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Briefing Report

Japan’s EPA Strategy (Mid-Term Goals)

Professor, Faculty of Economics, The University of Tokyo
Mr. Motoshige Itoh

[Economy] March 20 , 2006

Today I want to discuss the recent trends in free trade agreements [FTAs] and economic partnership agreements [EPAs]. Before I begin, allow me to explain my personal position on these agreements. As I believe everyone is aware, negotiations for both FTAs and EPAs are advanced either previous to or simultaneously with intergovernmental talks, with people from the academic, business, and economic communities also participating in research, negotiations, and other aspects of this process. In Japan’s EPA talks with Singapore, I was involved in all phases from the initial research through the negotiations. I also took part in the EPA talks with Thailand as a delegate of the academic community. As such, I have experienced these negotiations in a number of instances, and I would like to share my impressions of that work with you here today.

One other area to which I would like to draw your attention is the Council on Economic and Fiscal Policy [CEFP], an advisory panel currently chaired by Prime Minister Junichiro Koizumi, which contains a sectional meeting in which I am also active. The largest theme currently being addressed by this council is “fiscal soundness,” with the council scheduled to draft a global strategy for the government in that area by this May or June. One of the major issues in this strategy is the handling of EPAs and FTAs. This is an area of considerable importance, with the types of strategies and proposals to emerge from this process to depend upon my own effort and participation as well.

It is necessary to understand, as you may already know, that in advancing negotiations to the point they have reached today, the stance of the Japanese government has changed from what it was seven or eight years ago when the talks with Singapore were first started up. Japan entered its negotiations and research with Singapore from around year 2000, at a time when only about three or four of the world’s top 30 countries ranked by gross domestic product did not belong to any FTA whatsoever. Three of those countries were Japan, China, and South Korea. The fourth was Taiwan, setting aside the issue of whether or not that state can be labeled a “country.” While this region thus got off to a slow start in terms of negotiating FTAs, the thinking of Japan and the other countries has undergone major changes since 2000 or so. Up to that point, discussions were held largely on the choice between multilateral approaches such as the General Agreement on Tariffs and Trade [GATT] or the World Trade Organization [WTO], and the FTA approach. In the case of Japan, I believe it can be said that there were strong forces that stressed the importance of the multilateral mode.

I believe you are aware of the various academic problems with the FTA approach. Because these agreements open up free trade only between specific nations, there will naturally be various gaps between countries on the basis of whether they participate in such pacts or not. At the same time, with FTAs it is also important to have the “rule of origin” in force to determine whether the key components of products imported from the partner country are in fact being produced in that country. As a result, increases in the number of FTAs will likewise serve to increase the volume of documentation used between parties actually engaged in trade. These and other extremely complex problems have been frequently pointed out from an academic perspective.

For example, in trade talks between Japan and Thailand, a major topic of discussion concerns tuna that is caught near Taiwan and then canned in Thailand. Would that tuna be targeted in a Japan-Thailand FTA? This and other issues have been raised with regard to FTAs. In a certain sense, a major turning point for Japan’s foreign relations was marked by the emergence of the FTA as the rule for world trade―
egardless of whether one finds that approach desirable or not. Metaphorically speaking, while the Japanese prefer to play shogi, a board game resembling chess, if everyone overseas is playing chess itself, then we will need to learn that game too. I believe that line of thought has become very strong in Japan of late.

In this respect, I believe that Japan must pay especially close attention to Mexico. As you know, Mexico has signed FTAs with a number of different partners (the United States and the European Union in particular). Because of that, Japan’s failure to establish an FTA with Mexico would have alienated Japanese companies from the Mexican market within a certain context. Viewed in these terms, at a time when Mexico is playing the FTA game with the United States, the EU, and other regions, we need to join that game too. I believe there will be a steady increase in such situations over the years to come. As more FTAs come to be signed by countries worldwide, Japan will also need to participate in the FTA game in order to join that group. This is one big reason for the shift in Japan’s foreign policy stance.

