Free trade agreements (FTA) are on fire in East Asia, something that could not even be imagined just a few years ago. FTAs indicate a policy that integrates markets by eliminating trade barriers such as tariffs between countries. This abolishment of barriers between the countries activates competition between the two parties. This leads to natural selection that results in increasing economic efficiencies and also promoting growth. Consequently, victors and losers emerge from its inception. Since it is a quite severe policy, it had trouble moving forward in East Asia, an area not known for being adept at liberalization.
However, Japan created the turning point. The whole trend was ignited when Japan and South Korea began a joint study into an FTA in 1999. When Singapore got wind of this, there was an immediate reaction, leading to Japan and Singapore promptly proceeding with FTA negotiations (concluding an agreement in January 2002). When China saw what was happening, it claimed that it was being left out and soon was on a charge of its own. It first approached the Association of Southeast Asian Nations (ASEAN) about an FTA and, with remarkable concessions as its weapon, successfully signed a basic agreement with ASEAN in November 2002.
ASEAN, which has always maintained a balance policy between the two Asian powers, concluded an FTA with China but has left Japan out. Now Japan, feeling a sense of crisis, has followed China’s lead and commenced negotiations with ASEAN.
What will happen to Japan if it is left out of the move of mutual tariff abolishments between China and ASEAN? This reminds me of the fortunes of Japanese companies that had set up operations in Mexico. As a result of Mexico signing the North American Free Trade Agreement (NAFTA) with the U.S.A. and an FTA with the European Union (EU), Western foreign companies were able to import components and materials from their home countries duty free. Japanese companies bore the handicap of paying tariffs and many were forced to withdraw from the country.
Fortunately, Japanese companies have already established production bases throughout Asia. If Japan were left behind, the companies would most likely simply move their parts production and assembly operations to a plant in a region where it is able to trade duty free. However, this only means further hollowing out and it is only natural that the sense of crisis has increased within Japan.
ASEAN has also been stimulated by Singapore, which took the lead in forming an FTA with Japan. Malaysia, the Philippines and Thailand have begun bilateral negotiations for FTAs with Japan to seek a balance with the FTA gained with China. Although this is an unbelievable situation, there are three major problems remaining for Japan.
The first is the lack of openness in the agricultural products market of Japan, an issue that needs no further mention. It is said that FTAs permit exceptions of up to 10 percent of the trade volume. However, taking into consideration their strengths in agricultural products, is an FTA within this framework truly possible with Thailand and other ASEAN countries? Japan’s counterparties in the negotiations will probably bring to the table the amazing concessions China showed to try to shake Japan. The task Japan is weak at remains: coordinating national and special interests.
The second problem is what to do about Japan and China even if Japan and ASEAN did successfully conclude an FTA. The best possible answer for ASEAN is being able to conclude FTAs with both Japan and China. However, without the remaining side of the triangle relationship -- the FTA between Japan and China -- both Japan and China would suffer disadvantageous trade conversion.
As for the Japan-China FTA, abolishing mutual trade barriers between the countries would logically benefit Japan, which already has low industrial protection barriers, but the pain of restructuring for weak industries would also be great. Moreover, as the “Theory of the Chinese Economic Threat” indicates, the Japanese currently see less merit in unifying economies with China than merits. To a certain extent, they can understand an FTA with ASEAN but most Japanese are hesitant to create an FTA with China. In addition, the mutual lack of trust in each other’s political systems is still deeply rooted. The day that an FTA is concluded between Japan and China will not arrive that soon.
The third and largest problem is the fact that de-facto economic integration with China is irresistibly moving forward with or without an FTA. Thanks to the dramatic traffic cost reduction of human, commodity and money, there are already integration merits in place that are equivalent to abolishing the tariffs between Japan and China. Although Japanese companies that have recently encountered Severe Acute Respiratory Syndrome (SARS) in China may contemplate diffusing their risk within Japan and Southeast Asia, their attitude regarding investment in China will probably not change in the long term.
But is there really no merit in what is, in effect, the integration of the Japanese and Chinese economies? This is not the case. Current huge imbalance of merits and demerits simply derives from the three “nots,” The nots are: (1) Japan does NOT notice even if there are merits, (2) Japan has NOT gone to take advantage of the merits even though they exist, and (3) Japan wants to take advantage of the merits but it can NOT because of reasons on the Japanese side( such as immigration regulations.)
As long as this integration in essence cannot be stopped, this huge deficit of accounts will not be able to be eliminated unless greater efforts are made by Japan to grasp these merits. The following are three examples of such efforts.
The first is the absorption of foreign direct investment. After having seen the success of Nissan’s reformation instituted by President Carlos Ghosn, more Japanese have come to believe that “foreign investment is a good thing” but many still believe “foreign capital to be Western.” However, a glance at Asia reveals that Taiwanese firms have either acquired or participated in the management of Japanese companies, as seen with the semiconductor business of Nippon Steel Corporation and the TFT LCD business of IBM Japan and Fujitsu. Another Taiwanese firm is reportedly planning to invest capital in the Wakayama Steel Works of Sumitomo Metal Industries, Ltd.
The flow of investment into Japan via corporate acquisitions will now expand to include Chinese corporations. There has already been a case of a bankrupted medium-sized printing machine manufacturer in Tokyo that was acquired by a state-owned company headquartered in Shanghai and then successfully survived through corporate restructuring.
To an Asian company, a business division slated for termination or other Japanese companies in financial and other trouble are also often entities with valuable technologies, sales channels and the like. We are now in an era where we should borrow on the business resources and vitality of Asia to revive our ailing companies.
