Copyrighted material List of Illustrations. Preface and Acknowledgements. Notes on Contributors. List of Abbreviations

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1 Contents List of Illustrations Preface and Acknowledgements Notes on Contributors List of Abbreviations vi viii ix xi 1 Understanding Japanese Trade Policy: A Political Economy Perspective 1 Aurelia George Mulgan 2 Postwar Japanese Trade Policy: A Shift from Multilateral GATT/WTO to Bilateral/Regional FTA Regimes 41 Shujiro Urata 3 The Political Economy of Japanese Agricultural Trade Negotiations 71 Kazuhito Yamashita 4 The TPP and Agricultural Reform in Japan 94 Masayoshi Honma 5 To TPP or Not TPP: Interest Groups and Trade Policy 123 Aurelia George Mulgan 6 The Impact of Trade Policy on Japanese Trade and Investment 157 Roger Farrell 7 International Production Networks and Economic Diplomacy in Japan 175 Fukunari Kimura 8 Locating Japanese Trade Policy in an Evolving Regional Context 196 Hidetaka Yoshimatsu Index 223 v

2 1 Understanding Japanese Trade Policy: A Political Economy Perspective Aurelia George Mulgan Introduction and analytical framework The purpose of this book is to identify the main political and economic forces that have helped to shape Japanese trade policy in the postwar period. The individual chapters focus on different aspects of this story, although they share a broad political economy perspective and common underlying themes such as factors influencing Japanese trade protectionism and liberalisation, and the timing and extent of Japan s accession to bilateral, regional and multilateral trade agreements. In economics, the standard political economy approach to explaining trade policy assumes that individuals and firms, who may organise into interest groups, are motivated exclusively by considerations of economic self-interest to prefer particular trade policies as are the politicians responding to them (Baldwin 1996). Key trade policy measures such as reducing levels of import protection or becoming a member of a trade bloc result from the balance of political forces motivated by economic self-interest to support or reject these measures (Baldwin and Baldwin 1996). In political science, public choice analysis attributes motivations to core trade policy constituencies such as farmers, business firms and consumers based exclusively on economic self-interest, while assigning a political calculus to politicians based exclusively on political self-interest (George Mulgan 2008b). Even economists, however, concede that trade policy preferences cannot be fully explained by the self-interest model, pointing to the broad social concerns that underpin the trade policy preferences of voters and public officials (Baldwin 1996; Baldwin 1989). This approach 1

3 2 Aurelia George Mulgan argues that trade policy can be explained mainly by the government s concern for the welfare of certain social and economic groups and by its desire to advance particular national and international goals, which are also endorsed by the general public (Baldwin 1989). Among the most widely discussed are goals relating to the maintenance of the existing distribution of income, or to enhancing the power of the nation-state by pursuing trade alliances (Baldwin 1989). This approach allows for more diverse motivations beyond the assumptions of economic or political self-interest, such as ethical considerations and the desire to promote the public good, including genuine ambitions to advance the interests of the nation-state in the international community. The integrative political-economy framework introduced in this chapter builds on these approaches by adopting a broadly conceived interest-based perspective in which interests are divided into sectoral and state. Sectoral interests are associated with specific producer groups such as farmers and manufacturers as well as with wider socioeconomic sectors such as consumers, regional dwellers and taxpayers. State interests, on the other hand, refer to benefits that accrue to the whole nation-state, not to particular sections or sectors. They can be further sub-divided into domestic and external. Domestic state interests encompass collective economic goals such as economic growth and national prosperity as well as broader social concerns such as environmental conservation and social welfare. They relate to the interests of the nation-state with a domestic focus. External state interests, on the other hand, are the interests of the nation with an international focus. They can be embedded in and pursued through trade policy and are not necessarily restricted to narrowly defined trade goals. They include objectives such as expanding international economic and political influence, exercising regional and global trade leadership and strengthening alliance relationships. This approach adopts a wider lens for viewing the interests that might find expression in trade policy. It also acknowledges that government decision-makers can be motivated to respond to sectoral interests, but they can also seek to advance the broader societal and international interests of the state in formulating trade policy (George Mulgan 2008b). Trade policymaking will inevitably involve a balancing of diverse interests, some of which will conflict while others will be mutually reinforcing. The analytical framework outlined here discards the theoretical assumption of self-interest. It is based on the premise that both government and non-government actors can pursue sectoral, societal and

