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Japan’s FTA Strategy

August 7, 2014

Shujiro URATAWaseda University

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Contents

I. Japan’s Economic Situation

II. High Economic Growth and RegionalEconomic Integration in Asia-Pacific

III. Japan’s New Trade Policy in Asia-Pacific

IV. Japan-EU EPA/FTA

V. Concluding Remarks

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1. Japan’s Economic Situation

Current situation

Low economic growth

Deflation

Shortage of demand

Sign of recovery (Favorable impacts of Abenomics)

Structural Problems

Declining and aging population

Declining savings rate

Increasing government debt

Regulated sectors (agriculture, medical services, etc)

Closed economy3

Challenge for achieving economic growth

Increase productivity

Increase economic interaction with growing Asia-Pacific countries and the EU

Increasing importance of East Asia for theJapanese economy (trade and FDI)

Solutions

Implement structural (policy) reforms

New Trade Policy in Asia-Pacific and with theEU

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GDP Growth Rates (%)

5

GDP Growth Rates (%)

6

Inflation/Deflation(% change in consumer prices)

7

Inflation/Deflation(% change in consumer prices)

8

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1,000Japan’s Declining Population

65-

15-64

0-14

9

Gross Savings-GDP Ratio (%)

10

0

50

100

150

200

250

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

%Government Debt-GDP Ratios (%)

Japan

US

UK

Germany

France

Italy

Canada

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Trade-GDP Ratios (%)

12

FDI Inflows (net) -GDP Ratios (%)

13

Japan’s Trade by Regions

Export Destinations(%)) Import Sources (%)

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Japanese Firms’ Overseas ActivitiesRegional Shares in Japan’sFDI Stock

Regional Shares in JapaneseFirms’ Overseas Sales

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II. High Economic Growth and Regional EconomicIntegration in Asia-Pacific

Market-driven Regional Economic Integration High economic growth achieved by rapid

expansion of foreign trade and foreign directinvestment (FDI)

Advances in regional economic integration Expansion of trade and FDI in machinery sector

(electronic machinery, transportation machinery) Increase in parts and components trade Fragmentation strategy by multinational

corporations: formation of regional productionnetworks (Supply-chains)

Liberalization of trade and FDI policies 16

Intra-regional Trade Ratio (%)

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Shares of East Asia’s Trade with Selected Regions (%)

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Share of Parts and Components inIntra-regional Trade (%)

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Trade Liberalization: Declining Tariff Rates (%)

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Non- Non-Primary Primary Total Primary Primary Totalproducts products products products products products

China 1992 35.1 40.6 40.4 Thailand 1989 30 39 38.52010 15.6 8.7 9.6 2010 22.8 8 9.9

Indonesia 1989 18.2 19.2 19.2 Australia 1991 9.5 14.2 13.12010 8.4 6.6 6.8 2010 1.3 3 2.8

Japan 1988 8.3 3.5 4.2 US 1989 3.8 5.9 5.62010 17.3 2.5 4.4 2010 4.9 3.3 3.5

Korea 1988 19.3 18.6 18.6 Canada 1989 6.1 9.2 8.62010 48.5 6.6 12.1 2010 11.3 2.6 3.7

Malaysia 1988 10.9 14.9 14.5 Mexico 1991 12 13.4 13.42009 10.9 7.6 8 2010 21.5 7.1 9

Philippines 1988 29.9 27.9 28.3 Chile 1992 11 11 112010 9.8 5.7 6.3 2010 4.38 4.91 4.85

Singapore 1989 0.2 0.4 0.4 Colombia 1992 11.8 12 122010 0.2 0 0 2011 7.49 6.73 6.8

Emergence of institution-driven regional economic integration

Rapid expansion of free trade agreements (FTAs) in EastAsia in the 21st century

FTA (free trade agreement): free trade (elimination,reduction of tariff and non-tariff barriers among FTAmembers)

In East Asia ASEAN has become a hub of FTAs:

5 ASEAN+1 FTAs have been implemented

Long term goal: Free Trade Area of Asia-Pacific (FTAAP)APEC-wide FTA

2 major initiatives have been negotiated: Trans-PacificPartnership (TPP), RCEP (ASEAN+6)

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Viet Nam

Singapore

Brunei

New ZealandChile

USA

TPPPeru

Australia

Vietnam

Malaysia

RussiaChina

CH. TaipeiCH.

