Towards the Implementation of Strategic Trade Policies

In our July 2000 proposal entitled 'Urgent Call for Active Promotion of Free Trade Agreements', Keidanren urged that while Japan should remain strongly committed to the WTO system, which is based on free, multilateral and non-discriminatory principles, the Japanese government should also simultaneously pursue measures towards forming trade agreements at bilateral and regional levels. Since then, for the first time, early this year the government initiated negotiations for a free trade agreement with Singapore, officially called the 'Japan-Singapore Economic Agreement for a New Age Partnership'. This is the first step towards the development of a new trade policy framework.

All WTO members will discuss the launch of a new round of negotiations at the 4^th WTO Ministerial Conference, which will be held in Doha, Qatar in November this year. These negotiations would include discussion of new issues as well as further liberalization and strengthening of rules in areas already discussed at previous rounds.

Under these circumstances, however, Japan's trade policy position is not clear. Especially, Japan's position on how to strengthen the WTO system, its intentions regarding the types of trade agreements to be formed with which country or region, and what type of domestic structural and systemic reforms need to be created has not been made explicit.

Now is the time for Japan to lay out the grand design for future trade policy for the understanding of those at home and overseas, and to take a proactive initiative to strategically promote this policy.

Keidanren urges the government to adopt and implement the strategic trade policies shown below along with domestic regulatory reform. Individual companies are expected to contribute to sustainable economic development in Japan as well as the prosperity of the world economy through business activities under the new international trade framework.

1. Expansion of International Business and Trade Policies of Foreign Governments

Along with the rapid globalization of the economy, Japanese businesses are actively promoting the advancement of division of labor between Japanese and foreign countries and forming strategic partnerships with foreign companies, while at the same time also pursuing the expansion of cross-border business activities. The influence of international standards and rules on business activities undertaken by Japanese companies is also expanding.

The number of bilateral and regional Free Trade Agreements (FTAs) in the world has been growing on an unprecedented scale and pace since the early 1990s. Already, more than 120 FTAs exist worldwide. Most countries, including the United States and European countries, are promoting the WTO system while also working actively towards promoting FTAs. They are also utilizing the experience gained in these cases in their efforts toward multilateral trade liberalization and the establishment of new rules. Corporations in the U.S. and Europe, which derive maximum benefit from the merits of market integration, are making efforts to expand their operations utilizing results of multilateral negotiations such as the Uruguay Round and those held thereafter.

On the other hand, Japan's trade policies are being dictated by the arguments of individual government ministries without adequate policy debate involving the general public in defining national interests. Japan's ill-defined mid- and long-term trade policies are one of the factors hindering companies with overseas operations in drawing up future business plans.

(Note*)
The 'USTR 2001 Trade Policy Agenda and 2000 Annual Report' of the Office of the United States Trade Representative (USTR) that was published in March this year expresses concern that the U.S. has lagged behind in the global trend of forming FTAs, in contrast to the European Union (EU), which is actively expanding its FTA network, despite the U.S. being the leading nation of the North American Free Trade Agreement (NAFTA).

2. Future Outlook for Regional Economic Integration and the WTO

Ten years from now, it is expected that FTA networks among various countries will expand further. The U.S. is working to strengthen economic ties with partner countries through alliances such as the Free Trade Area of the Americas (FTAA), and through concluding FTAs with countries in the Asia-Pacific region and the Middle East. The EU has already begun to expand towards Eastern European countries, and is also working actively to strengthen economic ties with countries in Central and South America, as well as with Gulf Cooperation Council (GCC) countries and Africa, Caribbean and Pacific (ACP) countries. In East Asia, along with the establishment of the ASEAN Free Trade Area (AFTA), it is expected that mainly Singapore and the Republic of Korea will conclude a number of regional and trans-regional FTAs.

At present, the WTO system includes over 140 member countries and regions, with additional 30 countries and regions under accession. With the accession of countries and regions such as the People's Republic of China, Taiwan, the Russian Federation and the Socialist Republic of Viet Nam, that number is expected to rise steadily in the future. The range of issues dealt with at the WTO is expanding. In the course of the Uruguay Round negotiations, the issues of trade in services, intellectual property rights and trade-related investment measures were discussed in addition to tariffs and non-tariff barriers on goods. It is now expected that future rounds of negotiations will see efforts on new trade issues such as electronic commerce, and issue of trade and environment, trade and development, trade and investment, and trade and competition policy.

The Japanese government should adopt and implement a strategic trade policy based on a complete grasp of the current situation and a clear outlook for the future. In addition to promoting global activities of Japanese companies, it is vital to create a business environment that will enable Japanese companies to maximize their strength, in the area of trade policy.

