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Toward Greater Diversity in Japan-Canada Economic Relations

April 21, 2000

Japan-Canada Economic Committee

  1. Background to This Study: The Need for Greater Diversity in Japan-Canada Economic Relations
    1. Background to this study
    2. In September of last year, Canada sent a "Team Canada" delegation to Japan, led by Prime Minister Chretien. Comprised of representatives from Canada's federal and provincial governments as well as 270 Canadian (mostly high-tech) companies, the delegation is just one example of the efforts to diversify and strengthen economic relations between Japan and Canada in recent years. The following factors provide the background to these developments.

      1. Stagnant trade and investment relations
        Until now, Japan-Canada trade has been characterized by a successful complementary relationship in which Japan imports Canadian raw materials, produce, and fishery products, and Canada imports finished Japanese goods (Table 1). However, with recent reductions in Japanese imports of coal and other raw materials, coupled with such factors as Japan's recession, Canadian exports to Japan have remained essentially stagnant (Table 2). To stimulate the further expansion of economic relations between Japan and Canada, it is necessary to increase not only Japan's importation of primary goods (a course that continues to be pursued), but also to diversify the types of goods traded and to stimulate two-way investment.

      2. The need for Canada to engage more trading partners and diversify its exports
        Ever since NAFTA was signed, Canada has become increasingly dependent on NAFTA (and especially the US) for trade (Table 2). In light of this, the need for Canada to engage with more trading partners in Asia and Europe has become an issue. Also, finished products constitute a much higher proportion of Canada's total exports (Table 3) than they do of its Japan-bound exports, indicating the need for Canada to expand its exports of value-added (primarily high-tech) products and services to Japan.

      3. Economic responses to advanced communications and information services
        As the economy develops advanced communications and information services through the dissemination of the Internet, Japan is faced with the pressing need to respond to the ongoing revolution in information technology (IT). In this context, Canada, with its strength in IT software and its commitment to promoting high-tech industries, has growing potential as a possible collaborator with Japan.

      4. Trend toward regional integration and liberalized bilateral trade
        As the trend toward regional integration accelerates globally, Japan has shown greater interest in liberalizing bilateral trade and investment (through free trade agreements) as a means of supplementing WTO efforts to liberalize global trade and investment. Preliminary explorations of a new trade framework with Canada have already begun.

    3. The establishment of a study committee on the diversification of Japan-Canada economic relations
    4. Against the background described above, the Japan-Canada Economic Committee decided to further strengthen the existing cooperative economic relationship between Japan and Canada while studying ways to expand relations in new fields, particularly in high-tech industries. To that end, it established the Study Committee on the Diversification of Japan-Canada Economic Relations (chaired by Hiroshi Zaizen, Executive Advisor, Mitsubishi Corporation) in November 1999.
      Meanwhile, the Business Council on National Issues (BCNI) of Canada began working with other organizations and individuals in Canadian economic circles to study the same themes, with the understanding that both sides would share their findings at the 23rd Japan-Canada Business Conference scheduled for May 15, 2000.
      Furthermore, at the Japan-Canada summit held in September 1999, it was also announced that such activities of private economic organizations in both countries would be welcomed.

  2. Methods of Study
  3. The Study Committee on the Diversification of Japan-Canada Economic Relations was comprised of representative companies and organizations in various sectors that have an interest in the diversification of Japan-Canada economic relations. Meeting a total of six times between November 1999 and March 2000, it held sector-by-sector hearings on the following themes: 1) issues in further strengthening Japan-Canada economic relations in existing fields; 2) measures to expand Japan-Canada economic relations in new fields, especially high-tech industries; and 3) a new bilateral framework (free trade agreement) that would promote Japan-Canada economic relations. The committee also listened to the opinions of representative Canadian companies that have established themselves in Japan. The results are summarized below.

