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Special Reports
Tokyo, Seoul move to bury trade hatchet
By Tony Allison
1. Japan and South Korea
South Korean President Kim Dae-jung, during his visit to Japan in October 1998, took big strides in improving bilateral relations with Japan by two means. First, he adopted a low profile and did not argue historical issues. He proposed that the problems of the 20th Century should be resolved within the century. Second, he committed to abolish traditional restrictions on cultural exchange with Japan, despite opposition in Korea. Conservatives attacked him for making too many concessions with Japan, but over the following two years his approach appears to have worked.
Japan has started to regard Korea as a real partner in the region. Japan's acceptance has been symbolized by recent booming tourism to Korea, rising human exchanges, and increased numbers of ministry meetings.
Most important, Japan and Korea committed to an "Action Plan for the New Korea-Japan Partnership for the 21st Century", which sought to increase comprehensive cooperation through to joint hosting of the soccer World Cup in 2002.
This was cemented in two rounds of summit talks in Atami, near Tokyo, in September 2000 with Japanese Prime Minister Yoshiro Mori, which paved the way for establishing a new framework for bilateral economic cooperation in the new millennium. Kim and Mori reviewed pending bilateral issues, such as economic cooperation and their respective North Korea policies.
One positive outcome of their talks was the adoption of a joint statement on bilateral cooperation in the information technology (IT) industry. Seoul officials said the so-called South Korea-Japan IT Cooperation Initiative will outline the basic direction for cooperation between the two countries in the information and technology sectors, a driving force for economic development in the 21st century.
"The adoption of the IT initiative will help invigorate the economies of the two countries and enhance their international competitiveness by accelerating bilateral cooperation in the core business of the 21st century," a government official said.
Kim and Mori also made progress in economic cooperation by moving one step closer to concluding a free trade agreement (FTA) and an investment pact. For the promotion of the FTA, the two leaders agreed to establish a South Korea-Japan business forum, which will collect opinions from civilian sectors on the trade pact.
In March 1999, Japan and Korea had finally agreed to conduct a joint study on the feasibility of a FTA. The study, conducted by the Institute of Developing Economies (IDE)/Japan External Trade Organization (Jetro) and the Korea Institute for International Economic Policy (KIEP), was completed and made public in May 2000. The study teams, which included members from academia, and think tanks as well as government observers, met 13 times beginning in December 1998.
While Japan and South Korea have followed the non-discriminatory principles of the World Trade Organization (WTO), they have begun to feel threatened in international negotiations by the fact that among the world's 100 largest economies, only five, and all of them located in Northeast Asia - Japan, Korea, China, Taiwan and Hong Kong - are not a part of any regional cooperation framework.
Nevertheless, a Japan-South Korea FTA could prove to be problematic politically. Levels of protection are generally higher in South Korea than in Japan. Moreover, South Korea pursued a policy of actively discouraging imports from Japan through its "import diversification program" until this policy was terminated in June 1999 as part of the International Monetary Fund conditionality for the December 1997 standby package.
When the policy ended, imports from Japan surged in a number of sectors causing public protest in South Korea. Any FTA with Japan will thus be hard to sell politically in South Korea. Japan is similarly disunited on this issue: while the Ministry of Trade and Industry supports the FTA, it is reputedly opposed by the Ministry of Foreign Affairs, which champions the WTO, and the Keidanren, the big business association, whose members fear South Korean penetration of the steel sector.
In economic reforms, Korea has made strong commitment to rapid market opening and deregulation. It has abolished special import restrictions against Japan, and actively started to promote negotiation for BITs (Bilateral Investment Treaties) to attract more foreign direct investment from the US, Japan, European countries, Taiwan and other economies.
South Korea is also promoting the conclusion of an FTA with several other countries, including Chile and Israel. It has also shown interest in FTAs and other closer relations with Mexico, New Zealand, Singapore and Thailand.