(Note*)
A universally accepted definition of a FTA does not exist and the contents of FTAs may differ according to the agreement in question. Here, the term FTA is used in reference to bilateral or regional agreements with comprehensive coverage which address the following issues:

1. Elimination of tariff and non-tariff barriers related to trade in goods
2. Liberalization of trade in services
3. Investment protection and liberalization
4. Establishment of trade rules with regard to issues such as rules of origin, anti-dumping and safeguard measures
5. Harmonization and mutual recognition of standards and certifications
6. Protection of intellectual property rights
7. Opening of government procurement markets
8. Simplification of customs and other trade-related procedures
9. Cooperation in the areas of financial and telecommunication services, technical exchange and human resource development
10. Establishment of dispute settlement procedures

In this case, requirements of Article XXIV of the General Agreement on Tariffs and Trade (GATT) in relation to trade in goods and Article V of the General Agreement on Trade in Services (GATS) regarding trade in services must be adhered to.
However, since total consistency with Article XXIV of GATT is not easy, agreements that are expected to have major economic effects through liberalization and cooperation in areas other than 1 as outlined above, will henceforth be referred to as 'Agreement for Promotion of Economic Relations.'

1. Basic Guidelines for Trade Policies

With recognizing that Japan is a Nation Built on Trade (one which has sustained and developed itself through trade and investment), it is imperative to develop strategic trade policies that contribute toward strengthening the global competitiveness of Japanese industries, in order to ensure the overall welfare of the Japanese economy, while promoting the further opening up of markets. The following points form the basic guidelines, which are prerequisite to achieving this end:

1. Promote a multilateral trade system centering on the WTO while concluding bilateral and regional trade agreements proactively.

2. Remove barriers to free cross-border movement of business resources such as people, goods, services, capital and information, while undertaking efforts to maintain transparency, and achieve the harmonization of domestic systems and regulations with international standards.

3. Promote domestic structural and systemic reforms along with the realignment of Japan's trade policies through strong political leadership. In this process, Japan should also reform the overcompartmentalized vertical system of related Ministries and Agencies, and utilize the business experiences of the private sector.

2. Trade Liberalization and Strengthening of Rules within the WTO

Japan should take a lead so that the WTO system, which has the basic principle of granting Most Favored Nation (MFN) status among the member countries, and the mechanism for dispute settlement, will continue to play a central role in the international trading system.

One of the immediate issues regarding Japan's trade policy is to ensure the launch of a new round of comprehensive negotiations at the WTO Ministerial Conference to be held in Doha this November. For this, it is essential to resolve differences in opinion regarding the agenda among member countries, including developed countries as well as developing countries, before summer this year. It is essential that the public and private sectors of Japan work in coordination towards this end, that our nation strengthen ties not only with European nations but also work proactively to call upon the new U.S. administration in this regard. In particular, it is imperative that the Quadrilaterals, namely Japan, the U.S., EU. and Canada, work in coordination and take initiative in the WTO liberalization talks. Also, since the participation of developing countries is indispensable to the success of launching the WTO new round, it is imperative that due consideration be given to the needs of developing countries.

Japan must work towards the inclusion of the following issues in the agenda:

Integration of the Built-In Agenda:

Ongoing negotiations for liberalization of trade in services and agriculture should be integrated into the new round of WTO talks. In particular, regarding the issue of trade in services, which forms a considerable bulk of overseas activities for Japanese companies and is also gaining global prominence, there are still some countries where obstacles have not been removed to a satisfactory level. Thus, we must call for an initiative to promote further liberalization and the strengthening of rules.

Reduction of Tariffs on Industrial Products:

While using request-offer approach (reducing or eliminating tariffs by country-to-country negotiations) or the formula-cut approach (reducing the tariffs based on a numerical formula for all countries) as a basic policy, alternative approaches (for all countries) such as the peak tariff cut (concentrating on reducing or eliminating particularly high tariffs), which developing countries have much interest in, removal of tariff escalation (where the tariff is higher for highly processed products) and zero-zero tariff cut (removal of all tariffs in a specific sector) should also be explored.

Review of the Anti-Dumping Agreement:

There is a need to review the present Agreement, and to make revisions and clarify rules in order to prevent abusive enforcement of anti-dumping measures.

Establishment of Investment Rules:

It is necessary to establish rules for the protection and liberalization of investment while ensuring participation by a large number of countries from many regions to a satisfactory standard.

