Over recent years the members of the Gulf Cooperation Council (GCC: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) have been enjoying rapid economic development, and Japan's exports to the GCC countries have been growing. In order to preserve and expand the scale of the local market for Japanese products, institutional support is becoming increasingly necessary. At the same time, supplies of services and investments to the GCC members from Japan are also growing. Improvement of the environment for this is urgently needed, since promoting the supply of services accompanying direct investment and the creation of local business bases will both benefit Japanese companies and directly enhance the interests of the GCC countries, which are seeking industrial diversification, technology transfer, and employment.
Based on the perspective of assisting the activities of local Japanese affiliates through improvement of the environment for investment and business, Nippon Keidanren (Japan Business Federation) released a "Call for Early Launch of Negotiations for Japan-GCC Economic Partnership Agreement" in September 2005. This proposal made the points that a Japan-GCC economic partnership agreement (EPA) is indispensable for (1) strengthening the historically amicable diplomatic relationship between Japan and the GCC members and (2) promoting the activities of Japanese firms in these countries.
In relation to this request, in April 2006 Japanese Prime Minister Junichiro Koizumi and Saudi Arabian Crown Prince Sultan Bin Abdulaziz Al-Saud released a joint statement welcoming the decision to start negotiations on a Japan-GCC free trade agreement (FTA). The negotiations began in September that year, and another official negotiation session took place after that, along with four unofficial meetings. Unfortunately, there is no indication at present of when the two sides will reach an agreement. The GCC countries are, meanwhile, actively pursuing FTA talks with other major countries. Accordingly, Japan is likely to incur an opportunity cost if it falls behind in the work of assembling a framework for the FTA and other arrangements. Avoiding this is an urgent task.
At this time, taking note of the points of interest to the business community described below, we again strongly urge the government to pursue the negotiations speedily and steadily so as to realize the Japan-GCC FTA at an early date.
The GCC countries apply a uniform 5% common tariff to all products from countries outside their region except those treated as exceptional items. This means that in the event the GCC members conclude FTAs with other countries, Japan would find itself at a comparative disadvantage in its access to their markets. To prevent this from happening, there is a vital need for concluding the Japan-GCC FTA at an early date and promptly removing or phasing out the tariffs. For the FTA to be compatible with the rules of the World Trade Organization, it will need to satisfy Article 24, Item 8(b), of the 1994 General Agreement on Tariffs and Trade (GATT), which requires that "duties and other respective regulations of commerce be eliminated with respect to substantially all the trade." In other words, the FTA will need to cover basically all of Japan's GCC-bound exports including the automobiles, auto parts, and trucks in the category of transport equipment, which accounts for more than half of the total exports.
Complaints have been raised about several obstacles Japanese exports have encountered. For example, (1) depending on the country, customs inspections may take a long time even in the case of duty-free goods, and a customs deposit may be demanded for the interval from the inspection until duty-free treatment is officially approved, which depletes operating funds; (2) sometimes there is a need to comply with unusual quality standards or meet special safety specifications in addition to international safety standards, and the import inspections may involve several steps and much work. Nontariff barriers of this sort need to be dismantled, and trade procedures should be simplified and facilitated.
In the WTO's Doha round of multilateral negotiations, talks are underway in the area of trade in services to round out each country's schedule of commitments. For the Japan-GCC FTA, both Japan and the GCC members should naturally put forward liberalization offers going beyond their commitments in the Doha round. For compatibility with the WTO, the FTA will need to satisfy Article 5, Item 1(a), of the General Agreement on Trade in Services (GATS), which requires that an FTA have "substantial sectoral coverage."
More than a few problems have been identified in the local supply of services, which corresponds to GATS Mode 3 (commercial presence), within the GCC members. Although the obstacles are not as serious in some countries as in others, they need to be removed or reduced. For instance, (1) restrictions are imposed on foreign capital, and the investment ratio of foreign investors cannot go above 50%; (2) the employment of local workers may be required even in cases where securing appropriate human resources locally is difficult.
Even after improvements have been made in market access, if other problems still remain in domestic regulations, they can in effect act as barriers to services trade. For instance, (1) generally a local sponsor is required for establishing a base for service supplies, and a costly sponsor fee may have to be paid; (2) land ownership by foreigners is generally subject to restrictions.
In the area of investment as well, when the purpose of the investment is to conduct business activities from a local base, the problematical points are basically the same as those already noted for the supply of services on GATS Mode 3.
In order for Japan's firms to engage in business activities freely, the FTA will need to meet three requirements. (1) The coverage of the liberalization must extend to petrochemicals, electric power, water supplies, and the environment, fields in which Japanese technologies can display their strengths. (2) Barriers to market access including restrictions on foreign capital and excessive obligations to employ local personnel must be reduced or eliminated. (3) Domestic regulations obstructing the activities of foreign investors must be corrected.
As liberalization of services trade and investment advances, there needs to be a parallel easing of the restriction on the movement of natural persons. In the case of foreign human resources, principally intra-corporate transferees and natural persons working on a contract basis (such as lawyers), it is important that their access to GCC labor markets as well as freedom of action in the GCC countries be guaranteed.
In relation to the obligation to employ local personnel, a number of cases have been pointed out in which limits were imposed on the issuing of working visas and resident permits to foreign workers. In the fields where a commitment is made to liberalizing services trade and investment, consideration should also be given to liberalizing the natural persons. In addition, improvements are needed to deal with problematical points in domestic regulations, such as requirements to have local sponsors, when such documents as visas and resident permits are acquired.
In order to promote trade and investment relations with the GCC countries, it is important to provide local foreign companies with a number of guarantees. These include (1) national treatment, most-favored-nation treatment, fair and equitable treatment, compensation in the event of expropriation, protection from strife, and freedom of capital movement; (2) in cases where disputes arise between investors and states, there needs to be a guarantee that the matter can be entrusted to third-party arbitration based on general principles of internationally accepted law.
In accordance with the wishes of the GCC countries in the Japan-GCC FTA talks, which target the fields of trade in goods, trade in services, and investment liberalization, separate negotiations are being conducted with each country on the protection of investments. In order to protect investment assets of companies that move in and to ensure equitable settlements when disputes arise, it is to be desired that parallel negotiations be accelerated on investment protection agreements.
It is also necessary that tax treaties be concluded between Japan and each of the GCC countries. These treaties would have the aim of preventing double taxation of Japanese companies in the GCC countries and securing tax-based incentives.