Timing right for Japan to end resistance to free trade pacts

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Last November’s World Trade Organization ministerial conference in Seattle ended in disappointment. We hope the leaders of major economies, including Japan, the United States and the European Union, will take the initiative to launch a new WTO round of multinational talks with a comprehensive agenda. Regrettably, no such breakthrough appears to be on the horizon.

Despite such disappointment, the breakdown did manage to have an unintended positive effect on Japan: mounting demand for the nation to seek free trade agreements.

Japan has already begun discussing a pact with Singapore. It is also being approached by several others countries, including Mexico and South Korea, with unofficial studies being launched by public- and private-sector institutions and on both sides. Japanese maquiladora industries are particularly keen to strike a Japanese-Mexican free trade agreement because the implementation of the North American Free Trade Agreement means they will face import tariffs on imports of component parts beginning in 2001. The tariffs will weaken the position of their local units in respect to rivals in the NAFTA member countries and in the EU as well, when the Mexico-EU FTA comes into effect July.

Japan has been reluctant to seek free trade accords and has instead pursued multilateralism under the WTO, on the grounds that free trade agreements could result in stronger trade barriers to nonmember states. But in the past few years, people in and outside of government sectors have begun to say that the nation should pursue free trade pacts simultaneously with its efforts to promote the WTO regime. A consensus is now emerging that free trade pacts do not contradict WTO rules but allow them to complement each other.

Among the world’s 30 major trading powers, Japan is one of a handful of countries that have not joined any free trade arrangements, bilateral or regional. As the European Union and NAFTA have shown, free trade pacts tend to expand. These pacts promote economic activity inside borders, which in turn leads to greater exchanges with nonmember states and further liberalization of cross-border trade.

Some Japanese experts say one major factor behind the breakdown in Seattle was a lack of enthusiasm on the part of the U.S. and the European countries, who have become increasingly dependent on trade within their regional free trade blocs and expect less from time-consuming WTO talks. If their theory is correct, the natural choice for Japan would be to follow the U.S. and European examples and pursue free trade pacts.

There are many types of free trade agreements, including mutual elimination of tariffs and introduction of common tariffs, pacts on investment and service trade, or more comprehensive ones promoting mutual recognition of industrial standards, safeguard and anti-dumping rules and dispute-settlement mechanisms.

Negotiating parties will set their own targets and decide how comprehensive they want their pacts to be. Resistance to liberalization from less-competitive sectors of the economy will naturally arise. In some cases, colliding interests will become easier to recognize than in multilateral trade liberalization talks, threatening the negotiating process. But it is also possible for the negotiating parties to spend enough time on a step-by-step approach and pursue maximum liberalization by eliminating exceptions as much as possible.

EU and NAFTA members have gone through a complicated and difficult process to complete their economic integration. Japan, which has so far focused on multilateralism, lacks experience in such a process, which requires them to recognize and adjust to differences with its partners. However, an integration process will help Japan promote deregulation and structurally reform the economy. Thus for Japan, it will be meaningful to seek free trade pacts not only as a means to catch up with globalization, but also to move ahead of the WTO and complement liberalization under the multilateral regime.