Policy Proposals Trade, Investiment, EPA/FTA Proposals for Redefining of Trade Strategy -- Towards a proactive new trade strategy that takes the initiative to establish global rules --
In April 2011 Keidanren published its "Proposals for Japan's Trade Strategy." Released in the immediate aftermath of the Great East Japan Earthquake, the proposals conveyed the message that Japan should maintain its stance as a nation built on trade and investment with a view to rebuilding the national economy and industrial infrastructure. They advocated the need to facilitate global business activity by taking the initiative in advancing trade policy, including participation in Trans-Pacific Partnership (TPP) negotiations.
Following a national debate lasting more than two years, on March 15 this year Prime Minister Shinzo Abe declared Japan's willingness to join TPP negotiations. The announcement demonstrated political will to seriously address Japan's economic growth, and we applaud this leadership. As the background to this decision, it is a notable trend that the public's understanding has improved regarding how important it is for Japan, as a nation built on trade and investment, to pursue a proactive trade strategy.
However, during the delay in deciding to join TPP negotiations, there have been major changes in the international trade environment. Free trade agreements (FTA) were previously negotiated mainly among neighboring countries and regions or on a bilateral basis, but negotiations will soon begin for "mega-FTAs" including US-EU FTA, in addition to TPP. There have also been active moves towards issue/sector-specific trade agreements among multiple countries, such as new service trade agreements. Thus competition is heating up among major countries to take the initiative in establishing global trade and investment rules.
The background to these trends is the deadlock of the World Trade Organization (WTO) "round" negotiations that have strived towards multilateral liberalization. At the end of 2011, the goal of concluding the Doha Round of WTO negotiations in the near future was abandoned. The era when Japan could passively participate in global liberalization and establishing rules simply by being a WTO member came to an end. In future negotiations, Japan can no longer expect to unconditionally enjoy the benefits of most-favored-nation provisions, which are extended to all members in the WTO framework as negotiation results.
Faced with several challenging large-scale trade negotiations including TPP, Japan must actively utilize frameworks such as regional FTAs as a key pillar of growth strategy to achieve international agreement at the global level on the trade and investment rules it desires. At the same time, we must change our trade strategy by taking a proactive approach to reforming domestic rules and systems.
The proposals below detail the new trade strategy that Japan should adopt, based on changes in the international trade environment since April 2011.
1. Basic Approach
(1) Current Situation and Challenges
1) Stalling of Doha Round and Acceleration of Mega-FTAs
The Doha Round of WTO negotiations, which began in 2001, came close to reaching a settlement in 2008. However, the gap between the claims of developed and developing countries could not be bridged, and the target of concluding the round in the near future was abandoned at the end of 2011. Efforts to reach a settlement in a future round continue, but given the shift in the balance of power for shaping an international agreement as emerging countries rise and developed economies stagnate, revising or formulating global trade rules that include both developed and developing countries is currently an extremely difficult task.
WTO trade rules have not been revised since the organization was established in 1995, and are increasingly unable to cope with changes in business. In this situation, the establishment of trade rules outside the Doha Round has been picking up pace. Such arrangements include the Trade in Services Agreement (TISA) and FTAs such as TPP and the Transatlantic Trade and Investment Partnership (TTIP) proposed between the US and the EU.
Given this background, the delay in joining TPP negotiations, which are considered to form a model for the global trade system in the 21st century, has undeniably made Japan a latecomer to the process of establishing trade and investment rules adapted to the new business environment.
At the same time, as financial crises trigger a growing trend towards protectionism, especially in emerging and developing countries, there are concerns about whether the WTO's multilateral free trade system can ensure compliance with existing trade rules.
2) Growing Importance of Services and Value Chains in Business
Global business has undergone rapid and widespread change in recent times. Services have come to represent a relatively higher proportion of economic activity, and cross-border corporate operations have lent greater importance not only to supply chains for movement of goods, but also value chains, which focus on adding value at each stage. The emergence of new products and business models driven by technological advances such as cloud computing and provision of diverse range of services via a multifunctional terminals is causing major changes to the assumptions on which global business is based. As a result, a growing number of situations are not covered by existing trade rules.
3) Restrictions on Global Business Based in Japan
In these circumstances, Japan's delay in forging economic partnerships that create new trade rules has hampered competitive conditions for Japanese companies in the global market when competing with countries that are actively pursuing FTAs. This tardiness has left Japanese exporters subject to tariffs not levied on foreign firms and harmed their global market interests in other respects such as investment conditions and protection of intellectual property rights. It has created a situation where global businesses face restrictions or obstacles to the smooth construction of supply chains and value chains using Japan as a base.
(2) New Perspectives Required for Trade Strategy
1) Facilitation of Global Supply Chains and Value Chains
Considering the situation and challenges outlined above, an important requirement in reformulating Japan's trade strategy is to facilitate global supply chains and value chains that incorporate Japan and are suited to new business models. This will lead to improving the business environment for companies using Japan as a base.
Looking at Japan's trade on a value-added basis, exports to the US still exceed those to China, which shows that many Japanese exports arrive in the US and other end-user markets via intermediary assembly countries such as China. Tariff elimination focused solely on the bilateral flow of commodities between Japan and a country importing intermediary goods will not enable overall facilitation of such global supply chains and value chains. Bilateral FTAs have their limits, and Japan needs to take a strategic approach and prioritize regional FTAs.
In other words, to facilitate global business as a whole it is important to ensure that companies can smoothly and borderlessly conduct all tasks involved in supply chains and value chains, including management; research and development; procurement; manufacturing; sale and supply of products, services, and content; transfer of intellectual property and transmission of information; movement of personnel; transfer of capital; and repatriation of profits, in countries including Japan. The establishment of new trade rules that will contribute to this aim is essential.