Another important development is taking place in Asia. Between China and Thailand, for example, speedy liberalization of trade for specific products is being advanced in the form of the “early harvest” step of accelerated tariff reduction. The Chinese have also launched negotiations with Australia, while with South Korea, although it cannot really be labeled negotiations, research is being promoted to explore the possibilities. As you know, because China is a so-called “developing country,” it does not pursue FTAs under the tight controls of Article 24 of GATT but rather in an easier sense of the word. I believe that the resulting advance of China FTAs has placed considerable pressure on Japan, particularly on our politicians, and in large part has convinced Japan that there is no choice but to move ahead with its own FTAs.

In addition to this, I feel it can be said that the negotiations of other countries are exerting what I would characterize as an interesting impact on Japan. For instance, while Japan has entered FTA negotiations with South Korea, those talks are not going well. What is occurring now is that Seoul has begun negotiations with the United States, and it is my personal impression that it will be interesting to see pressure come to bear on the Japanese authorities if Seoul and Washington actually do sign such an agreement. Australia, while being an important supplier of food and natural resources to Japan, also views China as an important trading partner. If Australia and China begin to negotiate an FTA or other form of agreement, it would raise the incentive for Japan to talk with the Australians. In essence, therefore, various different and interesting policy games are emerging in the Asia-Pacific region, and without knowledge of these facts it will be difficult to understand Japan’s diplomatic stance.

As we can see, the regions targeted for Japanese FTA negotiations are expanding. Up to now Japan has placed the priority on FTAs with countries in the Association of Southeast Asian Nations [ASEAN], with progress in fact being made in those talks. From here on, however, I believe that the countries and regions to be particularly newsworthy in this perspective will fall into two groups. One is Australia, as a source of natural resources, along with the oil-producing countries of the Persian Gulf. The other is India as a single nation. Other regions can also be expected to emerge on the scene, and it seems to me that the presence of such countries and regions will strengthen the awareness that Japanese FTAs must reach beyond the conventional scope into a broader sphere. I believe this thinking will be further clarified at forums like the CEFP that I mentioned before, such as in the form of the “Nikai Proposal” of Minister of Economy, Trade and Industry Toshihiro Nikai.

Another interesting movement concerns the fact that while bilateral negotiations, such as those between Japan and Singapore or Japan and Mexico, have been the focus to date, the awareness of the entity of “regions” has grown steadily more pronounced within the Japanese government. Worthy of particularly keen attention in this respect from here on are the negotiations between Japan and ASEAN. In the academic world, of course, there is the idea of the ASEAN+3 grouping that includes Japan, China, and South Korea with the ASEAN states. In view of the state of Japan-China and Japan–South Korea relations at present, I doubt if such collaboration will be attained anytime soon. Depending on the political situation, however, I do believe that sooner or later the forging of a large FTA with ASEAN, bringing on board Japan, China, and South Korea as well, is not a pipe dream by any means.

As another point, it is conceivable that there will be changes in the approaches adopted within Japan’s regional negotiations from here on, depending upon the countries involved. Up to this point Japan has emphasized the EPA, in a context that includes FTAs and other fields. Therefore, it can be said that Japan has striven quite earnestly to conclude regional agreements engineered with a high degree of perfection. However, when Japan negotiates with ASEAN, for example, there are obviously various countries involved. Because of that, the approach of discussing only the FTA component― hat is, separating only the tariff parts for initial talks―would raise the speed of the negotiations and likely be more realistic in terms of results.

When viewing Japan in its relations with China and South Korea, it appears particularly unlikely that Japan and China will enter into either an FTA or an EPA in the near future. For its part, China is currently in the process of liberalization following its admission to the WTO, which means that to Japan it will be more realistic for Japan-China trade to be expanded within the framework of the WTO. Within that structure, however, it is quite feasible that an investment agreement between Tokyo and Beijing could be worked out in advance of trade, with efforts toward that goal already under way. What I am saying, therefore, is that while there would be no relation to an FTA, there is also the view that the signing of a bilateral agreement along the lines of an investment pact would actually have greater significance for both sides.

Next, regarding the speed at which Japan negotiates EPAs, it is well known that these talks drag on over extremely long periods of time. While there are various reasons for this situation, I believe that two points are notably important. The first is that Japan faces particularly difficult issues in coordinating such negotiations domestically. The other is the style used―in other words, the specific schemes being mobilized to carry out diplomatic negotiations. I will address these two reasons why Japan’s negotiations slow down in that order mentioned.