Japanese suddenly working under a Chinese president dispatched through the firm’s acquisition may find it hard to quickly rectify their feelings with the situation. However, when Toyota and Honda began building plants in America or Europe around 20 years ago, the individuals involved most likely had the same feelings. However, they rectified their feelings and decided that “employment is important.” Is this not an era where the Japanese people again need to rectify their feelings?
The second example is foreign tourists. A Japanese government led advisory group recently discussed establishing Japan as a tourist destination. A proposal was made to increase the present 5 million foreign tourists to 10 million, but the “foreign tourists” they have in mind are actually not Westerners, but are rich Asians.
There is a term called “Ego Investment.” This refers to an investment that satisfies the investor’s “ego” (including its promotional effects and such) though it makes no sense with regard to profitability. An example of this would be the acquisition of a famous French winery. In this vein, when a wealthy Taiwanese likes to stay at high-class Japanese inns for 50,000 yen a night, it is “consumption that satisfies the ego.” These wealthy say that it feels great to squander money in Japan. China is also home to many wealthy, but the key to attracting them depends on whether or not the harsh immigration policies of Japan can be revised
The third example is the utilization of human resources. The vitality and capabilities of the youth in China shine brightly in the eyes of Japan today. If that is the case these human resources should be “imported.”
One often hears about “research and development is quite vital for the survival of the Japanese manufacturing industry.” However, not only America but also Europe are using visa arrangements and the awarding of scholarships to recruit student talent from India and China before they graduate. There is no way that the strength of Japan alone can victoriously battle this confederation of people and maintain its advantage in research and development.
All of these three points represent blind spots for Japan, which has stubbornly looked down on Asia. When it is spelled out in this manner, it is vividly apparent that we need to swallow the bitter pill of coming down from our roost. If the Japanese economy is to be rehabilitated, thought must be given to that which has not been done and what has been overlooked to this point. If time is needed before an FTA can be concluded between Japan and China, Japan needs to first start by revising its perception of China (Asia), as this is essential for absorbing the merits that China (Asia) possess.
Date: Thu, 19 Jun 2003 12:44:39 -0700
From: Edward Lincoln, Senior Fellow, The Council on Foreign Relations
Subject: NBR'S JAPAN FORUM (ECON) Free trade agreements
Body:
The article in Sentaku about the rapid rise of free trade areas (FTAs) written by Toshiya Tsugami and posted for us by Eric Dinmore is interesting, but in my mind represents a typical Japanese analysis of the situation. As such it:
1) exaggerates the role of Japan in motivating what has happened in East Asia. It's not even clear that Japan proposed the FTA to Singapore; it appears that Singapore approached Japan and that caused the government to rethink its previous opposition to FTAs. This was part of an existing strategy of Singapore to help extricate itself from dependence on its ASEAN neighbors, especially in the wake of the '97 financial crisis. The idea that China approached ASEAN because Japan had begun negotiations with Singapore I find implausible.
2) It is also an exaggeration to say that there is a lot of activity in East Asia concerning FTAs. ASEAN agreed to an FTA among its members over a decade ago and has been slowly and unevenly implementing it ever since. Singapore has been quite active. Japan has signed one (Singapore) and is negotiating one (Mexio). Korea has signed one (Chile). ASEAN is negotiating with China. But all this is happening in a world where other players have been quite active--the U.S. has several (Canada, Mexico---i.e. NAFTA, Jordan, Singapore) and is negotiating a bunch (FTAA, Central America, Morocco, Australia). World wide, about 100 of these things have been created in the past decade. In that context what is happening in East Asia is not so exciting.
3) This is especially true of Japan, which is having considerable difficulty in moving forward. It has been unable to start negotiations with either Korea or ASEAN despite several years of official study groups. It might eventually do so, but the delay is noticeable.
4) The article by Tsugami extols the virtues of a Japan-China FTA, but this is one that is absolutely not on the Japanese government's radar screen, probably for good reason. China has a long way to go with implementing its obligations under the terms of its accession to the WTO before it will really be ready to participate in such arrangements with advanced nations.
Finally, I may be the only one saying this besides Jagdish Bhagwati, but I think FTAs are a bad idea and deeply regret the enthusiasm that the U.S. government has shown for them.
If anyone is interested, I have a book on these developments coming out later this year, a joint publication of the Council on Foreign Relations and the Brookings Institution.
From Toshiya Tsugami dated June 26th
Dr. Edward Lincoln writes in his posting on the 19th that my article in ”SENTAKU "exaggerates the role of Japan in motivating what has happened in East Asia. It's not even clear that Japan proposed the FTA to Singapore; it appears that Singapore approached Japan and that caused the government to rethink its previous opposition to FTAs. This was part of an existing strategy of Singapore to help extricate itself from dependence on its ASEAN neighbors, especially in the wake of the '97 financial crisis."
Let me respond. If my article had given an impression that it exaggerated the role of Japan, it was precisely because I wanted to provoke policymakers in Japan, some of whom are caught by a sense of sufferer with the sudden rise of the China-ASEAN FTA. They are feeling that China intends to downgrade Japan's presence in East Asia; a combination of two theories --"China conspiracy" and "China threat." But I wanted to warn them: it was actually Japan that has inadvertently triggered the current chain reactions of FTAs in the region. It is true that Singapore approached Japan first (summer 1999), but one of the reasons, I believe, must have been the news that Japan started to explore a bilateral FTA with Korea (spring 1999), which was hitherto not heard of nor thought of.
