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Japan in an Era of Mega-FTAs (1) Economic Partnerships Today Yasuyuki Abe Deputy Director Economic Partnership Division Trade Policy Bureau Ministry of Economy, Trade and Industry [Date of Issue: 29/June/2018 No.0280-1081]

Date of Issue: 29/June/2018

Japan in an Era of Mega-FTAs (1)
Economic Partnerships Today

Yasuyuki Abe
Deputy Director
Economic Partnership Division
Trade Policy Bureau
Ministry of Economy, Trade and Industry (METI)

Japan is working hard to ride the current wave of mega free trade agreements, with the Diet approving the TPP11 in June this year and the Japan-Europe EPA expected to go into effect by spring 2019. How should Japan respond to the recent surge in protectionism? How should the world respond? We asked the Economic Partnership Division at the Ministry of Economy, Trade and Industry.

Recent years have seen a surge in protectionism that could impact heavily on the global free trade system powering the world economy for the last several decades. A key example is the decision made by the United States in March 2018 to restrict steel and aluminum imports on the grounds of national security.

How should Japan respond to this trend? How should the world respond? It might be useful here to reflect on what steps Japan has taken to date to maintain and strengthen the free trade system, and then look at what we should do to address the spread of protectionism.

This three-part series will therefore examine current trends in economic partnerships, the development of the Trans-Pacific Partnership (TPP) Agreement and the Japan-EU Economic Partnership Agreement (EPA) as examples of key economic partnerships and, finally, the road ahead.

I should note at the outset that the views and opinions expressed in these articles are the author's own and do not reflect the views of the organization with which I am affiliated.

1. Japan's economic partnerships to date

The rapid advance of the emerging economies in the 21st century has expanded their share of world nominal GDP from 20.3 percent in 2000 to 39.3 percent in 2015 (White Paper on International Trade and Industry 2016, p. 4). Japan's relative position has, by contrast, trended down, with our share of world nominal GDP failing from 14.5 percent to 5.9 percent over the same period (Cabinet Office, International GDP Comparison).

Looking at world trade structure, a production network has emerged in East Asia based on the optimal intraregional division of industrial processes. More specifically, there has been a marked trade trend whereby intermediate goods made in Japan, Korea and ASEAN are exported to China for assembly, with the finished goods exported to major markets such as the United States and the European Union (White Paper on International Economy and Trade 2011 (4(2-1) PP. 22-23))

In East Asia, countries have responded to the development of these supply chains by channeling resources into the establishment of the trade and investment conditions to encourage other countries to set up production facilities locally.

For Japan, bolstering international trade rules through conclusion of the WTO Doha Development Agenda negotiations remains an important means of establishing trade and investment conditions. However, with little progress made in the Doha Round over the last several years, Korea, for example, is pushing forward with high-level free trade agreement (FTA) negotiations with its main trade partners. As a result, as at December 2017, Korea's FTA coverage ratio (the ratio of trade with FTA partners (FTAs either signed or in force) to total trade) had topped 60 percent, whereas Japan's FTA coverage ratio remained at 40 percent (Figure 1).

Figure 1: Comparison of FTA Coverage Ratios (748kB)

Japan's first shot at an EPA was with Singapore. Once this entered into force in November 2002, interest rose in concluding more agreements between Japan and other ASEAN countries. The Japan-Mexico EPA went into force in April 2005, followed in 2008 by the ASEAN-Japan Comprehensive Economic Partnership Agreement (AJCEP), which was Japan's first broad-ranging EPA. Since that time, a further seven bilateral EPAs have entered into force.

Japan's expression of interest in the TPP* in the fall of 2010 has lent momentum to comprehensive EPA negotiations with the EU, China and Korea, and East Asia. EPAs serve as a useful source of motivation for all the parties to do the necessary work to reach agreement, so it will be important that Japan continues to move forward proactively with its economic partnership efforts.

The negotiations for each of Japan's economic partnership and free trade agreements are outlined below.

* Then-Prime Minister Naoto Kan noted in his policy speech to the 176th Extraordinary Session of the Diet in October 2010 that “we will look into participating in such negotiations as those for the Trans-Pacific Partnership agreement and will aim to build a Free Trade Area of the Asia-Pacific.”