First, I will examine the various difficulties that exist domestically in sorting out and coordinating the issues to be negotiated. The most challenging problems are related to agriculture and human migration. While there is not sufficient time today to address Japanese agriculture in detail, I would like to point out one area that I feel is important. Politically, there is an extremely strong sense of resistance to liberalization among Japanese farmers. Yet at the same time, viewed in terms of our domestic consumption, Japan is also the world’s greatest importer of agricultural produce. This reality makes the problem quite complex. Another serious aspect of Japan’s farming issue is the very backward agricultural policy maintained by the Japanese government over the years. In considering negotiations from here on, this is an extremely important point. Using simplistic terms to examine just why Japan’s farming policy has lagged so far behind, the first area that comes to mind concerns the measures taken after World War II to protect independent farmers owning small plots of land. This can be explained in terms of the “convoy system,” a term widely used in Japan. In this case, it refers to policies aimed at helping out the weakest farms instead of promoting the stronger ones.

Another key characteristic of Japanese agricultural policy maintained to date is that the support to producer farms is not furnished directly. Instead, the approach used is to nurture Japan Agricultural Cooperatives [JA], with farmer protection and assistance then supplied indirectly through JA. There are also public works projects in farming districts known as “agricultural civil engineering works,” in which generous amounts of money are supplied to the companies in charge of that work. In this way, the history of this support has seen considerable funds used in ways that are not directly related to actual farming production. The Japanese government is aware of this situation and is trying to change it. Important from here on, however, will be the relationship between the pace at which such reforms are advanced and the speed of negotiations on FTAs, for example, or at the WTO. The tempo of reform for Japan’s domestic institutions is clearly slow, with that posing a major barrier for FTA or WTO negotiations. From a more optimistic perspective, however, we must also not forget that the negotiations on FTAs to date, or the WTO talks to be advanced from here on, will in the end also generate political impact in speeding up the domestic coordination process.

I would like to mention a certain anecdote as an example of this, dating from my first visit to Singapore. Representatives of the Japanese and Singaporean government, business, and academic communities gathered to begin the discussions, with everyone present primed to get going. At this crucial juncture, the first delegate to raise his hand to speak was a section chief from Japan’s Ministry of Agriculture, Forestry and Fisheries. He proceeded to throw a damper over the whole atmosphere by saying, “It is wonderful that Japan and Singapore are getting together to negotiate an FTA. Farming issues, however, will be off the agenda.”

In the discussions with Mexico, which I feel are fresher in everyone’s mind, the farming negotiations were definitely tough. Nevertheless, tenacious efforts were advanced to open up the Japanese market for pork, for example, and in several other areas. As a result, I believe that with regard to pork Mexico gained attention in the eyes of Japan as well, with considerable progress being made on that front.

In the case of Thailand, I had an extremely interesting experience. While it is true that there were various restrictions in dealing with the Thais, the farming negotiations actually produced areas in which it was easier to reach agreement than in other sectors discussed. In order to promote this stance, I visited Prime Minister Koizumi to explain the dynamics. Also present at that time was Chairman Hiroshi Okuda of Nippon Keidanren [Japan Business Federation] and other business leaders, along with top members of the farming world. Before I met with Koizumi, the farming people took me aside and whispered in my ear, “Because the prime minister won’t believe farmers like us if we tell him directly, we want an academic like you to get him to understand that agriculture is definitely not a bottleneck for Japan’s FTA negotiations. Tell him that we have been making every possible effort.” In this way, therefore, I feel that while it has taken some time, considerable changes have occurred in the thinking of the farming community over the past five years.

Another issue with which Japan is struggling and finds it very difficult to sort out is that of the acceptance of foreign workers in Japan. The truth is, however, that the Japanese population will rapidly age from here on, while the declining birthrate will also make it critical to provide greater support for working women. This will strengthen the political clout of consumers, while demands to determine ways to bring overseas nurses and household helpers to Japan will also pick up momentum. Therefore, while it may take some time, I believe that we can look forward to considerable progress on the problem of the influx of people into Japan from here on.

