The tenth meeting of the Japan-Brazil Economic Cooperation Committee was held in Sao Paulo in March 2003 by the Japan-Brazil Economic Committee (Chairman: Shoei Utsuda, president and CEO, Mitsui & Co. Ltd.) and the Brazil National Confederation of Industry (CNI). At that meeting the two organizations recognized the importance of a Japan-Brazil Economic Partnership Agreement (EPA) encompassing a broad range of issues, including the improvement of the business environment, as a new scheme for strengthening bilateral relations amid the tide of trade liberalization in Latin America. It was agreed that studies of its merits and demerits would begin at the private-sector level on both sides.
Taking above situation into consideration, the Japan-Brazil Economic Committee conducted a questionnaire survey with the cooperation of Camara de Comercio e Industria Japonesa do Brasil (Japan Chamber of Commerce and Industry in Brazil), in order to sound out the frank opinions of companies about the Japan-Brazil EPA, and a study was conducted under the auspices of its Sub-Committee (Chairman: Yasuo Hayashi, executive vice president and managing director, Mitsui & Co.). Thereupon the Committee compiled a report that underlines the importance of the Japan-Brazil EPA and calls for an early start to intergovernmental studies of such an agreement.
Under the strong leadership of President Luiz Inacio Lula da Silva, Brazil is endeavoring to strengthen external economic relationships. For example, it is strengthening the unity of Mercosur, progressing with negotiations toward formation of the Free Trade Area of the Americas (FTAA) in 2005, and also actively pursuing negotiations between Mercosur and the European Union on a free-trade agreement (FTA). In addition, North America and Europe are stepping up their investment in Brazil, making it their key base for Latin America. China is also making active approaches to Brazil for such purposes as securing resources, and there have been remarkable developments in the economic relationship between the two countries in recent years.
Meanwhile, Japan has a profound relationship with Brazil both in the economic sphere and also in the realms of history, culture, and human interaction. In spite of this, however, trade and investment relations between the two countries currently show little signs of vigor. If the FTAA and the FTA between Mercosur and the EU are realized in the near future, Japanese companies may suffer the same substantial damage that they have suffered in Mexico. Today, Japan is engaged in very serious efforts with respect to EPAs, for example having recently reached basic agreement on an EPA with Mexico and having begun negotiations with Asian countries, such as South Korea, Thailand, the Philippines, and Malaysia. It is now important to expedite the conclusion of the Japan-Brazil EPA in parallel with relationships with Asian countries, in order to improve the stagnant Japan-Brazil economic relationship and to rebuild one that matches the huge economic potential of the two countries.
In recent years, trading and investment relationships between Japan and Brazil have both been languid, and the relationship between the two countries has been nowhere near a level proportionate to their economic strength. Japan's share of Brazil's trade has recently slipped to around 4 percent, from 7-8 percent at the beginning of the 1990s. Furthermore, in the mid 1990s Japan was ranked around fourth in terms of share of inward investment into Brazil, but has now fallen to around tenth place. The relationship that existed in the 1970s, when numerous national projects were implemented, is not expected today, and it has become a thing of the past.
In trade with Brazil, China has come strikingly to the fore in recent years; in 2002, Brazil's exports to China (2.52 billion US dollars) exceeded its exports to Japan (2.1 billion US dollars). With its eyes on the future, China is actively engaging in trade, investment, and other activities with Brazil for such purposes as securing resources, and in light of these developments it is essential for Japan to take necessary steps to strengthen Japan-Brazil relations.
Brazil is a major power in Latin America, with a GDP of more than 500 billion US dollars (in 2001) and an economy equal in scale to that of all ten ASEAN countries combined. As the pivotal nation of Mercosur it is striving to strengthen the political and economic unity of the region, and this also means that setting up operations in Brazil enables a company to target the entire Mercosur market of 210 million people with an aggregate GDP of 800 billion US dollars (in 2001).