Likewise, it is also necessary to consider issues such as promoting trade facilitation, strengthening of the mechanism for the protection of intellectual property rights, establishing rules for electronic commerce, handling trade-related aspects of the environment, and the issue of trade and competition. Keidanren's basic position regarding the new round of negotiations will be put forth in a separate proposal to be announced in July this year.

In order to assist developing countries in fulfilling their obligations to WTO agreements such as GATS, the Treaty on Trade-Related Investment Measures (TRIM) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), it is necessary to formulate a policy to undertake capacity-building measures through providing financial and technical cooperation. Japan should take the initiative and utilize the APEC, and other bilateral and international schemes to establish a supporting system.

3. Promoting Bilateral and Regional Agreements

To complement and promote trade and investment liberalization of the WTO multilateral rules, it is necessary that Japan also work proactively in utilizing bilateral and regional agreements. In particular, FTAs have the following benefits:

1. Enhanced economic integration taking advantage of regional characteristics and flexibility in liberalization and the establishment of rules
2. Expand the range of choices for business operation
3. Promote domestic structural reforms
4. Strategic effects from the geopolitical perspective

Viewed as such, Japan must explore the following region-specific strategies:

(1) East Asian Market Integration

Along with the U.S., the East Asia region, centered on ASEAN, China and the Republic of Korea, is gaining prominence as the most important base for global operations of Japanese businesses. Notably, in recent years and in keeping with the increasingly intense competition in global markets, there is a growing trend of Japanese companies collaborating with those in East Asian countries to form international frameworks for the division of labor and mutually complementary systems in processes such as research and development, design and assembly.
A large number of these companies are operating through the ASEAN business network, which is based on the AFTA and ASEAN Industrial Cooperation (AICO) schemes, and are also actively pursuing business development in China, which has abundant land and labor resources, and is a nation that is advancing technologically. It is our firm belief that creating common business infrastructures in East Asia and thereby linking related business networks would lead to an increase in the competitiveness of the entire East Asia region in addition to maintaining and increasing the competitive advantage of Japanese companies.
In this respect, it should be noted that the concept of market integration of East Asia was discussed at the ASEAN+3 (Japan, China, Republic of Korea) Summit Meeting, which was held in November last year. The following outcomes are expected as a result of the integration of East Asian markets:

1. The possibility of strengthening economic ties by eliminating trade barriers such as high tariffs
2. Ease in promoting a division of labor within different industries, and the subsequent formation of efficient production networks aided by the geographical proximity of countries in East Asia
3. Dynamic effects of market integration through the facilitation of trade and investment, deregulation and the standardization of systems
4. Greater regional security through the strengthening of political and diplomatic relations

On the other hand, there are also several obstacles such as the following:

1. The existence of difficult, sensitive sectors in the context of liberalization in all of the countries
2. Difference in the economic development in the region
3. Heterogeneous economic systems, society etc. in the region
4. The concerns of the US and other countries regarding the formation of an Asian economic bloc

As elaborated above, several major obstacles still exist, despite the numerous benefits of pursuing East Asian market integration. Therefore, we suggest the following step-by-step strategy with a view towards achieving East Asian market integration in the mid- to long-term perspective:

1. Japan shall conclude an FTA with the Republic of Korea, following an FTA with Singapore.
2. Japan, the Republic of Korea and Singapore, which have achieved a relatively similar stage of economic development, would conclude FTAs with other countries in the region in the next few years.
3. Japan should give its full support to the completion of AFTA
4. Japan should aim for the conclusion of an FTA among ASEAN+3 countries in the mid- to long-term perspective

In line with the move towards market integration, Japan should assist in capacity building, to assist China in following WTO multilateral rules.

(2) A Free Trade Agreement between Japan and the United States

The United States is Japan's largest trade and investment partner. It is important to seriously discuss concluding an FTA with the U.S. to pursue the further expansion of bilateral economic exchanges with the U.S., thereby enhancing political and security relations and removing any concerns that Japan might be forming an Asian bloc. By aiming at the inclusion of a provision that bans export restrictions of agricultural products in the FTA with the U.S., which is the largest exporter of agricultural products to Japan, it is expected that the FTA will contribute towards our nation's food security through ensuring the food supply source in case of an emergency.
On the other hand, compared to average global tariff rates, the existing rates of Japan and the U.S. are already quite low due to their liberalization efforts through several GATT rounds of negotiations. Reduction or abolition of tariffs on remaining high-tariff items could become sensitive issues politically for both Japan and the US. In such a case, in order to enhance bilateral partnership, it is worth considering the formation of an 'Agreement for Promotion of Economic Relations' as a transitional measure, whereby the issue of trade in goods is excluded from an FTA, with emphasis being placed on issues such as the free movement of people, cooperation in the field of electronic commerce and mutual recognition of standards and certifications, which can be expected to have a large-scale economic effect.