2) Mitigation of the "Spaghetti Bowl" Effect
Secondly, while conducting parallel negotiations for major regional FTAs such as TPP and a Japan-EU economic partnership agreement (EPA) in addition to existing FTAs, it will be vital to mitigate harm likely to arise from coexistence of multiple trade rules, sometimes referred to as the "spaghetti bowl" effect. To this end, it will be necessary to align FTA rules with WTO agreements and aim at adopting these FTA rules under the WTO agreements as common rules.
3) Maintenance and Strengthening of WTO Mechanisms Aimed at Deterring Protectionism
Thirdly, in order to maintain a free and stable environment for global business, it is essential that confidence in the WTO multilateral free trade system is not undermined by a proliferation of protectionism. Developed and developing countries should collaborate to ensure compliance with existing trade rules applying to the 159 WTO member countries and make every effort to maintain and strengthen the multilateral free trade system.
(3) The Trade Strategy Japan Should Promote
In view of the above, Japan should promote the following trade strategy.
1) Pursue Regional FTAs (TPP, Japan-China-Korea FTA, RCEP, Japan-EU EPA)
In order to achieve sustainable economic growth for Japan as a nation built on trade and investment, the first urgent challenge is to improve the business environment for companies operating in Japan by pursuing FTAs with other countries. Given that Japanese firms have supply chains and value chains that extend beyond Asia to Europe and America, there is a particular need to facilitate global supply chains and value chains encompassing Japan through wide-area FTAs including TPP as a route to creating a Free Trade Area of the Asia-Pacific (FTAAP), a Japan-China-Korea FTA, a Regional Comprehensive Economic Partnership (RCEP), and a Japan-EU EPA.
In negotiations for such agreements, it will be crucial not only to secure provisions no less favorable than those contained in FTAs already concluded by Korea and Japan's other business competitors, but also to achieve high levels of trade and investment liberalization and establish rules aligned to the realities of business.
2) Harmonize Regional FTAs by Establishing a Common Approach to Negotiations as a "Unified Axis"
The second challenge is to establish a common approach as a "unified axis" for Japan to negotiate trade and investment rules Japan is aiming to achieve, in order to mitigate harm from the "spaghetti bowl" effect as parallel negotiations are conducted for multiple regional FTAs. With a view to establishing common multilateral rules that can be adopted in future WTO agreements, it is important to achieve the greatest possible harmony among the rules contained in various FTA frameworks.
3) Proactively Pursue Issue/Sector-Specific Agreements (ITAs, the Trade in Services Agreement (TISA), etc.)
To establish global trade rules suited to new business models, the third vital measure is active participation in sector-specific agreements negotiated by like-minded countries (e.g., revision of the WTO Information Technology Agreement [ITA] and the Trade in Services Agreement [TISA] ). At the same time, we need to encourage developing country involvement in such agreements to the greatest possible extent, in order to facilitate global supply chains and value chains. In this way, pursuing new issue/sector -specific agreements such as the Trade in Services Agreement (TISA) should build on the WTO framework as agreements among like-minded countries become part of future WTO agreements.
4) Utilize WTO Functions
Fourthly, to deter protectionism, we should make active use of WTO functions that create and maintain a free and stable global business environment. Of the WTO's three key functions (compliance monitoring, dispute settlement, and rule formulation and amendment), the stalling of the Doha Round has shown that the rule formulation and amendment function is facing difficulties. However, we should persevere with efforts to establish rules based on WTO provisions, including negotiations for FTAs and issue/sector-specific agreements, with a view to incorporating them into future WTO agreements.
Compliance monitoring and dispute settlement provisions function effectively as a foundation for global business. It is important to make active use of these WTO functions to protect Japan's national interests and maintain and strengthen the multilateral free trade system. As well as enhancing the monitoring of protectionist measures worldwide, Japan needs to proactively utilize dispute settlement procedures to address rule violations.
5) Supplement Other Efforts with Investment Treaties, Tax Treaties, and Social Security Agreements, etc.
Finally, in order to deal with global business issues not covered by WTO, FTAs, or issue/sector-specific agreements, it is essential to pursue supplementary accords including investment treaties, tax treaties, and social security agreements. Bearing in mind the development of future legal frameworks, it is also important to encourage non-binding collaborative efforts initiated by groups such as APEC.
(4) Establish Trade Strategy Structure for Japan
1) Structural Improvement
As Japan pursues negotiations for multiple FTAs and issue/sector-specific agreements, it will be essential for the government to establish a unified structure enabling it to strategically and effectively advance such talks and to strengthen its negotiating capabilities, including increasing the number and quality of negotiators.
Trade negotiations involve several government ministries and agencies and an extremely diverse range of divisions. Moreover, they are closely linked to national systems and sometimes necessitate reform of such systems. Thus it is difficult to determine and implement an overarching strategy simply by coordinating matters among relevant ministries and agencies at the ministerial and administrative levels. Similarly, the Council on Economic and Fiscal Policy and the Industrial Competitiveness Council have limited capability to oversee trade strategy as a whole and offer detailed advice tailored to the progress of each set of negotiations.
2) Structural Reinforcement
To strengthen control by the Prime Minister's Office, "Trade Strategy Headquarters" (tentative name) should be established under the cabinet, headed by the prime minister with a newly and single designated "Minister for Trade" (tentative name) as deputy head. Other members would include the Minister of Foreign Affairs, the Minister of Finance, the Minister of Agriculture, Forestry and Fisheries, and the Minister of Economy, Trade and Industry. A "Trade Policy Advisory Council" (tentative name) should be established to promote partnership between the public and private sectors, utilizing expert private sector knowledge in business, law, and other specialized fields. These bodies should be supported by the establishment of their own secretariat staffed with hand-picked personnel from within and outside the government, which would be responsible for implementing overarching trade policy. It will also be crucial to enhance links with the Industrial Structure Council and other advisory bodies established by ministries and agencies.
A road map and specific goals need to be formulated for implementing trade policy. To achieve a consistent and effective approach to multiple negotiations, close links should be maintained among all those involved, and a unified public/private sector structure built to advance Japan's trade strategy.