Japan is well advanced with a FTA with Singapore, and is pursuing one with Mexico.
Under the Japan-South Korea FTA, both sides are obligated to remove tariff barriers on a phased basis over 10 years. According to Japanese Foreign Ministry officials, Japan first proposed discussing the FTA with Korea and has been more active in promoting the bilateral accord. The FTA between South Korea and Japan could help the domestic economy by sharply increasing Korea's industrial output.
"The proposed Korea-Japan FTA will likely further aggravate Seoul's chronic trade deficit with Tokyo in the short term. This would eventually be offset, however, by more direct investment from Japanese firms and enhanced productivity resulting in a sharp increase in the gross domestic product (GDP)," the KIEP said in a report submitted to the Ministry of Foreign Affairs and Trade.
Although Japan and Korea are major players in world trade, according to the Institute of Developing Economies (IDE), the effect of their FTA will increase world trade only by US$5.82 billion (0.10 percent). The effects will be greater for bilateral trade through the abolition of tariff and non-tariff measures, reduction in prices in the domestic market in sectors with clear comparative advantage, and boosting trade.
2. Communique on new partnership
Japan and Korea on May 23, 2000, issued a joint communique entitled Towards closer Japan-Korea economic relations: Proposal for formulating a 21st Century partnership. The following are excerpts of the statement.
Japan and the Republic of Korea have remained close neighbors for over 2,000 years. Since bilateral diplomatic relations were normalized in 1965, trade, investment and personnel exchanges between the two countries have increased dramatically.
However, trade and investment between the two countries stagnated throughout the 1990s. The Asian currency crisis that broke out in the summer of 1997 spread to Korea, and the country suffered severe economic stagnation. Similarly, Japan failed to emerge from the prolonged recession that had plagued it since 1992, and both countries posted negative growth rates in 1998. In the course of economic recovery, momentum grew in Japan and Korea to re-examine our bilateral relationship.
During a visit to Japan in October 1998, President Kim Dae-jung touched the hearts of many Japanese people when he expressed his proposal that the problems of the 20th Century be resolved within this century, and proposed the Action Plan for the New
Korea-Japan Partnership for the 21st Century. Toward the year-end, a number of ministers' meetings, cabinet ministerial conferences, and meeting of the Japan-Korea Public-Private Joint Investment Promotion Council were held to seek ways to bring the Japan-Korea economic relationship closer. Proposed during these
meetings was the idea that a Japan-Korea Free Trade Agreement (FTA) be studied in both countries. In his visit to Korea in March 1999, then-Japanese prime minister Keizo Obuchi proposed going beyond existing economic cooperative frameworks to
strengthen bilateral relations through the "Japan-Korea Economic Agenda 21". A study was subsequently conducted by the Institute of Developing Economies (IDE)/JETRO and Korea Institute for International Economic Policy (KIEP).
As an exception to the non-discriminatory and most-favored-nation treatment principles, the GATT-WTO recognizes FTAs as the first step toward realizing global-scale liberalization. In other words, it approves the preferential lifting of tariff and non-tariff barriers among member countries, on the conditions, however, that
trade barriers with third countries are not raised as a result, that such FTAs cover substantially all trade sectors, and that they be fulfilled in roughly 10 years' time. As two of the world's major trading nations, Japan and Korea must meet these
conditions.
This was the first attempt ever by Japan and Korea to jointly conduct a feasibility study of a bilateral FTA. Thus far, both countries have promoted liberalization on a global scale. Today, however, many countries have adopted regional trading
agreements - most notably the EU and NAFTA - as a means to promote economic integration with neighboring countries. Under multilateral trade systems, FTAs are increasingly being regarded as a pragmatic approach to achieving global liberalization. A free trade agreement between Japan and Korea would not aim
merely at removing the tariffs and non-tariff measures that still exist between our two countries; it would aim at a comprehensive framework encompassing an array of market-integration measures, such as investment promotion, trade facilitation, and harmonized trade and investment rules and standards.