(3) Others

While the U.S. is proceeding with the FTAA initiative, the EU is actively expanding its network of FTAs in Central and South America. If Japan does not take any measure for these movement, Japanese companies may face disadvantages in Central and South America such as being left in an extremely unfavorable position in business operations, as has already occurred in Mexico. It is an urgent task for Japan to promptly conclude FTAs with major countries in Central and South America such as Mexico and Chile to reduce disadvantages for Japanese companies and gain a firm foothold in the region.
Furthermore, it is also necessary to harmonize standards and procedures, conclude and expand Mutual Recognition Agreements (MRAs) with countries and regions such as the EU, Canada and Australia, and at the same time to also explore the possibility of forming 'Agreements for Promotion of Economic Relations'.
Moreover, APEC, as a forum that participants cover various countries of the Asia-Pacific region, including countries of North America and some countries of Central and South America, serves an extremely important function in the liberalization and facilitation of trade and investment. Japan must also make active use of APEC.

1. Advancing Domestic Reforms

(1) Promoting Adjustment of Industrial Structure

In the future, it is likely that as Japan develops strategic trade policies, domestic industries that are unable to compete internationally will face immense pressure due to the expansion of liberalization.
Globally uncompetitive industries should increase productivity and raise competitiveness through self-help efforts. It is also necessary to promote overall adjustment of industrial structure through the market mechanism with the ultimate aim of promoting the welfare of our national economy.
In order to support such efforts, the Japanese government should take necessary measures such as increasing efficiency and promoting further cost reduction in the areas of energy, logistics and distribution and the development of social capital, which have a critical influence on domestic business activities.
To promote the free movement of business resources across borders, it is vital to carry out regulatory reforms in addition to eliminating trade barriers at borders through WTO or FTA commitments.
Keidanren has continually emphasized the need for drastic structural reforms in order to realize prosperity in the 21st century, and has long proposed the building of a free and fair economic society led by the private sector. Since 1995, under the first and second three-year plans of the Regulatory Reform Action Programs, a certain level of success has been achieved in terms of the relaxation and elimination of regulations and the ensuring of increased transparency in government administration. However, economic regulations (*any rules which should be reduced or eliminated) still remain in various sectors.
We urge the Japanese government to create an environment in which companies and individuals can display their creative effort for entering and operating in markets, based on the market principle. To deal with urgent issues such as liberalization of the movement of people, goods and services to facilitate the globalization of the economy, the IT Revolution, the rapid aging and low birthrate Japanese society and environmental issues, Japan should carry out drastic reform of various regulations including social regulations, based on the principle of abolishing economic regulations and reducing social regulations to the minimum under the strong leadership of the Government and the Comprehensive Regulatory Reform Council.

(2) Promoting Agricultural Policy Reform

It is necessary to strengthen the competitiveness of the Japanese agricultural industry through agricultural policy reforms. By promoting specific reforms such as those outlined below, several economic benefits can be achieved such as maintaining the agricultural production base and increasing benefits to the consumer. In the mid- to long-term, such reforms will make tariff reductions and ultimate elimination possible, after which it is expected that the industry will be able to respond to the call for liberalizing the domestic agricultural market through WTO and FTA liberalization negotiations

- Abolition of the Price Support Policy and Introduction of Measures to Improve Farmer's Business

In its September 1997 proposal entitled 'Proposal for the Review of the Agricultural Basic Law' and on other occasions, Keidanren stressed that the Japanese government should discontinue its policy of price supports borne by the consumer. The Keidanren also emphasized that Japan should instead position agriculture as an industry with strengthening competitiveness through encouraging farmers to develop business entrepreneurship, increase productivity through such measures to increasing scale of production and the optimal use of land.
Due to the large difference between domestic and international prices of agricultural products resulting from price supports and high tariffs, there is a huge burden on the Japanese consumer. It is necessary to bring domestic prices in line with international prices by gradually reducing price supports and high tariffs and promoting pricing mechanism through the market.
Moreover, the present structure of Japan's agricultural policy does not necessarily reward the entrepreneurship of farmers sufficiently. The overall income of full-time farmers (*its major source of income is from agriculture), which should be nurtured and supported, is lagging behind as compared to other categories of farmers such as part-time farmers (*its major source of income is not from agriculture). It is therefore essential that the government should improve the reform of agricultural structure with regard to production as well as distribution, and should explore the possibility of initiating a system to stabilize business only for full-time farmers, which could serve as a safety-net. These government policies will support full-time farmers' business-oriented efforts for improving their operations in the region.