2. FTA Initiatives with a View to Establishing Multilateral Rules
(1) Fundamental Concepts
Major countries are taking the initiative in establishing global trade rules for the 21st century through FTAs, as exemplified by moves to start negotiations for a US-EU FTA. Under these circumstances, it is essential for Japan to participate in TPP, a Japan-EU EPA, and FTAs with other countries and to play a proactive and leading role in rule establishment so that Japanese companies can display their strengths.
As other countries actively pursue FTAs, Japanese firms face disadvantageous tariffs and trade rules in business with major markets such as the US and Europe. The bare minimum required in future FTAs will be concluding agreements that are no less favorable than those achieved by other countries such as South Korea. As well as maintaining and expanding exports through tariff elimination or reduction, we need to restore and enhance Japan's competitiveness by liberalizing service trade and establishing investment rules. This will enable companies to retain and expand domestic bases forming part of supply chains and value chains for products and services, which will preserve and create jobs and lead to economic growth.
Given that the Asia-Pacific region is experiencing remarkable growth, we should aim to achieve FTAAP by 2020. As a pathway to fulfilling this goal, we need to base our efforts on playing a leading role in establishing rules in TPP negotiations while pursuing RCEP and a Japan-China-Korea FTA. At the same time, it is important to pursue a Japan-EU EPA and aim to create global rules while securing consistency with rules under TPP and other agreements.
(2) TPP Participation
The countries participating in TPP negotiations account for 27.2% of Japan's total trade and 40.5% of its direct investment balance. TPP participation is essential to redressing the unfavorable competitive conditions Japan faces compared to countries such as South Korea and restoring and enhancing Japan's competitiveness through establishment of trade rules. Since TPP encompasses the US, Canada, and Australia, which are major exporters of resources and food, it will also contribute to the stable supply of resources, energy, and food to Japan. Moreover, it will play an important role in strengthening Japan-US relations, which are a cornerstone of Japanese diplomacy, and promoting political stability in the Asia-Pacific region.
Additionally, building strong economic and political relations with other TPP countries will provide powerful leverage for FTA negotiations, and place Japan in an advantageous position for RCEP talks and negotiations with the EU.
Since countries participating in TPP negotiations aim to reach a settlement by the end of this year, Japan must join the talks as a matter of urgency. Based on the joint statement issued at the Japan-US summit at the end of February, the decision to join TPP talks resulted from a display of political leadership and negotiating skill. Japan needs to complete arrangements with the US and other countries participating in TPP negotiations as soon as possible and quickly join the talks. Through the negotiations, it should achieve Japan's aims for tariff elimination or reduction and rule establishment.
In TPP negotiations Japan needs to identify global rules it should aim at for the future, proactively propose new rules aligned to the realities of business, and achieve rules that will enable Japanese companies to use their strengths. Keidanren will strengthen its own efforts by setting up project teams for areas of interest under relevant committees as required and enhance its contributions to the negotiation process by making specific proposals.
Goals to be achieved in TPP negotiations at this time are detailed in section 4 below ("Issue/Sector-Specific Consistent Approach with a View to Developing Multilateral Rules") and the appendix to "Proposals for Japan's Trade Strategy" entitled "Goals to Be Realized through the TPP" (April 19, 2011).
(3) Promotion of RCEP and a Japan-China-Korea FTA
An effective path to achieving FTAAP by 2020 will be to pursue RCEP under the ASEAN+6 umbrella at the same time as TPP and complete ASEAN integration by 2015 through the ASEAN Free Trade Area (AFTA). Important goals for this process include invigorating Asia-wide trade and investment, developing infrastructure, supplying goods to meet the needs of a fast-growing middle class, and cooperating to address environmental issues.
In RCEP negotiations, as far as possible Japan should aim for an agreement of no lesser quality than TPP to help facilitate Japanese companies' supply chains and value chains. In specific terms, RCEP should be a broad agreement fully reflecting the views of the business community and covering matters including elimination and reduction of tariffs in effectively all trade, liberalization of investment and service trade under a negative list approach, protection of intellectual property rights, and enhancement of the business environment.
Concluding an FTA among Japan, China, and Korea, which account for over 70% of ASEAN+6 GDP, and vitalizing trade and investment will be prerequisites to realizing RCEP. Improving access to the Chinese market is especially important for Japan. Since there are many restrictions on entry to service and investment sectors, the realization of a Japan-China-Korea FTA is expected to liberalize trade and investment. The Japan-China-Korea FTA also needs to address key areas for which the business community has high hopes, including protection of intellectual property rights, responses to environmental issues, easing of restrictions on resource and energy exports, enhancement of the business environment, and greater transparency in national regulations. It will be important to swiftly achieve higher standards in all these fields.
(4) Earliest Conclusion of a Japan-EU EPA
On March 25 this year the leaders of Japan and the EU agreed to launch EPA negotiations in April. As speed is vital to companies exposed to fierce competition on a daily basis, an agreement needs to be concluded as early as possible to secure a level playing field in the EU market, create a seamless business environment between Japan and the EU, and facilitate and expand business in third-country markets through Japan-EU cooperation. Bearing in mind that the EU will take stock on the progress made by Japan in addressing non-tariff measures within a year after negotiations begin and decide whether or not to continue talks, in order to conclude the negotiations in a form that will achieve the above goals Japan needs to steadily implement its current policy on regulatory and institutional reform with a view to economic partnership with the EU (including the cabinet decision on July 10, 2012) and promote further regulatory and institutional reforms, including international harmonization of technical regulations and standards, that will benefit both sides.
