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Monday, Dec. 27, 2004

Japanese Perspectives

Japan should entertain Swiss offer when planning its FTA strategy


With the number of member countries now topping 150, trade negotiations under the World Trade Organization will take more time to conclude. This has triggered a rush by many countries to conclude regional or bilateral trade liberalization agreements.

Japan has long placed priority on using the multilateral approach, and the nondiscriminatory principles promulgated by the WTO and its predecessor, the General Agreement on Tariffs and Trade. As a result, it has been lagging behind other industrialized nations in pursuing bilateral or regional agreements. Japan now needs a strategy as it tries to catch up with the global trend.

Japan signed an economic partnership agreement with Mexico, its second such accord, on Sept. 17 following nearly two years of negotiations that started in October 2002. The pact, which takes effect on April 1, 2005, is of course expected to boost trade and investment between the two countries. But the agreement is significant for another reason: It will indirectly give Japan greater access to the regional blocs to which Mexico belongs, especially the North American Free Trade Agreement.

The WTO sets strict rules on the conclusion of regional or bilateral free trade agreements because discriminatory practices against countries that do not belong to these pacts run counter to its basic principles. But in reality, there are different levels of treatment for members and nonmembers of regional or bilateral FTAs.

For example, tariffs on goods traded between Mexico and the United States differ from those traded between Mexico and Japan. The required procedure for issuing and confirming the origin of production certificates is proof of such gaps.

With the implementation of the Japanese-Mexican agreement, however, the discriminatory practices used by other NAFTA members when dealing with Japan will be reduced via Mexico, although they won't disappear completely, as the contents of two separate agreements are bound to differ.

This shows that partner selection for bilateral or regional FTAs is crucial for Japan. In this sense, it was correct for Japan to pick Mexico as its second FTA partner.

Japan also needs to realize that the nation, given the priority it places on its relations with the rest of Asia, has done effectively nothing to explore the possibility of forming an agreement with Europe, which has a larger economic base than even the United States.

The European Union now has 25 members, with the inclusion this year of former Soviet bloc countries, and has recently decided to start negotiations for the potential entry of Turkey. There will, of course, be difficulties negotiating a trade pact with a region of its vast expanse, and bilateral FTAs with individual European countries will not be easy because of the EU framework.

There is an opportunity to hurdle this difficult situation, however, because Switzerland -- a country geographically situated in the center of Europe -- is approaching Japan about a possible FTA.

After a 2001 national referendum negated the possibility of Switzerland joining the EU, the Swiss government held a series of trade talks with the union to avoid being left out of the trend toward integrated European markets. The first accord, which took effect in June 2002, dealt with liberalization of government procurement, elimination of technical barriers to trade, technological cooperation, and access to agricultural markets.

In May this year, the two parties also reached an effective accord on 10 other fields, including media, education, processed food products and measures to crack down on fraud.

A bilateral agreement with Switzerland would give Japan indirect access to the EU, as in the case of the FTA with Mexico. For Switzerland, a bilateral pact with Japan is seen as beneficial because it will boost financial cooperation, trade in goods and services, and give the country a strong foothold in the Asian market. While the size of the Swiss market itself may not be so big, we should not ignore the proposal from this country, which has a unique strategy of its own.

Asia is of course important for Japan. But economic exchanges between Japan and the rest of Asia have already expanded under private-sector initiatives. The areas requiring government-to-government talks in this region are defense and security.

In pursuing bilateral or regional FTAs, sheer numbers are not important. What Japan needs is a strategy that seeks balance in its relations with the Americas, Asia and Europe.

Teruhiko Mano is a professor at Seigakuin University.


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