No. 15 — April 14, 2000


Weekly Review

--- by Marc Castellano

International Trade and Industry Minister Takashi Fukaya indicated April 4 that Japan would consider a free-trade arrangement with Mexico. The announcement followed the previous day's release of separate studies commissioned by Mexico's Department of Commerce and the quasi-governmental Japan External Trade Organization, each of which recommended that the two countries pursue this idea. Although Mr. Fukaya cautioned that the immediate launch of bilateral negotiations is not likely, he confirmed Ministry of International Trade and Industry officials' interest in studying the possibility.

Tokyo's recent openness to free-trade agreements represents a stark break from the past. MITI and other economic decisionmakers long had approached the formulation of international trade policy within the context of the World Trade Organization framework or that of its predecessor, the General Agreement on Tariffs and Trade, preferring to negotiate multilateral trade-liberalization agreements rather than to establish regional or bilateral arrangements (see JEI Report No. 47A, December 17, 1999). Regional pacts, which are exclusionary by definition, could arouse a protectionist backlash among outsiders, or so the thinking went. More importantly, Tokyo worried that the establishment of regional free-trade areas could lead to the formation of a series of mutually exclusive trading blocs at the expense of the growth of the international trading system.

This thinking essentially was reversed in 1999, when MITI highlighted in that year's white paper on trade the benefits of economic integration and recommended that Japan work to establish free-trade agreements with its neighbors (see JEI Report No. 21B, May 28, 1999). The report's authors contended that Japan's future global competitiveness was at risk because, unlike most other major industrial nations, it was not a member of any regional trade grouping.

Another report, released last September by the Mission for Revitalization of the Asian Economy, a special task force commissioned in June 1999 by then Prime Minister Keizo Obuchi, hailed regional trade liberalization and recommended that Japan actively pursue a free-trade agreement with South Korea. It further suggested that the arrangement could be expanded to include other interested East Asian countries like Singapore. Regarding broad policy objectives, the study concluded that free-trade pacts are one way to strengthen and deepen economic relations between Japan and developing East Asia, especially South Korea and the members of the Association of Southeast Asian Nations.

In the intervening months, Tokyo has been testing the waters for potential free-trade partners. Both South Korea and Singapore have expressed interest, and preliminary discussions already are underway with them. Mexico may be next in line. In a February official visit to Japan, Foreign Minister Rosario Green urged Mr. Obuchi and Foreign Minister Yohei Kono to consider forming a free-trade area. Those discussions prompted the appointment of government-sponsored advisory groups in both countries and set the stage for a more serious dialogue on the issue.

Mexico is keen to diversify its international commercial activities to lessen its dependence on the United States, which accounts for some 80 percent of its total trade volume, a situation largely attributable to the implementation of the North American Free Trade Agreement in January 1994. Officials in Mexico City firmly believe that free-trade arrangements create jobs and promote exports. Thus, Mexico has sealed such agreements with six other Latin American countries and expects to conclude a deal soon with Israel. More importantly, Trade Minister Herminio Blanco just cinched a landmark free-trade pact between Mexico and the European Union that will take effect in July. Attention now is turning to Japan as the next logical partner (see JEI Report No. 41A, October 30, 1998).

In an effort to woo skeptics in Japan, Mr. Blanco went to Tokyo in early April. During various meetings and at an April 5 press briefing, he expressed understanding of the Japanese preference to use the WTO to promote the liberalization of world trade. Moreover, the Mexican official emphasized his appreciation of the need to build a consensus in Japan on regional or bilateral free-trade arrangements and to address sensitive agricultural issues. On the latter point, Mr. Blanco noted that although agricultural trade liberalization is a political problem in Europe, officials still were able to work out an effective Mexico-EU agreement. Notably, the JETRO report suggested that any free-trade deal with Mexico would have to include provisions to protect Japanese farmers and even might have to exclude agricultural, textile and leather goods completely.

The stakes involved in a Japan-Mexico free-trade accord are relatively low, a fact that could help calm the voices of opposition. Two-way trade flows are modest, reaching just ¥688 billion ($6.3 billion at ¥110=$1.00) in 1999, less than 1 percent of Japan's overall trade. In all of last year, Japan's purchases from Mexico totaled just ¥187.8 billion ($1.7 billion), less than Mexico exports to the United States in a typical week.

Nevertheless, Ms. Green contends that concluding a Japan-Mexico free-trade agreement would not only help reduce Mexico's persistent trade deficit with Japan, which amounted to ¥312.4 billion ($2.8 billion) in 1999, but also build stronger bilateral ties. Overall, Japanese enthusiasm for an accord has been tempered, but support is growing. JETRO President Noburo Hatakeya, a strong backer of free-trade agreements, is firmly behind the idea. Mr. Blanco hopes to advance the dialogue and alleviate lingering concerns at the next high-level bilateral meeting, scheduled for April 20.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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