2. EPAs within the APEC region (TPP and TPP 11)

(1) Trans-Pacific Partnership (TPP) Agreement (signed)

Japan's Basic Policy on Comprehensive Economic Partnerships (below, “Basic Policy”) was adopted by Cabinet decision in November 2010 to promote EPA negotiations within the APEC region. After information-gathering and other consultations with the relevant countries, then-Prime Minister Yoshihiko Noda announced at a November 2011 press conference that he had “decided to enter into consultations toward participating in the TPP negotiations with the countries concerned,” signaling the launch of individual prior consultations with those countries party to the TPP negotiations toward Japan's participation.

Based on the results of those prior consultations, it was announced that Japan would participate in the TPP, and after receiving the approval of the 11 other countries party, Japan began individual negotiations with them. The 12 countries reached an agreement in principle in Atlanta in October 2015, and the TPP was signed on February 4, 2016.

The TPP is a high-quality comprehensive EPA that includes not only trade and investment liberalization but also e-commerce, state-owned enterprise reform, and protection of intellectual property rights.

In Japan, the TPP Agreement and related legislation were put before the Diet on March 8, 2016. The Diet approved the agreement on December 9, 2016 and passed the related legislation, with Japan becoming the earliest among the 12 original signatories to notify the completion of domestic procedures.*

However, when the Trump administration decided to withdraw from the TPP, the remaining 11 countries launched negotiations on a new TPP, known as the TPP 11.

* On January 30, 2017, the US sent a memorandum to the TPP Depository in New Zealand and to the governments of TPP members notifying that it had no intention of being party to the TPP.

(2) Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP 11) (signed)

At the May 2017 APEC Trade Ministers' Meeting, a ministerial meeting was held among the 11 remaining TPP members*, who put out a joint statement in which they agreed to launch a process to assess options to bring the agreement into force expeditiously, including how to facilitate US membership.

* Australia, Brunei Darussalam, Canada, Chile, Japan, Mexico, New Zealand, Malaysia, Peru, Singapore and Vietnam

At the TPP Ministerial Meeting in Vietnam in November 2017, ministers reached agreement in principle on a package deal that included the text for the new agreement as well as a list of provisions from the original TPP the validity of which would be suspended, issuing a ministerial statement that noted (1) agreement had been reached among the 11 members on the TPP 11 and (2) the TPP 11 maintained the high standard and overall balance of the TPP.

A chief negotiators' meeting was held in Tokyo in January 2018 to confirm the final text of the agreement, and the TPP 11 was signed in San Diego, Chile on March 8. Member countries are now in the midst of ratifying procedures. Mexico has been first off the mark, with its Senate approving the agreement in April. Japan's Diet too is in the midst of deliberations toward approving the agreement before the end of the current session.

3. Other key economic partnerships

(1) Japan-EU EPA (finalization of negotiations)

Japan and the EU are important economic partners, comprising around 10 percent of the world's population, around 40 percent of trade (around 20 percent exclusive of trade within the EU), and around 30 percent of GDP. The agreement will expand trade and investment between Japan and the EU and bring about economic growth for Japan, as well as contributing to the creation of global trade and investment rules (Figure 2).

Figure2 (https://www.meti.go.jp/policy/trade_policy/epa/epa/eu/index.html)

Agreement to launch negotiations on a Japan-EU EPA and a Strategic Partnership Agreement (SPA) was reached during a teleconference between Japanese and European leaders in March 2013. In the negotiations, Japan sought the elimination of high tariffs on industrial products (such as the 10 percent duty on passenger vehicles and a maximum duty of 14 percent on electrical machinery) and improvement of regulatory issues faced by Japanese companies in Europe.

The EU sought better market access for agricultural products; reduced non-tariff measures (NTMs) on automobiles, chemicals, electrical machinery, food safety, processed food, medical devices, and pharmaceuticals, etc.; protection of geographical indications; government procurement; and sustainable development.

The 18 rounds of negotiations held through to April 2017 produced agreement in principle in July 2017, and the finalization of negotiations was confirmed by Prime Minister Shinzo Abe and President of the European Commission Jean-Claude Juncker via telephone in December.

(2) Regional Comprehensive Economic Partnership (under negotiation)

The Regional Comprehensive Economic Partnership (RCEP) is a framework comprising the 10 member states of the Association of Southeast Asian Nations (ASEAN), Japan, China, South Korea, India, Australia and New Zealand. In August 2012, the First ASEAN Economic Ministers Plus FTA Partners Consultations compiled the Guiding Principles and Objectives for Negotiating the Regional Comprehensive Economic Partnership and agreed to aim for negotiations to be launched at the leaders' meeting in November. The launch of RCEP negotiations was subsequently formally announced at the ASEAN Summit and Related Summits in November 2012.

