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Friday, April 30, 2004

Tunnel vision on Japan trade

LONDON -- The recent conclusion of the bilateral trade agreement between Japan and Mexico was heralded as opening the way to other bilateral trade agreements that would substitute for a successful round in World Trade Organization negotiations. This view is mistaken.

It is very much in Japan's national interest that a wide-ranging multilateral trade agreement be concluded, the sooner the better. With the Japanese economy increasingly meshed into the world economy, bilateral agreements will at best only help marginally. At worst, they could complicate the conclusion of wider trade agreements and lead to an escalation of trade discrimination.

The agreement with Mexico was of some significance. In the earlier agreement with Singapore, Japanese protectionism in agricultural products was largely irrelevant. However, under pressure from the Mexican agricultural lobby, Mexican authorities insisted on concessions from Japan over pork and orange juice before agreeing to tariff-free quotas for Japanese vehicles.

As a result of Mexican participation in the North American Free Trade Agreement, Japanese car manufacturers had been disadvantaged and had pressured the Japanese government and the Liberal Democratic Party to force the Japanese agricultural lobby to modify their protectionist stance relative to Mexican exports. The Agriculture Ministry has presumably taken the line that concessions in this case must not be seen as the thin end of a wedge and that the Mexican agreement was a special case.

Japanese authorities are now reported to be focusing on negotiating bilateral trade agreements with Malaysia, Thailand and the Philippines, but these will raise difficult issues over Japanese forestry and farm products. In negotiations with Thailand, the spotlight is likely to be on rice and poultry, which are particularly sensitive for Japanese farmers.

In the case of Malaysia, where Japan will be aiming to achieve a major reduction in high tariffs on vehicle imports, the main problem may be plywood. With the Philippines, there will be a problem over bananas. The Japanese agricultural lobby will fight hard to limit concessions and is likely to have strong LDP support. It would, therefore, be a mistake to expect an early breakthrough in bilateral trade negotiations with Southeast Asian countries.

Even if such negotiations are eventually concluded, the resulting pattern of agreements involving differing sets of concessions would not amount to a free-trade area, or FTA, that comprises Japan and the 10-member Association of Southeast Asian Nations. Moreover, such trade agreements would be peripheral to the fundamental problem of concluding free trade accords with China and South Korea. Apart from the serious agricultural issues, especially over rice, vegetables and fruit, the three countries compete in many areas of manufacturing such as vehicles and electronic products.

The Chinese and Japanese economies are seen by some economists as more complementary than competitive at this stage. Japanese companies are major investors in China, and some economists see the Chinese market as making up for weak demand at home. This means that the two economies are increasingly intertwined and that the Japanese economy could suffer badly if Chinese growth faltered. So far, Japanese manufacturers have managed to keep most research and development as well as the more sophisticated manufacturing processes within Japan.

It remains to be seen how long Japanese manufacturers will be able to retain their intellectual edge. China is producing a large number of well-educated engineers and scientifically trained staff, and despite years of Communist Party domination and ideology, they do not seem to be lacking in entrepreneurial flair.

It is hard to envisage an FTA being developed to cover Japan and China in the next few years. Apart from economic and trade problems, the countries have serious political differences. The Chinese Communist Party has yet to allow political liberalization. It is doubtful whether the Chinese economy can achieve balanced growth and the establishment of a sound banking system as well as further market liberalization without allowing a more democratic political system to develop. This will require imaginative Chinese political leadership -- which will be difficult to emerge within the mindset of Chinese Communist traditions.

The "Japanese threat" has been emphasized for so long in China that it obstructs efforts to improve the political relationship. Prime Minister Junichiro Koizumi's stubborn determination to continue making official visits to the Yasukuni Shrine, Japan's memorial for its war dead, does not help. The comparison that Koizumi makes between Yasukuni and Arlington National Cemetery in Washington, D.C., shows insensitivity and ignorance of history.

The Chinese, in arranging the six-power talks on North Korea, have shown signs of statesmanship, but they will need to work hard and exert more pressure on North Korea if the talks are eventually to succeed. Unfortunately, the situation on the Korean Peninsula is complicated not only by the outdated communist tyranny in the North but also by the current political instability in the Republic of Korea. Until more stable conditions are established, it is hard to see how there can be progress on a free-trade agreement between China, Japan and the Republic of Korea.

The Chinese also need to demonstrate that they really believe in the principles set out in the agreement over Hong Kong of "one country, two systems of government." The latest declaration by the Chinese that they alone will decide on when and how more democratic arrangements can be made in Hong Kong is a setback for this principle and has implications for the future of Taiwan, which remains a major political issue. Friction in the Taiwan Strait threatens peace in East Asia.

Japan would benefit most from a successful world trade round that brought in China, South Korea and ASEAN members, covering not only tariffs and quotas but also intellectual property and, in due course, investment issues. But to achieve such an agreement, Japan, South Korea as well as the European Union will have to make major concessions on agriculture. To do so, Japan will need to make major changes in the way in which agriculture and rural communities are supported in Japan.

Instead of limiting imports of agricultural products, emphasis should be placed on the direct promotion of environmentally based farming and rural development, but this will raise major financial problems for Japanese central and local governments and will be resisted by the LDP.

Hugh Cortazzi, a former British career diplomat, served as ambassador to Japan from 1980 to 1984.

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