  4. Issues in Strengthening Japan-Canada Economic Relations in Existing Fields
  5. In the sector-by-sector hearings (covering resources, food products, lumber, paper making, housing, automobiles and automobile parts, information and communications, and financial services), the following issues were identified in connection with strengthening Japan-Canada economic relations in existing fields.

    1. Canadian issues
      1. Issues common to all sectors

        1. Labor
          Respondents pointed out that it is difficult to keep superior human resources in Canada and that, compared with other markets, Canada does not necessarily offer low labor costs. Some respondents also pointed out that labor disputes, including frequent strikes that interrupt business and supplies, are an issue (it should be noted, however, that respondents in some sectors indicated that labor relations were good).

        2. Transportation infrastructure
          Railroads, harbors, and other transportation infrastructure are crucial for smoothly conducting trade with Canada, which has a vast land area. Although Canada possesses a good transportation infrastructure, high harbor usage fees, supply interruptions caused by strikes staged by harbor and railway employees, and other operational factors were cited as impediments to trade.

        3. Tax system (federal and provincial levels)
          Respondents pointed out the following issues: 1) the high corporate income tax (45%), 2) the capital tax on loans and capital, and 3) the overseas asset tax, which taxes increases in overseas assets possessed by Canadians living.

        4. Residency requirements for corporate board members
          According to Canadian federal and provincial laws, more than half of a Canadian corporation's board members must be Canadian residents (Canadian citizens or permanent residents in accordance with Canadian immigration laws). Respondents pointed out that this requirement creates a barrier to investment.

        5. Financial regulations
          Various regulations in the financial sector were cited, including: issues related to the formation of local corporations in the banking sector (regulations on loans made to parent banks, guidelines on liquidity ratios, etc.); issues related to setting up branch offices (restrictions on the acceptance of small deposits, time limitations on special income tax breaks, etc.); and issues related to nonlife insurance (separate licensing systems by different provinces, restrictions on stock acquisition, and restrictions on legal deposit money, reinsurance, etc.).

        6. Visa issuance and renewal
          Respondents pointed out that the standards for issuing and renewing business visas are unclear and seem to differ depending on the immigration official in charge.

      2. Sectoral issues
        Issues by sectors were pointed out as per attached sheet (see Table 4).

    2. Japanese Issues
    3. Respondents cited various issues related to trade and investment in Japan, including: tariffs on forest products and building materials in the field of imported housing (high tariff rate, detailed tariff rate classifications depending on material quality or application, etc.) and problems related to standards and certification.
      In addition, the Canadian Chamber of Commerce in Japan published its "Position Paper on Trade Issues in Selected Sectors of the Japanese Market" (1999), which cites sector-by-sector issues such as the following: tariffs on forest products (abolishing tariffs on spruce, pine, and fir lumber, as well as on engineered wood products); abolishing tariffs on cooking oil (crude and refined canola oil); revising safeguard measures on imported pork; and addressing issues related to safety approval procedures for foods (simplifying acceptance of transgenic canola, etc.).

  6. Expanding cooperative relationships in new fields
  7. Concerning high-tech and other new fields that involve high value-added products and services, respondents pointed out the following issues that affect the expansion of cooperative relationships between Japan and Canada.

    1. Current status of the Japanese market
    2. Japan has almost no tariff barriers, government regulations, or other impediments that affect Canadian high-tech products/services or high value-added products in the Japanese market. Furthermore, with the progress that has recently been made in deregulation, as well as the effects of Big Bang financial reforms, opportunities for investing foreign capital in Japan have steadily grown. The Japanese government has also adopted (through JETRO and other means) a wide range of measures designed to encourage foreign investment in Japan, including low-interest financing, free office space, the provision of various kinds of databases, etc. However, some minor impediments to foreign investment in Japan remain, making further improvements desirable.
      The Canadian Chamber of Commerce in Japan has pointed out barriers such as the following in the Japanese market: the difficulty of securing human resources; high telecommunications interconnection fees; restrictions on the activities of foreign lawyers practicing foreign law; and the lack of portability of Japanese and Canadian pension rights (with an expressed desire to sign a bilateral social security agreement). In addition, the Canadian government has asked Japan's Regulatory Reform Committee to give consideration to such issues as: reviewing fire-prevention regulations for wooden frame housing; lowering telecommunications connection fees; and reviewing restrictions on foreign lawyers practicing foreign law in Japan.

