The Keidanren Vision 2007, entitled "Land of Hope, Japan" <PDF> and released in January 2007, envisages Japan as a nation enjoying "respect and friendship from countries worldwide." The vision places priority on Japan playing "the role of a gateway" and becoming "a conduit between Asia and the rest of the world."
To follow up the realization of the Vision, the Committee on Trade and Investment of Nippon Keidanren held wide-ranging hearings to learn more about the various situations and difficulties faced by Japanese companies operating all over the world. The results of those hearings formed the basis for the following proposals on external economic strategies, and ways Japan should promote those strategies.
Japanese business activities have become increasingly globalized over the last few years. Through globalization, their business activities are taking advantage of growing interdependent relationships with entities in other parts of East Asia. This is seen, for example, in the business networks being developed by manufacturing industries. Japan's service industries are also expanding abroad, especially in East Asia. Parallel to these developments, corporations in newly emerging economies are raising their profile, to the extent that they are now competing with Japanese companies. On another front, resource nationalism is growing stronger, with governments of countries with a great demand for resources taking the lead in efforts to acquire natural resources. Other challenges include the growing number of counterfeits and pirated goods being distributed worldwide, a high percentage of which are sold in developing countries.
Certain parts of East Asia still suffer from insufficient institutional development, lacking the economic infrastructure required to satisfactorily support the above-mentioned Japanese business activities. This situation calls for urgent action in the form of improvements in local business environments to ensure the smooth and efficient provision of services for manufacturing industries, and to eliminate or relax limitations on the participation of foreign capital in the financial, logistics/transportation and retail/distribution sectors. However, Economic Partnership Agreements (EPAs) concluded by Japan offer only limited liberalization in trade in services, and provisions for protecting and liberalizing investment are not incorporated into Free Trade Agreements (FTAs) concluded by ASEAN. Furthermore, efforts to improve basic infrastructure for business activities are being delayed, in spite of the need to increase the efficiency of distribution and customs procedures, to develop standards and certification procedures, to establish mutual recognition procedures followed by both Japan and the country in question, and to provide rules for ensuring the protection of intellectual property rights.
The Japanese government tends to lag behind other countries in its promotion of WTO negotiations and EPA negotiations with counties outside East Asia.
In addition, Japan's infrastructure for trade and investment (financial and capital markets, air transport, distribution, and customs clearance, etc.) has already become inferior to that of some advanced regions in East Asia.
The Japanese government must abandon its current passive, reactive stance for external economic policy, and instead take leadership and strategic initiative. It should adopt a comprehensive perspective for domestic policies related to foreign matters including not only trade and investment but also the protection of intellectual property rights, the stable supply of natural resources and energy, the parallel pursuit of anti-global warming efforts and business opportunities, and the international standardization of specifications and rules. The Japanese government needs strategies targeting a comprehensive resolution of these issues.
Studies on EPAs and FTAs have been conducted simultaneously regarding ASEAN+3, ASEAN+6, and a Free Trade Area of the Asia Pacific (FTAAP). The time has come for Japan to seriously discuss a concrete vision for a future "East Asian (Economic) Community", building on what it has achieved through EPA negotiations with East Asian countries.
In order to envisage a clear vision for an "East Asian Community", it is first necessary to come to a common understanding on such issues as Community ideals and objectives, the member states, limits of powers and parameters of action. As one step in this direction, it would be useful to discuss the advisability of drafting a "Charter of the East Asian Community".
Economic issues are the most likely factors that can be linked to shared values, ideals and interests, so it would be realistic to begin with economic issues when examining areas where integration is possible. In this regard, we strongly urge the prompt signing of free trade agreements between India and ASEAN, and between Australia-New Zealand and ASEAN, as a step toward the establishment of ASEAN+6. Positive results could also be achieved by integration through ASEAN+1 FTAs, such as the ASEAN-Japan Comprehensive Economic Partnership (AJCEP) Agreement, the China-ASEAN Free Trade Agreement and the South Korea-ASEAN Free Trade Agreement. In the future, it would be advisable to aim for elimination of all tariffs in principle in East Asia.