What effects would a Japan-Korea FTA bring about? First is the expansion of bilateral trade through the abolition of tariff and non-tariff measures. We would see a reduction in domestic prices of imported items in sectors where either Japan or
Korea has a clear comparative advantage, resulting in an increase in import volume. This is the trade creation effect. Meanwhile, a Japan-Korea FTA could also generate a trade-diversion effect, whereby a reduction would be seen in imports from third
countries to which tariffs and other barriers would continue to be imposed. Korean exports to Japan will increase for apparel, leather products, and agriculture and fishery products, and Japanese exports to Korea would increase for sophisticated
machinery, metal and chemical products. While Korea's average tariff rate on Japanese products is 7.9 percent, Japan's average tariff rate on Korean products is only 2.9 percent. Therefore, the increase in Japanese exports to Korea would surpass the
increase in Korean exports to Japan, and as a result, Korea's trade deficit with Japan would increase further.
But these are not the only effects of a Japan-Korea FTA. There also would be a steady increase in intra-industry trade between Japan and Korea, in which both countries mutually export and import low-end and high-end products as well as
components and finished products. Travel, transport, construction,
telecommunications, financing, and other service industries are also included in the effect. These sectors, which have either no or very low tariff and/or non-tariff barriers, are not captured by the static analysis mentioned above. In these sectors,
the enhanced integration of Korean and Japanese markets under a FTA would intensify competition between Japanese and Korean companies, while strategic alliances between them would also be created. The Japan-Korea integrated market would also attract a large number of US and European firms to invest in our countries. Through enhanced productivity and lower cost, corporations with global competitive edge would be fostered. This is the dynamic effect of the FTA, and, although it is difficult to make accurate quantitative estimates, according to calculations in the IDE and KIEP reports, the dynamic effects could be greater than those foreseen in the static analysis.
The dynamic effects would be realized generally through market mechanisms. To truly integrate Japanese and Korean markets, however, the two countries must conclude a taxation treaty, agreements on investment, mutual recognition of
standards and certification, and intellectual property rights, promote wide-ranging standardization of customs clearance procedures, and implement other trade facilitating measures and government procurements, so as to reinvigorate the
bilateral exchange of goods, services, financing, and human resources. The KIEP report covers some of these trade-creation effects. Promotion of investments, in particular, should be positioned as the core effect. These effects would certainly
improve the confidence of both Japanese and Korean firms in investing in each other's country. Many of these issues are included in the "Japan-Korea EconomicAgenda 21", and are to be negotiated bilaterally. A taxation treaty came into effect in November 1999 and negotiations for investment and mutual recognition agreements are under way.
In order to maximize the benefits of the FTA, bilateral cooperation needs to be expanded. For example, the Japan-Korea Industrial Technology Cooperation Foundation and Korea-Japan Industry Cooperation Foundation, both established in 1992, have been achieving results steadfastly in terms of fostering industrial
technology among small businesses, developing human resources, and enhancing productivity. Cooperation is particularly needed in the areas where Japan and Korea both have international competitiveness yet severely compete each other, where
inefficient over-capacities exist, and where intra-industry trade is underdeveloped. To realize such cooperation, the KIEP report suggests the establishment of a Korea-Japan Industrial and Technological Cooperation Council comprised of private
businesses. The IDE report suggests that there is also substantial room for cooperation in the fishery sector in terms of joint management and utilization of resources common to both countries. Efforts are also needed to enhance the
integration of the financial and capital markets of Japan and Korea.
This will help to reinforce competition through mutual bilateral cooperation and alliances of Korean and Japanese corporations.
The KIEP report expresses concern that the FTA would further expand Korea's trade deficit with Japan. However, Korea would enjoy a surplus in the services trade and its overall trade balance would improve. Although the Korean deficit may decrease in the long run due to dynamic effects and various facilitation measures, to ensure that they will indeed decrease, the KIEP report points out the importance of investment to materialize the dynamic efficiency of the FTA, and it proposes the establishment of a Korea-Japan Investment Development Bank.
