Japan's Free Trade Agreement Program

CRS Report for Congress
Japan’s Free Trade Agreement Program
August 22, 2005
Raymond J. Ahearn
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade

Congressional Research Service ˜ The Library of Congress

Japan’s Free Trade Agreement Program
Japan’s trade policy historically has centered on multilateral negotiations and
dispute settlement mechanisms. Over the past five years, however, Japan has shifted
course somewhat by seeking free trade agreements (FTAs) with a number of
countries, mostly in Asia. An FTA is an agreement between two countries or
regional groupings to eliminate or reduce tariffs and other barriers on trade in goods
and services. Non-members find their exports discriminated against.
The pursuit of FTAs is occurring worldwide. The U.S. has an aggressive
program and has FTAs in place with two Asian-Pacific countries — Singapore and
Australia — and is negotiating one with Thailand. Europe has been pursuing a
similar course for years. China and 10 members of the Association of Southeast
Asian Nations (ASEAN) began implementing a partial FTA this year. Now Japan
is trying to catch up.
By freeing up trade in goods and services, Japan hopes to energize its economy,
as well as to better compete with China for influence in Asia — objectives that seem
to support U.S. interests. However, Japan’s FTA program to date has not been robust
enough to have much impact. Constrained by domestic pressures to continue
protection of its agricultural sector, the FTA agreements Japan now has implemented
with Singapore and Mexico and is scheduled to implement next year with the
Philippines, Malaysia, and Thailand are unlikely to have a significant impact on
Japan’s economy. Agreements with larger countries where the commercial stakes are
greater, such as South Korea, Australia, and China, are either stalled or being shied
away from.
Agriculture is Japan’s biggest constraint on moving forward on FTAs. While
some progress is being made in cutting tariffs on food items that serve small
markets, highly protected rice and beef markets are not being offered for
liberalization. Moreover, in the absence of a substantial farm reform program that
would make liberalization of these products easier, many Japanese decision-makers
hope protectionist pressures will go away over time with an aging farmer population
that is shrinking and increasingly part-time.
Japan’s FTA program, assuming the current cautious and defensive course
persists, is likely to have varied effects on U.S. interests. On the one hand, it is likely
to provide a positive, yet small, boost to increasing Japan’s role in the economics
and political economy of East Asia. It is also likely to be favorable to bilateral trade
ties as other Asian trading partners (instead of just the United States) pressure Japan
to open its agricultural market further. On the other hand, the absence of a
meaningful agricultural reform bodes poorly for support from Japan in the
agricultural negotiations of the Doha Round. There are also concerns that a
defensive and weak FTA program could allow China to play a more dominant role
in the Asian economy through its own FTA program — perhaps even creating a
exclusionary Asian trading bloc. This report will be updated as events warrant.

In troduction ......................................................1
Motivations ......................................................2
Status of Japan’s FTA Negotiations...................................3
FTAs Entered Into Force — Singapore and Mexico...................4
FTAs Agreed in Principle — Philippines and Malaysia................6
FTAs Under Negotiation — Republic of Korea, Thailand, and Indonesia..7
Other FTA Candidates..........................................8
Challenges to Advancing FTA/EPA Negotiations.........................9
Agriculture ...................................................9
Immigration .................................................10
Implications for U.S. Interests.......................................10
Japanese Growth.............................................11
U.S.-Japan Economic Ties......................................11
Rising China.................................................12
List of Tables
Table 1. Japan’s Top Export Markets,1998, 2000, 2002, and 2004..........14
Table 2. Japan’s Top Suppliers of Imports,1998, 2000, 2002, and 2004......15

Japan’s Free Trade Agreement Program
Japan’s trade policy has historically centered on multilateral negotiations and
dispute resolution mechanisms. The rules of the General Agreement on Tariffs and
Trade (GATT) and the World Trade Organization (WTO) have provided Tokyo an
ability to interact with its trade partners on an equal basis. Given its global trade
interests, a contentious bilateral past with the United States, and historic legacy with
Asian countries, particularly Korea and China, reliance on the multilateral system has
helped promote Japan’s trade interests.1
Over the past five years, Japan has shifted course somewhat by pursuing
negotiations in the WTO but by also seeking free trade agreements (FTAs) and
Economic Partnership Agreements (EPAs) with mostly Asian countries. An FTA is
an agreement between two countries or regional groupings to eliminate tariffs and
other trade barriers, while an EPA goes further by also attempting to facilitate the2
free movement of people and capital among the partners to an agreement. Non-
members find their exports discriminated against.
As a practical matter, officials at Japan’s Ministry of Economy, Trade, and
Industry (METI) acknowledge that there is little difference between an FTA and
EPA. METI, however, prefers the EPA label based on the view that it does less to3
provoke domestic political opposition than the “free trade” moniker.
The pursuit of FTAs is occurring worldwide with nearly 300 estimated to be
currently in effect. The United States has an extensive FTA program and agenda, and
has FTAs in effect with two Asian-Pacific countries — Singapore and Australia.
Europe has been pursuing a similar course for years. China and six ASEAN states
(Thailand, Malaysia, Indonesia, Philippines, Singapore, and Brunei) are in the
process of establishing an FTA by 2010. Now Japan is trying to catch up.4

1 Pekkanen, Saadia M., “The Politics of Japan’s WTO Strategies,” Orbis, Winter 2004, pp.


2 The concept of an EPA and how it differs from an FTA is not commonly made, but appears
unique to Japan.
3 Interview with Norio Nakazawa, METI Counsellor for Regional Cooperation, June 28,


4 Schott, Jeffrey J. “Free Trade Agreements: Boon or Bane of the World Trading System?”
In Bergsten, C. Fred., The United States and the World Economy, Institute for International
Economics, 2005.