4 Understanding Japanese Trade Policy 3 international interests either for reasons of their own self-interest or out of concern for the wider national benefit. The following sections illustrate the framework by identifying the range of interests both sectoral and state that key Japanese trade policies advance. Sectoral interests Trade liberalisation without agriculture Perhaps the most distinctive, enduring and internationally contentious feature of Japanese trade policy is a continuing reluctance to liberalise agricultural trade. Japan has concluded a series of trade agreements without fully opening its agricultural market. It has insisted on maintaining high levels of agricultural protection by negotiating exemptions, exclusions and other special arrangements for so-called sensitive products ( juyo hinmoku ) such as rice, dairy products, beef, pork and others. Sensitive in this context means politically sensitive (Urata 2014), reflecting the sectoral interests of Japan s small-scale, internationally uncompetitive agricultural producers as well as the interests of regional dwellers more broadly, particularly in areas of declining population and economic contraction. Under the General Agreement on Tariffs and Trade (GATT), Japan s domestic production of core agricultural commodities was heavily protected through controlled trade schemes or quota systems that were granted exceptional treatment (Honma 2005). As Urata argues in Chapter 2, although import liberalisation, beginning with the 1960 Trade and Foreign Exchange Liberalisation Plan Outline, proceeded not only for industrial products but also for agricultural products, items considered important to domestic agriculture remained protected. During the Uruguay Round (UR) negotiations, Japan opposed the blanket conversion of quantitative import restrictions to tariffs on all products because of the implications for rice. It was prepared to accept an increased minimum access (MA) settlement in lieu of tariffication, obligating it to import specific quantities of rice annually over the term of the six-year Uruguay Round Agreement on Agriculture (URAA) 1 with only a small proportion used for food consumption in Japan itself, as Yamashita details in Chapter 3. In reality the URAA turned out to be a very imperfect instrument for liberalising Japanese agricultural trade. In addition to continuing rice protection, the tariff regimes instituted for products such as skim milk powder for school lunches, animal feed, whey, konjac root ( konnyaku )

5 4 Aurelia George Mulgan and starch were so punitive that imports of most of these products declined after the agreement was implemented (George Mulgan 2006). In addition, state trading regimes were continued for products such as wheat, barley and butter to protect domestic producers (Naoi and Urata 2013), while tariff-rate quotas and prohibitively high secondary duties for products such as wheat, barley and pork also had the practical effect of retaining agricultural protection, with the result that imports across the board barely increased if at all under the new tariff regime (Honma 2000). As Yamashita argues in Chapter 3, even in 1999 when Japan finally accepted rice tariffication, this was designed to reduce the level of rice imports, not expand it. In the Asia-Pacific Economic Cooperation (APEC) meetings that followed the signing of the 1993 URAA, Japan sought to limit any additional concessions on agriculture beyond those already agreed during the UR. At the 1995 APEC meeting in Osaka, the Japanese proposal listed exemptions to the principle of trade liberalisation for agriculture on the grounds that sensitive sectors needed to be considered and accorded special treatment. This stance implicitly rejected the APEC principle of comprehensiveness (meaning no exempt sectors) and the 1994 Bogor Goals of trade and investment liberalisation for developed economies by Japan also stated that it could not consider any more concessions other than those agreed to in the URAA. It was a similar story at the APEC Summit in Manila in 1996 and in Vancouver in 1997, where Japan rejected the option of placing primary products on the priority list for early voluntary sectoral liberalisation (EVSL) and any further tariff reductions beyond its URAA commitments. The same position was restated at the APEC meeting in Kuching in Malaysia in 1998 (George Mulgan 2006). This was a tactical move that was directly linked to Japan s World Trade Organization (WTO) strategy. There were concerns that any concessions at APEC would undermine Japan s position in the new round of negotiations in the WTO, which were due to begin in 2000 (George Mulgan 2006). Compared with its active engagement in the agricultural trade negotiations during the UR, Japan was much less active in the subsequent WTO Doha Round of agricultural negotiations where it remained arch-defensive on agriculture (Sally 2007, 3). It was reluctant to become involved in discussions on concrete measures for cutting tariff rates and would not discuss tariffs on specific items (George Mulgan 2006). It held the line on market concessions, reaffirming and elaborating the key arguments of its earlier negotiating positions, which pushed for greater, not less protection for agriculture. It called for restraint on the lowering of

6 Understanding Japanese Trade Policy 5 tariffs on important items and for a reduction in the MA quantity of rice imports. It also pressed for the admission of a new safeguard mechanism that would allow safeguards to be automatically triggered by import quantities and/or prices. The United States described this proposal as more regressive in content than the agreements reached under the Uruguay Round of global trade talks ( Kyodo News, 8 February 2001). To buttress its position, Japan became a prominent member of a group of agricultural protectionists in the Doha Round called the G-10 (Group of Ten), which included other net farm product-importing countries such as South Korea, Norway and Switzerland that were heavily reliant on protection at the border to shield their farm sectors from international competition. As Yamashita elaborates in his chapter, the Ministry of Agriculture, Forestry and Fisheries (MAFF) later endeavoured to designate all the important agricultural products including rice, wheat, barley, sugar, dairy products, beef and others as sensitive products to which a 70 per cent rate of reduction in tariffs higher than 75 per cent would not apply. Japan opposed a compromise farm trade deal put forward by the United States and European Union (EU), which would have allowed tariffs up to 100 per cent on agricultural products, advancing its own proposal, which offered only modest tariff cuts and no cap on the height of tariffs, asserting that it wanted to maintain the number of sensitive items at per cent, compared with the 1 per cent demanded by the United States and 8 per cent advanced by the EU ( Nikkei Weekly, 14 November 2005). It was prepared to let the Doha Round fail rather than concede on agricultural market access by agreeing to the US and European proposals for cutting agricultural subsidies. Japan also used the same tactic in the WTO that it was later to use in its approach to concluding Free Trade Agreements (FTAs) by offering to substitute aid for market-opening concessions (Rathus 2011; George Mulgan 2008b). It offered a $13.3 billion trade development package to the world s poorest countries in lieu of an offer to lower farm tariff barriers and production subsidies, which would have broken the impasse in the Doha Round in late It was hoping that the package would divert blame aimed at it for wrecking attempts to reach agreement on farm trade liberalisation at the WTO summit in Hong Kong in December 2005 ( Weekend Australian, December 2005). The sectoral interests of internationally uncompetitive agricultural producers have also been evident in Japan s FTAs, to which it became more receptive from the early 2000s. They were conspicuous in the order in which FTAs were concluded (beginning with Singapore in 2002), in

