No. 21 — May 26, 2000


Weekly Review

--- by Marc Castellano

The Ministry of International Trade and Industry's latest trade white paper urges Japan to pursue regional and bilateral trade agreements. According to the authors of the 2000 report, released May 16, such deals not only promote competition but also expand market opportunities. Moreover, the deepening economic integration of East Asia likely will benefit Japan and, thus, is a phenomenon that should be embraced.

Tokyo traditionally had shunned free-trade agreements, believing that they were detrimental to the development of the multilateral regime. The primary concern was that regional trade pacts, exclusionary by definition, would anger outsiders and lead to more protectionism, which, in turn, would hurt the growth of the world trading system. Last year, however, perspectives began to shift after MITI released its 1999 trade white paper. The report highlighted the benefits of regional free-trade agreements. In it, the ministry recommended that Japan seek potential partners in Northeast Asia. The document offered three main conclusions that led to the change in thinking (see JEI Report No. 21B, May 28, 1999).

First, such trading blocs as the North American Free Trade Agreement, the accord that liberalized trade among Canada, Mexico and the United States in 1994, and the European Union, the 15-nation economic grouping, had been successful in expanding trade and investment flows among participants. Second, it was apparent that countries that maintained low government and commercial barriers to trade would fare better in an era of rapid globalization. Finally, regional blocs had played a positive role in enhancing the development of the international trading system during the seven rounds of negotiations conducted under the auspices of the General Agreement on Tariffs and Trade, the predecessor of the World Trade Organization. MITI reinforced these ideas in its 2000 white paper.

Against the background of a weakened multilateral regime, the ministry also reevaluated the outlook for global trade. Last December, preliminary talks aimed at launching a new round of WTO trade-liberalization negotiations collapsed in Seattle amid government intransigence and violent protests (see JEI Report No. 46B, December 10, 1999). This is one reason that the drafters of the latest MITI white paper advocated greater regional integration. In their words, such a development would "supplement the multilateral trade system under the World Trade Organization."

Japan, unlike most other industrial nations, is not part of any regional trade grouping. That status, however, may change in the near future. Tokyo and Seoul have been discussing a free-trade agreement since September 1998 and recently have made significant progress. The Institute of Developing Economies, part of the Japan External Trade Organization, and the Korea Institute for International Economic Policy issued a report earlier in May that concluded that a bilateral free-trade agreement would benefit both countries by raising economic output and stimulating trade and investment. South Korean researchers previously had forecast that their nation would record a dramatically higher bilateral trade deficit if its tariffs were reduced or eliminated. However, the authors of the joint study asserted that South Korea's global trade balance likely would improve due to an overall increase in exports and the effects of heightened competition and enhanced productivity. Still, Japanese businesses, especially in the electronics and metals industries, are expected to reap greater benefit than their counterparts in South Korea from any free-trade arrangement.

Japan and Singapore have been talking as well about a free-trade agreement. During a December 1999 visit to Tokyo, Singaporean Prime Minister Goh Chok Tong proposed that the two sides begin to develop a framework. In March, Japanese and Singaporean delegates met to discuss a pact. They agreed to conduct a feasibility study and to propose possible areas of coverage. The two capitals also decided to schedule the start of their formal negotiations to coincide with the November informal meeting of the heads of government of the members of the Association of Southeast Asian Nations. Both the Japanese and the Singaporean prime minister will attend the session.

Still another free-trade agreement is in the works, this one between Japan and Mexico (see JEI Report No. 15B, April 14, 2000). International Trade and Industry Minister Takashi Fukaya first indicated in April that MITI officials were interested in considering such an arrangement. His announcement followed the release the day before of the recommendations of separate studies commissioned by Mexico's Department of Commerce and JETRO. Negotiating an agreement may be tricky, however, due to resistance in some Japanese quarters, especially the agriculture sector. Official negotiations are not likely to begin any time soon, but support for some sort of Japan-Mexico trade agreement is growing steadily.

Besides praising free-trade agreements in its annual trade report, MITI highlighted the benefits of record levels of inward foreign direct investment. In 1999, some ¥1.4 trillion ($12.7 billion at ¥110=$1.00) flowed into Japan, more than double the previous year's total. According to MITI, foreign investment, which brings with it outside know-how, technology and management skills, is a boon to the Japanese economy. More broadly, embracing competition and opening up the country to foreign influences will help spur fundamental reforms. These are essential to getting the economy back on its feet.

The drafters of this year's trade white paper concluded in short that less-restrictive trade and investment policies will help bring about positive change. A key part of this strategy involves the active pursuit of regional free-trade agreements. Talks with Singapore, South Korea (see JEI Report No. 47A, December 17, 1999) and even Mexico indicate that Tokyo has started down this path, albeit slowly.

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

*** JEI Report will not be published June 2, 2000 because of the Memorial Day holiday. ***
*** The Next Issue will be dated June 9, 2000 ***

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