    3. Toward Establishing Businesses in Japan
      1. Common characteristics among Canadian companies that operate successfully in Japan
        According to JETRO surveys and the results of a study entitled, "Canadian Business Opportunities in Japan: Current Realities and Future Prospects," Canadian companies that have been successful in Japan share the following characteristics in addition to supplying high-quality products and services.

        1. They do not view the Japanese market as simply a focal point for sales, but rather as a gateway to the Asian market as a whole. Successful companies generally have a long-term commitment to establishing business operations in Japan (they continue to work hard and patiently even when they meet with initial failure; conduct careful market surveys; often send representatives to Japan to engage in business discussions, etc.).
        2. They respond flexibly to the needs of Japanese customers (by being open to revisions and modifications in product/service standards; preparing Japanese-language manuals and materials, etc.).
        3. They discover appropriate distribution channels and, while maintaining close ties to customers, concentrate on providing excellent after-sale service.
        4. They do not depend solely on Japanese employees, but encourage Canadian employees living in Japan to learn the Japanese language and deepen their understanding of Japanese culture, while frequently reporting what they've learned about the Japanese market to the home office.

        Keidanren sent a business mission to Canada in 1996. As was pointed out in that mission's report, Canadian companies cannot expect to succeed in the Japanese market just because they have succeeded in the NAFTA (US) market, with which they share common standards, tastes, and the English language. Canadian companies wishing to succeed in Japan must keep the above points in mind, thoroughly study the needs of the Japanese market, and patiently pursue sound marketing activities. They will also find it effective to actively utilize the various special measures offered by the Japanese government (JETRO, etc.) mentioned above, which are designed to promote foreign capital investment in Japan.

      2. Providing information about high-tech products and services that Canadian companies can supply to Japan
        Although Canadian high-tech companies possess a high level of technical expertise and can supply many excellent products and services, it has been pointed out that Japanese companies that could be potential customers often lack detailed information concerning what Canadian companies have to offer. Therefore, a matching service is needed that will compile lists of potential Japanese customers on a sector-by-sector basis, conduct surveys of their needs, and match them with Canadian companies that can satisfy those needs.

    4. Things the Canadian Government and Economic Community Can Do
      1. Promoting trade with Japan in ways that give private companies more opportunities to participate
        Some members of the Study Committee have pointed out that, although the Canadian government has expressed intense interest in diversifying and expanding economic relations with Japan, private Canadian corporations seem less eager to do so. It is therefore considered desirable for trade promotion activities pursued by the Canadian government to be organized in such a way as to fully reflect the opinions of private companies, and to give those companies more opportunities to participate. Although Team Canada was very highly regarded as a joint government/private sector endeavor, it is important to engage in steady follow-up activities with private Canadian companies to ensure that the Team Canada mission does not end up a mere transient event.

      2. Establishing an agency dedicated to promoting trade with and investment in Japan
        JETRO offers many highly appreciated services to Canadian companies interested in Japan-related trade and investment, including database compilation and the sponsoring of business meetings and seminars with potential Japanese customers. However, Japan still lacks adequate information about Canadian companies. To address this problem, the Canadian government might consider establishing a special agency which could preferably share data with counterpart agencies in Japan and engage in intensive information exchange. The Japan-oriented promotional policies for trade and investment adopted by other countries in the Asia-Pacific region, as well as the trade offices of various US states, could provide a model for how such an agency might function.
        As a means for expanding cooperative relationships among Canadian and Japanese companies, the Japanese Study Committee believes it would also be effective to sponsor regular exchange meetings between various business organizations on a sector-by-sector basis, as outlined in (Table 5). It is important to actively continue pursuing exchanges between industrial sectors.