Dr. Lincoln also finds, "(t)he idea that China approached ASEAN because Japan had begun negotiations with Singapore" to be "implausible."
Would it sound more persuasive if I added the following? What China was concerned about was not that Japan was negotiating an FTA with Singapore (or was also exploiting it with Korea). Rather, China was concerned about the consequences of a Japan-centered web of preferential trade networks in the region, coupled with the sentiment of a "China economic threat" abroad, which could have lead to their isolation not only in terms of economic policy but also in terms of foreign policy. In this interpretation, timing mattered: the move started when China was turning the last corner of the WTO entry negotiation (Imagine you finally got to the finish line, and there is nobody here.) In my view, China launched its own regional initiative not offensively but defensively.
Dr. Lincoln also argues: "It is also an exaggeration to say that there is a lot of activity in East Asia concerning FTAs. Worldwide, about 100 of these things have been created in the past decade. In that context what is happening in East Asia is not so exciting."
It may be so, but just because East Asia has continuously failed to join this movement until very recently, the current change is striking.I don't understand why Dr. Lincoln speaks ill of the new movement - only because a rookie cannot play as "excitingly" as a veteran?
Dr. Lincoln goes on to argue, "Japan has been unable to start negotiations with either Korea or ASEAN despite several years of official study groups. It might eventually do so, but the delay is noticeable."
It seems to me that Korea is hesitating to start official negotiations with Japan, not vice versa. In the course of the recent bilateral summit, the Japanese government reportedly sought "joint declaration" of negotiation launch, but the Korean government politely declined the offer partly because it was concerned about another neighbor's (China's) reaction. True, some Chinese doubt if a Japan-Korea FTA is also meant to isolate China.
Regarding ASEAN, the concerned parties prefer bilateral FTAs with Japan rather than a Japan-ASEAN FTA. One of the reasons is that other members need to rebalance the already completed Japan-Singapore FTA (*). The other one, however, might be that they also need to rebalance the rapid development of China-ASEAN FTA negotiations by promoting a bilateral FTA with Japan because a Japan-ASEAN FTA would naturally take time and cannot catch up with the rapid move of China-ASEAN FTA, although saying so might be again criticized by Dr. Lincoln for "exaggerating the role of Japan." Anyhow, I admit Japan's bilateral FTAs with individual ASEAN members are quite uncertain, but they are more or less already being negotiated.
(* For your reference, Please see Singapore Premier Goh Chok Tong's speech (Q&A part, in particular) made last March at my institute http://www.rieti.go.jp/en/events/03032801/report.html)
Dr. Lincoln then says that my article "extols the virtues of a Japan-China FTA, but this is one that is absolutely not on the Japanese government's radar screen."
I have never "extol(ed) the virtues of a Japan-China FTA," but argued the need to face reality. As I wrote in my SENTAKU article, a de-facto economic integration is taking place rapidly and irresistibly between Japan and China with or without an FTA. What is a pity is that Japan might currently suffer more (i.e., hollowing out) than it benefits from this integration. But in my view, Japan itself is responsible for failing to absorb possible merits. To improve this situation, Japan needs to accelerate reform including a psychological adjustment. A Japan-China FTA will be helpful toward this end. Therefore, whether the officials don't want to see or are scared, it must be "on the radar screen of the Japanese government" now.
There is also another reason why I think it is necessary to think about a Japan-China FTA. As mentioned above, there are people in both Japan and China who are suspicious about the other party's FTA policy if it is malign. Korean government has declined to launch a Japan-Korea FTA negotiation partly due to the fear of such suspicions by China. Unfortunately, that is another reality of today's Japan-China relationship (I hope U.S. friends would not be complacent with this). But there are also people in both countries who already realize that neither side can benefit from such a game. Further inaction for a Japan-China FTA would risk giving whole East Asian FTA moves a serious chilling effect. No matter how long it takes to materialize a Japan-China institutional FTA, we need a clear vision now as to the eventual shape of the East Asian economic integration, an effective medicine to erase mutual suspicion.
Finally, Dr. Lincoln thinks "FTAs are a bad idea and deeply regret the enthusiasm that the U.S. government has shown for them."
If he really thinks so, then I don't understand why Dr. Lincoln lengthily illustrates how "exiting" and "active" other players are, "But all this (FTA) is happening in a world where other players have been quite active--the U.S. has several (Canada, Mexico---i.e. NAFTA, Jordan, Singapore) and is negotiating a bunch (FTAA, Central America, Morocco, Australia)" It doesn't appear that he does so in order to show how foolish U.S. policy makers are.
While Dr. Lincoln calls my article "represents a typical Japanese analysis," it seems to me that his comment also quite vividly represents a "typical" wishful thinking of some U.S. Asian experts. To me, "the enthusiasm that the U.S. government has shown for them (FTAs)" looks more realistic and constructive. If one day, when Japan-China FTA is really going to be materialized, then the two countries will naturally face an intervention from the opposite side of the Pacific Ocean. It might even be something that both Japan and China should welcome in order to avoid "a clash of civilization" across the Pacific and to secure constructive U.S. commitment toward East Asia. I believe this is also the best way for the U.S. to preserve its interest in East Asia. Why don't you engage in debate constructively, and give the Asian side time to hug before the game. You can take a rest for a while, as it is true it will take time.
If anyone is interested, and has no problem reading Japanese, my above arguments are elaborated in my book ("CHUUGOKU TAITOU --NIPPON HA NANI WO NASUBEKIKA" ("China's Rise --What Japan ought to do?",) Jan.,2003, NIKKEI Shinbunsha).