- Policy Mix to Enhance the Reform of Agricultural Structure

In order to accelerate the reform of agricultural structure, it is imperative that the government promotes the following policies:

1. Provide a system to reward entrepreneurship, such as diversifying operations and developing compound operations
2. Deregulation in order to promote incorporation of farming operations
3. Promoting the optimal use of land
4. Promoting efficient use of agricultural machines to improve productivity and streamlining the system with regard to harvest and storage
5. Strengthening research and development systems for agricultural technology, such as improvement of breed
6. Encouraging a shift to other businesses in the case of farmers with a higher ratio of non-agricultural incomes and low productivity due to small scale of operations etc.
7. Strengthening land use regulations for the purpose of securing and consolidating superior quality agricultural land, as well as preventing the neglect of arable land

In order for a system stabilizing farmers' business to function effectively, it is necessary that the government take the following measures while referring to the agricultural laws of other countries.:

1. Ensuring conformity with the WTO Agreement on Agriculture
2. Increasing productivity and promotion of high value-adding
3. Effective prevention of moral hazards
4. Allocation of funds through the revision of central and local governments' fiscal management procedures (agriculture, forestry and fisheries related budget)
5. Improvement of consumer benefits

- Crisis Management System

Ensuring food security is an important issue to be considered in promoting liberalization. Taking the calorie based food self-supporting ratio as a long-term goal, as stipulated by the present Basic Plan on Food, Agriculture and Rural Areas it is also important to maintain necessary basic food production, centering on rice, through maintaining the agricultural production base. In addition, a crisis management system to deal with unforeseen circumstances should be created through developing closer economic relations with food supplying countries.

2. Creating Domestic Laws and Regulations Related to Trade Policies

(1) Legal Process to Counter Unfair Trade Practices by Foreign Governments

Keeping in mind the trend towards legal dispute settlement procedures in the WTO-centered international trading system, we urge the Japanese government to create a sound domestic law related to trade, while referring to legal systems of the U.S. and EU.
Japan does not have legal provisions similar to Section 301 of the US Trade Act of 1974 or the Trade Barrier Regulation (TBR) of the EU, which allow domestic firms and industries that have suffered as a result of unfair trade practices to call upon their governments to take some form of countermeasures. Such unfair trade practices by foreign government are in violation of WTO and other trade agreements. These countermeasures include legal process to set a panel at the WTO dispute settlement mechanism. Lacking such measures, Japanese companies and industries that have suffered from a result of unfair measures have to appeal to politicians and ministries and agencies in charge through non-official channels to bring such issues to the attention of the government.
Efforts must be made to enhance the transparency of the procedures through which companies and industries can request the government to initiate an investigation. Furthermore, in order to ensure a legal background for such procedures, while referring to the EU TBR, a system for the filing for by companies and industries should be established.

(2) Measures in Response to Damage from Foreign Imports

In contrast to the U.S. and EU, where antidumping laws and safeguard measures are much in use, Japan rarely has enforced such measures. As further liberalization through WTO and FTA negotiations is expected, in the event of Japan's enforcing such measures, it is important that they follow legal procedures, and are transparent and consistent with the WTO Agreements.
In particular, in the event of safeguard measures, it is vital to clarify the interests of stakeholders such as user industries and importers, as well as to consider the national interests, including consumers. Therefore, specific procedures to guide their application should be established. Furthermore, while such measures are implemented, it is necessary to promote structural adjustment in order to increase international competitiveness of the industries in question.

Japan should take initiative to draft a grand design as befits a Nation Built on Trade. Japan must implement proactive and strategic trade policies, whereby a higher level of trade and investment liberalization based on WTO system and FTA network will lead to an expansion of global markets. Rules should be established that would facilitate the expansion of international business by Japanese corporations.

In the process of implementing such trade policies and the necessary domestic reforms, there will inevitably be a certain amount of pain in some areas of society. Recognizing this, it is equally important to respond effectively and promptly to solve these problems while conforming to international rules and obligations.

Promoting strategic trade policies from a medium-to long-term perspective will not only increase the global competitiveness of Japanese companies and contribute to the welfare of the entire Japanese economy, but will also raise Japan's credibility among the countries of the world, including developing countries, in the arena of international negotiations. This will provide a platform for Japan to demonstrate a leadership role in the international trading system.