On this point, about a month ago I was invited to the CEFP as a guest. One fact that I reported to Prime Minister Koizumi at that time was that of every 20 couples that married in Japan during the past calendar year, either the husband or wife of one of those pairs was non-Japanese. This is an issue that deserves attention before discussing whether or not to allow more foreigners into Japan. Clearly, an examination of even this marriage data alone reveals that the process of globalization is already well under way within this country. This is causing various tough problems as well. For example, crime in farming regions is on the rise of late, with discussions destined to emerge on this issue from here on. What is important, I feel, is the degree of progress to be made in improving Japan’s social infrastructure to accommodate the influx of foreign nationals into the country.

In terms of a car, we can compare this to the accelerator and the brake pedals. The current situation is equivalent to stepping on the accelerator, with the economy in a globalization mode and people entering the country. Viewed from the Japanese perspective, however, there is a need to use a firm braking function to create a scheme under which various types of people come to Japan. For example, it will be important to carry the discussions beyond the realm of simply determining whether or not to allow people inside the national borders. On the one hand, there must be controls over foreign residents, while on the other there is the need for education and other social services. It is vital to proceed from both these viewpoints in determining how the people who enter Japan live in their local communities. At the same time, problems of an administrative nature will also emerge in various forms, with numerous discussions to ensue in connection with the FTAs. I would personally like to address this issue within the context of the global strategy being advanced at the CEFP.

The other key factor that slows down Japan’s negotiations is the style that the Japanese bring to these talks, an area with which I believe you are familiar. I have heard comments from a Thai negotiator friend of mine to the effect that “When we negotiate with Japan, it is like sitting down at the table with five or six different countries. In other words, for farming problems we deal with the Ministry of Agriculture, Forestry and Fisheries, for human issues the Ministry of Justice, for financial themes the Ministry of Economy, Trade and Industry, and so forth. It is extremely difficult to tell who you are talking with.” We often hear comments like this, with the situation attributed to Japan’s administrative organization and the vertically segmented sectionalism of the bureaucracy. In my own opinion, however, I don’t find that viewpoint to be very realistic. I say this because changing Japan’s administrative organization for the sake of diplomatic negotiations would be putting the cart before the horse.

So just what is important? In my view, it truly comes down to the issue of commitment by the prime minister and other top government leaders. If the prime minister indeed considers FTAs or EPAs to be high priority issues for Japan, then he would form a strategic team. Because having too many people on such a team would not be a good idea, I would recommend a panel of between two and four members. I think it would be possible to initially hammer out the basic strategy for this with a number of ministers on board and then consign the results to the working level for negotiations. As you know from newspaper reports and other sources, such moves are beginning to surface to a certain degree. Based on the understanding that the process must be advanced in this style, moves are also afoot on the Liberal Democratic Party side as well. Policy Research Council Chairman Hidenao Nakagawa is particularly keen in this area, while this approach is also gathering momentum within the government. In the end, I believe it will be handled within the CEFP. It is my hope that a negotiating team and style that are top-down and place strong priorities on the policy side can take shape in some shape or form by June or July. If that can in fact be achieved, I believe there is a chance for a shift in the negotiating stance that has been adopted up to now.

Since there is no time for me to discuss issues related to the WTO, I would be glad to respond to any questions in that area during the Q&A session.

Finally, concerning the question of whether Japanese EPAs will be advanced from here on or not, I believe the key determining factor lies in the degree of priority attached to EPA negotiations within Japan’s policy options. If this is treated as a high priority, progress will most likely be made. But if the government leaders place the EPA issue in a low-priority bracket, the matter will be hidden in the shadows of other problems and be difficult to push ahead with. Under that scenario, it would follow the same basic course traveled to date. At the very least, setting lip service aside, the facts regrettably show that neither the FTA or the EPA issue have been a top priority for Japanese policymakers, and likewise this has not been a theme gaining much attention within the general public. If everyone comes to understand that they are in fact affected by various different problems in the ways that I have explained today, I feel that the situation can be changed from here on. Then again, this may be only wishful thinking on my part.