7 6 Aurelia George Mulgan the pace at which agreements were signed (e.g., the stalled negotiations with Mexico and in the failure to sign an FTA with South Korea), 2 in the agreements with developing countries such as Thailand, the Philippines and Malaysia but not with developed agricultural exporters such as the United States, Canada, Europe and Australia (until July 2014), in the need for the Japanese government to offer compensation, such as aid and technical cooperation, to some trading partners particularly developing countries in lieu of requested agricultural market access, and last, but by no means least, in the lower quality of the agreements signed in terms of trade liberalisation levels compared with other FTAs, as Urata demonstrates in the following chapter. Inclusive as they are of special product exclusions and quotas (outlawed by the WTO), small and differential tariff reductions, tariff quotas (which the WTO seeks to eliminate) and agreements to reserve certain products for later resolution, Japan s FTAs have thus revealed themselves as very restrictive templates for Japanese agricultural trade liberalisation. 3 This has been an important factor making them a more attractive proposition to Japan rather than persisting with the WTO multilateral agricultural trade negotiations. Certainly, if a prospective partner country has only a very small farm sector, then a deal will be easier to reach than in multilateral negotiations (Manger 2009). Singapore was selected as the partner for Japan s first bilateral agreement on the grounds that it exported virtually no agricultural products. Even then, the Japanese side steadfastly objected to the inclusion of primary products and refused to lower tariffs on imports of Singaporean agricultural and marine products. Its position was that it would not accept any further abolition beyond the WTO Agreement on Agriculture (AoA). 4 Indeed, among the total 2,277 agricultural, forestry and fishery items, the number of those on which tariffs were abolished in the Japan-Singapore FTA was 486 (428 items on which tariff abolition had been agreed in the WTO AoA plus 58 items on which the effective tariff rate was zero). This meant that agricultural products were effectively excluded from liberalisation in the Japan-Singapore FTA (Honma 2013; 2005). As Urata writes in Chapter 2, it was Japan s FTA strategy to eliminate tariffs that were effectively zero but not to concede more than the WTO concessions on other tariffs. It was only Singapore s willingness to sign the agreement with these exclusions that enabled the bilateral FTA to go ahead. Hence the Japanese government was able to establish the precedent for exceptional treatment for agriculture (George Mulgan 2006). In subsequent FTAs, Japan moved to pleading the case for special treatment of individual agricultural items that were the focus of specific

8 Understanding Japanese Trade Policy 7 import pressure. This became its standard negotiating position on FTAs (George Mulgan 2006). In the free trade negotiations with Mexico, for example, the most serious obstacle to agreement was Japan s strong resistance to liberalising pork, beef, chicken, oranges and orange juice, the so-called five fingers (Solis 2005). Vegetables were the only agricultural product on which tariffs were eliminated from the date on which the 2005 Japan-Mexico Economic Partnership Agreement (JMEPA) came into effect. All other agricultural products either had staged reduction followed by elimination of tariffs after three, five, seven or ten years, or the introduction of tariff quotas (for honey, processed tomato products, pork, orange juice, beef, chicken and fresh oranges) (Japan Customs n.d.). Moreover, while JMEPA generated further impetus for FTAs with Malaysia, Thailand, Indonesia, the Philippines and even for a full Japan- ASEAN agreement, in reality it provided only a very limited model for later settlements on agriculture (George Mulgan 2006). The April 2007 agreement with Thailand (Japan-Thailand Economic Partnership Agreement, or JTEPA) did not cover agricultural commodities such as rice, wheat and dairy products, 5 while the August 2007 Japan- Indonesia Economic Partnership Agreement (JIEPA) retained all existing tariffs on agricultural imports into Japan except for bananas and prawns. Similarly, the ASEAN-Japan Comprehensive Economic Partnership (AJCEP) Agreement of April 2008 exempted key Japanese agricultural items such as rice, beef, sugar and dairy products from tariff elimination or reduction. Nor were agricultural products adequately incorporated into the Japan-Philippines Economic Partnership Agreement (JPEPA) (Honma 2013; 2005), with some products such as pineapples and chicken subject to tariff quotas as were beef, pork and chicken in the March 2007 Japan-Chile Economic Partnership Agreement (JCEPA). When Japan signed the Economic Partnership Agreement with Australia (JAEPA) in July 2014, the precedent for exclusions and tariff quotas had thus been set because Japan had introduced them for key products in its FTAs with other countries, classing them as sensitivities. Japan agreed to only small, quantitative increases in imports of beef, and in varying degrees on processed cheese, high polarity sugars and pork. Even these limited concessions were not replicated on other sensitive products such as rice, wheat, other sugars, wheat, butter, fresh cheese and skim milk powder, as Honma points out in Chapter 4. Australia was pressing for better market access but these products were excluded from the agreement (George Mulgan 2014). A major problem was the fact that Australia s main farm exports coincided with Japan s sensitive products (Higuchi 2007).