To create a highly transparent, free, and stable business environment between Japan and the EU, it will be necessary to establish systems and rules enabling the free flow of people, goods, capital and services, information and knowledge. In doing so, the EU should pay due attention to ensure that systems and rules are applied to all member states in a uniform manner. Keidanren has already made proposals regarding a certain field, and will continue to look into details and make additional suggestions as part of our efforts to encourage industry-level dialogue on a sectoral basis between Japan and the EU. We have taken this opportunity to we renew our call for Japan and the EU to vigorously tackle challenges across industrial sectors, including (1) enhancing transparency and certainty through, for example, notification and consultation when changing tariff classifications and duty suspension measures, and launching trade remedy investigations, (2) ensuring regulatory coherence through, for example, notification, consultation, and early solicitation of comments when introducing or revising domestic regulations, and conducting continuous consultation on better regulations, and (3) promoting harmonization and mutual recognition of technical regulations, standards and conformity assessment procedures as well as mandating prior notification of their introduction and revision at a sufficiently early stage.
In developing such systems and rules, it will be essential to consider not only strengthening Japan-EU economic relations, but also applying them globally including emerging countries. Now that negotiations for an EU-US FTA (TTIP) are likely to begin in the near future, and Japan has formally announced its participation in the TPP negotiations, we first need to aim at establishing common rules among developed countries, while maintaining close links with the US, which shares our fundamental values.
(5) Other FTAs to Be Negotiated
In addition to those mentioned above, other countries and regions need to be strategically selected for conclusion of FTAs.
Other FTAs currently under negotiation (Australia, Canada, Colombia, Mongolia, Gulf Cooperation Council [GCC], and South Korea) need to be settled and put into effect as soon as possible. The joint study into an FTA with Turkey should be concluded swiftly, and negotiations started at the earliest possible date.
In addition, Japan should periodically review existing FTAs including that with ASEAN and continually attain rules suited to new business.
3. Expansion of Multilateral Rules Building on WTO
(1) Approach to Multilateral Free Trade System
1) Multilateral Liberalization Negotiations (WTO Doha Round)
Beginning with the General Agreement on Tariffs and Trade (GATT) and continuing through the establishment of the WTO, negotiating rounds aimed at multilateral trade liberalization have made an enormous contribution to building multilateral free trade structures. Keidanren has consistently strived to promote such negotiations, and was dismayed by the decision to abandon the goal of concluding the WTO Doha Round in the near future, after negotiations lasting more than ten years.
With a view to future settlement, agreement in trade facilitation negotiations is being prioritized over other areas. We call on WTO member countries to engage earnestly in this process to move the stalled round forward, reach agreement in areas where this is possible, and achieve the results the business community is hoping for.
2) Maintenance and Enhancement of the Multilateral Free Trade Structure
In proceeding with FTAs and issue/sector-specific agreements in various sectors, it is imperative to maintain confidence in the WTO, on which the multilateral free trade structure is built. FTAs and issue/sector-specific agreements must not replace or conflict with WTO functions such as law-making via negotiating rounds, and must supplement the WTO framework. It is vital that negotiations for FTAs and issue/sector-specific agreements preserve consistency with WTO agreements with a view to future incorporation into such agreements, and that negotiations are linked to efforts to formulate rules within the WTO multilateral free trade framework.
At the same time, the WTO's quasi-judicial functions in the form of dispute settlement procedures and its administrative functions in monitoring compliance with agreements, including deterrence of protectionism, continue to be as important as ever and need to be maintained and strengthened.
To this end, Japan should make active use of these functions and bring measures that are inconsistent with WTO agreements by other countries to dispute settlement procedures in the aim of swiftly resolving problems. Concerns also exist over measures that are consistent with WTO agreements yet have an adverse affect on free trade. To deter protectionist measures such as tariff hikes and preferential treatment for domestic products, the Japanese government should cooperate with other countries to actively confront countries taking such measures.
(2) Participation in Issue/Sector-Specific Rule Creation/Efforts by Like-minded Countries
1) ITA Amendment and Expansion
Since the WTO ITA came into effect in 1997, it has contributed to an increase in world trade of IT products and opened up a path for emerging and developing countries to grow as traders in IT goods. However, the goods covered by the agreement have not been reviewed in the 16 years since it took effect, and the ITA does not cover new IT products stemming from rapid technological progress, especially multifunctional products that have emerged with advances in digitization. Furthermore, emerging countries including those in Latin America are not members, making expansion of both the products covered and the membership a pressing issue.
In the negotiations launched in 2012 to expand the range of products covered by the ITA, we should seek to add products in which Japanese companies have strengths (including multifunctional products, digital network home appliances, and medical and healthcare equipment) and to introduce a mechanism for periodically amending and adding to the product list to enable the agreement to adapt to future technological advances. As well as aiming to conclude negotiations and bring the new agreement into effect as quickly as possible, we should continue efforts to expand the membership with a view to maximizing ITA effectiveness.
2) Negotiation of the Trade in Services Agreement [TISA]
After the stalling of the Doha Round, which included service trade within the scope of its negotiations, the concept of new service trade agreements outside the round emerged in mid-2011. As a result of discussion among 21 like-minded countries including Japan, it was agreed to launch negotiations in the spring of 2013.
It is vital for Japan to play an active role in these negotiations and formulate high-level rules suited to business realities. However, major emerging countries including ASEAN nations, China, and India are not taking part in the negotiations. It is essential for Japan that establishing rules and liberalization of service trade should include these countries.
To ensure that in the future the TISA can be incorporated into a WTO agreement applying to all WTO members, it should be consistent with the WTO General Agreement on Trade in Services (GATS). Other WTO members should be actively encouraged to join this plurilateral agreement based on WTO provisions, and negotiations should include emerging and developing countries and achieve a level of liberalization exceeding the commitments made in existing WTO agreements.
Specifically, the agreements should focus on achieving high-level liberalization in fields including distribution, ICT, e-commerce, finance, insurance, audio-visual services, air transport, construction, and medical care. When categorizing and defining services, the negotiations should consider the need to steadily guarantee liberalization of new services reflecting business realities as technology advances in fields such as ICT.
