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Chilean President Ricardo Lagos is currently visiting Japan at the official invitation of Prime Minister Junichiro Koizumi. I suppose that one of the aims of his visit is to ask Japan to begin a joint study with Chile on the possibility of a free trade agreement, or FTA, between Japan and Chile. I say, why not? In November 1999, Gabriel Valdes, then-Chilean minister of foreign affairs, visited the Japan External Trade Organization when I was its chairman and proposed that JETRO and the Chilean Foreign Ministry conduct a joint study on a Chile-Japan FTA.

The proposal was accepted by JETRO after consultations with the Ministry of International Trade and Industry (now the Ministry of Economy, Trade and Industry). With a JETRO committee formed on the Japanese side, the study started in May 2000 and was completed in June 2001. The committee included experts and business persons as regular members with director-level government officials of MITI, the Ministry of Foreign Affairs, the Ministry of Finance and the Ministry of Agriculture, Forestry and Fisheries as observers.

The study concluded that an FTA between Japan and Chile would be positive and that a maximum effort should be made to reach an FTA in view of the potential impact on Japan’s domestic industries, the multifunctionality of agriculture and the need to secure a stable supply of natural resources.

Last May, at the 21st Japan-Chile Business Cooperation meeting, cochairmen Mikio Sasaki, president and CEO of Mitsubishi Corp., and Roberto de Andraca, chairman of CAP SA, issued a joint statement with a resolution calling on the Japanese and Chilean committees to ask their respective governments to begin full-fledged negotiations on a Japan-Chile FTA. In November, Chilean Foreign Minister Soledad Alvear visited Japan and met Koizumi. It was reported that she conveyed to Koizumi Chile’s interest in promoting an FTA, which had been sought by business sectors of both countries.

Sasaki, also chairman of the Japanese National Committee for Japan-Chile Business Cooperation, then sent a letter to Foreign Minister Yoriko Kawaguchi requesting that she start negotiations with Chile as soon as possible, since Chile had already concluded FTA negotiations with the European Union and South Korea and since FTA talks with the United States were going smoothly. (Those talks ended in December.)

I think Japan should start a joint study on the feasibility of a Japan-Chile FTA for the following reasons:

* Since 1990s the international business community has entered an era in which many countries are pursuing both a multilateral approach involving the World Trade Organization and a bilateral or regional approach with FTAs. Japan should not be left out of this trend. Chile has concluded many FTAs with other countries while engaging in WTO negotiations enthusiastically.

* Japan is working hard for structural reform. An FTA is one of the best tools to create an external framework for structural reform. For example, the U.S.-Canada FTA and the North American Free Trade Agreement contributed much to the structural reform of the Canadian wine industry. Although Chile’s population is only about 15 million, among Latin American countries it was the first to adopt an economic policy based on market mechanisms and competition. In this regard Chile is advanced in terms of economic structural reform. Therefore, by becoming engaged in a comprehensive FTA with Chile, Japan could learn a lot about badly needed structural reform for itself.

* In the Chilean market, Japanese products compete mainly with American and EU products. Thanks to the completion of the FTAs, U.S. and EU products enter the Chilean market free of tariffs; Japanese products cannot do so at present. The same situation applies to the Mexican market. As Japan has been negotiating with Mexico since last November to eliminate the disadvantage of not having an FTA, it should do the same with Chile as soon as possible.

* Chile concluded an FTA with South Korea in November, the first case of an FTA crossing the Pacific Ocean. Thus Japan faces the disadvantage mentioned above in the South Korean market. True, South Korea at present does not have a very strong agricultural sector; that is why Japan and South Korea sometimes cooperate with each other on WTO and farm issues. Nevertheless, could not Japan do what South Korea did with Chile in solving difficult agricultural issues?

* WTO rules require FTAs to include substantially all products. This is interpreted as meaning that such agreements should cover more than 90 percent of imports. In general, it is assumed that eliminating industrial tariffs is easier than eliminating agricultural tariffs. The higher the weight given to agricultural and fishery imports, the more difficult it is for an FTA to cover more than 90 percent of the total imports. Since the share of agricultural, fishery and forest goods that Japan imports from Chile runs as high as 50 percent of total imports from Chile, it would seem unlikely at first glance that Japan could forge an FTA with Chile. But that is not so. Records for 1999-2001 show that 61.4 percent of Japanese imports from Chile were tariff-free, while tariffs of less than 5 percent were imposed on 29.4 percent of the products.

Adding 61.4 percent to 29.4 percent is 90.8 percent. Thus if Japan eliminates the less-than-5-percent tariffs, it can clear the 90-percent hurdle. Of course, that won’t be easy. It is true, though, that the imposition of tariffs of less than 5 percent to protect domestic industries could be absorbed at times by the fluctuations of foreign exchange rates.

Back in 1905, a frigate called Izumi played a great role in the Russo-Japanese War, monitoring the movement of Russia’s Baltic fleet in the Sea of Japan. Izumi’s original name was “Esmeralda III.” This frigate was purchased from Chile by Japan. If Japan and Chile can start a joint study on a Japan-Chile FTA to commemorate the visit by Lagos then go on to conclude negotiations in 2005, we will be able to proudly declare that the military bond between Japan and Chile exactly 100 years ago will have been converted to an economic legal bond between us.

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