In addition, the liberalization of cross-border logistical systems essential to entire supply chains, and the services supporting those systems (IT, distribution and logistics services, financial and insurance services, etc.) is equally as important as the liberalization of trade in goods. Japan should contribute to smoother and more efficient integrated supply chains in East Asia, and should be prepared to work for the establishment of partnerships promoting common customs procedures for all ASEAN+6 countries in the future.
Consideration should be given to establishing an "East Asian Government-Private Sector Council", which would be composed of the governments and business communities of interested countries, and which would serve as a forum to develop a clear vision for an "East Asian (Economic) Community". Council discussions on regional integration should be on track by 2010.
Strengthening their economic partnership between Japan and China is an essential step toward creation of an "East Asian (Economic) Community". Many benefits would arise from accelerating reform especially with regard to the application of laws and regulations such as further simplifying, expediting, and ensuring the greater transparency of various licensing and certification procedures in China. From that perspective, Japan, China, and South Korea should promptly sign an investment agreement and a free trade agreement.
It is important that East Asian integration is open to other countries or regions. A Japan-US EPA would serve as a bridge between the United States and a future East Asian Community, and could become a springboard for the establishment of an FTAAP. For this reason, too, it is important to work for the establishment of a Japan-US EPA, while at the same time working for the formation of an "East Asian (Economic) Community", and for stronger political and economic partnership with the United States.
It is also important to recognize that the APEC framework should be utilized for open regional integration. FTAAP discussions should be vigorously promoted within APEC, as one step toward economic integration in the Asia Pacific region. As the host country for the APEC leaders' meeting in the target year for achieving the Bogor Goals, Japan should exhibit leadership by rapidly establishing mechanisms and drawing up strategies that help promote those goals.
Indomitable resolve is needed to ensure the prompt and successful conclusion of the Doha Round. This goal should be promoted toward further liberalization and agreement on effective rules, by launching a new round of negotiations, and by expanding the scope of negotiation to include areas of interest to Japan's business community, such as investment and competition policy. Other major challenges include ensuring adherence to existing rules and maintaining multilateral free trade systems, through the use of the WTO dispute settlement system.
Priority should be placed on promptly signing EPAs or FTAs with countries in East Asia (e.g., India, South Korea, and Vietnam), and with countries supplying Japan with resources, energy, and food (e.g., Australia and Gulf Cooperation Council [GCC]). Joint inter-governmental studies should be started without delay by Japan and the United States, and by Japan and the EU, with a view to establishing respective EPAs. In this regard, bilateral EPAs and FTAs covering issues such as market access, investment, competition, environmental protection and trade remedies will serve as a model for global agreements. Therefore, through Japan's EPA negotiations with the United States and the EU, it is also important for Japan's business community to ensure that its opinion is reflected in the creation of global mechanisms.
Depending on countries and regions, Japan should also consider utilizing non-EPA and non- FTA tools such as investment treaties or mutual recognition agreements for strengthening economic ties with them. We recommend that the Japanese government negotiate tax treaties, social security agreements and the like with countries having close economic relations with Japan, and with other countries that can be expected to form close economic relations with Japan in the future. An expeditious and smooth consultation mechanism between tax authorities should be institutionalized through EPAs and tax treaties in order to resolve international double taxation caused by transfer pricing.
The following are the major global challenges that cannot necessarily be fully resolved within WTO, EPA or FTA frameworks, yet must be addressed on a priority basis.
(i) Protection of intellectual property
In order to effectively prevent losses caused by counterfeits and pirated goods, it is vital to ensure the continual enforcement of preventive measures, especially stricter regulations in countries and regions where they are manufactured, more rigorous controls at customs of countries and regions where they are distributed, stronger legislation protecting intellectual property rights, and steps leading to the adoption of "Treaty on Non-proliferation of Counterfeits and Pirated Goods" preventing the spread of counterfeit and pirated products. We recommend that, when the Japanese government negotiates an EPA, it makes sure that the agreement include provisions for the development of substantive legal system and effective enforcement in regulating counterfeits and pirated products (such as imposing stricter controls and penalties).
In order to ensure more efficient, speedy patent examinations, Japan, the United States and the EU should take the initiative in pursuing international harmonization of patent systems and procedures (such as collaboration at the patent examination stage, and mutual recognition procedures), and accelerating the movement toward a global patent system. It is especially important that the Japanese government galvanize the movement to bring about changes in first-to-invent practices common in the United States.
