Japan and Canada have developed economic relations that fulfill the needs of both countries. Bilateral trade can generally be characterized in terms of Japan exporting motor vehicles, machinery, appliances and the like to Canada, and Canada exporting raw materials and natural resources (lumber, pulp, rapeseed, etc.) as well as food (seafood, meat, wheat, etc.) to Japan.
And yet, for Japan this trade is relatively small, considering Japan's total exports and imports. In 2004, Japan's exports to Canada represented only 1.4% of its total exports, while Japan's imports from Canada represented just 1.9% of its total imports. Again in 2004, just 1% of Japan's total foreign direct investment was placed in Canada, while 5% of Japan's total foreign direct inward investment was from Canada. For Japan, Canada's trade and investment markets are small, compared with its trade with other parts of the world -- Japan's trade with the United States represents about 20% of its business with other countries, and more than 10% each in the case of China, ASEAN countries and the EU. Between January 25 and February 8, 2006, Nippon Keidanren (Japan Business Federation) conducted a questionnaire survey on ways to enhance Japan-Canada economic partnership. One response elicited from many respondents representing Japan's business community was that they did not expect Canada's economy to grow rapidly, unlike the emerging economies.
Even so, Canada is an advanced country with stable political and economic systems, and it boasts a highly qualified workforce and high-quality technology. Its underground natural resources are the third largest in the world, according to a 1997 World Bank survey. In 2004, Canada's real GDP (Can$1,293.3 billion) was 8th highest in the world. The country lies just north of the huge US market, and as a member of the North American Free Trade Agreement (NAFTA), Canada maintains close economic ties with the United States.
These facts show the significance of the Canadian economy and underscore the Japanese business community's conviction that it is essential for both countries to maintain their stable, mutually beneficial economic partnership, and to continue their efforts to expand trade and investment.
For some time, Canada's export-import trade with Japan has been second only to its trade with the United States. However, Canada's trade with China and Mexico has grown over the last few years, and in 2003 Canada actually imported more from China than it did from Japan. In 2004, Canada still exported more to Japan than it did to China -- so Japan remained Canada's second most important export market -- but exports to China are increasing rapidly.
Against this backdrop, Nippon Keidanren sees an urgent need to quickly resolve certain issues. To do so would ensure stable bilateral relations and strengthen their economic partnership.
At the present time, the two governments are conducting a Joint Study on the benefits and costs of further promotion of bilateral trade, investment and cooperation, and promoting activities identified under 15 priority areas of cooperation. #1 These steps are being taken in accordance with the Japan-Canada Economic Framework signed in November 2005.
There has already been progress on some issues, such as cooperation on anticompetitive activities and customs cooperation. Other examples of progress are the October 2005 agreement in principle regarding social security, and the signing of a Memorandum of Understanding between the Japan External Trade Organization (JETRO) and International Trade Canada, regarding cooperation in the promotion of mutual investment.
These achievements represent significant progress in efforts to enhance Japan-Canada economic partnership. But to maintain and strengthen this relationship further, more progress through bilateral cooperation is needed in following areas:
In order to rapidly enhance bilateral economic partnership, issues that are important to the business communities of the two nations should be given priority. Those issues would benefit the business communities as a whole once resolved, and some require swift resolution. In addition, issues that are relatively easy to resolve should be addressed first.
The above-mentioned questionnaire on ways to enhance Japan-Canada economic partnership received requests from a broad range of industries about promotion of regulatory reform and cooperation in improving the business environment. The questionnaire optionally asked for requests regarding Canada's reform of domestic regulations including such areas as taxation and the liberalization of investment and trade in services, and other requests regarding the promotion of cooperation. Of the 44 corporations that made these optional requests, 21 (46.7%) sent in requests regarding regulatory reform, and 25 (55.6%) sent in requests regarding the promotion of cooperation. Requests regarding regulatory reform focused primarily on the need to eliminate requirements in Canadian corporate law regarding the nationality of executive officers, and the avoidance of double taxation between Japan and Canada. Resolving these issues would benefit Japan's business community as a whole, and would also spur investment in Canada. We therefore call for their swift resolution. Requests regarding the liberalization of trade in services often focused on regulations governing foreign investment in financial and insurance services. It is also important to note that Canadian regulations governing foreign investment in railways, transportation, telecommunications and cultural industries also exist.