    5. Things the Japanese government can do
    6. JETRO has been engaged in many activities such as dispatching Japanese telecommunications specialists to Canada, sponsoring IT seminars in Canada, dispatching IT missions, creating databases of Canadian companies, and other activities that have been highly praised in both countries. It is recommended that these activities be further enhanced and expanded. One idea is to encourage Japanese and Canadian high-tech companies to create a cyber mall on the Internet that would promote further contact and exchange among companies active in the same fields. Japanese governmental support for such a project is desirable.

  8. A Japan-Canada Free Trade Agreement
    1. The trend toward bilateral and regional economic integration
    2. We are currently seeing a trend toward bilateral and regional economic integration throughout the world. Within this context, some people have proposed the signing of a free trade agreement between Japan and Canada as one way of revitalizing their bilateral economic relationship. The Study Committee therefore gave consideration to the advantages and problems that might accompany the signing of such an agreement.

    3. Advantages to signing a Japan-Canada free trade agreement
    4. Generally, the signing of a free trade agreement would have the following advantages.
      First, it would expand trade and investment within the free trade area. According to statistics released by the Canadian government, Canada-US trade has increased an average of 10% a year since NAFTA was signed, and Canada-Mexico trade has increased an average of 13% a year. Investment in Canada from the US and Mexico has increased 43% over five years, while that from Mexico and Canada in the US has increased more than 58%.
      Second, a free trade agreement would result in greater transparency and stability in the governmental policies and systems of the involved countries. This is especially true if the agreement extends beyond simple concerns such as tariffs and commercial regulations to include such areas as industrial standards, certification, tax systems, labor/management regulations, and environmental standards.
      Third, the signing of a free trade agreement would heighten the interest and concern that the industrial sector and the general population in one country would have in the other country, which would in turn help to expand business opportunities.

      Specifically, the signing of a free trade agreement between Japan and Canada would have the following advantages.
      First, such an agreement would be significant because it links Japan, which belongs to Asia, and Canada, which belongs to the North American economic zone as represented by NAFTA, thereby linking two geographically separated regions. The effect of such an agreement can be considered similar to that of the agreement between Mexico and the EU, as well as the one between Canada and Israel.
      Second, it would be an agreement between two industrially advanced nations that have few economic differences. As advanced nations, both Japan and Canada have an interest in liberalizing the global economy, and are in a good position to exchange technologies and investments. A Japan-Canada agreement could serve as a model for other free trade agreements Japan might sign with other advanced nations.

    5. Problems of Japan-Canada free trade agreement
    6. The main barrier to a free trade agreement between Japan and Canada is achieving conformity with WTO regulations with regard to agricultural, forest, and fishery products, which, according to Japanese statistics for 1999, comprise approximately 60% of all products Japan imports from Canada. In other free trade agreements we have studied, however, exemptions have sometimes been made for specially designated agricultural products, and separate, longer transition period for liberalization have sometimes been set for sensitive product categories. Therefore, Japan could follow the examples set by these other agreements and exempt certain products from the agreement, or establish a longer liberalization timetable for them, until the results of WTO negotiations concerning the liberalization of agricultural products are known.

    7. Future action
    8. As outlined above, the economic community in Japan has investigated the possibility of a Japan-Canada free trade agreement from a wide variety of angles. While there are some problems that must be resolved before such an agreement can be realized, it has been concluded that an agreement would contribute to the revitalization of economic relations between Japan and Canada. Further studies should be conducted, not only by people in economic circles but also by the government and knowledgeable specialists.

  9. Conclusion
  10. Through discussions conducted by the Study Committee, various opinions were exchanged concerning issues to further strengthening economic relations between Japan and Canada, measures to expand bilateral cooperative relations in high-tech and other new fields, and a new framework for promoting trade and investment between the two countries.
    It is our hope that constructive discussions can be pursued at the May meeting of the Japan-Canada Business Conference that will help bring the proposals included in this report to fruition.

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