9 8 Aurelia George Mulgan The record therefore shows that Japan has not signed FTAs that liberalise agricultural products it has wanted to protect. Agreements have generally placed less emphasis on trade liberalisation and have been accompanied by a significant component of economic cooperation, which has taken various forms, including infrastructure investment, technical assistance and promotion of small and medium enterprises (Lord 2010). Particularly when concluded with developing countries, aid, investment and technical cooperation have been important because they facilitate the acquisition of technology and other items important for economic growth. In the Japan-Malaysia Economic Partnership Agreement (JMEPA) of December 2005, for example, Japan offered assistance to Malaysia s domestic car manufacturers, with an obvious cost to Japan s competitiveness in the Malay domestic car market (Rathus 2011, 96). This was part of a comprehensive list of 24 Projects and Programmes under which Japan agreed to provide cooperation and assistance to a range of development programs in Malaysia, including agriculture, forestry and fisheries, education and human resource development, science and technology, and small and medium enterprises (Ministry of Foreign Affairs of Japan 2005). As Urata points out in Chapter 2, Japan has provided technical cooperation in the field of agriculture to developing countries specifically in lieu of agricultural trade liberalisation. In the case of Thailand and the Philippines, cooperation offered by the Japanese government included the dispatch of experts in the areas of food-security planning, agricultural development planning and sustainable management of agricultural water resources; and assistance in the development of agricultural statistics and analysis, in planning for protection against stock diseases and in response to bird flu (Fuji 2004). Japan s exclusion of a considerable number of mainly agricultural items from tariff abolition in its FTAs meant that its trade liberalisation rate (on a trade value basis) has been consistently lower than for partner countries (Urata 2014; Ito 2007). Only in the case of Brunei, Switzerland and Peru was the ratio of Japan s trade liberalisation more than 99 per cent, matching that of its FTA partner (Urata 2014, 10; Naoi and Urata 2013, 330). In the case of Mexico, Malaysia, Chile, the Philippines and Thailand, there was at least a five percentage point difference between Japan s and its trade partner s liberalisation ratio. The biggest difference was between Mexico at 98.4 per cent and Japan at 86.8 per cent (Urata 2014, 10; Naoi and Urata 2013, 330). Developing countries such as Mexico, Thailand, the Philippines and Malaysia were willing to accept these uneven terms in exchange for the compensation Japan offered in other areas (George Mulgan 2008b).

10 Understanding Japanese Trade Policy 9 The Ministry of Economy, Trade and Industry (METI) in its 2012 white paper on trade admitted that from a global perspective, Japan had achieved only a low level of liberalisation through Economic Partnership Agreements (EPAs) (90 per cent or more in terms of trade value, but approximately per cent in terms of trade items) because it set a relatively high number of exceptions to liberalisation (Ministry of Economy, Trade and Industry 2012, 640). Indeed, Japan s consistent use of the term economic partnership agreement rather than free trade agreement to describe all its trade agreements since Japan-Singapore Economic Partnership Agreement (JSEPA) in 2002 has been to show that these trade agreements are about more than simply abolishing tariffs. They are much broader agreements in which inducements can be offered to prospective trading partners to accept lower levels of trade liberalisation on the Japanese side including compensating EPA partners for Japan s failure fully to liberalise agricultural trade. In the Trans-Pacific Partnership (TPP) talks, as Yamashita observes in Chapter 3, the Japanese government has based its negotiating position on excluding five key agricultural product categories (rice, dairy products, sugar and starch, beef and pork, and wheat and barley, covering 586 food items) from the TPP principle of total tariff elimination. This was affirmed in the resolutions adopted by the Diet Upper and Lower House Agriculture, Forestry and Fisheries Committees and by the Liberal Democratic Party s (LDP s) TPP Affairs Committee calling for the five sensitive products to be treated as sanctuary ( seiiki ) from tariff abolition and for the government to withdraw from the negotiations if it judged that this sanctuary could not be protected (House of Councillors 2013). 6 The LDP s TPP Affairs Committee defined sanctuary as vital [ life and death] interests ( shikatsuteki rieki ). In the ensuing negotiations, the Japanese side sought a compromise by proposing to lower tariffs to a certain extent on some items within the five categories, including beef on which Japan imposes a 38.5 per cent tariff. 7 The TPP negotiations have also brought to the fore Japan s continuing preference for import tariffs rather than direct payments to protect farmers as Yamashita argues in Chapter 3. Japan is perhaps the only country that protects specific agricultural items with tariffs that are in the high hundreds of per cent (e.g., more than 700 per cent on rice and more than 1000 per cent on konjac root). Successive governments have chosen not to introduce direct income subsidies that would make up for the loss in farmers income when agricultural prices fell, but which