Date: Wed, 25 Jun 2003 14:03:03 -0700
From: William Overholt
Subject: NBR'S JAPAN FORUM (ECON) Free trade agreements
Dr. Tsugami makes some excellent points, but there is one assertion that needs correction. It is just not true that ASEAN prefers a series of bilateral FTAs to a multilateral deal. What ASEAN prefers is a multilateral deal that includes both China and Japan. It wants Japan to drop its agricultural protectionism and join the China-ASEAN deal, although ASEAN politicians are too polite to phrase it in those terms; that way, there could be real free trade but the small ASEAN countries would not be overshadowed by a single giant, China. They also agree, along with China and Japan, on excluding the U.S. from such a deal so that Asia can build a counterweight to Washington and the IMF and hopefully avert a recurrence of policy pressures they faced in 1997-'98.
Best regards,
From Toshiya Tsugami
I thank Dr. William H. Overholt for his comment on my posting, and on most parts agree with it.
I agree with his comment, “What ASEAN prefers is a multilateral deal that includes both China and Japan. It wants Japan to drop its agricultural protectionism and join the China-ASEAN deal, although ASEAN politicians are too polite to phrase it in those terms.”
One and a half years ago ASEAN announced that it was going to strike an FTA deal with China while leaving Japan alone. ASEAN did so hopefully because it wanted to warn Japan of the consequence of continuously denying ASEAN requests. That was a somewhat polite but was actually an effective threat --“gaiatsu” pressure Aseanese.
That said, I should have argued in my posting that, “Some ASEAN members, while pursuing an FTA with Japan as ASEAN as a whole on one hand, are also pursuing bilateral FTAs with Japan with a hope to rebalance the already completed Japan-Singapore EPA vis-à-vis the expeditious progress of FTA negotiation with China.” It may also be the intension of (at least FTA supporters in) the Japanese government to pursue a Japan-ASEAN FTA through pursuing bilateral FTAs with individual ASEAN members, and to eventually incorporate the latter into the former.
Dr. Overholt also comments, “They (ASEAN) also agree, along with China and Japan, on excluding the U.S. from such a deal so that Asia can build a counterweight to Washington and the IMF and hopefully avert a recurrence of policy pressures they faced in 1997-'98.”
I agree in the sense that there are certainly such sentiments across East Asia after ’97-’98. In my view, it was a huge mistake for the U.S. to have once strongly opposed to Premier Mahathir’s EAEC idea in ’90 on one hand, and have given Asians an inerasable impression of its lack of understanding of the Asia as well as of sympathy in the course of Asian economic crisis on the other hand.
But whether East Asia will and can really exclude the U.S. from a regional FTA is a different matter. In my view, as opposed to the currency cooperation in which involving the U.S. dollar is an inherent contradiction, there is no reason but a tactic for the East Asian FTA to eventually exclude the U.S. The nature of East Asia as “factory” and that of the U.S. as “customer” will not last for decades. The fact that Singapore –a leading proponent of East Asian economic integration, while boldly advocating the evolution of ASEAN+3 to a “East Asian Summit” in the 2000 ASEAN+3 summit, simultaneously accelerated the FTA negotiation with the U.S. might have reflected this. That is why I think the U.S. government attitude toward an East Asian FTA is realistic and constructive. Thus, (if it really works,) the whole process can also be a good hedge against a possible failure of the WTO new round -- the original Singapore intension to advocate an “East Asian Summit.”
Lastly, one correction to Dr. Overholt’s comment: I do not hold a Ph.D., unfortunately.
From Edward J. Lincoln dated July 1st
Mr. Tsugami and others have added interesting elements to the discussion of Japan's policy on free trade agreements.Here's a couple of additional comments.
Mr. Tsugami has an interesting interpretation of China's decision to propose an FTA to ASEAN (that China could see Japan's new favorable attitude toward FTAs and did not want to be left behind).I am not an expert on the internal politics of the Chinese government, but I still find this explanation unlikely.It is far more likely that the Chinese government a) could readily see the trend toward FTAs around the world, and b) was looking for an easy way to improve relations with Southeast Asian countries.The economics were easy, since China and ASEAN have relatively little trade (so that not very many domestic industries on either side would be badly hurt by opening the market).Meanwhile, ASEAN was worried about a "giant sucking sound" if foreign firms invested in ASEAN would move their factories to China now that it had joined the WTO.This latter fear is overblown (FDI into ASEAN has fallen since 1997 while that to China has remained high, but this had much to do with political instability in Indonesia and other temporary developments in the wake of the 1997 financial crisis and little to do with China's WTO accession).Therefore, Japan's newly announced FTA policy was not really a necessary ingredient in the Chinese government's decision to move forward with ASEAN.
Mr. Tsugami also wondered why I "spoke ill" of the slow movement toward FTAs in East Asia.Sorry, but I wasn't speaking ill of anything, only pointing out the interesting fact that the shift toward FTAs is not all that striking in the context of what is happening elsewhere in the world. It does seem to me that this raises questions as to why these countries did not jump on the FTA bandwagon earlier and why some of them have proceeded so cautiously.
