Next January, Japan and Singapore will kick off a round of government-to-government negotiations for a bilateral free trade agreement. The plans in the works reportedly call for signing the pact by the end of 2001 so that it will take effect in 2002.
There are already more than 120 regional FTAs worldwide; they include the European Union and the North American Free Trade Agreement. The Japanese business community is also looking into FTAs with other countries, such as South Korea and Mexico. The question is whether Japanese farmers, who still fear free trade, will accept these new agreements.
In the past, the Japanese government criticized FTAs on the grounds that free trade should be promoted through multilateral liberalization talks, such as those of the General Agreement on Tariffs and Trade and the World Trade Organization. They said that FTAs would divide the world into economic blocs. Tokyo opposed FTAs for another reason: Japan’s farm products are not internationally competitive. Article 24 of the GATT says an FTA must effectively scrap tariffs and all other trade restrictions.
Things changed after last year’s WTO ministerial meeting in Seattle failed to kick-start a new round. That turned a spotlight on FTAs as an alternative to multilateral liberalization. Last December, Singaporean Prime Minister Goh Chok Tong sounded out Prime Minister Keizo Obuchi on the possibility of concluding a bilateral FTA. Two months ago, a joint study group completed a report saying that an FTA would bring economic and strategic benefits to the two nations. And in October the two sides agreed to start negotiations.
A Japan-Singapore FTA, if it materializes, will be the third regional trade agreement in Asia after the South Asian Preferential Trade Agreement and the ASEAN Free Trade Agreement. It will likely set an example for future FTAs. The joint report calls for, among other things, measures not included in existing FTAs, such as abolition of nontariff barriers, simplification of trade procedures, promotion of e-commerce and simultaneous listing of stocks.
However, the negotiations will not be easy, largely because Japanese farmers fear that an FTA with Singapore — the first of its kind for Japan — might affect other trade talks and put them under greater pressure to liberalize. There is also fear that orchids from Singapore might flood into the Japanese market.
Keidanren, the Federation of Economic Organizations, supports a Japan-Singapore FTA, as it sees FTAs as a new trend in international trade. However, Keidanren attaches greater importance to an FTA with Mexico, which, in addition to being a NAFTA member, now has an FTA with the EU. The country levies no tariffs on products from the United States, Canada and EU states, but imposes high tariffs of 10 to 20 percent on Japanese products, such as cars and home appliances.
There is another reason why Keidanren is pushing for an FTA with Mexico: The “maquiladora” duty-free trade zone was closed Nov. 1 this year, at the end of a five-year grace period granted under NAFTA. That further cuts the competitiveness of Japanese companies operating in the area.
The Mexican government, in an effort to expand trade with Japan, has been calling for a bilateral FTA for the past several years. In the background is the worry that NAFTA has made Mexico overly dependent on trade with America. The Japanese government has its own worry: Livestock products, such as pork, make up a big part of Japan’s imports from Mexico. There is still a heavy residue of agricultural protectionism within the government.
Tokyo should change its conventional thinking on FTAs because these bilateral and regional arrangements will promote economic structural reform in Japan through deregulation as well as trade and investment liberalization. The U.S. is enjoying its longest-ever economic boom, and it has occurred during the inauguration of NAFTA, which includes Canada and Mexico. By contrast, Japan is beset by a decade-long economic slump.
The effect of FTAs is also obvious from the example of Mexico, which has reportedly registered nearly twice as much growth in regional trade as it has in external trade.
FTAs, it should be noted, also have a positive political role to play in promoting peace. For example, the creation of the European Coal and Steel Community in 1952 reflected in part a desire on the part of Europe not to repeat the tragedies of world wars I and II. During the Cold War the agreement functioned as a sort of political alliance against the Soviet Union.
In East Asia, however, there is no such regional agreement. Japan often finds itself at odds with China and South Korea over its activities before and during World War II. Such unsettling relations can be resolved if FTAs are used as regional confidence-building devices. In this sense, it is welcome that moves to sign a Japan-South Korean FTA have gained momentum since South Korean President Kim Dae Jung’s visit here in 1998.
Furthermore, Japan, China, Taiwan and South Korea can be expected to conclude an FTA if China and Taiwan join the WTO. Such a regional trade agreement would go a long way toward promoting economic and political stability in the region.
Japan should not worry too much about farm liberalization. Article 24 of GATT does not require 100-percent liberalization. For example, the EU-Mexico agreement excludes certain agricultural and marine products. The Japanese government, as well as the industrial and agricultural communities, should throw their weight behind FTAs. They are also an effective way to promote deregulation.
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