In addition, Brazil is also making efforts to achieve market integration with neighboring countries and to integrate economic infrastructure, and is making progress with the creation of an efficient transportation system that transcends borders, and a customs system encompassing not only Mercosur but also other countries in the region. This means that through Brazil it will be possible to engage in corporate activity in Mercosur and the whole of Latin America. Brazil has a major role to play as a production and sales base for Latin America, one of the world's most important markets alongside Asia, North America, and Europe.
Japanese people began migrating to Brazil in 1908-almost a century ago. Today some 1.4 million people of Japanese descent live there, primarily in Sao Paolo, forming the largest community outside Japan of people of Japanese ancestry. They are playing the role of fostering mutual understanding both at the cultural level and the grass-roots level.
As a result of the revision of Japan's Immigration Control and Refugee Recognition Act in 1990, which made people of Japanese ancestry eligible for residence, the number of Brazilians working in Japan has been increasing rapidly, and has now reached around 300,000. For further strengthening the bond between the two countries, there are high hopes for the future activities of those people utilizing the experience of working in Japan. These close and profound relations at the human level are unique to the Japan-Brazil relationship, bringing the two countries close to each other despite the physical distance between them. In tandem with economic relations, the rich and deepening human and cultural relations constitute a priceless asset that will serve as an enduring cornerstone for the two countries' future development.
Brazil is a nation blessed with immense natural resources. It is the world leader in the production of iron ore, coffee beans, and oranges; second for soybeans and beef; and third for bauxite, maize, pork, and chicken meat (in 2001). During the 1960s and 1970s, Japan rendered assistance for national projects in the fields of both steel (for example for the Usiminas steel plant) and nonferrous metals such as aluminum, and also provided assistance in the agricultural sector (for example for the Cerrado development). In addition, a large number of Japanese companies set up operations in Brazil, contributing to the development of Brazilian industry. Brazil has steadily supplied Japan with mineral and forestry resources and agricultural products, and Japan has supplied Brazil with manufactured goods. This has created economic complementarity between the two nations.
President Lula has made the promotion of exports a key policy, and the Brazilian government is devoting greater-than-ever efforts to increasing exports to Japan. This makes it all the more important to strengthen economic relations with Brazil, a country that has enormous potential.
Japanese companies came to Brazil in two waves; the first began from the mid-1950s and the second occurred in the 1970s. Today, around 350 operate in Brazil, and the majority of them are conducting business in Sao Paolo. In recent years a large number of Japanese companies have set up operations in the Manaus Free Zone, where they engage in manufacturing. Brazil has been implementing privatization since the 1990s, and Japanese companies have adopted a vigorous approach to investing in such areas as the pulp and paper industry and infrastructure for the transportation of mineral and agricultural resources. Japanese companies are also actively conducting technology transfers to assist the export of products manufactured in Brazil. In addition to the complementary economic relationship that has existed hitherto, in which Japan imports primary products and exports machinery and electrical goods, we can expect to see the emergence of a cooperative relationship based on an equal partnership that combines both competition and cooperation. Such a relationship is exemplified by the cooperation between Japanese and Brazilian companies in aircraft manufacturing.
European and U.S. companies regard Brazil, with its abundant minerals, energy, agricultural products, and other resources, as an important base for the global market. In recent years they have stepped up collaboration with Brazilian companies and have been expanding business in such fields as energy, infrastructure-development projects, telecommunications, information technology (IT), agro-industry, and tourism.
On the Brazilian side, the government has been implementing privatization, deregulation, and other programs to make Brazil an attractive investment destination and motivate foreign companies to invest in it, and international opinion is becoming increasingly positive toward aspects such as the country's political and economic stability. Of particular note is that attention is now focusing on the environment business as a promising new field, and business is expected to develop in fields such as biomass energy, the prevention of environmental pollution, and the Clean Development Mechanism (CDM), which helps to reduce greenhouse gases. Amid the steps being taken by Brazil to diversify and increase the value-added of its export products, a product that is expected by Brazil to serve as an export to Japan is ethanol for use as a gasoline additive.
