In our May 1999 proposal entitled "Challenges for the Upcoming WTO Negotiations and Agendas for Future Japanese Trade Policy", Keidanren urged the Japanese government to strengthen its efforts toward a new round of World Trade Organization (WTO) negotiations, and to consider concrete ways to realize free trade agreements (FTAs). Although the possibility of FTAs seems to have reached the drawing board, such as Japan's establishment together with Singapore of a study group of representatives from industry, academia and government, Japanese businesses are concerned that the government's move has still been lamentably slow.
In the 1990s, FTAs mushroomed worldwide on an unparalleled scale and with unprecedented speed, as exemplified by the formation of the ASEAN Free Trade Area (AFTA, 1992), the North American Free Trade Agreement (NAFTA, 1994), and the Common Market of the Southern Cone (Mercado Común del Con Sur, or MERCOSUR, 1995), as well as the expansion of the European Union (EU, 1995). To date, approximately 120 free trade agreements have been notified to the WTO and put into effect.
U.S. efforts toward the establishment of the Free Trade Area of the Americas (FTAA) in 2005 signal the emergence of a massive economic bloc encompassing the entire American continent. The EU is pursuing two tracks, further expansion and deepening on the one hand, and the widening of its free trade agreement networks with the Americas on the other, as demonstrated in its conclusion of a free trade agreement with Mexico in March 2000. Other countries are, therefore, positioning FTAs alongside the WTO as essential planks in their trade policies, leading the international trade system to a new era of co-existence between multilateralism and regionalism.
Japan, however, has yet to undertake a single free trade agreement. As a result, Japanese companies are losing out on business opportunities in the international arena, and also finding themselves placed at a competitive disadvantage in doing business with countries that have already concluded FTAs elsewhere.
While Japan should remain strongly committed to the WTO system, we need to also simultaneously pursue more active use of FTAs as a new pillar in its trade policy.
The basic objective of free trade agreements is to eliminate impediments related to trade in goods between the countries party to the agreement, such as tariffs and non-tariff barriers. Recently, however, as in the case of NAFTA, an increasing number of agreements are extending into a range of areas even beyond the scope of the WTO. These include liberalization of trade in services, investment protection and liberalization, the development of trade rules, harmonization and mutual recognition of standards and certification, protection of intellectual property rights, opening of government procurement markets, inter-governmental cooperation for customs procedures, and the development of dispute settlement procedures.
Therefore, FTAs stand to provide a crucial systemic framework in terms of promoting the international activities of Japanese companies.
The main reasons why Japan should pursue free trade agreements are summarized as follows:
FTAs are an essential tool in expanding business opportunities with counterpart countries and regions.
Despite the key importance to international business activities of the free and smooth flow of people, goods, money and services, many countries, particularly developing countries, impose myriad restrictions. FTAs do not simply eliminate tariffs, but also pave the way for a high level of liberalization extending to areas beyond the current scope of WTO liberalization negotiations. Such agreements offer expanded trade in both goods and services with the counterpart countries and regions, greater direct investment, and greater ease of participation in a variety of projects.
Further, FTAs tend to boost the policy transparency of the counterpart governments and prevent the counterpart countries from instituting policy changes in response to administration changeovers, thus improving business predictability.
In the case of the EU and NAFTA, free trade agreements have not only bolstered intra-regional trade and investment, but have also created an advancement in the division of labor among intra-regional industries, strengthened strategic partnership among companies in the region, and boosted investment from outside the region.
With North American and European countries pursuing FTAs more aggressively, the Japanese government needs to dispel the competitive disadvantage being suffered by Japanese companies.
In doing business with countries which have FTA commitments elsewhere, Japanese companies are currently at a disadvantage compared to companies in countries with FTAs in terms of not only tariffs, but also the licensing and protection of investment and participation in government procurement.
For example, Mexico is a member of NAFTA and also has a free trade agreement with the EU. As a result, North American and European companies can export their products to Mexico free of tariff charges (10-20 percent for cars and household electric appliances). The ineligibility of Japanese exports for such treatment is expected to impact heavily on Japanese trade with Mexico, including a decline in exports to Mexico from Japanese companies, reduced competitiveness for local producers using parts exported from Japan, and withdrawal by Japanese companies from a number of projects in Mexico. (See the "Report on the Possible Effects of a Japan-Mexico Free Trade Agreement on Japanese Industry", released by Keidanren in April 1999.)
In addition, realization of the FTAA which the United States is pursuing will inevitably force Japanese companies to compete under discriminatory conditions compared not only to U.S. companies in North America, but also to U.S. companies across the entire American continent.