Other important aspects are domestic regulations (transparency of approval and authorization requirements, and transparency of regulations through the introduction of public consultation systems, etc.) and liberalization of investment (elimination of restrictions on foreign ownership in mode 3 services and restrictions on the type of legal entry of business bases, etc.).
In liberalizing the movement of people, it is necessary to enable natural persons working in specialized or technical fields to move freely across borders. Temporary stays should also be liberalized, including personnel movement within companies, movement of persons working in specialized or technical fields between companies or on the basis of individual contracts, business trips, and short-term assignments. Visa procedures should be simplified and made more efficient wherever possible, and a visa waiver system needs to be established for in-house movement of persons working in specialized or technical fields.
3) Expansion of Agreement on Government Procurement
We hope that as many major emerging countries as possible will join the Agreement on Government Procurement, and the Japanese business community is especially interested in seeing China become a member.
We need to continue calling for China to join the Agreement as quickly as possible and to make a high level of commitment regarding subject organizations, products and services, and standard procurement amounts. If China becomes a member of the Agreement, this can be expected to encourage the membership of other emerging nations that are currently observers (such as Indonesia and Turkey) and contribute significantly to the liberalization of the government procurement market.
4. "Unified Axis": Issue/Sector-Specific Coherent Approach with a View to Developing Multilateral Rules- What Japan Should Aim For
It is important for Japan to establish a common approach to negotiating FTAs and issue/sector-specific agreements as a "unified axis", with a view to developing shared, multilateral trade and investment rules it should aim for as part of future WTO agreements, and to harmonize rules as much as possible among its various FTA frameworks.
Further strengthening of links among FTAs involving Japan, Europe, the US, and other major countries will be effective in helping to achieve this goal. Cooperative initiatives including formulation of rules and guidelines in forums such as APEC would also contribute to greater connection and harmonization of FTA and issue/sector-specific agreement efforts. We should devote further energy to the strategic activities of APEC as a forum for promoting progressive initiatives including reduction of tariffs on environmental goods and facilitation of supply chains.
Below are examples of the consistent approach that should be adopted in the aim of establishing shared, multilateral rules in negotiations for FTAs and issue/sector-specific agreements, through efforts such as those mentioned above.
(1) Liberalization of Goods in Which Japan Has Strengths (Environmental Goods, Medical/Healthcare Products, etc.)
Liberalization of goods in which Japanese companies have strengths is essential to overall facilitation of business supply chains that incorporate bases in Japan. Through FTAs and issue/sector-specific agreements, we should strategically promote global elimination of tariffs on such goods, which include environmentally friendly products and medical/healthcare products.
At the 2012 APEC Summit, it was agreed to reduce applied tariff rates on 54 environmental goods to 5% or less by the end of 2015. Keidanren welcomes this as an important step towards liberalizing environmental goods. However, energy-saving technologies and equipment, in which Japanese companies have strengths, are not included on the list. Japan should continue its efforts to have energy-saving technologies and equipment defined as environmental goods and to liberalize them.
(2) Simpler and Smoother Customs Procedures
Enhancing connectivity in response to the development of global corporate supply chains is essential in facilitating cross-border distribution, and the following measures are especially crucial.
1) Rules of Origin
Rule of origin and certification systems for receiving preferential tariffs should be easier to use. Specifically, a system needs to be adopted that enables companies to choose the standard to be applied freely from several options, including tariff code change, added value, or extent of processing.
To deal with business models involving third-country bases, it should be easier to obtain country of origin certification using invoices issued in the third country. The use of both the approved exporter self-certification system and the third-party certification system should also be allowed.
Moreover, it is important to encourage use of FTAs, and rules should be established for provision of FTA databases by customs authorities, harmonization and commonality of rules of origin, and recognition of full cumulation among treaty-member countries.
2) Improvement of Single Window Usability and Enhancement of AEO System
There is a need to establish true, user-friendly single window systems with paperless and electronic import/export and port procedures. The relevant authorities should promote data-sharing and simpler, more efficient procedures.
To facilitate trade without compromising trade security, procedures for Authorized Economic Operators (AEO) should be further simplified. A multi-level system should be considered, whereby AEOs are graded according to security and compliance system status, and customs procedures are eased to a greater extent for higher grades.
At the same time, the mutual recognition of AEO systems should be expanded. In the aim of achieving international consistency in future unified multilateral framework, forums such as APEC should offer further support for establishing AEO systems. In particular, a multilateral mutual recognition system needs to be quickly established within the APEC framework and implemented in stages, beginning with countries where implementation is possible.
(3) Disciplines Concerning Export Restrictions on Natural Resources and Foods
Stronger disciplines than those included in current WTO agreements should be introduced to counter restrictive measures concerning exports of foods and scarce materials such as rare earths, including prohibition of export duties and arbitrary resource development regulations. Stricter conditions should be imposed regarding measures recognized as "general exceptions" under such agreements.
At the same time, the application of existing WTO disciplines concerning export restrictions or export duties should be strengthened and clarified by referring such matters to dispute settlement procedures. A reporting mechanism to ensure transparency in the administration of export regulations concerning scarce materials such as rare earths should also be established as quickly as possible.
Amid concerns about the tightening of global food supply and demand, export restrictions imposed on agricultural products by exporting countries in a food crisis represent a great threat to food security in importing countries. Accordingly, Japan should strive to further strengthen disciplines, for example by establishing rules on export restrictions. It is also necessary to ensure the stability and security of agricultural production through cooperation in training and exchange of human resources, establishment of production infrastructure, improvement of production technologies, and provision of equipment and materials. In addition, it is important to promote the securing of a stable food supply through measures such as the creation of a framework for the joint reserves of food.
(4) Information and Communications Technology (ICT) Services (Electronic Commerce and Telecommunications)
There is a need for comprehensive liberalization of ICT services, including those in developing countries. It is especially vital to enable the free and smooth cross border provision of newly-developed services driven by technological advances (such as Internet services, cloud computing, and data centers). National regulations governing such services also need to be more transparent. Progressive initiatives with private-sector involvement, such as the US-Japan Cloud Computing Working Group Report, can provide valuable reference material for such efforts.