Nippon Keidanren believes that, to improve the business environment, priority should be given to:
Regarding the promotion of trade in goods, the advantages and disadvantages of Japan and Canada signing a Free Trade Agreement should be further examined and discussed in the future.
Nippon Keidanren's questionnaire asked for responses regarding items subject to customs duties, and tariff rates that presently impede business operations. Canada imposes tariffs on motor vehicles (6.1%) and automotive components, while Japan imposes tariffs on spruce-pine-fir (SPF) building materials (4.8%). Responses from corporations involved in these industries focused on these items. (Not all respondents believed that tariffs on all automotive components impeded business operations.)
Responses mentioned other items given relatively low tariff rates, and noted that those rates did not impede business operations.
The following issues should be considered when studying tariff reduction and elimination as a way to promote trade in goods.
First, we should consider sensitive products for Japan such as agricultural, forestry and marine products. Nippon Keidanren has often called for multi-leveled efforts to create a foundation upon which free economic activity can be conducted through the formation of comprehensive Economic Partnership Agreements (EPAs) with countries and regions important to Japan. These EPAs are to be formed with the aim of realizing a higher level of liberalization and creating wider-ranging rules, while remaining rooted in the WTO. #2
When establishing FTA or EPA, the parties must ensure trade liberalization by eliminating tariffs "with respect to substantially all the trade" between themselves, in accordance with Article XXIV of the GATT. Sensitive products should basically be dealt with by promoting structural reform within the countries concerned, and by strengthening international competitiveness. Japan is now pushing forward with structural reform of its agricultural sector, in accordance with the Basic Plan for Food, Agriculture and Rural Areas announced by the Cabinet in March 2005. These efforts should form one basis for discussions on the possibility of signing FTAs. However, while ensuring the mutual understanding of Japan and potential FTA partners, consultations working towards a Free Trade Agreement should examine products that could pose considerable risk to the health or safety of the Japanese people or to local economies in Japan. In this way, the interests of the many people concerned would be safeguarded.
Secondly, tariff elimination or reduction should be considered with an eye to progress in WTO Doha Development Agenda negotiations. If DDA negotiations result in agreement, tariffs on all products will be reduced in principle, based on specific reduction formulae. Nippon Keidanren has stressed the need for DDA negotiations to aim for a high level of liberalization (see, for example, A Successful Hong Kong Ministerial Conference Can Still Save the Doha Development Agenda: Political Leadership Needed from All WTO Members). We call for the negotiations to be concluded successfully during 2006, as planned.
Thirdly, the Japanese business community must keep in mind the progress of ongoing negotiations between Canada and other countries as they pursue FTAs or EPAs. Such agreements would eliminate tariffs between the parties, making Japanese exports to Canada less competitive. Of particular note here are the Canada-South Korea EPA negotiations -- the fifth round of negotiations ended in February 2006, and the Japanese business community must keep a sharp eye on future developments.
The two governments are presently conducting a Joint Study, and the final report is expected in the autumn of 2006. Because of the above considerations, we urge that after the Joint Study is concluded, priority be given to an investment agreement that includes the liberalization of trade in services, dialogue on regulatory reform, and the promotion of cooperative issues. We also strongly recommend that the government and the private sector continue to discuss the establishment of an FTA or EPA. These efforts could include, for example, negotiations on an agreement to improve the climate for trade and investment. Such an agreement should contain:
A change in the status quo, such as Canada signing a new FTA with South Korea or some other country, would make the exports of the FTA partner far more cost competitive than Japanese exports. In the meetings on a regular basis to discuss trade and investment liberalization and the advantages and disadvantages of an FTA or EPA, if it is decided that there is an urgent need to remedy such negative impact on Japan's competitiveness in the Canadian market and that an FTA or EPA would be, on the whole, greatly advantageous for both Japan and Canada, the two sides should begin consultations on the FTA or EPA.
