Emerging East Asia and Japan’s New Trade Policy

--- Domestic Structural Reform and Japan’s New Economic Diplomacy ---

Prof.Yorizumi WATANABE

Faculty of Policy Management,

Keio University, SFC

December 15, 2006

Y.WATANABE 2

Table of Contents

Japanese Economy in Expansion: Renewed Dynamism generated by Koizumi Reform

Shift in Trade Policy reflecting Changes in Trade Pattern and Investment Flow

Reshaping Japan’s Economic Partnership with Major Partners

Beyond Bilateral FTAs ? Asian “Noodle Bowl” or Stepping Stone to Global Liberalization

Y.WATANABE 3

Basic Facts on Japan Today

The second-largest economy after the US: GDP of Japan = $4.6 trillion ( $11.7 trillion for US, $2.7 trillion for Germany, $12.8 trillion for EU, 2004)

GDP per capita of Japan = $36,574 ( $39,934 for US, $32,695 for Germany, 2004)

Sources of economic strength: Advanced ①Technology, Household Wealth, Social ② ③Stability

Y.WATANABE 4

The Japanese Economy is Recovering

Real GDP Growth Rate

-0.7

3.02.2

5.9

3.5

-0.9

0.8

-1.3

6.05.4

1.4

5.5

-4

-2

0

2

4

6

8

I II III IV I II III IV I II III IV

03 04 05

(at annual rate, %)

Source: Cabinet OfficeThe real GDP growth rates have been positivefor four consecutive quarters.

Real GDP Growth Rate

-0.7

3.02.2

5.9

3.5

-0.9

0.8

-1.3

6.05.4

1.4

5.5

-4

-2

0

2

4

6

8

I II III IV I II III IV I II III IV

03 04 05

Export and Production

96.0

98.0

100.0

102.0

104.0

106.0

04/1 04/7 05/1 05/7 06/1

108.0

110.0

112.0

114.0

116.0

118.0

120.0Index of Industrial

Production（left scale）Export Volume Index

（right scale）

Y.WATANABE 5

In an Expansion Phase since 2002

2.3

2.7

1.9

1.7

1.1

▲ 1.0

▲ 0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2002 2003 2004 2005 2006 （FY）

（％） Projection

Source: Cabinet OfficeNote 1: The components in the bar graphs are the contribution to GDP growth. 2: Public demand, private inventory and residential investment are included in "Others."

Real GDPgrowth rate

OthersPrivate

Consumption

BusinessInvestment

Net exports

Y.WATANABE 6

The Key to Recovery: Structural Reform

Koizumi’s “No Growth without Reform” Policy

Priority to private sector initiatives: smaller government and less dependence on fiscal stimuli

Japanese version of “Subsidiarity” : leave to the localities what they can do

Y.WATANABE 7

Successful Structural ReformProgress of NPLs Disposal

(Major Banks)

26.823.920.217.5

13.612.17.4 6.1 2.4

8.4 8.17.2

6.55.2

4.7

2.9

0

10

20

30

40

50

60

02.3 03.3 04.3 05.3

（year.month）

0

2

4

6

8

10(%)ratio of NPLs

(right scale)

amount of NPLs(left scale)

(t rillion yen)

Source: Financial Services Agency

Y.WATANABE 8

Structural Reforms: Unfinished Business

Over 1000 regulatory reform items have been implemented, and more than 500 Special Zones for Structural Reform had been created by Spring 2005

“Invest Japan” Campaign: to double the cumulative stock of FDI in Japan since 2003

Privatization of Japan Post (the bills passed in October 2005, to be privatized in October 2007)

136 out of 163 public corporations were abolished, privatized or underwent other reorganization measures

Y.WATANABE 9

Employment is also ImprovingEmployment Situation

3.5

4.0

4.5

5.0

5.5

6.0

02 03 04 05 (year)

(%)

0.2

0.4

0.6

0.8

1.0

1.2(rat io)

Unem ploy m ent Rate

Effective Job Offers-to-Applicants Ratio

4.4%（05/12）

1.00(05/12)

Y.WATANABE 10

　　

Japan

USAE 　

U

China

source ： IMF Direction of Trade, MOFA

143.9

172.9

289.0

60.5 113.1

54.4

89.3

53.7

73.976.3

128.6

34.7

Japan’s Trade with Major Trading PartnersJapan’s Trade with Major Trading Partners （（ 2004, 2004, $billion$billion ））