I agree with both Stonehill and Tsugami that the ASEAN countries would like Japan to be involved with them in an FTA to help counter the weight of China.They were certainly willing to begin negotiations with China, but the press around the region has expressed some reservations about the process.In that context, the disappointment in ASEAN when Prime Minister Koizumi made his major policy speech in Singapore in January 2002 and failed to announce an offer to begin similar negotiations with ASEAN was palpable.Here we are more than a year later and the Japanese government has [not?] yet made a firm offer of an FTA to either ASEAN as a whole or any individual members other than Singapore.Perhaps this will happen in the next year or two, but the slowness in getting started--despite the obvious competitive pressure on Japan represented by the ASEAN-China negotiations is interesting.Mr. Tsugami, others at METI, and officials at MOFA have been working hard in the past 3-4 years to get a policy of active negotiation of free trade areas underway, but they have had great opposition from MAFF.
Meanwhile there is a new element in the mixture.Despite the notion of insulating the region from Washington and the IMF, it's not at all clear that FTAs serve this purpose (as Mr. Tsugami points out in his most recent post).Last October, the U.S. government announced a new initiative with ASEAN, in which it has offered to negotiate FTAs with individual ASEAN members (presumably because an ASEAN-wide agreement that would include Myanmar would be impossible).The Philippines and Thailand are the most likely candidates for a first round of FTA negotiations.It would be somewhat ironic if these countries began negotiations with the U.S. before they begin with Japan.
Finally, I would ask Mr. Tsugami not to read into my comments things that are not there. He suggests that my listing of the U.S. government's recent activity on FTAs is inconsistent with my dismissal of FTAs in general as a good policy choice ("It doesn't appear that he does so in order to show how foolish U.S. policy makers are"). I listed the activity of the U.S. government on its own FTA policy to provide readers of this list with some facts about what is going on.Listing those agreements and negotiations is absolutely not an endorsement on my part for this policy.I consider FTAs an unfortunate fact of current global trade policy making, but stick to the position that we are all better off putting more energy into the WTO rather than these regional and bilateral deals.
From B.K. Gordon
Dear Forum Members:
Toshiya Tsugami's article on the "FTA" issue, in SENTAKU in mid-June, has led to good responses from Bill Overholt, Ed Lincoln and others. It's been especially interesting to me, since trade policy is the field of my current research and writing.The current issue of Foreign Affairs has my article "A High-Risk Trade Policy," and in late 2001 Routledge published America's Trade Follies, my book on FTA's and US foreign policy.
On that basis I strongly agree with Ed Lincoln's judgement that "FTAs [are] an unfortunate fact of current global trade policy making" and "that we are all better off putting more energy into the WTO rather than these regional and bilateral deals."I too reached that conclusion in the Foreign Affairs piece, which called for the US to "end the promotion of regional blocs," and resume instead its role as the principal force behind the WTO.
Nevertheless, we're certain to hear more about FTA's in the region, and a US-Australia FTA is likely to be the first result.Both US Trade Representative Zoellick and the President increasingly see FTA's as rewards for helpful foreign policy steps, and Australia's record in Iraq certainly qualifies.Moreover, as Robyn Lim has also pointed out, PM John Howard wants a US-FTA as part of his legacy,
On Japan, Ed Lincoln was also correct to state that Tsugami's SENTAKU article exaggerated Tokyo's role in this revival of interest in FTA's, though as Ed probably knows, there is a long history in Japan of discussion on issues related to FTA's.It dates from the 1950s work of Kojima and Kitamura, along with Okita Saburo, whose interest is traceable to his prewar days at Prince Konoye's Showa Kenkyukai.(Some of this has been dealt with in the East Asia chapter in America's Trade Follies.)
It is nevertheless true that the early Japanese interest in Asian economic regionalism has been followed up in recent commentaries by editorialists and others.Several have warned that Tokyo is in danger of "losing out" to China as a result of this spate of FTA activity. Nikkei made that point in November 2002, when it commented that China's ASEAN-FTA proposal generated a sense of alarm and irritation among the government officials who accompanied Prime Minister Junichiro Koizumi." There have been many similar comments, but none is likely to lead to action, primarily for reasons located partly but not altogether in the Fisheries and Agriculture Ministry.Even the "FTA" Tokyo signed with Singapore excludes agriculture, though Singapore has no agricultural sector worth mentioning---other than its export of tropical fish!And while there is now much talk--though mainly in Korea--about a Japan-Korea FTA, that too is likely to go nowhere, for reasons likewise rooted in both nations' farming sectors.
Bill Overholt's comment on ASEAN and the FTA issue deserves a brief response.I have the greatest respect for Bill's work, especially on China and Hong Kong, but I believe his reference to what "ASEAN prefers" is wide of the mark. These days there really is no "ASEAN" view on these subjects, particularly with Indonesia having turned largely inward. Whatever else can be said about the Suharto era, a due regard for the regional environment was one of its positive features, and it was especially burnished by former Foreign Minister Alex Aletas.
Not so these days, and there is no point in looking for any alternative "ASEAN" leadership in Thailand, Malaysia, or the Philippines.That leaves only Singapore, where solid thinking does of course take place, but Singapore initiatives will never be accepted by the others--least of all by Malaysia/Indonesia.And of course the so-called ASEAN FTA ("AFTA") is going nowhere, for reasons beginning in Malaysia but responded to as well by Thailand.
Two final points.Toshiya Tsugami responded (on 27 June) to Bill Overholt by arguing that "it was a huge mistake for the U.S. to have once strongly opposed Premier Mahathir's EAEC idea in '90 "
Few, however, would agree that former Secretary of State Baker's opposition to the EAEC was a mistake.The reason was that it clearly sought to create a dividing line in the Pacific, from which not only the US, but also Canada, Australia, and New Zealand would have been excluded.That's why Mahathir's "caucus" proposal was quickly labeled "A caucus without Caucasians."
