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Japan and Mexico have made it halfway through what for Japan remains an unexplored tunnel and are beginning to see a glimmer of light.

But both remain unsure how much brighter that flicker will grow.

Under an agreement reached between Prime Minister Junichiro Koizumi and President Vicente Fox in Tokyo in early June, Japan and Mexico inaugurated a joint study group in September to explore ways to strengthen bilateral economic ties, including the possibility of concluding a free-trade agreement.

The study group, comprised of about 10 government officials, academics and business people from each side, has so far met four times, alternatively in Mexico City and Tokyo. It will meet two additional times — in Mexico City in late April and in Tokyo in June — before compiling a report on its findings in July.

The report appears more likely to recommend, in one way or another, the opening of formal negotiations on concluding a free-trade agreement, or FTA.

But the question is how strongly and convincingly the report will make the recommendation, amid stubbornly strong objections from domestic farmers and their supporters within the ruling Liberal Democratic Party to any further liberalization of the weak but politically sensitive domestic agriculture markets.

A panel member from the Japanese government acknowledged the farm sector is the biggest stumbling block to opening FTA negotiations with Mexico.

“It will be difficult for us to say in the report that Japan should liberalize its farm markets,” he said, requesting anonymity. “But at the same time we will not be able to say that Japan does not need to do so at all.”

If FTA negotiations are actually launched following the study group’s report, Mexico will likely become Japan’s second FTA partner, after Singapore. At present, Japan is the only major world economic power that has not yet concluded an FTA with any trading partners.

Japan and Singapore signed an FTA in January during Prime Minister Koizumi’s visit to the city state; it will take effect this summer.

Singapore produces almost no farm products, and those it does produce account for only a negligible percentage of its overall exports to Japan.

Therefore, the Japan-Singapore FTA, which excludes farm products, will not be in violation of international rules set by the World Trade Organization that stipulate all FTAs “substantially cover all trade” between partners.

But Mexico is quite different. Farm products account for more than 20 percent of its exports to Japan.

What’s more, the biggest Mexican farm export is pork — one of the most politically sensitive and heavily protected products in Japan.

In 2000, the latest year for which figures have been made available, two-way trade between Japan and Mexico totaled $7.6 billion, with Japan exporting $5.21 billion worth of goods while importing $2.39 billion worth.

Mexico, for its part, seems to be taking it for granted that Japan will launch FTA negotiations once the joint study group has completed its work.

Indeed, Mexican Economy Minister Luis Ernesto Derbez said during a visit to Tokyo in July that Mexico hopes to conclude an FTA with Japan by early summer 2003.

If Mexican expectations about an FTA with Japan are betrayed, bilateral relations may suffer.

Many Japanese companies have firmly called for an early FTA conclusion between Japan and Mexico, a major manufacturing base for products exported to the U.S.

Their motivation is simple: They fear being put at a further disadvantage to increasingly globalized competitors from the U.S. and Europe.

Mexico has already concluded FTAs with 30 trading partners. The North American Free Trade Agreement, encompassing the U.S., Canada and Mexico, took effect in 1994. An FTA between Mexico and the 15-nation European Union was put into force in July 2000.

Japanese industries’ fear of falling further behind grew further with the abolition last year of Mexico’s maquiladora system — under which foreign companies with operations along the U.S. border were permitted to import raw materials and parts tariff-free.

FTA proponents within the Japanese government, especially those within the Ministry of Economy, Trade and Industry, also believe that these agreements can encourage structural reform of Japan’s internationally weak industries and eventually revive the struggling domestic economy.

But the Ministry of Agriculture, Forestry and Fisheries, LDP politicians with close links to domestic farm lobbies and the politically powerful farmers themselves are dead-set against any liberalization of Japan’s farm markets.

How much give and take can be expected?

The farm ministry says it will not object to concluding an FTA with Mexico — if the farm sector is completely excluded, according to government sources.

Pinned against the seemingly immovable agriculture bloc, some government officials are now rationalizing that a Japanese-Mexican FTA that completely excludes the farm sector may not necessarily be incompatible with WTO rules.

They argue that the sector accounts for only about 5 percent of the overall two-way trade between the two countries.

Other government officials do not agree. They say that it is quite doubtful that any such FTA would comply with WTO rules, because agricultural goods account for more than 20 percent of Mexican exports to Japan.

“It will be undesirable for Japan to conclude any FTA that is incompatible with the WTO rules,” one government official said, speaking on condition of anonymity.

In addition, Mexico appears unlikely to agree to completely exclude the farm sector from a possible FTA.

“A decision on whether to open FTA negotiations with Mexico will be a very difficult political one that cannot be made by working-level government officials alone,” one senior trade official said, requesting anonymity. “It will have to be made by Prime Minister Koizumi.”

If the Koizumi government decides to go forward with FTA negotiations, he and President Fox are likely to declare the beginning of negotiations in October during the annual summit of top leaders from the 21-member Asia-Pacific Economic Cooperation forum in Mexico.

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