The Nippon Keidanren questionnaire gave representatives of Japanese corporations the option of offering their opinions on tariffs levied by Japan and Canada, and on tariff items and rates that presently impede business operations. Typical responses are listed below.
Canada imposes a 6.1% tariff on automobiles and trucks. In 2004, Japanese automobile exports to Canada represented 33.5% of Japan's total exports to that country, while Japanese exports of trucks (diesel-powered, 5 to 20 ton range) represented 0.4% of its total exports to Canada. In other words, one-third of Japan's exports to Canada are finished vehicles. The cost imposed by these tariffs on Japan's automotive industry in 2005 was about 20.8 billion yen (total automobile export value x 6.1%).
Typical questionnaire responses regarding tariff level:
Typical responses regarding sales of cars made in Japan:
Canada imposes a 9.5% tariff on wheels for railway rolling stock. Because there is insufficient demand for such wheels in Canada, they are not produced domestically and must be imported. Japanese-made wheels are subject to the tariff, and their sale price is 20 to 30% higher than tariff-free NAFTA-made wheels. If the tariff were not imposed, the price would be only 10 to 20% higher, permitting Japanese-made wheels to do well because of their better quality.
Canada imposes a 6.5% tariff on photographic films for exposure in cinematographic. Japanese exports of photographic films for exposure in cinematographic (width: 16 mm - 35 mm; length: 30 m and longer) to Canada represent 0.3% of Japan's total exports to that country. When responding to our questionnaire, Company A stated that in 2005 it paid about 168 million yen in tariffs for its film exports to Canada (Company A's total photographic films for exposure in cinematographic export value of approx. 2,582 million yen x 6.5%).
Photographic films for exposure in cinematographic made by US companies competes with Japanese-made film, and because imports from the United States, a NAFTA member country, are not subject to the tariff, Company A stated that it was at a distinct competitive disadvantage.
Canada imposes a 3.0% tariff on electrical insulators of ceramics. Japanese exports of electrical insulators of ceramics to Canada represent 0.2% of Japan's total exports to that country. Company B pays about Can$200,000 in tariffs each year for its exports of electrical insulators of ceramics to Canada.
Manufacturers of electrical insulators based in the United States, a NAFTA member country, pay no tariff on their exports to Canada. Glass insulators are subject to a 2.5% tariff, and there is no tariff on polymer (resin) insulators. Company B states that its electrical insulators of ceramics are at a distinct competitive disadvantage. Its exports to Canada were valued at about 2 to 3 million dollars, less than its exports to the United States. Even so, it says, "Some of our customers are leading Canadian electric power companies, and we believe Canada will continue to be an important market for us in the future."
Japan imposes a 4.8% tariff on spruce-pine-fir (SPF) products (mainly two-by-fours). In 2004, the value of SPF imports from Canada represented 5.1% of all imports from that country.
In 2004, Company C paid about 500 million yen in tariffs for its SPF imports from Canada, while Company D paid around 40 million yen.
Japan imposes a 6.0% tariff on oriented strand board (OSB). In 2004, Company C paid about 75 million yen in tariffs for its OSB imports from Canada. Japan imports this sheathing material mainly from Canada and Europe. It is not produced in Japan.
Japan imposes a 38.5% tariff on beef. Imports from Canada were suspended throughout 2004, so no tariffs were paid on Canadian beef. Company E stated that, if the tariff were to be reduced or eliminated, it would greatly increase its imports.