QUESTIONS AND ANSWERS

Q: You mentioned that Japanese policy is heavily influenced by external elements. For example, decisions can be swayed by the degree of progress made in FTAs between South Korea and the United States or between China and Australia. If that is so, then how should we view the clout of domestic policy in determining the direction from here on? In terms of trade, meanwhile, while China is the country in which Japanese investment is charting the greatest growth of late, there is still no talk of any FTA with the Chinese. What is your take on that?
A: First of all, the policies or systems of an entire nation are determined through a balance of various stakeholders, past connections, and other factors. There are naturally various ways to view the farming problem as well, with policies being determined on the basis of such a balance. However, there are two forces that can change this. One is pressure from the outside. This can consist of direct pressure on Japan, while there is also indirect pressure, such as the example you mentioned of Washington and Seoul signing a free trade agreement. The second force consists of changes in Japan’s domestic structure―for instance, the rising number of senior citizens or the big changes in information technology. When viewing Japan’s so-called FTA policy in that light, I believe we can definitely label changes or pressure from the outside as the most important factor in prompting immediate and major change.
However, with regard to the matter of why I spoke so extensively about farming and human issues here today, when viewing things over a time span of about five years, I believe that these industries are likely to hold the key to engineering major changes from the domestic side. For example, the average age of farmers is 65, and that figure is now rising by one year annually. As we can all see, therefore, if things continue at the current pace, the situation there, including Japan’s domestic food supply, will enter extremely dire straits. With regard to the declining birthrate and the aging of the population as well, it may very well be that the public is beginning to sense the crisis. With Japan’s population certain to gray considerably from here on, if that aging is accompanied by a continued decline in the number of children being born, it will become difficult to ensure the human resources needed to provide medical services, nursing care, and housework from within Japan alone. I believe that these types of trends will have a major impact on FTAs and similar Japanese foreign policies over the mid-term range of about five years.
With regard to China, since I am an economist, I cannot comment in great depth on the bilateral relations between Japan and China. However, we need to pay close attention to the fact that despite the difficult political conditions that exist at present, we are seeing rapid growth in both trade and investment between the two countries. Outside of the political issues, I believe that there are major incentives in both Japan and China to further increase the mutual economic exchanges between the countries on the trade and investment fronts. In that sense, therefore, while it is inconceivable that FTA negotiations would take place in the midst of the current conditions, negotiations for an investment agreement are nevertheless under way. Taking that as one case in point, when we view things over a time span of five years, or perhaps 10 years depending on what comes to pass, I believe we can look forward to the emergence of economic initiative in various different forms.

Q: The Ministry of Economy, Trade and Industry is also compiling a global growth strategy with a target date of around the end of March, and I believe that this will serve as the global strategy of the CEFP. What other details do you expect to be included from the perspective of human migration that you mentioned?
A: In my understanding, the inclusion of a firmly structured global strategy encompassing this type of FTA in a big-boned policy will most likely be a key point in policy implementation. Toward that end, the CEFP will continue its discussions from here on, with that naturally to include the portions compiled by the Cabinet Office as well as the areas emerging from the position of the economy, trade and industry minister. I hope that all of this can be blended into the final version in the end. In that sense, the most important factor in the CEFP discussions will most likely be the degree to which truly penetrating proposals can be made for problems that straddle different government offices. At the present time, various efforts toward internationalization are being made at individual ministries and agencies, with this not limited to EPAs. First of all we have the human issues, which are quite important. With the farming problem as well, depending upon the method adopted, an approach may be taken that relates not only to the Ministry of Agriculture, Forestry and Fisheries but deals with Japan’s ties with Asia as well. Moreover, while this is not directly related to EPAs, there is the question of how Japan should restructure its treatment of the issue of organizations for overseas assistance― he Japan Bank for International Cooperation [JBIC] or official development assistance [ODA]―within the government’s latest reforms. It waits to be seen to what degree we will be able to bring out problems that are important to Japan, beyond the borders of specific government offices, within the CEFP discussions. At the same time, I also naturally believe that each of the ministries and agencies will also work on their own to liberalize. There may very well be other issues on which action must be taken, but they do not come to mind at this time.