Many countries, including those in the Asia-Pacific region, have shown interest in a proposal to study a Japan-Korea FTA. Amid the move toward increasing globalization, countries, while themselves becoming involved in regional integration, tend to be sensitive to other countries' moves. We have two messages to these
countries. First, the Japan-Korea FTA would directly contribute to revitalizing the two economies and also reinvigorating all economies in the Asia-Pacific region, as well as boost the two countries' liberalization efforts and strengthen their initiatives
toward liberalization under Asia-Pacific's trade liberalization structure and its multilateral trading regime. Second, the Japan-Korea FTA would be consistent with GATT Article 24.
Various facilitation measures and cooperation on institutional arrangements have started to be negotiated, but the FTA is a systematic framework that includes all these negotiations. At the same time, the FTA could serve as a vision showing us the
ultimate objectives of individual negotiations and helping to keep the momentum toward developing closer economic relations between Japan and Korea. In that context, it is desirable that the FTA framework would encourage individual treaties
to advance smoothly. In announcing the results of our joint study today, we wish to suggest that people in both countries promote discussions to bring bilateral economic relations closer.
3. Japan and Mexico
On January 24, Japan and Mexico agreed to finalize the details of a bilateral investment protection pact over the following three months in a bid to conclude it within six months.
Takeo Hiranuma, Minister of Economy, Trade and Industry, and Luis Ernesto Derbez, the Mexican Economy Secretary, announced the agreement in Mexico City.
They said senior officials from the two countries will continue talks on how to strengthen their trade partnership, possibly through a FTA, once the investment protection pact is concluded.
Japan and Mexico have been negotiating the investment accord since last March. The deal is primarily aimed at protecting and facilitating Japanese investment in Mexico.
Hiranuma was cautious on a FTA pact, saying there is still stiff opposition to the idea in Japan, particularly in the agricultural sector. He added, however, that tariffs on 70 percent of agricultural products imported into Japan are less than 5 percent, which should allow the two sides to settle their differences through discussion.
Why Mexico?
Mexico hopes to reinforce its economic ties in Asia, particularly with Japan. When then president Ernesto Zedillo visited Japan in November 1998, he proposed that concrete measures be taken to cement economic ties between the two countries. As such, Mexico has sent a positive signal for a FTA with Japan.
Historically speaking, when Japan was struggling to abolish its unequal treaties with the great powers of Europe and the United States in the last century, Mexico became the first country to conclude a reciprocally equal trade treaty of amity (in November 1888). Inspired by the conclusion of this treaty, Japan revised its unequal treaties with the US, Germany and Russia and signed equal treaties in the following nine months.
Today, Mexico holds an important meaning as a member of the North America Free Trade Area (Nafta), along with the US and Canada, as a place where Japanese industries can secure a foothold in the North American market.
Negotiations on the FTAA (Free Trade Area of the Americas) , which include North America and Latin America, are scheduled to be completed by 2005. A FTA with Mexico will give further impetus to Japanese access to a total population of 800 million and to a market valued at a GDP of $10 trillion.
Present conditions
According to 1999 Japanese statistics, Mexico's share of Japanese trade stood at 1.1 percent of exports (20th) and 0.5 percent of imports (36th). Meanwhile, Japan's share of Mexican trade stood at 0.6 percent of exports (5th) and 3.6 percent of imports (2nd). The US, Mexico's largest trading partner, accounted for 88.2 percent of Mexican exports and 74.1 percent of Mexican imports.
Japanese exports to Mexico primarily consist of electronic and electrical appliances, auto parts and industrial products such as general machinery. Among total imports from Mexico, oil import accounts for about 20 percent, foodstuffs for about 30 percent, and industrial products for about 40 percent. In recent years, however, the ratio of industrial product imports has been rising.