Ethanol derived from sugarcane is a form of biomass energy, and under the Kyoto Protocol it is a renewable energy source, which contributes to the reduction of carbon dioxide emissions when used as an alternative to fossil fuels. Brazil, whose capacity for the export of ethanol is among the world's largest, has been promoting the use of alcohol-powered cars, which run on ethanol mixed with gasoline. Last year the Japanese government fixed the upper limit for the admixture of ethanol at 3 percent, in part for safety reasons such as the risk of corrosion. However, a number of issues need to be resolved before ethanol can be put to practical use as car fuel, including lowering the price (ethanol's calorific value is low relative to gasoline, and its price is currently around double the before-tax price of gasoline) and assuring stable supplies. It will be essential to take the appropriate steps in line with the development of infrastructure for supplying ethanol and the evolution of government policy.
For Japan, a nation based on trade, forming EPAs with other leading countries on the basis of World Trade Organization (WTO) principles is key to improving market access for goods, services, and other items; to invigorating trade and investment; to implementing structural reform, including the correction of the high-cost structure; and to enhancing international competitiveness.
The Japan-Singapore EPA was concluded in January 2002. Since November 2002, negotiations on an EPA have been conducted with Mexico, and a basic agreement was reached in March this year. In addition, negotiations with South Korea started in December 2003, and with Thailand, the Philippines, and Malaysia in January this year. Japan is moving into full gear in its approach to EPAs.
Hitherto, Brazil has oriented its policies toward the realization of economic development through the formation of customs unions with neighboring countries, of which Mercosur is the prime example. However, in addition to strengthening the relationship with Mercosur, Brazil is now pressing ahead with negotiations on the Free Trade Area of the Americas (FTAA), which encompasses the whole of the Americas, as the co-chair together with the United States.
In addition, Brazil is also actively pursuing FTA negotiations between Mercosur and the EU, and studying an FTA between Mercosur and India.
Taking the progress in the sphere of FTAs in Brazil and the rest of Latin America into consideration, it is essential for Japan to study how to shape its relationship with the region. As is well known, the fact that an EPA has not been concluded with Mexico has imposed a variety of handicaps on Japanese companies there with respect to tariffs and other factors affecting their competitiveness, and those have translated into damage measured at 400 billion Japanese yen per year. To eliminate such damage, active progress has been made with the negotiations for a Japan-Mexico EPA, on which basic agreement has recently been reached. In order to benefit from that experience and to avoid suffering damage from the lack of an FTA, it is essential to begin studying the conclusion of an EPA between Japan and Brazil at government level as soon as possible, parallel to the negotiations with Asian countries.
In trade with Asian countries, Latin America has drawbacks such as its great distance, but it also offers advantages such as abundant resources and a large market. In this context, China's vigorous stance toward Brazil and Latin America in recent years has been remarkable. Brazil, Russia, India, and China-the BRICs economies-have enormous potential for economic growth, and the impact of the link between Brazil and China could be particularly large. It is imperative for Japan not to lag behind developments such as these.
In view of the considerable presence of Japanese immigrants in Brazil and of Brazilians of Japanese ancestry in Japan, the EPA will strengthen relations not only in the economic sphere, but also in the spheres of culture and human interchange, and in consequence its impact would double.
In Brazil there are numerous Japanese companies that are competing with their European and U.S. counterparts, and since the absence of an EPA would be a detriment to their corporate activities in the future, they are calling very strongly for the rapid conclusion of an EPA with Brazil. If Japan drags its feet while the tide of trade liberalization sweeps across Latin America, Japanese companies operating in Brazil will shift the procurement of products, raw materials, and parts from high-tariff Japan to other countries with no or low tariffs, and that may exacerbate the hollowing-out of the Japanese industrial sector.