Q: I would like to ask about India and what you feel the chances are for starting up negotiations with that country. I ask this because intergovernmental talks have picked up steam of late. Chairman Okuda of Nippon Keidanren has visited India, and the Japan External Trade Organization [JETRO] is actively supporting such moves. What is your estimate of the timetable needed for such an agreement to be realized, and in what form would it get off the ground?
A: Since I am not deeply involved in this area, it is difficult for me to offer a truly educated opinion. But I will comment from an outside perspective.
As one such observation, what I glean from talking with various different people is that at the current stage in time no-one is opposed to establishing deeper ties with India in some form. Politically speaking, therefore, I don’t think it will be that many more years until that momentum grows and evolves into negotiations on an FTA or EPA. But there are also various obstacles to such progress. One such impediment is that the current priority for Japan continues to be ASEAN. Before that, of course, there is also the need to finish up agreements with Thailand and Malaysia. In that sense, there is the question of whether immediate progress can be achieved in talks with India while carrying on negotiations with ASEAN at the same time. Although I feel that India is destined to become an important negotiating partner in the future, right now ASEAN continues to be a very key priority. So I suppose this can be labeled a barrier, insofar as there is a need to take care of the business at hand before shifting attention to India.
As another outsider comment, which I must preface by saying that I am not an expert on India by any means, there are aspects of the country that resemble China. Within the so-called WTO framework, for example, India is a country characterized by fairly strong protectionist measures. One symbol of this, and an example that is quite easy to understand, is the extremely high average of tariff rates in India. In Japan, as you know, while high customs tariffs are maintained on certain agricultural produce, the average tariff rate is low. Viewed in that context, I would predict major difficulties in the ability to truly negotiate an agreement between two countries that maintain such different stances. In determining Japan’s stance toward countries like China and India, when viewing the situation over the next five years or so, I feel it will be more important not just for Japan but for the rest of the world as a whole to first observe what progress will be made in WTO negotiations. But this is certainly not to say that Japan should not negotiate with India.

Q: FTAs have also attracted a certain degree of criticism. President Haruhiko Kuroda of the Asian Development Bank and others have commented that FTAs resulted in a “noodle bowl” state in Asia and are not desirable for companies. As the direction from here on, you stated your view that it would be preferable for an FTA to be formed in Asia with the focus, for example, on the three main powers of Japan, China, and South Korea. But as you also noted, it is doubtful that such an agreement can be realized in the immediate future. Another approach would be to initially form an FTA within the ASEAN+3 framework and then bring various other countries into the fold. I would like to ask, therefore, whether or not Japanese companies consider the current “noodle bowl” conditions to be a big problem. In addition, what do you feel is the most appropriate direction to follow from here on?
A: In reality, Japan is expanding trade with the countries with which it has signed FTA or EPA pacts. For example, automobile trade with Mexico is on the rise, while investment with Singapore, although this is not a very large country, is also charting major advances. In sum, therefore, I do not see any proof that the increase in FTAs has led to complexity in various agreements of origin or that companies are suffering major damage from any such “noodle bowl” conditions.
In the future, however, the points you mentioned will become extremely important. Although it will be difficult to determine how exactly to approach the formation of FTAs, I feel that it will be necessary to adopt a regional approach, and not a sequential extension of the bilateral approach of forging agreements between two specific countries that I mentioned before.
In addition to that, an area that has taken on an extremely high level of importance is what type of cooperation will be provided at the regional level for the systems when companies come to pass through customs on a general basis. For example, a major theme for the Customs and Tariff Bureau at Japan’s Ministry of Finance is what type of mutual aid the Japanese and Chinese customs authorities can muster in dealing with terrorism and the smuggling of narcotics and other contraband. As one example of this, when airplanes take off from an airport, a passenger list detailing who is on board is sent to the destination airport before the flight arrives. However, in the case, for example, of cargo that is shipped from the port of Shanghai to Tokyo, I don’t imagine that there is any sufficient means of ascertaining what exactly is being carried. Such approaches will grow extremely important from here on, and I believe it will be indispensable for discussion of this area to be included in EPA negotiations. In areas other than agreements of origin as well, as networks become more complicated and tightly knit from here on, it will grow increasingly crucial to first develop and negotiate such schemes or systems within Asia.

* Given on March 20, 2006, at the Foreign Press Center/Japan. This paper is reserved for internal use; any reproduction or quotation is forbidden without prior permission from the FPC. 　 ©FPC 2006