Tsugami is however correct that the US has "given Asians an inerasable impression of its lack of understanding of Asia" and its lack of "sympathy in the course of the Asian economic crisis? But the catalyst was not its position on the EAEC, but the US posture toward the 1997-98 economic crisis.The key issue was Former Treasury Secretary Larry Summers' quashing of the idea of an "Asian Monetary Fund," a proposal strongly backed by Eisuke Sakakibara (aka "Mr. Yen").Those steps indeed left a troubling legacy with which the US will need to come to grips.
I'll conclude by emphasizing that while I have only the greatest respect for Ed Lincon's work on the Japanese economy, I'll pretend I didn't see his 19 June comment that "Finally I may be the only one saying this besides Jagdish Bhagwati, but I think FTAs are a bad idea？Yes, Bhagwati, along with Anne Krueger, has been ahead of us all on these issues, but they've not been alone. In a couple of articles in the mid-90s in The National Interest I wrote about the foreign policy foolishness--from a US perspective-- of FTA's, and followed that in the "Natural Market Fallacy" in Foreign Affairs in 1998.That pointed to the likely errors in the US effort to build a "Free Trade Area for the Americas (the "FTAA").
To bring this back to Japan, it was Ryutaro Hashimoto who told us in his book Vision of Japan, that in 1991 he warned Henry Kissinger that " if the United States strengthens its posture towards forming a protectionist bloc by extending NAFTA and closing off South America and North America, then Japan will have to emphasize its position as an Asia-Pacific country.This will inevitably alter the Japan-U.S. relationship？So please do not force us into such a corner."
That's quite a warning, with obvious implications for today!
From: William Overholt dated July 5th
I also have great respect for Bernard Gordon's authoritative work on regionalism, and I agree that there is no officially stated ASEAN view.However, these trade issues are debated primarily within a limited elite of the old ASEAN 6 at a series of meetings sponsored by various think tanks, universities, governments, and ongoing forums.The key people hold or have held high positions in their governments and within a not-too-wide variation they speak for their countries.They are essentially an expanded version of the old Eminent Persons Group.If one attends these meetings, there is a clear working consensus on a number of points.By working consensus I don't mean perfect agreement but rather a sufficient level of agreement that those who disagree would likely defer if push came to shove: --They prefer the Chinese multilateral free trade approach to the Japanese spider web of FTAs.This part has of course been officially endorsed by ASEAN as a group.In fact, China just joined an ASEAN proposal rather than vice versa and ASEAN encouraged it to do so.--They are uncomfortable being small countries in a trade region with one huge giant, namely China. --They seek to use the trade arrangement along with currency arrangements to build a regional organization that could counterbalance US/IMF pressure in events like the 1997 Asian crisis.Therefore they do not want the U.S. in.Singapore disagrees, and therefore is sometimes not invited to the meetings.--Because they need somebody to counterbalance China, they want Japan in, but only if Japan will accept real trade liberalization.--Because they want the set of institutions to be broad enough to function as a counterweight to the US and the IMF, they want to be as East Asian-inclusive as possible.For this reason they also want Japan in, along with Korea and Taiwan.--For the same reason, they are very blunt in private in telling the Australians and New Zealanders that they will never be fully accepted into either the trade or the currency arrangements because they are viewed as cats' paws for the Americans.This is somewhat unfair to the Kiwis, but it is strongly felt in ASEAN.--The principal barrier to their ambitions is Japanese and Korean agricultural protectionism and more generally Japanese unwillingness to accept true free trade.There are constant informal efforts to work with more liberal interests in Japan to move Japan on these issues, and there is serious consideration even in China of at least temporarily accommodating some Japanese protectionism in order to get Japan on board.
--Chinese objections to formally including Taiwan in some of these arrangements is also a problem, but one that ASEAN leaders are pretty confident they can circumvent. --They view it as undiplomatic to press Japan too hard too openly. --They view it as particularly undiplomatic to make public statements about their determination to create institutions that will eventually come together into a secretariat intended to counterbalance the US and the IMF.
Best regards, Bill
From Toshiya Tsugami dated July 6th
Please allow me to make a rather out dated response.
Edward Lincoln says in his posting dated June 30th:
> ...that China could see Japan's new
> favorable attitude toward FTAs and did not want to be left behind
> ...
> I still find this explanation unlikely.It is far more likely that the
> Chinese government a) could readily see the trend toward FTAs
> around the world, and b) was looking for an easy way to improve
> relations with Southeast Asian countries.The economics were
> easy, since China and ASEAN have relatively little trade (so that
> not very many domestic industries on either side would be badly
> hurt by opening the market).
It seems to me that there is not much contradiction between what he thinks is unlikely and what he thinks is far more likely. Logically speaking, his interpretation of my arguments, the above a) and b) can go together.
However, regarding his comment,"(China) was looking for an easy way to improve relations with Southeast Asian countries", I have two views: On one hand, I agree in the sense that a China-ASEAN FTA may result in "an easy way," but I also think one should not view it as "an easy way" so quickly, because there are rather ambitious goals in their FTA draft, such as service sector opening, and a dispute settlement mechanism. Dr. Lincoln may again oppose this wishful thinking. Indeed, there is certainly ambiguity as to whether China will really live up to its WTO commitments. ASEAN has also not had a good record in abiding by what they have mutually committed to in the AFTA--a good reason to believe that it is no use to wonder if China and ASEAN can establish this ambitious FTA. But I still hope that he does not laugh at them, and hope he continues watching with a cool head and warm heart. Since they are all rookies.