The conclusion of a Japan-Canada investment agreement would effectively and efficiently spur regulatory reform in Canada and the liberalization of its trade in services. The agreement should be comprehensive and advanced befitting to the two developed countries. It should also ensure that the federal and provincial governments grant most-favored-nation treatment and national treatment (including at the investment authorization stage), and it should prohibit the application of performance requirements, obligate the maintenance of current investment conditions, protect investment assets, and liberalize trade in services.
An investment agreement signed with Canada should ensure that corporate laws are changed to eliminate nationality requirements, following the example of such clauses in the Japan-Korea Investment Agreement (Article 8, Section 3) #3 and the Japan-Viet Nam Investment Agreement (Article 4, Section (f)). #4 Nine of the 24 corporations responding to the regulatory reform section of Nippon Keidanren's questionnaire recommended the abolition of nationality requirements, indicating that this is the most important regulatory reform issue for the business community. We call for swift resolution of this issue.
Regarding the liberalization of trade in services, many questionnaire respondents requested the elimination or relaxation of regulations controlling foreign investment in the insurance industry. Such measures should be included in a future Japan-Canada investment agreement.
Japan and Canada should establish a framework for mutual domestic regulatory reform to develop the business environment, drawing inspiration from Regulatory Reform Dialogues among industrialized countries (e.g., Japan-US and Japan-EU dialogues). We suggest that government officials responsible for industrial sectors meet in sector-specific workshops and negotiate concrete issues and federal and provincial regulations, aiming for continual and effective regulatory reforms. Provincial government officials should also attend the meetings to permit the resolution, within the framework, of regulatory issues under their jurisdiction.
Also necessary is the public disclosure of all relevant information pertaining to the two sides' positions, the reasons for their positions, and the objections offered by each side. Regarding the Japan-US and Japan-EU Regulatory Reform Dialogues transparency with regard to demands, negotiation progress, and the reasons for adopting specific measures is not sufficient. On the other hand, anyone can view on the Internet the deliberations of Japan's Council for the Promotion of Regulatory Reform, the positions of all interested parties, responses from relevant government ministries and the basis for these responses. To give greater impetus to regulatory reform, experts from outside the process should be encouraged to meet and evaluate the suitability of proposed reform measures.
We suggest that the financial ministries of both countries establish a framework for regular dialogue on tax reform, with a view to implementing rapid, practical tax reform measures. The dialogues should be held independently from the governments' dialogues on regulatory reform. Tax reform should be included in the above-mentioned agreement on improving the trade and investment environment. They should begin without delay, and work toward conclusion of such an agreement.
Our questionnaire elicited valid suggestions for the establishment of the above-mentioned framework for regulatory and tax reform. We request that Canada prioritize and resolve the following issues.
In Canada, regulations are enforced at both federal and provincial levels, and this duplication creates complications when applying for permits and licenses. For example, if a company wishes to offer insurance services in Canada, it must obtain authorization from each provincial government. Another problem is that in some cases, provincial regulations are stricter than federal ones.
We therefore ask that the federal and provincial governments harmonize their regulations as much as possible, and ensure that trade and investment are not restricted more than necessary.
In addition to concluding an investment agreement, the two countries should promote regulatory reform for each sector, ensuring liberalization at the investment authorization stage and improving the business environment so that companies can continue their operations smoothly. Priority should be placed on removing requirements in corporate law regarding the nationality of executive officers, and liberalizing insurance services.
We recommend that the governments of Japan and Canada study harmonization of standards and recognition of professional licenses (such as engineering licenses), with the goal of introducing smoother administrative procedures and facilitating business activities. In addition, visa issuance procedures should be simplified and made more efficient, and visa validity periods should be extended. These measures would all facilitate the movement of natural persons.
Tax reforms are another way to promote investment and reduce business operating costs. Issues of special importance include elimination of the Capital Tax, and elimination of duplication whereby unemployment insurance premiums must be paid in both countries.
Regulatory and tax reforms are only some of the efforts needed to strengthen Japan-Canada economic partnership -- also essential is the strengthening of cooperation. We call on the governments of both countries to continue and expand their efforts in the 15 priority areas of cooperation listed in the Japan-Canada Economic Framework.