Y.WATANABE 11

　　

Japan

USAE 　

U

China

-80

2,173

8,637

7,25813

13,492

＊“ net-flow” includes capital withdrawals and return on investment. （ Source: Bank of Japan 、 MOFA)

FDI net-flow with Major PartnersFDI net-flow with Major Partners （（ 2005, Y100million2005, Y100million ））

Y.WATANABE 12

<country>Number of Japanese companies（ manufacturers）

Denmark29(8)Ireland

48(21)

Netherlands373(54)

Belgium149(41)

Sweden　 66(15)

United Kingdom839(248)

Luxembourg17(2)

Spain157(68)

Germany633(103)

Portugal32(18)

Italy192(67)

Poland63(36)

Austria48(10)

Hungary59(42)

Greece11(4)

Romania10(9)

Bulgaria2(0)

Slovakia16(9)

Source: JETRO, Toyokeizai( 2004), MOFA

Manufacture ： 989 West Europe ： 814 　 Central&East:160 　 Turkey 　　 ： 15

Ukraine2(0)

Estonia3(0)

Latvia1(0)

Lithuania1(1)

Croatia1(0)

France384(146)

Switzerland62(2)

Turkey28(15)

Serbia Montenegro

2(1)

Czech Rep. 63(62)

Finland21(6)

Norway18(1)

Slovenia4(0)

ＥＵ Member States

__ （ since 2004.5 ）

future members/candidate

Non-EU countries

Japanese Companies in EuropeJapanese Companies in Europe

Y.WATANABE 13

Intra-regional Trade (%)

East Asia EU(15) NAFTA

Export1980 年 33.9 61.0 33.6

2003 年 50.5 61.4 55.4

Import1980 年 34.8 56.9 32.6

2003 年 59.7 63.5 39.9

Source ： Japan Economic Journal （ 5/11/2004 ）

Y.WATANABE 14

Japanese Car Industry:Optimal Supply System in Asia 　

Thailand ： Diesel Engine 、Air Conditioning 、

Tariff Rates ： 40-60%

Malaysia ： Engine Parts 、Condenser 、

Tariff Rates ： 5-80% Philippines ： Transmission 、Combination MeterTariff Rates ： 3%

Indonesia ： Gasoline Engine 、Horn

Tariff Rates ： 5-15%

Japan ： high-value addedEngine parts and

components

Y.WATANABE 15

Guideline for EPAs(Ministerial Council’s Decision, Dec.21 2004)

EPA to complement the multilateral trading system embodied in WTO

EPA to develop further Japan’s external economic relations and ensure its economic benefits

EPA to enhance domestic structural reform EPA as a diplomatic device to create sound

international environment, notably in East Asia EPAs to be concluded expeditiously by the

Government in its totality

Y.WATANABE 16

Criteria to Specify Partner Countries and/or Regions

Whether it contributes to create beneficial international surroundings for Japan (East Asian economic community, diplomatic agenda, WTO negotiations, etc)

Whether it contributes to enhance Japan’s economic welfare

Feasibility and accommodation of sectoral difficulties of either side, impact on third countries, domestic system for implementation, etc.

Y.WATANABE 17

Economic Partnership Agreement

Investment

FTA Market Access

Goods, Services Movement

of Persons Bilateral

Cooperation

Government

Procurement

Business

Environment

Competition

EPA

18Y.WATANABE

Japan-Singapore New-Age Economic Partnership Agreement

Japan’s first FTA in force since Nov.2002 Comprehensive coverage; goods, services,

investment, movement of natural persons, information and communication technology, human resources

Over 98% of tariffs eliminated Liberalization in trade in services beyond

WTO commitments (134 /102 sectors for Japan, 139/62 sectors for Singapore)

19Y.WATANABE

Japan-Mexico EPA

Japan’s first FTA to involve agricultural sectors substantially

Japan’s second FTA to redress disadvantages in the absence of FTA

Gateway to Americas for Japan, 　　　Gateway to Asia for Mexico

Bilateral cooperation Entered into force as of April 1st 2005

Y.WATANABE 20

Strong business demand for FTA

Disadvantageous conditions in tariff rates (average: 16%) Decline of Japan-Mexico Trade Unfavorable condition in government procurement

Access to 10th economy Possible gateway to North/South America Better business environment for Japanese companies