11 10 Aurelia George Mulgan would facilitate agricultural trade liberalisation. As Yamashita argues, maintaining tariff barriers to farm imports panders to the sectoral interests of the farmers agricultural cooperative organisation (JA, or Japan Agricultural Cooperatives), which markets locally produced farm products. JA has a vested interest in the high price of agricultural goods traded in the domestic market because of revenue generated by commissions on sales, which are calculated as a fixed proportion of the final price. For JA, lower prices resulting from tariff elimination would reduce revenue from its marketing business, and the consequent shake-up of the domestic agricultural sector as the bulk of JA s farmer-members part-time, uncompetitive producers exited farming would rock JA to its very organisational foundations. Agricultural protection in the form of tariffs also privileges the economic interests of taxpayers over those of consumers. Using direct income subsidies funded by the budget to assist potentially damaged import-competing sectors, such as agriculture, would affect the budget bottom line but under import protection Japanese consumers are forced to buy basic foodstuffs at inflated prices because of hefty tariffs as Yamashita points out in Chapter 3. Tailor-made for business Japan s jumping on the FTA bandwagon in the early 2000s, which Urata documents in Chapter 2, demonstrates the potential of such preferential agreements to offer immediate, direct, and concentrated benefits (Pekkanen 2005) to business interests seeking improved trading conditions and higher profits, particularly given the faltering pace of Doha Round (Kawai and Urata 2012). Firms that stood to gain were exportoriented manufacturers in fields such as steel, transport machinery and electronics (George Mulgan 2008b; Pekkanen 2005; Kawasaki 2004). Among Japan s exports to Mexico, for example, machinery products such as cars accounted for 75 per cent (in 2002), on which tariff abolition was expected to contribute to a significant expansion of Japanese exports to the country (Honma 2005). Moreover, as Japan s trade increasingly became concentrated in East Asia, Japanese exporters faced on average higher tariff rates in these countries, 8 which imposed an additional burden for Japan s exporters... in key markets such as Indonesia and sectors like automobiles (Rathus 2011, 77). The focus on East Asia in Japan s trade strategy certainly made sense in terms of producing the greatest additional benefits through further liberalization (Kovrigin and Suslov 2006, 40). Japanese businesses were also facing rising competition from China

12 Understanding Japanese Trade Policy 11 and Association of Southeast Asian Nations (ASEAN) countries in these markets (Kovrigin and Suslov 2006). Indonesia alone represented 40 per cent of the consumers within the 10-member Asian region. Joining the growing movement towards FTAs additionally stood to benefit general trading companies, which had a relatively high degree of dependence on foreign trade, which were major importers of energy goods, minerals and raw materials into Japan as well as exporters of finished goods, and which were also prime movers of commodities within Japan s intra-regional networks of production and distribution (George Mulgan 2008b). Perhaps even more importantly, Japanese firms were facing an increasingly unfavourable situation as a result of the proliferation of FTAs in the global market from the early 1990s onwards (Park, Urata and Cheong 2005). Playing catch-up in an environment of competitive liberalisation served the interests of Japanese corporations, which were disadvantaged in doing business with countries that had already concluded FTAs elsewhere (Solis and Katada 2007). As Urata points out in the following chapter, securing and expanding export markets for Japanese business in an environment of rapidly proliferating FTAs among the regions of the world was an important sectoral interest served by Japan s pursuit of FTAs. In particular, Japanese firms faced discriminatory trading arrangements as a result of the fast pace of FTAs signed by the EU and the United States. For example, the market situation for Japanese firms became tougher without an FTA with Mexico, not only for exporters but also for Japanese corporations operating in Mexico (Working Group on Economic Partnership Agreements and Agriculture 2007). The North American Free Trade Agreement (NAFTA) and the EU-Mexico FTA meant that European and American firms faced zero tariffs in the Mexican market. Japanese firms, on the other hand, had to pay an average of 16.2 per cent on all exports in 2001 (Kawai and Urata 2012). In particular, Japanese car and steel companies wanted to expand their exports to Mexico, with steel companies exporting to Japanese assembly firms operating there (Kawai and Urata 2012). With the tariff rate for cars at per cent, Japanese firms could not produce cars profitably in Mexico because they had to import parts under tariffs (Honma 2005). They were additionally at a disadvantage in bidding for government projects as eligibility was limited to countries that had concluded FTAs with Mexico (Honma 2005). Without an FTA, the total cost in terms of lost business was estimated at 400 billion, almost the equivalent of the value of Japan s export trade to Mexico (Urata 2005). Not surprisingly,

13 12 Aurelia George Mulgan Japanese business groups pushed hard for equal access to the Mexican market as Farrell points out in Chapter 6. The EPA with Mexico signed in September 2004 the second that Japan signed after JSEPA thus defended Japanese firms interests in avoiding the opportunity cost of being excluded from FTA networks (George Mulgan 2008b). It was a similar story with JTEPA, which supported the interests of Japanese firms that were using Thailand as a production base, but which were being outcompeted by American firms because of the more favourable investment conditions available to these firms under the US-Thailand Treaty of Commerce and Navigation (Manger 2009). Japanese car assembly plants in Thailand ended up major beneficiaries of JTEPA. As Farrell points out in Chapter 6, JTEPA meant that Japanese auto firms were given national treatment and concessions on a par with the rival companies of third countries. The March 2007 EPA with Chile (JCEPA) played a similar role in protecting the interests of Japanese car and electronics manufacturers against their competitors in South Korea, which was ahead of Japan in ratifying an agreement with Chile in In the interim, Chile s imports from Japan had flattened while its imports from South Korea had grown rapidly. It was the same story with the Japan-ASEAN FTA. When Japan reached agreement with ASEAN in August 2007, it was in the position of having to catch up to China and South Korea, which had already concluded FTAs with ASEAN. This had put Japanese exports to the region at a competitive disadvantage compared with Chinese and South Korean goods. AJCEP particularly benefited Japanese manufacturers of flatpanel TVs and car components, which secured more favourable tariff treatment from the ASEAN states compared with South Korean products. This was because the tariffs on those products from Japan were scheduled to be eliminated by many ASEAN countries while those on such products from South Korea would only be reduced under its agreement with ASEAN ( Japan Today, 26 August 2007). Japan s decision to participate in the TPP negotiations as well as those on a Japan-EU EPA and a trilateral China-Japan-South Korea FTA also caters to the interests of Japanese corporations that export to countries and regions such as United States, EU and China, and which are eager for a level playing field with their competitors. South Korea, in particular, is ahead of Japan in signing FTAs with the United States and EU as well as a prospective FTA with China. If Japan did not join the TPP, for example, then the gap with South Korea would continue to widen, rendering Japan uncompetitive. Companies producing commercial vehicles, passenger

