Japan and India struck a bilateral economic partnership agreement Monday, taking a big step toward deepening economic ties.
The accord is expected to encourage Japanese companies to boost investment and exports of auto parts to the rapidly emerging economy.
Analysts also say the agreement may help Japan reduce its heavy reliance on the Chinese market, where tensions have mounted with Beijing in connection with an incident near the Senkaku Islands in the East China Sea.
Under the Japan-India EPA, which took more than three years to conclude, the two countries will scrap tariffs on goods that account for 94 percent of their two-way trade flows in 10 years after the deal takes effect.
The two Asian powerhouses have expanded economic ties in recent years, but the amount of trade and investment has not been impressive. Of Japan’s total trade in value terms, India accounts for less than 1 percent, according to the Foreign Ministry.
“The figure has not reflected the size of our economies, which are among the top three in Asia . . . so we hope this agreement will contribute not only to promote trade, but also investment, and various cooperation between authorities,” a ministry official said.
Responding to India’s call, Japan has agreed to simplify approval procedures for the sale of generic drugs, while discussions on allowing Indians to work in Japan as nurses and caregivers will continue.
An EPA aims chiefly to remove tariffs on goods and trade barriers for services, but also covers areas such as intellectual property rights and facilitation of human exchange.
Most of Japan’s major export items, including auto parts, steel and home appliances, which have tariffs ranging from about 5 to 10 percent, would be eliminated under the Japan-India deal, according to a Ministry of Economy, Trade and Industry official.
Japanese automakers, notably Suzuki Motor Corp., have expanded local production in India, and eliminating tariffs on auto parts would help them reduce the cost of procuring parts made in Japan, experts said.
“It would have been better if the agreement was reached earlier to support those companies that have been increasing local production. But at least we have now come to the starting line (for improving their situation),” said Masanori Kondo, senior associate professor at International Christian University.
Kondo also said India apparently made concessions, such as on the area of tariff elimination, so the two countries could reach the EPA, partly in the hope of counterbalancing China’s increasing clout by firming its relations with Japan.
The latest agreement is a boon for Japan, which is becoming increasingly wary about lagging behind South Korea in the intensifying global EPA race. South Korea has already signed an EPA with India, which took effect in January.
Japanese officials boasted that the Japan-India EPA is “around the same level, or even higher,” than the one between India and South Korea. But it may be too early for Japanese companies to feel relieved because India and South Korea are seeking to abolish tariffs within eight years, quicker than the Japan-India EPA.
As for other possible benefits for Japan, Toru Nishihama, an economist at Dai-ichi Life Research Institute, said the agreement may enable Japan to diversify the overseas markets it relies on amid the “China risk.”
“As we are starting to see a question mark over whether China is an appropriate market to continue to focus on, India is probably a promising economy (to pursue),” Nishihama said.
Diplomatic ties between Tokyo and Beijing declined sharply after Japan arrested a Chinese fishing boat captain whose trawler collided with Japan Coast Guard ships on Sept. 7 near the Japanese-administered Senkaku Islands, which are also claimed by China.
The incident escalated into a dispute over Chinese exports of rare earth metals to Japan, which stagnated amid growing tension between the countries. China has denied officially placing an embargo on the resources, which are vital for high-tech products.
Meanwhile, India, with a population of 1.2 billion, second-largest after China, is drawing attention as a large consumer market.
Japan’s 2010 white paper on trade estimated that middle-income households in India will increase to 620 million people in 2020 from an estimated 190 million in 2010.
“With China’s labor costs rising, India is becoming attractive not only as a market but as a production center,” Nishihama said.