Pursuit of FTAs vital but troublesome

Last month, leading brewer Asahi Breweries Ltd. began shipping its Super Dry beer to Singapore from Japan, instead of from its facilities in China.

The move is designed to improve cost competitiveness by taking advantage of the anticipated abolition of import tariffs on beer between Japan and Singapore under a bilateral free-trade agreement scheduled to take effect as early as this summer.

“By directly shipping our products from Japan, we gain cost competitiveness by the margin of the tariff,” Asahi Breweries spokesman Yasuhiro Nakahara said.

FTAs are designed to promote cross-border business activities by removing tariffs and other trade barriers, while simultaneously facilitating the flow of people and information. The accord with Singapore is Japan’s first such agreement.

Tokyo is at present increasing efforts to sign FTAs with East Asian countries, viewing them as a useful tool to further enhance economic ties throughout the region.

Indeed, there may have been little choice.

Although Japan’s basic position used to be that trade liberalization should be pursued under the multilateral framework of the World Trade Organization, it has changed this stance in the face of the mushrooming of FTAs the world over.

“We are facing the reality that free-trade agreements are being formed one after another” throughout the world, a senior official at the Ministry of Economy, Trade and Industry acknowledged. “We can’t help but pursue them ourselves.”

In a speech delivered at an economic forum on Hainan Island, China, last month, Prime Minister Junichiro Koizumi proclaimed that Japan will actively promote FTAs in Asia and expressed a will to seek greater economic integration in the region.

“Our strategic challenge is to bind together our individual efforts to create a more organic and expanded regional economic integration,” Koizumi said, after touching on the idea of FTAs.

His comments were not out of the blue. Japan has been conducting a feasibility study on an FTA with the 10-member Association of Southeast Asian Nations through a group of experts; a report is expected to be submitted to the Japan-ASEAN summit in November.

Separately, Tokyo has agreed with Thailand, one of ASEAN’s five founding members, to set up a working group to examine the feasibility of a bilateral FTA.

In addition, Japan and South Korea will set up an FTA study group as early as next month, following calls for such an agreement by business leaders in both countries.

In the latest move, Koizumi and Australian Prime Minister John Howard agreed Thursday to hold high-level consultations to seek an economic partnership with the ultimate goal of an FTA.

One of the driving forces behind Japan’s thirst for FTAs is China and its increasing economic influence. Beijing announced in November that it plans to form an FTA with ASEAN within 10 years.

“That announcement effectively accelerated our actions (to conclude more FTAs in Asia). To say the least, we must secure conditions under which companies based in Japan are not put at a disadvantage,” the METI official said.

In that sense, concluding a free-trade deal with Singapore, with its relatively comparable level of economic development and its lack of items that are politically sensitive in Japan, such as agricultural products, was easy, many experts point out.

“The free-trade agreement with Singapore is like a drill,” the official explained. “We expect the real test to come in time.

“The biggest opportunity for Japan is ASEAN, and we are willing” to work on a FTA there, he said.

If China signs an FTA with ASEAN and Japan does not, Japanese firms would be at a disadvantage in trading with ASEAN, possibly accelerating the hollowing out of manufacturing bases from Japan, he added.

As Japan forms FTAs with other countries, however, it must cope with expected opposition from the politically sensitive agricultural sector.

The country’s farm sector, which is a strong political base for the ruling Liberal Democratic Party, lacks global competitiveness and thus opposes FTAs that would leave it exposed to direct competition from foreign products.

“If the domestic farm sector had the strength to export, cutting a deal might be possible,” an official of the Ministry of Agriculture, Forestry and Fisheries said. “But in reality, we have nothing to gain (from FTAs).”

The Japan-Singapore free-trade agreement only covers import tariffs on farm products that are already removed or effectively removed under the WTO, a style that the farm official said was domestically “acceptable.”

Although Japan was able to adopt this method with agriculturally weak Singapore, other nations, including the ASEAN members, are likely to demand that Japan make concessions over farm products.

On top of the farm issue, there is still the question of whether Japan can pursue free-trade agreements with ASEAN countries, which are in varied stages of economic development.

Even efforts to form the ASEAN Free Trade Area — which, it is hoped, will be created among developed ASEAN members by 2003 — are not progressing smoothly, observers say.

Motoshige Ito, an economics professor at the University of Tokyo, said that considering the diversity of the ASEAN countries, realistic partners for FTAs with Japan would be relatively developed members, including Thailand and Malaysia.

With these hurdles in mind, it would appear that turning the emergence of free-trade agreements in East Asia into a regional free-trade area is a remote and ambitious goal, although the issue is on the agenda under the framework known as ASEAN Plus Three, which includes China, Japan and South Korea.

But while it may be difficult to imagine economic integration in Asia similar to the European Union and the North American Free Trade Agreement, the current situation does indicate a move toward integration, Ito said.

At issue now is how to handle Australia and New Zealand — countries that ASEAN may want to exclude from the regional framework due to overlapping export goods, especially agricultural products — as well as how the United States, which has so far taken a wait-and-see attitude, reacts to such developments in Asia, according to Ito.

The U.S. and the EU, which are actively seeking new FTA partners, may also start forming such accords with countries in East Asia. In fact, the U.S. is currently negotiating a free-trade pact with Singapore.

“If the U.S. forms FTAs with such countries as South Korea and the Philippines, it would adversely affect Japan’s position (in the region),” Ito added.

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