14 Understanding Japanese Trade Policy 13 cars and flat-screen TVs have been the most affected by the US-Korea FTA (Working Group on Economic Partnership Agreements and Agriculture 2007). Chairman of the Japan Automobile Manufacturers Association (JAMA), Toshiyuki Shiga, complained about South Korean exports gaining an advantage and Japanese automakers having to compete at a disadvantage because of tariffs they face at the US end ( Yomiuri Shinbun, 16 March 2012). Japan s participation in the TPP promised to rectify this disadvantageous position. It would also enable Japanese electronics manufacturers to keep their production lines and technologies for key components in Japan and to compete with South Korean firms ( Yomiuri Shinbun, 22 November 2011). Similarly, a Japan-EU EPA, which the Japanese government began seriously to negotiate in April 2013, promised to advance the interests of Japanese business firms apprehensive about loss of market share with tariff-free South Korean goods flooding into Europe. Their primary concerns were for the EU to lower or abolish its tariffs on passenger vehicles (10 per cent), car parts (4.5 per cent) and flat-screen TVs (14 per cent). As Yoshimatsu points out in Chapter 8, Japanese car sales to the European market declined after the South Korea-EU FTA came into effect. Japan s entry into negotiations on a China-Japan-South Korea trilateral FTA accommodates the same fear about Japanese corporations being at a disadvantage in the Chinese market compared with their South Korean rivals ( Yomiuri Shinbun, 14 May 2012). In fact because Japan faces high tariffs on exports of cars and machinery in both China and South Korea, it probably stands to enjoy the benefits of the trilateral FTA the most (Sakakibara 2013). Mega-FTAs such as the TPP and the Regional Comprehensive Economic Partnership (RCEP) are also recognised as having the benefit of improving the competitive environment for Japanese companies ( Nihon Keizai Shinbun, 4 April 2012, 7). For example, Japanese car manufacturers will gain from higher exports under lower tariff conditions in the TPP. Abolition of car tariffs will save them the 130 billion they had paid to participating countries by 2010 ( Yomiuri Shinbun, 22 November 2011, 9). In fact, the prospect of expanding exports through tariff cuts under both the TPP and RCEP will reduce the need for Japanese companies to move to foreign countries in order to avoid the burden of tariffs and thus enable them to maintain their production bases in Japan. It will offer the same advantages for small- and medium-sized manufacturers that cannot afford to set up factories overseas ( Yomiuri Shinbun, 9 March 2011). The TPP also promises benefits to agri-businesses seeking cheaper inputs and higher exports.

15 14 Aurelia George Mulgan Some EPAs, such as JCEPA and JAEPA, offered specific gains to companies with a high dependency on mineral and energy goods. JCEPA, for example, catered to the interests of Japanese car manufacturers in providing secure access to large quantities of copper from copper-rich Chile. JAEPA, on the other hand, was of vital interest to firms that tapped into and relied on Australian natural resources for manufacturing and energy-generation. Such high natural resource-use industries had been concerned about guaranteed and stable access to mineral and energy resources in light of intensifying competition with China. Japan s EPAs with East Asian countries also accommodated the desire of export-oriented manufacturers and multinationals to improve the business environment in these countries. They included foreign direct investment (FDI) liberalisation and other measures designed to create a more business-friendly environment (Kawai and Urata 2012). By concluding FTAs with developing countries such as the ASEAN countries, which still had relatively high barriers to trade and investment, it was possible to establish an environment in which Japanese firms could more easily conduct their business activities (Urata 2014; Naoi and Urata 2013). 9 Because Japan s trade agreements were EPAs and not simply FTAs, they catered to such interests. The Ministry of Foreign Affairs (MOFA) of Japan itself distinguished between FTAs and EPAs by stating that FTAs abolished tariffs on goods and lowered barriers to trade in services while EPAs promoted the liberalisation and facilitation of trade and investment, aiming to strengthen economic relations in a broad sense, including the abolition of domestic and border regulations and the harmonisation of various economic systems (Ministry of Foreign Affairs of Japan 2007). This meant that for Japan, enforcement of EPAs meant a strong commitment from the partner country to improve their business environment (Hiratsuka, Sato and Isono 2009). The most important elements of JSEPA, for example, were liberalisation of trade and FDI, FDI facilitation and economic and technical cooperation in a wide range of areas including the mutual approval of standards, the mobility of people and human resource development, information and communications technology including the conversion of trade procedures into electronic modes, as well as property rights, and competition and environmental policies (Urata 2005). As Ozaki comments, Under such a comprehensive liberalisation agenda, companies in Japan and Singapore stood to gain business opportunities without borders (2001, 2). Even more comprehensively, Japan s EPAs embodied the interests of Japanese multinational manufacturing firms involved in the