> Meanwhile, ASEAN was worried
> about a "giant sucking sound" if foreign firms invested in ASEAN
> would move their factories to China now that it had joined the WTO.
> This latter fear is overblown (FDI into ASEAN has fallen since 1997
> while that to China has remained high, but this had much to do with
> political instability in Indonesia and other temporary developments
> in the wake of the 1997 financial crisis and little to do with China's
> WTO accession).Therefore, Japan's newly announced FTA policy
> was not really a necessary ingredient in the Chinese government's
> decision to move forward with ASEAN.
The relocation of Japanese factories or production to China is real. Not a small number of Japanese factory managers said farewell to their counterparts or government officials in ASEAN, as they were dispatched to China, which naturally makes Southeast Asians uneasy. China's WTO accession or more precisely, a rapid development of Chinese domestic market was certainly one of the causes of this development. Recent SARS problem certainly warned multinational companies around the world the risk of putting all eggs you have into a basket.From now on, there will be some portfolio adjustment in their FDI strategy. But as far as Japanese companies are concerned, the magnitude of such adjustment may not be quite big.
> the (East Asian) shift toward
> FTAs is not all that striking in the context of what is happening
> elsewhere in the world. It does seem to me that this raises
> questions as to why these countries did not jump on the FTA
> bandwagon earlier and why some of them have proceeded so
> cautiously.
There are many reasons why the East Asia failed in jumping on the FTA bandwagon. They include the following: diversities in the region, complicated historical problems that are yet solved, rivalry between Japan and China, export oriented economic policies that other East Asian countries learned from Japan and so forth.
> I agree with both Stonehill and Tsugami that the ASEAN countries
> would like Japan to be involved with them in an FTA to help counter
> the weight of China.They were certainly willing to begin
> negotiations with China, but the press around the region has
> expressed some reservations about the process.In that context,
> the disappointment in ASEAN when Prime Minister Koizumi made
> his major policy speech in Singapore in January 2002 and failed to
> announce an offer to begin similar negotiations with ASEAN was
> palpable.Here we are more than a year later and the Japanese
> government has [not?] yet made a firm offer of an FTA to either
> ASEAN as a whole or any individual members other than
> Singapore.Perhaps this will happen in the next year or two, but the
> slowness in getting started--despite the obvious competitive
> pressure on Japan represented by the ASEAN-China negotiations is
> interesting.Mr. Tsugami, others at METI, and officials at MOFA
> have been working hard in the past 3-4 years to get a policy of
> active negotiation of free trade areas underway, but they have had
> great opposition from MAFF.
It would have been better if Prime Minister Koizumi could put it more decisively.But nonetheless both ASEAN counties as well as Japan are trying to negotiate FTAs. Dr. Lincoln's understanding about the situation inside the Japanese government is not wrong, but is slightly caught by a stereotype. MAFF's position is also changing. The root problem is that Japan needs a fundamental change in its agricultural policy (for example a "de-coupling" policy)--not a mission impossible, but also not the one that can be realized in a short period of time.
> Last October, the U.S. government
> announced a new initiative with ASEAN, in which it has offered to
> negotiate FTAs with individual ASEAN members (presumably
> because an ASEAN-wide agreement that would include Myanmar
> would be impossible).The Philippines and Thailand are the most
> likely candidates for a first round of FTA negotiations.It would be
> somewhat ironic if these countries began negotiations with the U.S.
> before they begin with Japan.
True, this is something that I am afraid of (laughter). But if this were the case, then it will resume gaiatsu pressure on Japanese government to move quickly. We would then need to thank the new U.S. initiative. That is why I think it is constructive.
> Finally, I would ask Mr. Tsugami not to read into my comments
> things that are not there. He suggests that my listing of the U.S.
> government's recent activity on FTAs is inconsistent with my
> dismissal of FTAs in general as a good policy choice ("It doesn't
> appear that he does so in order to show how foolish U.S. policy
> makers are"). I listed the activity of the U.S. government on its own
> FTA policy to provide readers of this list with some facts about what
> is going on.Listing those agreements and negotiations is
> absolutely not an endorsement on my part for this policy.
Maybe I went too far in reading his posting. But its tone seemed bitter against Japan, China or East Asia as a whole.
Best regards,
From: Toshiya Tsugami dated July 8th
Bernard Gordon writes in his posting dated 5th:
> Toshiya Tsugami responded (on 27 June) to Bill
> Overholt by arguing that "it was a huge mistake for the U.S. to have
> once strongly opposed Premier Mahathir's EAEC idea in '90?H"
> Few, hoever, would agree that former Secretary of State Baker's
> opposition to the EAEC was a mistake.The reason was that it
> clearly sought to create a dividing line in the Pacific, from
> which not
> only the US, but also Canada, Australia, and New Zealand would
> have been excluded.That's why Mahathir's "caucus" proposal was
> quickly labeled "A caucus without Caucasians."
In the above, I was not saying that US opposition to the EAEC was a mistake. If one reads the original sentence in one breath, one could construe that I intended to say that since the U.S. opposed "creating the dividing line in the Pacific" in 1990, then the U.S. should not have created a dividing line in the Pacific in 97-98 when wondering whether, how, and to rescue the balance of payments crisis on either side of the Pacific.In short, the above two U.S. reactions, through their combination, resulted in a double standard.
> Tsugami is however correct that the US has "given Asians an
> inerasable impression of its lack of understanding of Asia" and its
> lack of "sympathy in the course of the Asian economic crisis?H
> But the catalyst was not its position on the EAEC, but the US
> posture toward the 1997-98 economic crisis.The key issue was
> Former Treasury Secretary Larry Summers' quashing of the idea of
> an "Asian Monetary Fund," a proposal strongly backed by Eisuke
> Sakakibara (aka "Mr. Yen").Those steps indeed left a troubling
> legacy with which the US will need to come to grips.