Up to now, approximately 80 percent of Japanese direct investment in Mexico was in the manufacturing sector. Japan accounted for 3.1 percent ($1.6 billion) of foreign direct investment received by Mexico between 1994 and June 1999, ranking seventh. On the other hand, Mexico has made almost no direct investment in Japan. At present, only two government-owned financial institutions, one shipping company, an airline and a travel company have offices in Japan.
Problems in trade with Mexico from Japan's view include:
- Mexico's high tariffs are a problem. In January 1999, Mexico raised the general import tariffs applied to non-FTA countries and regions by either 3 or 10 percentage points on about 10,000 items, or about 85 percent of all tariff classifications. This raised the average to 16.1 percent. As a result, Japanese exports are levied higher tariffs than FTA signatories. In addition, it is also pointed out that the application of tariff classifications is arbitrary and lacks transparency.
- The bond system for imports of parts and materials that are to be exported to Nafta regions has been abolished under Nafta. This system had lured Japanese electronic and electrical appliance makers into Mexico.
- Mexico still retains regulatory measures aimed at protecting its auto industry. Only local manufacturers are allowed to import finished cars. In addition, foreign currency balance requirements and local content regulations are specified "Auto Decree". Under these regulations, only two Japanese makers engaged in local production are permitted to import finished cars.
- There are problems with changes in Mexican industrial standards and other systemic changes. Exports from Japan, which require many days for transport, cannot cope with arbitrary revisions made in a short period of time.
Problems with investment in Mexico from Japan's standpoint
- In Mexico some sectors still restrict foreign investment. These include banking, insurance and other financial sectors, oil and petrochemicals. With respect to banks, foreign companies are allowed to own an interest of no more than 49 percent in the case of new entry. Meanwhile, oil companies are completely state-owned, thus prohibiting foreign investment. These controls are restricting new investment and entry from Japan into these sectors.
- Problems with tax and accounting systems exist.
- Supporting industries such as local auto parts and electronic and electric parts are nonexistent, and transport-related infrastructure is underdeveloped.
Desired effects from a FTA
- Expansion of trade resulting from removal of tariffs An econometric model analysis shows the removal of tariffs would increase Japanese exports to Mexico by 29.4 percent, raising Mexico's share of total Japanese exports by 0.2 percentage points. Likewise, imports from Mexico would grow 10.9 percent, expanding Mexico's share by 0.1 percentage point. As a result, Japan's trade surplus with Mexico would be expected to grow 69.9 percent. Exports from Japan are witnessing rapid growth in the categories of textiles, apparel, transport equipment, metal products, and foodstuffs. Meanwhile, with regard to imports, foodstuffs and other primary products, oil and vegetables, fruits and nuts are anticipated to grow.
- The abolition of tariffs under a FTA will compensate for the loss of the bonded system for re-exports.
- The elimination of such performance requirements as local content and foreign currency balance requirements would be beneficial for the promotion of Japanese investment in Mexico. The import permit and local content and foreign currency balance requirements applied to automakers under the Auto Decree restrict investments and exports from Japan.
- The removal of foreign investment controls in petrochemical, financial and other sectors which Japanese enterprises are interested in entering will likely expand investment by Japanese enterprises. A Japan-Mexico FTA will enable direct entry from Japan by 100 percent Japanese-owned companies.
4. Japan's trade development
Japan has benefitted from the world's liberal international economic order in the area of trade. The General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO), have facilitated the reduction in barriers to international trade worldwide and thereby enabled Japan's exploitation of its comparative advantage and contributed to income growth and rising living standards in post-war Japan.
The World Bank, along with the International Monetary Fund (IMF), contributed even more directly to post-war Japanese economic development by financing such infrastructural projects as the construction of the Shinkansen (bullet train) railway system. As the post-war economic reconstruction proceeded, these institutions continued to serve Japan well, as its economic interests broadened from trade and finance, narrowly defined, to encompass a wide range of issues relevant to the expansion of Japanese firms around the world.