16 Understanding Japanese Trade Policy 15 development of regional production and procurement networks. These networks played an increasingly important role in the business models of these firms (Lord 2010), which were eager to utilise trade agreements (Hiratsuka, Sato and Isono 2009) because they offered a supportive policy framework for deepening these networks and building up regional supply chains (Kawai and Wignaraja 2011). As Kimura points out in Chapter 7, Japanese firms treated East Asia as a production site. Many Japanese manufacturers had established integrated production hubs, from parts-making to assembly, in the region where they began making investments more than two decades earlier ( Nikkei Weekly, 22 May 2006). Hence, Japan s production and distribution networks were well positioned to benefit from the improved business environment created by EPAs, which became vital building blocks of regionally integrated business networks (Kimura 2007). The increasing focus in Japanese trade policy on deepening economic and trade relations with East Asian trade and investment partners through EPAs directly benefited these manufacturers (Kawai and Urata 2012). 10 Prospective partners for EPAs were selected on the basis of the production networks to which they belonged (Lord 2010). EPAs improved supply chain efficiency by reducing tariffs and by eliminating and promoting the adoption of cumulative rules of origin. The primary role of AJCEP, for example, was to enable the use of cumulative rules of origin and the harmonisation of trade-related laws and regulations (Kotera 2012). In fact, both Japan s EPAs and the TPP were expected to maintain Japan s position in global supply chains and work to improve supply chains ( Nihon Keizai Shinbun, 18 July 2012) by reducing barriers in supply chain networks. Because supply chains involved many countries, Japan s multinational corporations did not want barriers in any countries (Urata and Kusaka 2013). For these firms, as Dent observes, Japan s EPAs helped to minimize the international transaction costs incurred by operating these systems, for example in trade between different nodes of the... inter-firm networks (2006, 77). The Japanese car industry, for example, viewed the TPP as potentially making it easier for factories set up overseas to procure parts from Japan s domestic parts industry ( MSN Sankei News, 26 April 2014). The TPP would also offer greater opportunities for companies to diversify their supply chains ( Nihon Keizai Shinbun, 22 July 2012). ASEAN plus one (i.e., Japan) was insufficient for a supply chain to operate efficiently, for example. Similarly, Japan s joining the RCEP promised to serve business interests by making it easier for companies to establish supply chains spanning multiple countries ( Nihon Keizai Shinbun, 20 June 2012). As for the TPP, it offered the prospect of

17 16 Aurelia George Mulgan extending Japanese manufacturers global supply chains beyond Asia to North America as an area of final consumption (Fan 2013). Domestic state interests Domestic state interests encompassed by trade policy extend to concerns about the health of the national economy as well as broad social and economic concerns such as resource security, environmental conservation and social welfare. The importance of the US market For decades, Japan s responsiveness to external pressure ( gaiatsu ) from the United States on trade issues illustrated the importance of the trading relationship with the United States to the Japanese economy and therefore to national prosperity. Japan had a strong state interest in preserving its large stake in the American export market and in heading off American protectionism. On these grounds, a national interest case could always be mounted for any concessions made during the course of US-Japan trade negotiations. A pattern in which the United States threatened retaliation against the Japanese economy and Japan responded with concessions to American trade demands became well established. It was particularly evident during the 1970s, 1980s and first half of the 1990s when the relationship was characterised by high levels of trade friction owing to the blowout in Japan s trade surplus with the United States (Cooper 2014; George Mulgan 1997). This provided tremendous impetus for American pressure to open Japanese markets across a range of sectors (George Mulgan 1997). Gaiatsu was often accompanied by explicit American references to the larger value of Japan s relationship with the United States. The United States Trade Representative s (USTR s) Advisory Committee on Trade Policy and Negotiations (1989, 108), for example, argued that Japanese Government officials have a keen sense of where their national interest lies, and when faced with credible threats of retaliation that adversely affect that interest, they usually choose to accommodate requests from the United States. As Urata points out in Chapter 2, resolving trade friction with the United States became an important item on the trade policy agenda. Japan responded to gaiatsu with bilateral deals on a range of products including textiles, steel, televisions, cars and semiconductors. They involved so-called voluntary export restraints (VERs), orderly market arrangements and voluntary import expansion, as Urata notes. 11 For

18 Understanding Japanese Trade Policy 17 example, in response to America s so-called aggressive unilateralism (Bhagwati and Patrick 1990) in the form of the application of Section 301 of the US 1974 Trade Act (Super 301), which potentially restricted Japan s exports to American markets (Kawai and Urata 2012), Japan concluded the US-Japan Semiconductor Trade Agreement in Under the terms of the agreement, it agreed to end the dumping of semiconductors in world markets... and to help secure 20 percent of their domestic semiconductor market for foreign producers within five years (Irwin 1996, 5). 12 Japan faced similar demands on cars with the United States seeking the liberalisation of the Japanese auto market. It pressed Japan to set a numerical target for imports of US vehicles. The negotiations were settled in 1995 when Japan accepted part of this request by presenting Japanese companies voluntary plans ( Sankei Shinbun, 15 November 2011). The government justified the capitulation to American demands for access to Japanese markets as unavoidable because of Japan s huge trade surplus with the United States. Even multilateral trade rounds were consistently accompanied by bilateral pressure from the United States. No matter what the institutional setting the GATT, the WTO, or the TPP, which also became a surrogate bilateral between the United States and Japan the negotiations always followed a pattern of parallel negotiations with the United States. Japan s Central Union of Agricultural Cooperatives (JA-Zenchu), for example, described the secret US-Japan rice market opening negotiations of late 1993 as conducted on the basis of priority consideration being given to bilateral relations between the two countries ( JA-Zenchu News 1994, 5) At the time, there were both confirmed and denied reports that the Japanese government had already done a deal with the United States on rice in October 1993, before the final round of GATT negotiations. Economic growth through trade growth Japan s adoption of policies to facilitate trade flows and to support trade growth reflect a belief that trade is one of the foundations of national economic prosperity and a means to generate national economic growth. Japan s accession to the GATT and its support for the multilateral trading system, for example, brought into play considerations relating to the health of the global economy and the fact that Japan s pre-eminent economic position was derived directly from the benefits a liberal international trading regime bestowed on its export industries. Japan gained substantially from trade expansion under the GATT-supported