On the other hand, while the EU continues to expand into Central and Eastern Europe, it is also moving to conclude a free trade agreement with MERCOSUR, of which Brazil is a central member.
In regions where North American and European countries have concluded such free trade agreements, Japanese companies will therefore have to compete with Western companies under extremely disadvantageous conditions. To combat this situation, Japan obviously needs to conclude similar agreements to ensure a level competitive environment.
Conclusion of FTAs would promote intra-regional competition and Japan's own economic structural reform.
FTAs liberalize trade and investment and harmonize the regulatory systems of the countries concerned. In Japan's case, this would encourage the elimination or relaxation of various regulations, the redressing of high-cost factors, and other such structural reforms. In addition, the accompanying promotion of intra-regional competition would stimulate domestic industries, bringing about greater efficiency and competitiveness, which in turn would benefit consumers.
Conclusion of FTAs would also provide Japan with an important chance not only to absorb the standards of other countries, but also to disseminate Japanese standards internationally.
FTAs would complement WTO trade and investment liberalization and rule-making.
The Third WTO Ministerial Conference held in Seattle in the United States in December last year failed to launch a new round of negotiations due to differences in complex national interests among the Members. Embracing 137 Members, the WTO road to further trade and investment liberalization and rule-making will not be smooth. The OECD Multilateral Agreement on Investment (MAI) negotiations also ended in failure.
Faced with the slow progress of multilateral trade and investment liberalization and rule making, Japan should make efforts to create FTAs to complement WTO liberalization and rule-making at the regional level.
Experience in FTA negotiations and dispute settlement procedures may also be utilized in WTO negotiations.
Japan should take the following issues into consideration in actively promoting FTAs in the years ahead.
Firstly, the conclusion of FTAs must maintain and strengthen momentum toward the creation of a single world economy and WTO-centered multilateral trade liberalization.
Secondly, Japan must further boost the international competitiveness of domestic industry in anticipation of the intra-regional trade liberalization which will be achieved through, for example, tariff elimination. Measures should also be designed to prevent such liberalization from impacting seriously on certain domestic industries.
Playing a leading role in launching a new round of comprehensive negotiations
To ensure that WTO liberalization does not lose momentum, Japan must continue to commit itself to actively maintaining and strengthening the WTO-centered multilateral trading system.
The failure of last year's Seattle Ministerial Meeting has left the new round of negotiations pending, and both government and business must redouble their efforts to bring about an early start for the new round. Keidanren accordingly strongly urged just such an early start in its March 2000 proposal entitled "Expectations on the WTO Negotiations and Requests for Liberalizing Trade in Services." We are also taking opportunities such as bilateral conferences with industrial representatives from other countries, as well as regional fora such as the APEC Business Advisory Council (ABAC), to stress the importance of a comprehensive round of negotiations.
Creating FTAs fully consistent with the WTO Agreement
Within the WTO Agreement, Article XXIV of the General Agreement on Trade and Tariffs (GATT) in the case of trade in goods, and Article V of the General agreement on Trade in Services (GATS) in the case of trade in services, stipulate certain requirements regarding the conclusion of FTAs.
Where Japan concludes FTAs, these should naturally conform with WTO stipulations. Moreover, in the case that FTAs between other countries run contrary to the WTO Agreement, Japan must take an active stance at WTO meetings in highlighting the perceived problems. Such a strategy will allow FTAs to be promoted without damaging the credibility of the WTO system in its drive for multilateral trade liberalization.
Forming FTAs with various countries and regions
To dispel fears over the formation of economic blocs, Japan too needs to ensure that its FTAs are not restricted to specific regions, instead concluding such agreements with various countries and regions.
As seen in the recent FTA between the EU and Mexico, ties are in fact being developed between different regions, suggesting that the world economy is now less likely to repeat its pre-W.W.II breakdown into blocs.
While liberalization will mean stiffer competition for domestic industry, the industry should work to modernize and boost its competitiveness based on its own effort.
To assist this effort, the government will need to institute regulatory reform and develop social infrastructure such as information and telecommunications and distribution, redressing Japan's high-cost structure. In terms of regulatory reform in particular, Keidanren strongly urges early realization of the requests contained in our October 1999 proposal, "Keidanren Urges the Government to Resolutely Carry Out Sweeping Regulatory Reform."
At the same time, where factors such as sudden import liberalization impact heavily on certain domestic industries, the government will need to take realistic countermeasures such as the following, ensuring that these remain within the scope permitted by the WTO Agreement:
Stipulate rules of origin which provide for effective prevention of genuine import circumvention through third countries.