As international service trade expands and plays an increasingly important role in global business, it is vital to establish rules for smooth cross-border distribution of data and content. Regulatory systems should be designed to make the customs duty moratorium on electronic transmission and content permanent and binding, ensure non-discriminatory treatment of digital products and content, balance the privacy of individual/user data with the smooth flow of data, and ensure information security. With a view to international harmonization of such systems, specific rules should be established through the involvement of diverse stakeholders in continuing policy dialogue, making use of frameworks including not only the United Nations International Telecommunication Union (ITU), but also the World Intellectual Property Organization (WIPO), Organisation for Economic Co-operation and Development (OECD), and Asia-Pacific Economic Cooperation (APEC).
Concern has been caused by cases where governments have imposed, or called for consideration of, regulations hampering smooth provision of cross border services, including obliging operators to establish relevant data storage facilities, servers, or data centers within their jurisdictions or imposing charges or taxes on data flows. Since such regulations can jeopardize the convenience of cloud computing and other international services and can cause price rises, they should be limited to achieving clear and specific policy goals, such as ensuring a level playing field for domestic and overseas operators.
As international service provision has increased, issues have arisen regarding tax treatment at the national level. Although consumption tax is levied on content provided within Japan when digital content is provided via the Internet, etc., it is not levied on content provided from overseas. This interferes with neutrality and fairness, creating a disparity in the competitive conditions applying to domestic and overseas operators. In addition to business-to-consumer (B-to-C) transactions involving content such as music and e-books, the problem has also been noted in business-to-business (B-to-B) transactions including advertising distribution services, and harmful effects will be exacerbated when the consumption tax rate rises.
The relationship between cross border service provision and consumption tax needs to be examined with reference to OECD discussions and EU systems and giving full consideration to corporate compliance costs from the perspective of establishing equitable competitive conditions for operators. Tax system revisions scheduled for fiscal 2014 should introduce necessary measures for both B-to-B and B-to-C transactions.
(5) Expansion of International Rules and Cooperation on Intellectual Property Rights (Measures Against Counterfeit and Pirated Goods)
The prevalence of counterfeit and pirated goods in developing countries, particularly in Asia, is an impediment to securing profits. In view of this situation, there is a need to establish and improve legal systems related to intellectual property, strengthen enforcement through stricter penalties, etc. to prevent repeat offenses, encourage the dispatch of public- and private-sector experts through international cooperation, and promote appropriate protection in every country and region.
Specifically, it is important to expand the member countries of the Anti-Counterfeiting Trade Agreement (ACTA), an international agreement against counterfeit and pirated goods proposed by Japan.
It will also be beneficial to promote cross-border cooperation among customs authorities that expose and prevent counterfeit and pirated goods, determine the extent of damages, respond effectively, strengthen cooperation between tax authorities and among tax, police, and patent agencies, and establish a platform for public-private sector cooperation for the prevention of counterfeiting and pirating.
(6) Investment Protection and Liberalization
The best way of improving the investment environment, which contributes to smoother global supply chains and value chains, is to establish multilateral investment rules. High-level investment rules are crucial to stable investment in developing countries by Japanese companies in areas such as infrastructure exports. Now that foreign investment is being made not only by companies in advanced countries but also by those of emerging nations, global investment rules are becoming increasingly necessary for emerging nations too.
As well as establishing high-level rules through mechanisms such as TPP and the Trade in Services Agreement (TISA), it is worth considering formulation of multilateral investment rules through plurilateral agreements among like-minded countries, in the aim of wide-reaching participation by developing countries.
Multilateral investment rules must cover all type of assets directly or indirectly owned or controlled by investors and include investment protections, liberalization provisions, and high-level dispute settlement procedures (systems that cover investment disputes to resolve wide-ranging infringements of investment treaties and include provisions for Investor-States Dispute Settlement).
Regarding the protection of investment, it is necessary to include provisions for post-investment most-favored-nation treatment, national treatment and fair and equitable treatment obligations, restrictions on expropriation and appropriate compensation, freedom of remittance, governments' observance of promises made to foreign companies (umbrella provisions), and transparency through the publication of laws and regulations. Regarding the liberalization of investment, it is important to incorporate provisions for national treatment and most-favored nation treatment and prohibition of performance requirements prior to investment.
(7) Prohibition of Government Restrictions on Payment of Royalties and Overseas Remittance
Developing countries sometimes limit technology licensing fees (royalties paid to foreign companies in compensation for use of technology) and place ceilings on overseas transfers or contract periods. This prevents companies from collecting appropriate compensation for granting intellectual property rights and makes it difficult to repatriate profits. There are also cases where profits earned overseas by Japanese companies and retained locally are subject to double taxation: transfer pricing taxation by Japanese authorities and taxes levied by the local government. If no tax treaty exists, the relevant tax authorities do not consult with each other. Even if they do consult, there are cases where taxes paid are not refunded due to difficulties or breakdowns in discussions, or because no tax refund system exists in the other country.
To make it easier for Japanese companies to recover fees due to them for providing technology, the governments of countries where such companies invest should introduce rules prohibiting ceilings on royalty rates and overseas transfers. This would enable companies to set appropriate royalty rates and encourage transfers to Japan. If profits are retained locally, double taxation due to a lack of fairness and predictability in operation of transfer pricing taxation can be avoided.
(8) Competition Policy: Ensuring a Level Playing Field for SOEs and Private Firms
Disciplines relating to a level playing field for state-owned/operated enterprises (SOEs) and private companies include matters not covered by the current WTO Agreement on Subsidies and Countervailing Measures. In the TPP negotiations, Japan should propose appropriate disciplines in light of its own vision for domestic SOEs, referring to OECD guidelines concerning SOEs.
