joint study between the two countries.
Then Mexican President Vincente Fox visited Japan in June 2001 and agreed with P.M Koizumi to launch the governmental joint study. The first meeting of this study was held in Mexico in September 2001.
{8} On March 7th 2002 I paid a courtesy call to President Fox at his office and reported to him that the joint study seemed to be going well. The then Economic Minister Derbez was there too and he told me that Mexican government intention was to finish the joint study by the occasion of the APEC Leaders Meeting to be held in Los Cabos Mexico in October that year and to declare the commencement of the negotiation for JAPAN-MEXICO FTA. I also met the then Foreign Minister Castaneda and he told me that since President Fox was supposed to visit Japan in the fall of 2003 Mexico would like to conclude the negotiation by then. Upon return to Japan I visited P. M. Koizumi and conveyed these messages from Mexican leaders. He turned out to be positive toward Japan-Mexico FTA.
{9} The Asia-Pacific Economic Cooperation (APEC) leaders' meeting was held in Los Cabos Mexico on Oct.26 and 27 2002. On the sidelines of this meeting, Prime Minister Koizumi and President Fox agreed to launch the negotiation.
{10} President Fox visited Japan in October 2003 as a state guest. Ministers of both countries in charge of J-M FTA made every effort to conclude the negotiation on this occasion but failed, {11} However they agreed substantially in March this year and the final signature for t he J-M FTA was made by P.M. Koizumi and President Fox on September 17th here in Mexico City when P.M. Koizumi visited here.

4 Last but not the least I would like to touch upon China.
{1} Since last year Mexico's export to the US {$138million} started being exceeded by that of China {$152million}. Likewise Japan's export to the US {$1214million in 2002 and $1180million in 2003 has been exceeded since 2002 by that of China {$1252 million in 2002 and $1524million in 2003}. Not only in the export front, but also there has been a big change in import front. Japan's import from China has exceeded that from the US since 2002. In the case of Mexico, the ratio of the import amount from China to that from the US has been increasing recently from 1.5% in 1997 to 11.9% this year {up to July}.
{2} Will the J-M EPA contribute to rectifying this situation?
Yes. Firstly Japan's direct investments in Mexico, which will increase thanks to JM EPA, will strengthen the competitiveness of Mexican industries concerned, thereby reducing imports and increasing exports to and from Mexico
Secondly if Japan can import less expensive parts and components than now due to JM EPA, the competitiveness of Japanese industries will also be strengthened.
Thirdly through negotiations for JM EPA I think the relationship between Mexican and Japanese officials has become all the more friendly. Therefore they can now cooperate with each other in implementing trade remedy policies, if any, against China for example.
However I think the most important measures vis-à-vis China is to incorporate its inexpensive products into our economies rather than to try to avoid their entry into our economies.

The End