HongKong

Australia

New Zealand

Canada

US

Mexico

Peru

Chile

BruneiThailand

Malaysia

Philippines

Vietnam

Korea Japan

Singapore

Indonesia PNGAustralia

& NZ

India

ChinaKorea

Japan

ASEAN+1 FTA

FTAAP (APEC)

Region-wide FTAs in East Asia:RCEPP, TPP, China-Japan-Korea (CJK) FTA

TPPRCEP(ASEAN+6)

（ASEAN+CH, JP, KR, IND, AUS, NZ）

China-Japan-Korea

Mexico

CanadaJapan

Mega-FTAs in Asia-Pacific: TPP and RCEP

Current Status of Negotiations

TPP negotiations began in March 2010 and now in thefinal stage.

RCEP negotiations began in May 2013 and finished 5th

round in June 2014, aiming to conclude by the end of2015.

7 countries (Australia, Brunei, Japan, Malaysia, NewZealand, Singapore, Vietnam) participate in both FTAs.The US in TPP but not in RCEP, China in RCEP but notin TPP

Competition in negotiations23

Positions in FTAAP FTAAP: Long-term goal of regional economic

integration in Asia-Pacific TPP and RCEP are both pathways to FTAAP TPP and RCEP should be complementaryIssue Coverage TPP: comprehensive coverage not only market access,

services, and investment but also labor, environment, andcross-cutting “horizontal issues” such as regulatorycoherence, competitiveness and business facilitation,development and Small and Medium Enterprises (SMEs)

RCEP: limited coverage, trade in goods, trade inservices, investment, economic and technicalcooperation, intellectual property, competition, disputesettlement, other areas

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Objectives

TPP: To establish a high standard, regionalagreement that addresses new and emergingissues, incorporates new elements reflecting ourvalues and priorities, and responds to the 21stcentury challenges our citizens face. (USTRwebsite)

RCEP: To support and to contribute to economicintegration, equitable economic development, andstrengthening economic cooperation among theparticipating countries (Guiding Principles andObjectives)

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Some Comparisons

Level of trade and FDI liberalization:

TPP: high

RCEP: ?

Mode of Agreement

TPP: Single undertaking

RCEP: Stepwise, gradual (?)

Developing and Least-developed countries

TPP: Capacity building, staging of commitments

RCEP: Flexibility, special and differentialtreatment

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Expected Impacts of FTAs

Trade and FDI expansion between andamong FTA members

Economic growth

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III. Japan’s New Trade Policy in Asia-Pacific

Comprehensive Economic PartnershipAgreement (EPA) including trade and FDIliberalization, facilitation, economic cooperation

Export infrastructure such as transportationsystem and water supply system including hardand soft infrastructure

Export agricultural products

Attracting foreign direct investment inflows andhigh skilled personnel

Attracting foreign tourists

etc.28

Abenomics: Abe Economics

Three Arrows Strategy 1) Aggressive monetary policy: radical

quantity easing, inflation targeting 2) Flexible fiscal spending: large scale public

works 3) Growth strategy (Japan Revitalization

Strategy, Revised June 24, 2014): Strategy ofglobal outreach :FTAs (TPP, RCEP, Japan-Australia, Japan-EU), Double Inward FDIstock by 2020, Increase exports ofinfrastructure system, etc

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Current Status of Japan’s FTAs

Enacted relatively a large number of FTAs, but

Low country coverage in terms of trade: FTAcoverage ratio

Low tariff elimination: lower than 90% interms of tariff lines, whereas for the US, higherthan 95%

Japan’s FTAs

Motives

Expand export market for Japanese firms

Improve investment environment forJapanese firms

Obtain energy and natural resources

Promote structural reform in Japan

Improve and establish good relationship

Provide economic assistance to developingcountries

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FTA Coverage Ratios:Proportion of trade with FTA partners in total trade (%),

FTA (July, 2012), Trade data (2011) Source: JETRO

FTA Trade Liberalization Ratio (%)