There is a particular need to discuss disciplines concerning conduct by SOEs operating overseas that could distort competition with private companies. For example, disciplines are required on SOEs using home-country governments and their own finance to disregard commercial conditions when acquiring resource interests.
(9) Trade Measures and Rules for Preservation of the Environment/Biodiversity
It is necessary to examine the formulation of rules on curbing the distorting effect of trade and investment through measures based on international rules regarding elimination of greenhouse gas emissions and ensuring biological diversity.
5. Improvement of Systems to Supplement the WTO, FTAs, and Issue/Sector-Specific Agreements
Since Japanese companies face many challenges in their overseas business, not all problems can be resolved only by concluding agreements such as FTAs and utilizing WTO mechanisms. As part of efforts to establish systems relating to trade and investment, it will be essential to improve related systems, including the conclusion of investment treaties, tax treaties, and social security agreements as outlined below.
(1) Investment Treaties
Japan has so far concluded only 30 investment treaties including FTAs with investment chapters, lagging far behind Western countries, China and South Korea in this regard. Furthermore, the level of protection and liberalization of investment in these investment treaties or FTAs with investment chapters is not necessarily sufficient.
As well as ensuring that FTAs or investment treaties currently under negotiation or preparation (Saudi Arabia, Kazakhstan, Angola, Ukraine, Algeria, Mozambique, Uruguay, Myanmar, Oman, Morocco, Libya, and Qatar) are concluded as quickly as possible, Japan should without delay begin examining the establishment of legal frameworks for investment from Japan (investment agreement or FTA including investment chapters) with important countries and regions that have not yet provided such a framework (Brazil, South Africa, United Arab Emirates, Argentina, Venezuela, Nigeria, Iran, Bahrain, Panama, Bolivia, Israel, etc.). Furthermore, reviews should be conducted continuously to raise the level of investment protection and liberalization in existing treaties.
In order to make timely and appropriate revisions of systems and rules in response to the daily changing business environment and needs of companies, it will also be necessary to incorporate a framework allowing for continuous requests for improvement from the private sector across the entire business environment, including issues not covered by agreements.
(2) Tax Treaties
Elimination of international double taxation through tax treaties is essential to ensuring that Japanese companies can securely and steadily develop their business overseas. Reduction of source-country taxation on investment income also helps to achieve a virtuous cycle of fund repatriation from overseas and reinvestment in the country.
Japan should revise its tax treaties with countries including China, India, Thailand, Indonesia, Singapore, Malaysia, South Korea, Vietnam, Brazil, Germany, and Russia, and negotiate to conclude tax treaties with countries and regions that are not currently treaty partners, including Taiwan, Chile, Myanmar, Argentina, Venezuela, Colombia, and Nigeria.
During such negotiations it is important to include provisions for corresponding adjustment in response to transfer tax pricing and an arbitration provision, which contribute to swift rectification of international double taxation, withholding tax exemption provisions relating to parent-subsidiary dividends and interest on loans, and provisions for reducing or exempting withholding tax on royalties.
The introduction of permanent establishment (PE) rules relating to services needs to be carefully addressed, since such rules lead to an expansion of the scope of taxation in source countries. Challenges in individual treaty negotiations will include improving royalty definition rules and PE rules.
In recent years, transfer pricing taxation and PE taxation have often lacked transparency in tax treaty partner countries, especially China and India. As well as seeking to establish and improve tax treaties, Japan's public and private sectors need to unite in proactively addressing such issues with a view to resolving actual disputes that have arisen and promoting fair implementation of rules, for example by calling on partner governments and local governments that conduct tax inspections to make improvements.
(3) Promotion of Social Security Agreements
As the world economy becomes increasingly globalized, Japan's overseas direct investment is expanding and the number of Japanese nationals overseas is increasing, especially in Asia. Concluding social security agreements should be further promoted as part of efforts to provide legal platforms for international business activities. Agreements, which are aimed at avoiding the dual burden of contribution payments and totalizing the coverage period of signatory countries eligible for benefits, would reduce costs associated with assigning staff overseas and preserve employees' rights to social security. In order to ensure a level playing field with foreign companies and enable Japanese companies to appropriately locate personnel globally, it is important for Japan to promote the conclusion of social security agreements.
Up to the present, Japan has concluded social security agreements mainly with Western developed countries. In parallel with such efforts, the conclusion of social security agreements with emerging countries is now an important challenge, given that those countries are attracting a large number of companies as both global manufacturing centers and growing consumer markets.
Specifically, Japan should soon conclude agreements with the six European countries (Hungary, Luxembourg, Sweden, Austria, Slovakia, and Finland), China, the Philippines, and Turkey with which negotiations or consultations are currently under way. Japan also needs to launch negotiations with Portugal, Mexico, and Russia, with which agreements have been called for by Japanese businesses or the governments of countries concerned.
The agreement currently being negotiated with China, which has the second-largest number of long-term Japanese residents, including company employees assigned there, after the United States and claims a large social security burden in total, must be concluded as quickly as possible. The fact that specific implementation of the law differs from one province to another is one of the reasons why the earliest conclusion of the agreement is necessary.
In addition, possibilities for concluding plurilateral agreements need to be studied from a medium- to long-term perspective to facilitate the intra-company movement of employees between overseas bases.
(4) Restructuring the Export Control System
Concrete efforts are under way to achieve the internationalization of the numbering system for controlled items recommended in the above-mentioned "Proposals for Japan's Trade Strategy" issued by Keidanren in April 2011. Some progress has also been made on improving the clarity of the application of the Foreign Exchange and Foreign Trade Act to cloud computing services, which Keidanren called for in its proposal for regulatory reform last fiscal year. Now that a certain amount of progress, albeit not yet sufficient, has been achieved in streamlining and simplifying regulations, the time is right to get down to the work of restructuring the export control system.