(ii) Ensuring a stable supply of natural resources and energy
Government-private sector ties should be enhanced with a clear division of roles, with priority placed on jointly developing and implementing strategies toward comprehensive strengthening of resource diplomacy and energy and environment cooperation in energy issues and environmental protection. The Japanese government should, through EPAs, FTAs and other agreements with countries supplying resources, continue to promote business environment improvements for the development and importation of energy.
To enhance its negotiating capabilities, it is also important for Japan to promote the effective use of energy, the development of alternative sources of energy, and energy conservation measures in countries rich in natural resources.
The Japanese government should also consider promoting the development of frameworks for dialogues among consumer countries, and proactive cooperative measures for the construction of oil reserve system in Asia. It is essential that governments and private sectors in consumer countries work together for the joint development of natural resources.
Parallel with these efforts, supply/demand gaps should be reduced through cooperation in energy issues and environmental protection.
(iii) Mitigating global warming
All the major emitters should participate in a Post-2012 international framework on climate change. The framework should be designed to include measures based on the sectoral approach, a mechanism for effectively providing financial and technological assistance to developing countries with high aspirations, and measures enhancing the development of innovative technologies so that it substantially contributes to reducing the greenhouse effect. Japan should play a leading role in constructing such an effective international framework to combat global warming.
(iv) International standardization of specifications and rules
Japan's public and private sectors should join forces in giving greater impetus to the movement toward international standardization, based upon the Japanese government's comprehensive strategies for international standardization. Additionally, strategic steps are required to bring about the international standardization of health, environment and safety benchmarks, security- and logistics-related regulations, and accounting standards. Japan should play an especially active role in the international harmonization of specifications and rules in East Asia, and should consider including such issues in EPAs.
ODA is vital for promoting Japan's trade policies effectively and strategically. The Japanese government should therefore boost even further the assistance it provides to developing countries for their economic development. On the other hand, it is important to support the stable supply of natural resources, food, and water, energy conservation, the effective use of energy, the development of alternative sources of energy, and response to natural disasters in East Asia.
Logistical infrastructure can be regarded as the backbone on which trade strategies are based. It is therefore necessary to take a mid- to long-term perspective and continually revamp logistical infrastructure -- not only the physical structures but also legal systems and procedures. It is especially important to strengthen the far-flung links between major ports, and between major airports.
As a first step, major and rapid changes are required to improve systems for the international logistics in Japan. This goal requires systemic reforms to ensure that mechanisms and formalities are suitable for the smooth functioning of supply chains (e.g., fundamental reform of customs laws, including the abolition of regulations requiring bonded warehousing before export, and consistent improvements introducing next-generation single window systems).
Japan should also promote the establishment of a Japanese Authorized Economic Operator (AEO) system, promptly work with the United States and the EU to develop mutual recognition mechanisms for security-related systems that are equivalent to such a Japanese AEO system, and launch similar efforts with other major countries.
Another urgent task is to establish convenient rules of origin, as part of Japan's promotion of EPAs and FTAs. Much could be gained by rapidly launching efforts to redesign rules of origin, and by strengthening the foundation for systems for issuance and confirmation of certificates of origin.
The Japanese government should enact a petition system for initiation of investigations regarding unfair trade practices of foreign nations in order to afford domestic companies legal grounds for the submission of petitions. Parallel to these efforts, domestic Japanese law should be modified to ensure that the requirements for petitioning for an antidumping investigation in Japan is consistent with the ones specified in the WTO Antidumping Agreement. The safeguards system should include measures granting the right of a private-sector entity to petition for an investigation, and the procedures up to the launch of the investigation should be made fair and transparent. Furthermore, unified procedures consistent with the WTO Safeguard Agreement should be established for investigation and invocation of safeguard measures.
(i) Accelerating structural reform of Japan's agriculture
The most important issue remaining to be solved is reform of the farmland system in order to strengthen the international competitiveness of Japan's agriculture and to transform farming into a vibrant industry. Another urgent task that should be tackled parallel with this is to make measures required to meet the challenges of globalization compatible with the measures required for the construction of a healthy domestic agricultural sector. Such measures are now being considered in the relevant committee.