Brazil's average tariff rate is 12 percent, and without the EPA this would place Japanese companies at a major disadvantage as compared with European and U.S. companies. Some Japanese companies operating in Brazil procure substantial quantities of products, raw materials, and parts from Japan, and the impact would be particularly large on companies producing electrical equipment and transportation equipment, for which there is a high ratio of procurement from Japan. Without further liberalization and facilitation of investment by means of the development of high-level investment rules, it will not be possible to promote investment in Brazil in the future.
Some of the costs of doing business in Brazil that have long been pointed out derive from the complex tax system, the excessively protectionist measures in the realms of labor and employment, and unstable security, which needs to be improved. This is another reason why there is a strong need for an EPA that encompasses not only the fields of trade in goods and services and investment, but also the improvement of the business environment.
The problems with the tax system include its numerous categories, its complexity, the heavy tax burden, and the fact that it is changed frequently, while in the sphere of labor and employment the problems include the fact that in areas such as wages and jobs, the rigid employment laws give excessively favorable treatment to employees.
With respect to the movement of people, there are three visa categories: for business trips, for working, and for permanent residence. But there is a need for various improvements, such as shortening the period required to obtain a visa, making the period of validity more flexible (a working visa for Brazil can be renewed only once, and the maximum period of stay is four years: two two-year periods), and easing the issuance conditions (the cost of obtaining a permanent visa in Brazil is 200,000 US dollars per person).
In addition, with respect to government procurement, as illustrated by the fact that in Mexico, eligibility to participate in tendering is limited to companies from countries with which Mexico has FTAs, there is a risk of exclusion from government tenders in Brazil as well.
Brazil is a major agricultural country, and the ratio of Japan's imports from Brazil of agricultural, forestry, and fisheries products, for example chicken meat and orange juice, stands at approximately 40 percent, of which around half are subject to tariffs. To ensure compliance with WTO rules, the field of agriculture cannot be made an exception, and therefore addressing that field will be even more important than in the case of Mexico. Domestically, meanwhile, it is incumbent on Japan to implement structural reforms to establish a strong agricultural sector and enhance its international competitiveness. To achieve these ends, all of Japan needs to share a sense of crisis and support the structural reforms being implemented in the agricultural sector.
Under these circumstances, Japan must address the issue of agricultural products in an appropriate and flexible manner, taking into consideration issues such as the way agricultural products are being addressed in the ongoing EPA negotiations with Asian countries and the items of concern to the Brazilian side. When doing so, in regard to goods that Japan has not yet imported from Brazil, such as beef, pork, and vegetable oil (soybean oil), it will also be necessary to give study to factors including the impact on domestic Japanese industries of measures such as the lowering of import tariffs.
For two countries that share a long history of interaction, the EPA, as a new scheme to further strengthen their relationship, should be pursued for the purpose of increasing economic interchange from its present inactive level and of further deepening interpersonal exchanges. For Japan, the EPA will mean the removal of tariffs and the resolution of the broad range of problems, referred to as Brazil costs, encountered by companies conducting business in Brazil in such forms as the complex tax system, labor laws, and unstable security. For Brazil, it will have major effects in such forms as the invigoration of trade, the increase of investment from Japan, and the expansion of local production and employment.
According to the rules of Mercosur, the ultimate stage will be the conclusion of an EPA between Japan and Mercosur, but an important first step toward that will be the start of EPA studies between Japan and Brazil, the core nation of Mercosur.
The study group of the Japan-Argentina Business Cooperation Committee of the Japan Chamber of Commerce and Industry and the Tokyo Chamber of Commerce and Industry has compiled a report on a Japan-Argentina FTA, which points out the necessity to strengthen economic relations through an EPA between Japan and Mercosur. The Nippon Keidanren Japan-Brazil Economic Committee intends to continue its collaboration with the Japan-Argentina Business Cooperation Committee as it lobbies the appropriate quarters for the realization of such an agreement.
For the sake of rebuilding the Japan-Brazil relationship and ensuring its future development, we will request the government to bring about a visit to Japan by President Lula as soon as possible. It is our strong hope that this will lead to the early start of negotiations between the two governments on the EPA, followed by a rapid conclusion of the agreement.