Y.WATANABE 21

Japan’s FTA/EPAAchievement so far

Japan-Singapore EPA (in force since Nov.2002) Japan-Mexico EPA (in force since April 2005) Japan-Malaysia EPA (agreement in substance May, signed Dec. 2005, in

force since July 2006) Japan-Philippines EPA (agreement in substance Nov.2004, signed in

September 2006) Japan-Thailand EPA (agreement in substance Sept. 2005) Japan-ASEAN EPA (negotiations started in April 2005) Japan-Korea EPA (negotiations started in Dec.2003) Japan-Indonesia EPA (agreed to start negotiations in June 2005, the first

round was held in July 2005, agreement in substance in November 2006) Japan-Chile EPA (JSG’s 1st meeting in Jan.2005, negotiations started in

February 2006, agreement in substance in November 2006) Preliminary talks: Vietnam, Brunei (early 2006) Joint Study Group (JSG): India, Australia, Switzerland, GCC

Y.WATANABE 22

Overall Picture

Japan

MexicoMexico

Ｊａｐａｎ’ｓＥＰＡ Ｎｅｇｏｔｉａｔｉｏｎｓ

EPAs concluded or agreements in principle reached

MalaysiaMalaysia

Negotiations ongoing or about to start

Australia

PhilippinesPhilippines

Indonesia

Preliminary discussions or government-involved joint studies ongoing

CanadaSwitzerland

Korea

South Africa

SingaporeSingapore

ThailandThailand

Egypt

MERCOSUR

ASEAN

Private-sector studies are ongoing with these countries, or their governments/business community have indicated interest in EPA with Japan

（Brazil, Argentine, Uruguay, Paraguay）

China

India

Brazil

Argentine

TaiwanHong-Kong

Mongolia

IsraelMorocco

（Note）Regional Trade Agreementsreported to the WTO

6 in 197031 in 1990168 in 2005

Brunei

Vietnam

Saudi Arabia

GCC

NorwayIceland

LaosMyanmar

Cambodia

Ｃｈｉｌｅ

Y.WATANABE 23

Why with Chile? Chile: A Pivotal Point in

Latin America MERCOSUR: Since 1995 Chile: Associate member to MERCOSUR since

1996 through FTA Santiago Mendoza Buenos Aires⇒ ⇒ ⇒San Paulo Potentiality of “Eje MERCOSUR-Chile” Chile’s FTA network with 35 countries Chile, the major source of minerals; e.g. copper

(50.6%), molybdenum (55.8%)

Y.WATANABE 24

Mexico, Chile, and Beyond?Case for Brazil and Mercosur

Motorcycle: Moto Honda (since 1976) 896,000 units in 2004 (market share 80%)

Passenger car: Toyota Mercosur 17,424 units (2002) ⇒ 　 37,747(2004, market share 40%), CKD parts exported to Argentine

TV sets, Audio, DVD, PC: Toshiba with SEMP (Sociedade Eletro Mercantil Paulista) TV sets 1.7 million units (2004, the size of the national market is about 7million units)

Y.WATANABE 25

FTA schedule in East Asia2002 年　　　　　　　　　　 2005 年　　　　　　　　 2010 年　　　　　　　　　 2015 年　　　　　　　　　　 2020 年

ASEAN　 2003 年　　　　　　　　　　　　　　　　　　 　 2010 年　　　　　　　　　　　　 2015 年　　　　　　　　　　　　 2020 年予定

ASEAN ＋ Korea　　　　　　　　　　　　　 2004 年 11 月　　　　　　　　 2009 年　　　　　　　　　　　　　 2014 年

ASEAN ＋ China

　　 2002 年　　　　　　　　　　　　　　　　　　　　　　　　　　　 2010 年　　　　　　　　　　　　 2015 年

ASEAN ＋ Japan

　　　 2003 年 10 月　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　 2012 年　　　　　　　　　　　2017 年