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Japan-Philippines FTA Australia-US FTA

Japan 88.4 Australia 100

Japan-Malaysia FTA US 99

Japan 86.8 US-Peru FTA

Japan-Indonesia FTA Peru 99

Japan 86.6 US 98

Japan-Chile FTA Korea-US FTA

Japan 86.5 US 99

Japan-Switzerland FTA Korea 98

Japan 85.6

Japan’s Import Items Excludedfrom Tariff Elimination under FTAs

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Rice (58)

Wheat (109)

Sugar (131)

Dairy products (188)

Beef (51) and pork (49)

Fishery (91)

Beans (16)

Konyaku (3)

Prepared food (30)

Plywood (34)

Manufactured products (95)

Products that have been subject to tariff elimination

(8089 tariff lines, 89.7%)

Total number of Japanese imports (9018 tariff lines)

Source: Masahiro Kawai

Five key

items (586

tariff lines,

6.5%)

Agricultural,

forestry and

fishery products

(248)

Other items

(343 tariff

lines, 3.8%)

Products

that have

never been

subject to

tariff

elimination

(929 tariff

lines,

10.3%)

Impacts of TPP on Japanese Economy (GDP)

Japan’s Cabinet Office:

0.66% (TPP 12 countries)

Petri, Plummer and Zhai (2012):

2.0% (TPP 12 members)

1.8% (RCEP)

4.3% (FTAAP)

The Trans-Pacific Partnership and Asia-Pacific

Integration: A Quantitative Assessment,

Petersons Institute of International Economics

Economic Obstacles to FTAs, TPP

Opposition from the agriculture sector

Decline in already low self-sufficiency in foodsupply

Negative impacts on environment

Negative impacts on regional economy

Opposition from the service sectors includingmedical service sector and insurance servicesector

Negative impacts on vested interest groups37

High Tariff Agricultural Products (%)

0 200 400 600 800 1000 1200 1400 1600 1800

Konnyaku potato

Rice

Peanuts

Starch

Corn

Pork

Sugar

Barley

Wheat

Dairy products

Beef

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IV. Japan-EU EPA/FTADevelopments

Negotiations began in April 2013 after completing ascoping exercise

Japan’s participation in the TPP contributed to EU’sagreeing to start the negotiations (competitiveregionalism)

6th round of negotiations was conducted in July 2014

The European Commission reviewed the progress ofthe negotiations in spring 2014 and it decided tocontinue negotiations.

Japan’s interests

To overcome disadvantageous position in the EUmarkets vis-à-vis Korean firms: EU tariffs, cars(10%), flat screen TVs (14%), microwave ovens (5%)etc.

EU’s interests

Dismantle non-tariff barriers in the Japanese market

Expand an access to the government procurementmarkets

Expected benefits

Expand exports and FDI not only bilaterally butwith other countries through liberalization andstructural reforms Economic growth

Impacts on GDP:

EU estimates: EU, 0.34-1.88%, Japan, 0.27-0.67%( EU Commission)

Japan estimates: EU, 0.27%, Japan, 0.12%(Kawasaki)

TPP: EU, -0.14%, Japan, 0.54%

Contribute to the rule-making in the globaleconomic system 41

V. Concluding Remarks

Faced with many difficult challenges, Japan has to open upits economy and carry out structural reforms, in order toachieve economic growth or to maintain high livingstandard, to contribute to economic growth in Asia-Pacificand in the world.

WTO liberalization being stalled, free trade agreements(FTAs) are second-best solution for promotion of trade andFDI

Japan can gain a lot from FTAs not only in East Asia butalso with countries in other parts of the world such as theUS, the EU, and Latin American countries

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Japan should play active roles in establishing region-wide mega FTAs: TPP, RCEP, Japan-EU FTA byliberalizing its market

Then expand these FTAs by merging with otherFTAs, leading to global trade liberalization

FTAs (particularly TPP) face opposition from theagriculture sector

Various measures including gradual phase-inliberalization, and temporary assistance (safety net)to negatively affected workers can moderate thenegative impacts during the process of transition

Need strong political leadership to promote FTAs,particularly TPP

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