Again, I was not saying that "the catalyst was its position on the EAEC," but argue that the catalyst was a double standard that is felt by the East Asians.
Let me add several points on the issue of double standard.
East Asians still do not understand why Americans are concerned about East Asian FTA moves. If they more or less lead to "creating the dividing line in the Pacific," why did not the establishment of the NAFTA constitute the same thing?
To be fair, I need to touch upon the sentiment in East Asia that William Overholt showed in his thought-provoking posting dated 5th. This sentiment might distinguish EAEC or other East Asian FTAs "without Caucasians" from the NAFTA or other Western FTAs. True, there is certainly a somewhat narrow, Pan-Asian driven sentiment, which I think is not a good idea even for East Asia.
But if I speak for those East Asians, one of the driving forces of this sentiment is certainly the sense of a US double standard. In my view, quite ironically, they want to go "without Caucasians" because the U.S. is often inclined to oppose it, or to overly intervene in it from which they cannot help but feel the double standard.
Several American participants argue in this mail list that WTO based multilateral trade regime should be preferred rather than an FTA. WTO is surely something that the world needs to continue to cherish. However, there are numerous FTAs elsewhere in the world including the U.S.'s as Ed Lincoln wrote before. The world has been accepting FTAs in the past. The rationale must have been the recognition that competitive FTAs may help accelerate further liberalization in broader regions, if they are correctly run.
In this regard, I would ask US friends to remember that sounding the alarm of the danger of FTA moves today in 2003 may risk sounding like another double standard to East Asians. For holders of such views in the U.S., why don't you talk about the danger to your people rather than to people in the East Asia, where that move is not still "active" or "exciting?"
The key issue today should also be how best to corporate those East Asian FTA moves into more regionally broad, multilateral, one.
Best regards,
Date: Tue, 08 Jul 2003 17:43:26 -0700
From: Edward Lincoln Senior Fellow The Council on Foreign Relations
Subject: NBR'S JAPAN FORUM (ECON) Free Trade Agreements
Body:
As this discussion has proceeded, I have the impression that Mr. Tsugami actually has views on many issues that are not all that different from mine or others. But there does seem to be some mis-communication. In his latest posting, he suggests that "sounding the alarm of the danger of FTA moves today in 2003 may risk sounding like another double standard to East Asians." Who is "sounding the alarm? Certainly no one I know in Washignton. In my postings to this forum, I have noted that there is less to the FTA activity in East Asia than one might think given the enthusiasm with which Japanese government officials have pushed the idea. But that's not alarm. The only sense of alarm I have is that the world in general--the U.S. included--is drifting away from a WTO-centered approach to trade and investment liberalization and increasingly embracing FTAs. But that's a general problem, not one specific to East Asia. And it's fair to say that few policy makers in Washington seem to share my view (though I am pleased to see Bernard Gordon sharing the same views and I look forward to reading his Foreign Affairs article).
Rather than alarm, in fact, from an analytical standpoint, the interesting development in Washington is the absolute absence of alarm over either East Asian FTAs or broader economic discussions within ASEAN+3. My own quick explanation for this development is:
1. Rather than a double standard as Mr. Tsugami argues, the U.S. government is so enamored of FTAs as a means of moving the world toward more open trade, that both the Clinton and Bush administrations have welcomed moves by other countries like Singapore or Japan to proceed with their own FTA strategies.I think officials and people outside government are well aware that NAFTA is a geographical bloc (and, as is the case with all FTAs, is leading to trade distortion with a rising percentage of American trade over the past decade with Canada and Mexico). Therefore, they are not about to criticize Japan or others for proposing similar regional groupings.
2. The Clinton administration was well aware that it had created some ill-will in both Japan and around the region by its open opposition to the EAEC (even though I think it was justified at that time for the reasons others have brought up about a "line in the Pacific"). Therefore, the Clinton administration was disposed to take a neutral stance on ASEAN+3. I see no change in this posture in the Bush administration.
3. Opposition to the 1997 AMF proposal was driven by the particular nature of the issue. MOF had a very imprecise proposal that certainly had the potential for undermining a well-established global (i.e. IMF-led) approach to financial crises, and like the EAEC, this proposal had heavy overtones of East versus West that was not useful in resolving the crisis. (And I do not understand why Mr. Tsugami sees this episode as a double standard, with the U.S. drawing the "line in the Pacific"; I see it as very consistent with the earlier EAEC opposition, driven by trying to prevent a divisive Asia versus IMF approach to the crisis.) Certainly, the IMF approach to the '97 crisis was flawed in its initial stage, but the solution to that is to fix the IMF, not create competing institutions. More recent proposals from Japan and elsewhere for some modified version of the original idea appear to have gotten no negative response from Washington because they clearly put an AMF in a subordinate position to the IMF. As a result, the sense of opposition in Washington has dissipated. Indeed, the IMF and the U.S. government have welcomed moves such as the ASEAN+3 central bank swap agreements.
4. Overall, what Japan chooses to do no longer gets much attention in Washington, at least on the economic side of policy. Specialists on Japan have watched the change in Japanese trade policy, embracing FTAs, with considerable interest, but the broader policy community in Washington is not paying much attention. In contrast to the late 1980s and 1990s, no one talks much about how an East Asian economic bloc might be detrimental to American economic interests.