Nevertheless, despite its efforts to increase its influence on multilateral institutions, its influence on the global economic policy architecture is smaller than one would expect for the world's second largest economy.
Japan's attempts to project greater influence on the international institutions are limited by three factors: dominance of the United States and Japan's unwillingness to risk a rupture with the world's sole superpower; the historical legacy of suspicion and distrust of Japan in Asia; and Japan's own parochial politics.
Trade policy Japan's history of problematic trade relations with the rest of the world can be traced to its forced opening to trade by the United States in 1854. The 50 years which followed the Meiji Restoration in 1868 were a period of modernization in which Japan adapted a myriad of foreign social and technological innovations to its own ends.
The Japanese leadership of the late 19th century was driven by the exigency of preserving national sovereignty, and Japan was one of the few non-Western nations to escape colonization. Economic liberalism, which would become the dominant ideology of the world system, never really took hold in Japan. The densely-populated country with a relatively high level of education and social capacity quickly developed a comparative advantage in labor-intensive manufacturing.
Japanese exports were met by discriminatory trade restrictions imposed by trade partners fearing import surges. Japan began raising its tariffs significantly during the worldwide slump which followed the conclusion of World War II. In the wake of the 1923 Great Kanto Earthquake, Japan raised tariffs to 100 percent on a number of luxury items. Instead of reducing tariffs back to their earlier levels after the immediate crisis was over, Japan continued to raise its tariffs through the 1920s.
Japan moved further away from economic liberalism with the installation of the Inukai Tsuyoshi cabinet in 1931. Under finance minister Takahashi Korekiyo, it began a policy of regulated reflation and as the international economic system disintegrated, Japan launched the Pacific War with the aim of creating a Greater East Asian Co-Prosperity Sphere.
The war ended in ruin, defeat and occupation by US military forces. US occupation authorities installed a set of institutions modeled on the "New Deal" experience in the United States, but sided with Japanese conservatives in Japanese economic affairs as the Cold War with the Soviet Union deepened. Once again, economic liberalism failed to establish itself.
After the occupation ended in 1952, Japan applied to join the GATT. The application was initially opposed by a number of countries, but the United States strongly supported the application, and Japan was granted provisional membership in 1953 and full membership in 1955.
Once in the GATT, Japan participated in successive rounds of multilateral negotiations (including the Tokyo Round of the 1970s). Japan was relatively passive, however, in its use of the GATT's admittedly-weak dispute settlement mechanism. Due to this poor settlement procedure, many trade conflicts were resolved bilaterally, often in a discriminatory fashion.
In addition to GATT-consistent forms of protection such as antidumping measures, Japanese exports were subject to grey area measures such as the orderly marketing arrangements (OMAs) invented by Japan and the US in the 1950s and applied to textile trade, the forerunner of the so-called voluntary restraint agreements (VRAs) or voluntary export restraints (VERs), which the US and EU applied to Japanese steel and automobile exports in the 1980s. In the 1990s, Japan and the US pioneered the use of voluntary import expansions (VIEs).
The January 1, 1995, establishment of the WTO and its new and improved dispute settlement mechanism marked an important turning point in Japan's trade relations with the rest of the world, greatly strengthening its ability to oppose discriminatory trade protection by its trade partners. This was demonstrated dramatically that year when Japan called the US bluff in an automobile dispute, refused to agree to US market-opening demands, and threatened to resolve the issue in the WTO. The US decided to settle out of court.
Since then, Japan has brought cases to the WTO at a rate of slightly more than one per year. About half the cases involve the US and about half of these involve the automobile industry. WTO panels have yet to rule against Japan in any of its complaints.