Of special importance is cooperation in energy and natural resources, to ensure the sustainable use of resources and their efficient and stable supply, at a time when supplies are declining worldwide, global population is increasing, and growth in emerging economies is boosting demand for energy resources. Another issue, although it is not included in the 15 priority areas, is the stable supply of food. We also call on the governments to cooperate on this issue.
Our questionnaire also elicited optional responses regarding areas and types of cooperation Japanese corporate managers believe to be especially important. Our recommendations for the following six areas are based on their responses.
Of the 25 companies responding to this optional section, seven companies (28%) responded to the part on cooperation in energy and natural resources. Their interest undoubtedly springs from Canada's abundant supply of resources. Responses included the need for better infrastructure to promote more trade in natural resources with Japan and other Asian countries, by:
Japan's tourist and aviation industries requested enhanced advertising campaigns to promote tourism and cooperation in developing tour products. Suggestions included campaigns to attract tourists to Vancouver for the 2010 Winter Olympics.
A number of respondents expressed the hope for investment promotion through events (e.g., more PR events targeting industries in both countries) that would increase mutual understanding. One example mentioned was the investment promotion seminars sponsored jointly by JETRO and International Trade Canada. It was suggested that this type of activity be continued and expanded.
Rail freight fares are high in Canada because of the monopolization of local rail transport. Respondents requested that this situation be changed to boost the transport of energy and other resources, and to reduce the cost of their transport.
Recognizing that Canada's electronics industry is highly developed and has a talented workforce, respondents expressed a hope for the absorption of know-how and the securing of human resources in Canada. This, they suggested, could be achieved through support for the establishment of an organization that would hold periodic technical exchange sessions, train promising engineers, and promote bilateral personnel exchanges.
Because food-related products comprise a large part of Japan's imports from Canada, responses emphasized cooperation with Canada to ensure food safety in Japan. A typical response mentioned the need to prevent residual pesticides and mold poisons in wheat.
Over the last few years, Canada has been strengthening its business partnership with Asian countries other than Japan, as can be seen in its increased trade with China and its FTA negotiations with South Korea. For its part, Japan is moving forward with negotiations on economic partnership agreements with East Asian countries, which are geographically close and which have already developed strong economic relations with Japan. These trends have convinced Japan's business community of the need to strengthen Japan's economic partnership with Canada by quickly resolving the above-mentioned issues. Nippon Keidanren therefore calls for constructive and forward-looking discussions between the two governments on the framework after the Joint Study is completed in the fall of 2006.
- The 15 priority areas of cooperation are: social security agreement, cooperation on anticompetitive activities, food safety cooperation, customs cooperation, trade facilitation, transportation, investment, science and technology, information and communication technology (ICT), e-commerce, e-government, energy and natural resources, climate change, tax convention, and tourism promotion.
- See, for example, Challenges for the Upcoming WTO Negotiations and Agendas for Future Japanese Trade Policy (May 18, 1999), Urgent Call for Active Promotion of Free Trade Agreements (July 18, 2000), Towards the Implementation of Strategic Trade Policies (June 14, 2001), and Japan 2025: Envisioning a Vibrant, Attractive Nation in the Twenty-First Century (January 1, 2003).
- Regarding stipulations prohibiting nationality requirements for members of boards of directors (Article 8, Paragraph 3), all existing exceptional measures are listed in the Annex, and are specified with a division as to whether SS/RB applies or not.
- Article 4 of the Japan-Viet Nam Investment Agreement prohibits a number of specific requirements. Section (f) of the Agreement prohibits the imposition or enforcement of any requirement "to appoint, as executives, managers or members of boards of directors, individuals of any particular nationality." Existing exceptional measures are dealt with in the same way as in the Japan-Korea Investment Agreement.
Other reference material: Ministry of Finance (Japan), Trade Statistics; JETRO trade statistics database