19 18 Aurelia George Mulgan open multilateral trading regime, which assisted its postwar economic reconstruction, rapid industrialisation and economic growth (Kawai and Urata 2012). Similarly, Japan s signature to international trade agreements embodies an acceptance that its economic growth and success are predicated on market access. National gains to welfare, gross domestic product (GDP) and exports result from trade creation (Hiratsuka, Sato and Isono 2009). Certainly the Japanese government has recognised the benefits of trade liberalisation as a source of economic growth (Urata 2009; 2005). Japan s policy was to contribute to the GATT-based open trade order by beginning the liberalisation process of its own markets, which involved reducing quantitative restrictions, and tariffs and non-tariff barriers on manufactured imports (Kawai and Urata 2012). A range of direct and indirect benefits to the Japanese economy were identified as arising from a successful completion of the UR, for example. These included the positive developments in world trade consequent on the rolling back of protectionist policies, a reduction in trade friction between nations, the institution of a more liberal rule-based trading system, the lowering of the costs of protection to the efficiency of the global economy and the existence of a countervailing force to the rise of trade blocs that might provoke trade conflict leading to political and other forms of conflict between nations. Japan s Prime Minister Hosokawa justified his government s decision to end Japan s ban on rice imports in order to secure the UR agreement by saying, We must do it for the sake of world trade....the Uruguay Round should not fail because of us ( The Australian, 15 December 1993). Analysis suggesting that a successful conclusion to the UR would pump up to 24 trillion in trade into the world economy over a nine-year period, which was vital to resurrecting the global economy, linked Japan s future prospects for economic growth directly to a positive outcome for the Round ( Japan Times, 27 November 1992). As a foreign ministry official remarked during the UR negotiations, A successful conclusion to the latest GATT round is essential for Japan, which benefits so much from free trade (Hirose 1990, 39). Some of the specific benefits from the Round included the provision of an agreed code on what constituted dumping, abolition of localcontent rules and a termination of voluntary restraint measures and the possibility of decreased trade friction by streamlining trade-dispute settlement procedures. A study of the major effects of agricultural trade liberalisation alone revealed that there would be a 3 per cent rise in Japan s export earnings. 13 Acceptance of the URAA thus reflected a belief

20 Understanding Japanese Trade Policy 19 that Japan s prosperity had been brought about as a result of the GATT free trade system and for that reason, the success of the UR was Japan s international mission (Watanabe 1994). Concessions to American demands for agricultural access as part of successive GATT trade rounds also supported Japan s domestic state interests in ensuring the success of these negotiations. In the closing stages of the Tokyo Round in 1978, for example, the Carter administration calculated that it could ease US-Japan bilateral tensions if it achieved Japanese concessions on beef and oranges and thereby obtained the support of private industry and the Congress for the success of the negotiations. By making the agreement of Congress to the Round conditional on Japanese concessions on beef and oranges, the United States extracted additional quota increases for beef and citrus from Japan in December 1978 following on from those granted in the earlier beef and citrus agreement negotiated in January. The advantages to Japan were reputedly those that would accrue from a successful Round, which, as Urata notes in his chapter, Japan itself had initially proposed and in which it had actively engaged, and which would be forthcoming on Congressional approval. This was secured by an overwhelming majority in July In the UR, the United States also explicitly leveraged Japan s stake in the global trading system to extract concessions on rice. American negotiators made these concessions critical to the success of the agricultural trade negotiations and thus the success of the UR negotiations as a whole. This position was made clear by US Secretary of Agriculture Clayton Yeutter in He argued that the UR could not be brought to a satisfactory conclusion without resolving the issue of Japan s rice market, complementing earlier statements that Japan s rice ban was undermining efforts to reform farm trade. His position was echoed by supportive voices on the Japanese side who admitted that Japan might have to offer a major concession on rice in order to wrap up the farm trade talks, which in turn could decide the eventual outcome of the whole Uruguay Round (Hirose 1990, 40). Furthermore, Japan s concessions on rice promised to deal with a number of specific problems it faced in trade disputes with the United States, such as the use of protectionist legislation, the deployment of unilateralism as a weapon of gaiatsu and potential discrimination against Japanese trade and investment, by keeping the United States committed to an international set of trade rules ( Australian Financial Review, 8 April 1988). It was also argued that a positive resolution of the agricultural trade friction problem would have the effect of ameliorating America s