Allow for the application of intra-regional safeguard measures.
Looking ahead to the possibility of serious damage being inflicted on certain domestic industries as a result of a sudden import boom, it would be wise to retain the option of applying safeguard measures solely to parties of the free trade agreement.
Use the transition period towards full liberalization to strengthen the competitiveness of the relevant industries.
Under the WTO Agreement, members concluding FTAs must eliminate intra-regional tariffs within around 10 years. This period can be used to adopt competitiveness-boosting measures.
Items for which liberalization is by any means impossible can be excluded from liberalization as exceptions.
GATT Article XXIV (GATS Article V in the case of services) stipulates that "substantially all the trade" between contracting parties should be liberalized under the FTAs. Therefore, it is desirable to liberalize as much trade as possible. However, as is evident looking at other FTAs, some items of the industry in question which simply cannot be liberalized because of the serious impact by the free trade agreement may result in being removed from the liberalization list.
(Note: Many FTAs already extend exceptional treatment to sensitive items which need to be protected from international competition, exempting these from tariff elimination and other liberalizing measures. For example, communication submitted by the European Commission to the Council and European Parliament concerning the EC-Mexico free trade agreement notes that some agricultural and fishery products are exempted from liberalization under the agreement, but explains that the agreement is WTO-consistent in that it liberalizes 95 percent of total bilateral trade volume. (The internal EC benchmark in fact holds that at least 90 percent of trade liberalization is consistent with the WTO Agreement.) Such examples should prove a useful reference in Japan's considering FTAs.)
FTAs must be reciprocal, providing benefit to all parties to the agreement.
Further, given that FTAs allow a level of liberalization and rule-making among specific countries which is not easily obtainable under the WTO, any such agreements should be comprehensive, including a wide range of areas contributing to the smooth promotion of corporate trade and investment activities. (See Reference Material.)
Liberalization of trade in goods and services:
The elimination of tariffs and non-tariff barriers for goods will be vital in promoting Japan's exports and cutting import costs.
At the same time, in advancing import liberalization, it will be important to consider that the disciplines be strengthened, avoiding intra-regional export bans and restrictive measures to ensure Japan's economic security.
In addition, WTO liberalization of trade in services has only just begun, with various barriers still remaining in many countries. In particular, it will be important to use the formation of FTAs with countries which have been slow to liberalize areas such as telecommunications, distribution and financial services to encourage further liberalization and support the offshore activities of Japanese companies. Mutual recognition also needs to be promoted for licenses and certifications to facilitate services-related business.
Development of investment rules:
As this is an area where WTO rules have yet to be established, the formation of FTAs would be highly significant in allowing investment by Japanese companies to be liberalized and to enjoy stronger protection.
Japan should look in particular at the elimination of foreign investment regulations, greater transparency and stability in related regulations, abolition of performance requirements, banning of citizenship requirements for key personnel such as managers and members of the boards, and the development of dispute settlement mechanisms.
Harmonization of standards and conformity assessment systems, promotion of mutual recognition:
It will be essential to ensure that standards and conformity assessment systems do not become unnecessary trade barriers and to harmonize them for products such as household electrical appliances, machinery and equipment, food products and medical products, as well as to promote mutual recognition of assessment results. This must be accompanied by the harmonization of regulations in the area of information technology (IT) such as electronic authentication systems. The latter in particular could be a critical means of disseminating Japanese standards globaly in the Internet and IT areas.
Strengthening of disciplines of trade rules such as anti-dumping:
Some countries are using anti-dumping measures for protectionist purposes, despite the fact that such measures are an exception to the basic WTO principles of non-discrimination and the prohibition of tariff imposition beyond bound rates. The abuse of anti-dumping measures should be prevented by including provisions in FTAs which draw on and strengthen the disciplines contained in the WTO Agreement. Using the network of FTAs to disseminate fairer anti-dumping rules out to other countries would help strengthen Japan's position in the next WTO negotiations.
To further this discussion it may also be important to consider the possibility of mutual non-application of anti-dumping measures, bringing in the perspective of competition law.
In terms of rules of origin, negotiations on the creation of the Harmonized Non-preferential Rules of Origin are currently underway based on collaboration between the WTO and the WCO (World Customs Organization). Any preferential rules of origin applying under FTAs should therefore be developed bearing these negotiations in mind, as well as being based on the rule of tariff classification change which Japan has been pushing for. The value-added rule should not be adopted, as these lack predictability and stability.