(ii) Accepting more non-Japanese workers and liberalization and facilitation of the movement of natural persons
Japan needs to accept more non- Japanese workers. This can be achieved by relaxing "Specialist and Engineer" status of residence requirements and by classifying those with a certain level of skills, qualifications, and/or Japanese language ability as belonging to a "Specialist or Engineer" field of endeavor (although they have not yet been so classified), thereby permitting them to work in Japan. In particular, we recommend that the Japanese government promptly develop systems for accepting nurses and care workers, for Japan's Industrial Training and Technical Internship Programs, and for accepting specialists based on contracts between corporations.
It is also important to facilitate the movement of natural persons between the bases of operation of Japanese corporations outside Japan. Such intra-company movement should be achieved not only through EPAs but also through WTO negotiations on the liberalization of trade in services, with regard to the movement of natural persons in specialist or technical fields, and through negotiations that lead to member countries making liberalization commitments in the areas of all intra-company movement and temporary stays.
(iii) Promoting financial market reforms
It would be advisable for the Japanese government to push forward rapidly with systemic financial reforms to make Japan's financial markets more attractive internationally. Major steps in this direction would be to strengthen the international competitiveness of the Tokyo market, and to make suitable changes to tax systems governing capital and securities with a view to encouraging the trend of savings being converted into investments. Furthermore, the interpretation and the application of finance-related legislation should be made more transparent, and steps should be taken to ensure the international mutual recognition of accounting standards.
(iv) Expanding foreign direct investment in Japan
The Japanese government should continue its efforts to establish a business environment that is internationally attractive. This goal can be met through increasing the efficiency and reducing the cost of distribution, transportation, communications and social capital improvement; lowering the effective corporate tax rate; promoting investment in research and development; implementing tax reforms including international tax systems such as transfer pricing taxation; and simplifying and speeding up administrative procedures. Japan would also take on greater appeal as a destination for international investment through the signing of EPAs/FTAs, social security agreements and tax treaties. On the other hand, mechanisms identical to those introduced in Europe and the US should be incorporated into the existing system if it is more vulnerable than Europe and the US to inward direct investment that may weaken the international competitiveness of Japan as a whole and undermine its national interests.
In order to get a comprehensive grasp of external economic strategies and resolve economic problems in an integrated manner, it is important that decisions are made with the nation's real interests in mind and implemented with a sense of responsibility.
With this in mind, we call on the Japanese government to establish an External Economic Strategy Promotion Headquarters within the Cabinet, with the power to make decisions across ministry and agency lines. We suggest that the Headquarters be directed by the Prime Minister, and that his/her deputy be a "minister of state for external economic strategy", given special authority over external economic strategy. This would assume unified control over external negotiations and domestic coordination.
This development should be complemented by the establishment of an "External Economic Strategy Council", an organization that would conduct policy research and offer advice to the Prime Minister and the "minister of state for external economic strategy" with regard to comprehensive and specialized decisions to be made regarding external economic policies.
It is vital that the opinions of private companies be reflected on a regular basis in Japan's diplomatic negotiations on different issues. In this regard, we propose that the government and the private sector form stronger ties through the medium of the above-mentioned "External Economic Strategy Council". In addition, we consider it important that private-sector personnel are brought in as top-echelon staff at governmental organizations such as embassies and other Japanese government offices overseas, and that Japanese government leaders' official visits overseas accompanied by representatives of the business community are utilized more for strategic purposes.
For their part, Japanese companies must take the initiative in pursuing what they would like to realize by strengthening their relationships with the government and making recommendations to it. For these goals to be effectively achieved, the corporate sector should make efforts to have a stronger voice fortified by its specialized expertise. Japanese corporations should also present their opinions to the governments of foreign countries where they operate.
The business environment in which Japanese corporations find themselves is changing rapidly, and they are now facing increased global competition. Meanwhile, the governments of other countries are speeding up their efforts to create international systems that are advantageous to their own countries. If the Japanese government's response to these challenges is slow, this could have dire consequences for Japanese corporate activities. We earnestly hope that the Japanese government and the Diet recognize this situation and develop and implement external economic strategies with a strong sense of urgency.