At the same time, Japan's partners have taken it to the WTO at a rate of about two cases per year. As is often the case in the WTO, many of these disputes are settled bilaterally without going through the complete adjudication process. In the cases that have gone through the dispute settlement process, Japan has lost two (the complaint about discriminatory taxation on alcoholic beverages brought by the EU, the US and Canada, and an agricultural quarantine case brought by the US). It has won one, the famous Kodak-Fuji spat on photographic film.
Japan has also availed its third-party rights in 24 cases, mostly with regard to cases involving the US and/or the EU. From an Asian regional standpoint, Japan has brought one case against another Asian country (Indonesian autos), and entered two more (South Korean government procurement and Thai antidumping) as a third party. No Asian country has made use of the WTO dispute settlement procedure to challenge Japanese trade practices.
Although the new dispute settlement system represents a noteworthy advance over the old GATT system, the WTO faces a number of challenges, notably the failed seattle talks and how to integrate China into the organization.
The 1999 attempt to launch a new round of multilateral trade negotiations in Seattle was driven by a political compromise left over from the Uruguay Round, rather than any global groundswell for trade liberalization. To secure a conclusion to the last round of negotiations, the US accepted less than complete reform of agricultural trade practices on the part of the EU in return for a commitment to revisit the issue in 1999. This is the origin of the so-called built-in agenda of talks on agriculture and services motivating the new round.
Regional initiatives Japan stands alone as the only major WTO member which does not participate in preferential regional trade arrangements. However, dissatisfaction with the WTO is encouraging Japan and other countries in Asia to go their own way, creating regional preference arrangements similar to those that exist in Europe, North America, and Oceania.
The sole major existing regional initiative, the Asia-Pacific Economic Cooperation (Apec) forum, includes countries from outside of Asia, most notably the US. Indeed, Apec was originally an Australian initiative; some Asians wanted US involvement to counterbalance Japan, which had a similar proposal, and Apec's first meeting was held in Canberra in 1989.
Apec's membership accounts for more than 2 billion people (40 percent of world population), and more than half of world output. An officially-appointed Eminent Persons Group issued a report calling for free trade and investment in the region by 2020 (2010 for rich members, 2020 for poorer ones), a goal that the governmental leaders adopted in their Bogor Declaration of 1994.
Due to great political-economic diversity among membership, no one anticipates deep integration along the lines of the EU. Rather, much activity has been in terms of business facilitation, such as streamlining procedures.
Progress on trade and investment implementation has been uneven. Agriculture is a highly-sensitive issue, and Japan attempted to carve out agriculture from the accelerated liberalization commitments at the Bogor (1994) and Osaka (1995) leaders' meetings. Later, in November 1998, Japan sank the early voluntary sectoral liberalization (EVSL) initiative, which would have required it to eliminate over a 10-year period its relatively-low tariffs on forest and fishery products.
The growth of regionalism outside of Asia and the failure of the WTO meeting in Seattle have encouraged Asian countries to take a second look at regional economic integration schemes. The old East Asian Economic Caucus idea has been revived as the Asean+3 (Japan, China and South Korea) initiative.
In Japan, thus, free trade areas are being considered. Article 5 of the General Agreement on Trade in Services (Gatts) specifies the conditions under which preferential trade arrangements are consistent with signatories' WTO obligations.
The WTO must be notified of the intent to form a FTA; it must not raise barriers to other parties; tariffs within the FTA must be reduced to zero within "a reasonable time period", which was codified in the Uruguay Round agreement as 10 years; trade restrictions must be abolished in "substantially all sectors"; and liberalization should target the services sector per the Gatts. For Japan and its potential partners, the problem is the "substantially all sectors" requirement. Because of its inefficiency in agriculture, Japan is constrained to look to partners which either do not have an agricultural sector (Singapore), have similarly inefficient agricultural sectors (South Korea), or run the risk of a WTO challenge if it attempts to exclude agriculture from an agreement (Mexico).
Japan's search for regional alternatives to the multilateral system is hamstrung by its own agricultural policy.
(Special to Asia Times Online)
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