Opening of government procurement markets:
Given the limited number of countries participating in the WTO Agreement on Government Procurement, including government procurement provisions in FTAs formed with countries outside this Agreement would be an extremely effective step.
Protection of intellectual property rights:
A system needs to be established which will allow a high level of intellectual property rights protection that safeguards patents and know-how, while developing countries should also be urged to develop and strengthen their domestic systems.
Facilitation of the movement of businesspersons:
Procedures need to be simplified in regard to the movement of businesspersons, or more specifically, in the case of long-term stays and the business trips of staffs at short notice.
Development of rules such as competition policy and electronic commerce:
The inclusion of new rules a step ahead of the WTO will not only contribute to corporate activities, but will help Japan in leading subsequent WTO discussion on these issues.
Development of dispute settlement systems:
Systems should be developed which allow prompt bilateral dispute settlement.
Japan could also consider the inclusion in FTAs of new areas such as technology cooperation, research cooperation and cultural exchange.
Criteria for free trade agreement partners
Japan should consider forming FTAs with as many countries as possible in order to optimize the merits to be garnered from FTAs and dispel concern over the possible emergence of blocs. At the same time, it would also be worth prioritizing certain countries based on the following criteria:
Asia (for example the Association of South-East Asian Nations (ASEAN) and the Republic of Korea) is a geographical neighbor, has close economic links with Japan, and is expected to achieve further economic growth. Strengthening ties between Japan and Asia promises great benefit for both Japanese and Asian industries. Japan needs to give concrete consideration to the formation of FTAs with countries likely to conclude a free trade agreement with Japan.
As Asia also embraces many countries that have been slow to liberalize, using FTAs to promote trade and investment liberalization would have enormous merit for both Japanese and local companies.
In addition, the Asia-Pacific Economic Cooperation (APEC) forum has been advancing trade and investment liberalization based on the 1994 Bogor Declaration, and again, Japanese promotion of intra-regional FTAs would be extremely significant in terms of complementing APEC's efforts.
With a network of FTAs already concluded in the region, and preparations advancing toward initiation of the FTAA in 2005, the Americas will be an important area to establish bases within. The EU is moving steadily ahead in this regard, having already formed a free trade agreement with Mexico and currently accelerating moves to conclude a similar agreement with MERCOSUR. Korea too is in the process of negotiating an agreement with Chile. Japan needs to act promptly so as not to deprive Japanese companies of business chances in the region.
The United States in particular is the world's biggest market, as well as Japan's largest trade and investment partner. Conclusion of a free trade agreement in the future could provide major benefits to both countries.
Given these circumstances, Keidanren welcomes the considerations underway at various government and private-sector levels on FTAs with countries such as Singapore, Korea, Mexico, Chile and Canada.
Representatives of industry, academia and government from Japan and Singapore are currently examining the prospects for bilateral free trade agreement, which Keidanren hopes will go beyond the development of stronger bilateral relations to bring Singapore into play as Japan's gateway into ASEAN. We also urge that the two countries consider the development of a comprehensive, high-level agreement which will serve as a model for future FTAs. A special task force has been established within Keidanren which is currently considering a Japan-Singapore free trade agreement.
As Korea is Japan's closest neighbor, substantial economic merit could be derived from raising the level of division of labor through the expansion of intra-regional trade and investment. A free trade agreement would also have such non-economic effects as strengthening political, social and cultural ties.
Given that Mexico and Canada are both NAFTA members, while Chile has established a free trade agreement with MERCOSUR, agreements with these countries would not only stimulate business with their domestic markets, but would also play an important role in terms of establishing strategic bases in the Americas.
The GATT/WTO-centered trade order based on the principles of free, multilateral and non-discriminatory trade has contributed enormously to developing the sound global economy as well as to setting an environment conducive to the global activities of Japanese companies. Japan must continue to demonstrate initiative in maintaining and strengthening the WTO system. At the same time, the government should also fully recognize the merits of FTAs, and position FTAs as a new pillar in Japan's trade policy.
The significance of individual free trade agreements, as well as the issues arising in FTA negotiations, will differ substantially with every counterpart country. It is incumbent upon the government to seize various opportunities to advance concrete considerations toward free trade agreement formation, and industry is prepared to provide active support for government activities in this regard. Further, the government must examine the possibilities of FTAs with an eye to the benefit to the country as a whole, even where certain industries could suffer as a result. While the road to conclusion of FTAs will not be smooth, Keidanren strongly urges the government to display political leadership on this issue.