The first round of negotiations took place in May 2013 in Brunei, followed by 19 subsequent rounds and nine ministerial meetings (including three intersessional ministerial meetings) as at December 2017. An RCEP summit was held in Manila in November 2017.

Following that meeting, the Joint Leaders' Statement on the Negotiations for the Regional Comprehensive Economic Partnership was released, reaffirming leaders' commitment to achieving a high-quality agreement that addresses market access, rules and cooperation, and instructing ministers and negotiators to intensify efforts in 2018 to bring the RCEP negotiations to conclusion.

Negotiations are currently underway in the RCEP Trade Negotiation Committee (TNC), as well as in a wide range of area-specific groups dealing with trade in goods, trade in services, investment, intellectual property, competition, economic and technical cooperation, legal and institutional issues, e-commerce, Standards, Technical Regulations and Conformity Assessment Procedures (STRACAP), Sanitary and Phytosanitary measures (SPS), rules of origin, customs procedures and trade facilitation, finance, electronic communications, small and medium enterprises, government procurement, and trade remedies, etc.

As a regional economic partnership, if the RCEP can provide preferential tariffs among member countries for products manufactured across multiple countries and harmonize EPA utilization procedures such as rules of origin, in East Asia, this would represent a substantial contribution to rule-making that reflects East Asia's high-quality supply chains (Figure 3).

Figure 3: RCEP member countries (3) China-Japan-Korea FTA (under negotiation)

With further growth expected for the Asia-Pacific region, the Chinese and Korean economies occupy an exceedingly significant position for Japan because of the extremely close international specialization that has developed among China, Korea and Japan in supply chains spanning the entire East Asian region.

China in particular is becoming increasingly important as a massive growth market. China and Korea respectively account for 21.7 percent and 5.9 percent of Japanese trade, making them Japan's top and third-placed trade partners (according to Ministry of Finance (2017), Trade Statistics of Japan; Figure 4).

Figure4: Ratio of Japanese trade with China and Korea (2017) Joint private-sector research on the Japan-China-Korea FTA began in 2003, based on the results of which the 2009 China-Japan-Korea Leaders' Meeting and Economic and Trade Ministers Meeting agreed to launch an industry-government-academia joint study on an FTA framework. A report from that study was produced in December 2011 and presented to the Leaders' Meeting in May 2012, with the three leaders agreeing to launch negotiations before the end of the year. The Economic and Trade Ministers Meeting in November 2012 announced the beginning of FTA negotiations, and a total of 12 rounds were conducted between March 2013 and April 2012.

(4) Japan-Canada EPA (under negotiation)

Four rounds of joint research conducted between March 2011 and January 2012 were followed by agreement at a March 2012 summit to launch Japan-Canada EPA negotiations. The first round of negotiations was held in November 2012, with the most recent (and seventh) round taking place in November 2014.

As at 2016, dutiable exports from Japan to Canada accounted for 37 percent of Japan's total exports to Canada, while dutiable exports from Canada to Japan accounted for 33.2 percent of Canada's total exports to Japan. The main dutiable products exported by Japan to Canada were automobiles (6.1 percent duty), automobile components (6-8.5 percent), gearboxes (6 percent), and tires (seven percent).

(5) Japan-Colombia EPA (under negotiation)

Leaders agreed at the September 2011 Japan-Colombia summit to launch joint research on a bilateral EPA. This research was conducted from November 2011 to May 2012, with a report produced in July 2012.

In response to the report, the leaders agreed at their September 2012 summit talks to hold EPA negotiations, the first round of which took place in December that year. Thirteen rounds were held over August-September 2015. At the November 2016 summit talks, leaders affirmed that the negotiations were in their final stages, and that they would aim for an early conclusion.

(6) Japan-Turkey EPA (under negotiation)

Japan and Turkey held their first Trade and Investment Ministerial Meeting in July 2012, agreeing to launch joint research on a bilateral EPA. In light of that research, leaders agreed at their January 2014 summit to begin EPA negotiations, the first round of which was held in December that year. A total of eight rounds of negotiations had taken place as at February 2018.

Japan's aim with this EPA is to level the playing field for Japanese companies against Korean companies and other rivals as soon as possible so as to promote Japanese companies' exports to Turkey, as well as to improve investment environment-related systems in Turkey as a hub for exports to neighboring countries and entry into their markets.

This article has examined main trends to date and outlined Japan's main EPAs. The next article will explain the significance and results of the TPP and other agreements.

(For the Japanese version of this article)

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