ASEAN ＋ India

　　　 2003 年 10 月　　　　　　　　　　　　　　　　　　　　　　　　　　　　 2011 年　　　　　　　　　　　　　2016 年

ASEAN

＋ Australia

＋ New Zeeland

　　　　　　　　　　　　　　 2004 年 11 月　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　 2015 年

CLMV= Cambodia, Laos, Myanmar and Vietnam Source: MOFA and JETRO

AFTA AFTA （ Excl.CLMV ） AFTA （ CLMV ） ASEAN Economic Community

FTA（ Excl.CLMV ）

FTA（ Excl.CLMV ）

FTA（ CLMV ）

FTA（ CLMV ）

FTA（ Excl.CLMV ）

FTA（ CLMV ）

JointDeclaration

FrameworkAgreement

FTA（ CLMV ）

ASEAN ・ India（ Excl.CLMV ）

ASEAN ・ India（ CLMV ）

FrameworkAgreement

FrameworkAgreement

FrameworkAgreement

Y.WATANABE 26

East Asian Economic Community

AFTA: completed by2010(excl.CLMV) China + ASEAN: by 2010 (excl. CLMV) Korea + ASEAN: by 2009 (excl. CLMV) Japan +ASEAN: by 2012 (excl. CLMV) Australia +ASEAN: by 2007 (excl. CLMV) Japan-China-Korea FTA maybe forthcoming

after the Investment talks

Y.WATANABE 27

Issues to be considered

WTO consistency: “substantially all the trade”, “within a reasonable period of time (= 10 years)”, “not to raise barriers to third countries”

Relationship with two other mega-regions, i.e. EU and Americas (NAFTA, FTAA)

APEC & ASEM: inter-regional cooperation Multilateral liberalization through WTO/DDA

Y.WATANABE 28

Regional Trade Arrangements

NAFTA３カ国

米、加、墨

MERCOSUR４カ国

ｱﾙｾﾞﾝﾁﾝ、ﾌﾞﾗｼﾞﾙ、ﾊﾟﾗｸﾞｱｲ、ｳﾙｸﾞｱｲ

FTAA（２００５年目標）

EU-メキシコＦＴＡ合意

EU15カ国

EU-USパートナーシップ

AFTA10ＡＳＥＡＮ カ国

東方へ拡大

ラ米へ拡大

CERNZ豪、

ﾌﾗﾝｽ、ﾄﾞｲﾂ、ｲﾀﾘｱ、ﾍﾞﾙｷﾞｰ、ｲｷﾞﾘｽ、ｵﾗﾝﾀﾞ、ﾙｸｾﾝﾌﾞﾙｸﾞ、ｽﾍﾟｲﾝ、

ﾎﾟﾙﾄｶﾞﾙ、ｷﾞﾘｼｬ、ｱｲﾙﾗﾝﾄﾞ、ｵｰｽﾄﾘｱ、ｽｳｪｰﾃﾞﾝ、ﾌｨﾝﾗﾝﾄﾞ、ﾃﾞﾝﾏｰｸ

ｲﾝﾄﾞﾈｼｱ、ﾏﾚｲｼｱ、ﾌｨﾘﾋﾟﾝ、ｼﾝｶﾞﾎﾟｰﾙ、ﾀｲ、ﾌﾞﾙﾈｲ、

ｳﾞｪﾄﾅﾑ、ﾗｵｽ、ﾐｬﾝﾏｰ、ｶﾝﾎﾞｼﾞｱ

（最近動きなし）

SAPTAｲﾝﾄﾞ、ﾊﾟｷｽﾀﾝ、ﾊﾞﾝｸﾞﾗﾃﾞｼｭ、

ｽﾘﾗﾝｶ、ﾈﾊﾟｰﾙ、ﾌﾞｰﾀﾝ、ﾓﾙﾃﾞｨｳﾞ

ロメ協定アフリカ、カリブ海等の旧植民地諸国約７０ヶ 国

ＡＦＴＡ－ＣＥＲ（ＦＴＡ検討開始）

Y.WATANABE 29

Three Mega-Regions

EEUU EFTA, ACP

CH

LL ..AA ..

MERCOSUR

EE ..AA SS IIAA

J apan ＋ASEAN China ＋ASEAN Korea ＋ASEAN

FTAA

NNAA FFTTAA

USA CANADA MEXICO

A S E M A P E C

T r ans-A tlan tic M ar k et P lace

WTO

Y.WATANABE 30

Conclusions :Japan’s New Approach

FTA/EPA as complementary device to multilateral trade liberalization

East Asia: providing legal frameworks to secure de-facto business-driven integration： Japan-China　 FTA is crucial

World-wide: from “defensive FTA” to “strategic FTA” (Chile, CH, GCC, Australia, India)

Further commitment in WTO, APEC, ASEM Closer cooperation with US and EU in trade and inve

stment through Regulatory Reform Talks

Y.WATANABE 31

Thank you for your kind attention!

　　 Freer trade for the better future