Firstly, it is essential to shift away from the current situation where considerable human resources and time are devoted to judgments as to whether a certain item to be exported falls under the control list, towards a control system focused on regulation based on the assessment of end-use of items to be exported. The original purpose of the export control system — to prevent sensitive products and technologies from being diverted to purposes such as use for weapons of mass destruction or being transferred to countries which have a strong potential to cause security concerns without undermining companies' international competitiveness — would be fulfilled if such a reform is implemented, In making a reformed system work, the Government of Japan should reinforce its available resources and functions for identifying end-uses with the potential for causing security concerns, and inform exporters that they should apply for export licenses to conduct transactions judged by the government to present security concerns. For other transactions, "the Foreign End User List" would be improved under a new system to increase the visibility of information on importers and users of concern, and in principle export licenses would not be required for transactions deemed to present extremely low security concerns (for example, exports to overseas subsidiaries, exports to "white countries," and return of goods).
Secondly, a legal system for export controls should be carved out from the Foreign Exchange and Foreign Trade Act, and should then be reorganized and simplified. The current export control system has the following defects among other things: (1) it is difficult to identify exactly what items and destinations are controlled without going through complex systems that are multi-layered and contain many exceptions; (2) it is not easy to understand the patchwork of additions and amendments to the law and their implementation regulations; and (3) application and interpretation of the law and its regulations are not always consistent. Reforming the legal system would resolve these problems, enabling limited public- and private-sector resources to be focused on items that really need to be controlled and create a clear and simple system.
(5) Compatibility of Corporate Social Responsibility with Smooth Supply Chains
With the global spread of companies' supply chains, it has become necessary for companies to make the utmost efforts to fulfill their corporate social responsibility across the whole supply chain. However, in cases where it is necessary to ensure these corporate efforts by means of regulations, the contents of these regulations should be made flexible in accordance with the actual situations of the various supply chains.
For example, the US Dodd-Frank Wall Street Reform and Consumer Protection Act obliges companies listed in the US to investigate and report on whether certain minerals used in products originate from countries such as the Democratic Republic of the Congo that have relations with armed groups. However, it is not easy for individual companies to obtain voluntary disclosure of mineral supplier information from refiners. To fulfill the purpose of the law, the US authorities should cooperate with other governments to ease the compliance burden for companies by educating individual refiners and encouraging them to obtain "conflict-free" certification.
6. Promotion of Domestic Reforms to Thrive in Global Competition
In order to thrive amid intensified competition with overseas companies as countries vie to enhance their own competitiveness by establishing global trade and investment rules, as part of growth strategy there is a pressing need to restore and strengthen Japan's "location competitiveness" and improve the business environment for companies operating bases in Japan.
To this end, Japan needs to take the initiative in establishing global rules in the aim of liberalizing and facilitating overseas business through arrangements such as FTAs and issue/sector-specific agreements. At the same time, it is important to attract domestic and foreign investment and jobs by providing a business environment more suited to promoting innovation and promoting the vitalization of Japan's private sector.
From this perspective, there is an urgent need to undertake fundamental domestic reforms including developing and securing wide-ranging human resources to strengthen competitiveness and establishing a business environment equal to that of other countries through bold reforms of regulations and systems. In the agricultural sector, which is one of the focal points of negotiations with other countries, Japan needs to create a strong industry that can thrive within TPP and other FTA frameworks by undertaking fundamental domestic reforms to enhance competitiveness and make agriculture a growth industry.
(1) Enhancing Competitiveness of Agricultural Industry and Developing It into a Growth Industry
In order to make agriculture more competitive, it is essential to expand the scale of operations and improve efficiency by consolidating farmland. The Japanese government is currently facilitating the formulation of regional agricultural master plans, which should be finalized as quickly as possible to swiftly achieve the following five-year goal for farming units in field crop agriculture in flat land areas stated in The Basic Policy and Action Plan for the Revitalization of Japan's Food, Agriculture, Forestry, and Fisheries determined by the Headquarters for the Revitalization of Food, Agriculture, Forestry, and Fisheries on October 25, 2011: "farming scale should be expanded substantially with the aim of realizing an agricultural structure where management entities with 20-30 ha of farmland in the case of flat land areas and 10-20 ha in the case of hilly and mountainous areas are the majority" (approximately 80%).
In addition, the domestic agricultural sector should be developed into a growth industry by realizing highly profitable farm management through promoting agricultural exports, along with encouraging agricultural-commercial-industrial collaboration and "Sixth Industrialization" (i.e., turning agriculture, forestry, and fisheries into value-added industries by integrating, among others, processing and/or retailing functions with them).
Japan needs to quickly build a strong domestic farming industry not only by taking these steps towards enhancement of its competitiveness and its transformation into a growth industry but also by reforming the direct payment scheme to provide a platform for such efforts. At the same time, the Japanese government must strive in its negotiations for TPP and other FTAs to obtain favorable terms to meet the national interest as well as implementing a comprehensive package of necessary domestic measures based on the progress of both domestic structural reforms and international negotiations.
The Japanese business community has high expectations for strong political leadership to achieve these goals and intends to cooperate in the agricultural sector's reform efforts in every way possible by making full use of all its technologies, knowledge, and expertise.
(2) Reform of Other Rules and Systems
In order to place Japan on the path to growth under the current challenging economic conditions and fiscal constraints, it will be essential to reform regulations and systems in ways that promote innovation through originality and ingenuity in the private sector, to rectify high-cost structures, and to create a free and smooth business environment. There is an urgent need to review regulations in the fields that are expected to contribute to the expansion of markets, creation of employment, and revitalization of the Japanese economy such as agriculture and medical, nursing, and child care, as well as encouraging the use of ICT including big data business, promoting smart cities, and attractive urban development. Regulatory reform is also vital in the employment sector, to encourage labor force participation by diverse groups including women and older people and promote labor mobility.
Moreover, Japan needs to create systems and environments for accepting more diverse foreign personnel in order to develop and secure human resources that, regardless of nationality, hold the key to enhancing competitiveness through innovation.