Economists still disagree about the merits of negotiating FTAs on the grounds
that discrimination may undermine the multilateral trading system while others
believe that FTAs promote multilateral deals in the long run. The concern is that
FTAs could lead to a “spaghetti bowl” of overlapping conflicting trading partnerships
each with its own set of rules at the expense of a more unified and non-discriminatory
set of multilateral rules. But domestic support in Japan for an FTA program appears
strong. Prime Minister Koizumi is firmly behind the approach, as well as the ruling
LDP-Komeito coalition. While the Democratic Party, the major opposition party,
supports the general thrust of the policy, some members maintain that the United
States and China should be considered as prospective FTA partners.5
Given its own aggressive FTA program, the United States is hardly in a position
to criticize Japan’s new policy orientation. But it has considerable interest in whether
Japan’s policy evolves in a manner that is supportive of U.S. interests in Asia —
which include promoting a stable balance of power and insuring that U.S. trade and
investment interests are not discriminated against in the region.6
Japan’s FTA program has been motivated by a combination of economic and
political objectives. The most important entail avoidance of becoming isolated as
other major trading countries actively pursue FTAs, energizing domestic economic7
activity, and promoting Japanese influence in Asia.
Japan’s concern about the possible emergence of economic blocs in the
Americas and in Europe goes back to the early 1990s. In 1994 the United States
entered into the North America Free Trade Agreement (NAFTA) and announced
plans to create a Free Trade Area of the Americas. Europe at the same time was busy
entering into preferential trade agreements and subsequently has come to conduct
trade relations on a multilateral or non-discriminatory basis with only a handful of
trading partners, including Japan and the United States. In 1999 the collapse of
multilateral trade negotiations at the WTO Ministerial in Seattle shook Japanese
confidence in the future of multilateralism. China’s decision in 2001 to negotiate an
FTA with ASEAN countries was also a seminal event, providing more ammunition
for those in Japan that were advocating a change of policy course.
The case for developing an FTA program was also driven by Asian economic
trends and opportunities. METI officials see East Asia as the fastest growing region

5 Interview with Kenzo Fujisue, Upper House Diet Member, Democratic Party, June 23,


6 CRS Report RL32688, China-Southeast Asia Relations: Trends, Issues, and Implications
for the United States, by Bruce Vaughn.
7 Hatakeyama, Noboru. “Japan’s Movement toward FTAs,” Speech delivered at the Institute
for International Economics, Washington, D.C., May 8, 2003.

in the world and a region that is increasingly vital to Japan’s economic future.8 FTAs
and EPAs are viewed as one way to deepen economic ties with East Asia and
facilitate a new division of labor and production sharing. The experience of the
European Union has demonstrated that, as institutional integration develops, so too
does intra-regional division of labor that leads to a more effective production network
and to more efficient industrial structures. As a result, METI maintains that both
individual parties to an FTA, as well as the region as a whole, can enjoy more robust
economic growth powered by an expansion of exports and imports.
Reform-minded METI officials also hope that an aggressive FTA-EPA program
will serve as a force for promoting domestic agricultural reforms. By entering into
negotiations with trading partners that continue to demand liberalization of Japan’s
protected agricultural sector, it is hoped that domestic support for programs that
might aid farmers transition to a less protected environment would be proposed and
Finally, many decision makers see FTAs providing Japan with varied political
and diplomatic advantages. These range from increasing Japan’s bargaining power
in WTO negotiations to helping Japan better compete with China for influence in
Asia. Under the view that FTAs symbolize special relationships based on political
trust, Japan hopes to bolster its diplomatic influence on a range of political and
security issues.9
Status of Japan’s FTA Negotiations
Three regions- Asia, North America, and Europe — account for 80% of Japan’s
total trade. Given that the simple average tariff rates imposed by the United States
and the European Union are low (3.6% for the U.S. and 4.1% for the EU) compared
to East Asia (10% for China, 14.5% for Malaysia, 16.1% for South Korea, 25.5% for
the Philippines, and 37.5% for Indonesia), the Government of Japan (GOJ) placed10
priority on negotiating FTAs with countries in East Asia. Not only do East Asian
countries impose the highest trade barriers against Japanese exports, they also
account for the highest and most dynamic share of Japan’s trade, thereby providing
the greatest additional opportunities for expanding Japan’s economy via cuts in both11
foreign and domestic trade barriers.

8 METI projects that East Asia’s share of world GDP will increase to 16% by 2020, up from
5% in 1990, with the shares accounted for by Japan, the United States, and Europe all
dropping. East Asia’s economic growth is also projected to average 5.5% between 2010-
2020, compared to 0.5% for Japan, 1.4% for the United States, and 1.5% for Western
9 Interview with Isamu Ueda, Lower House Diet Member, Komeito Party, June 23, 2005.
10 According to WTO data, Japan’s simple average tariff rate is now around 6.3%.
11 Japan’s Ministry of Foreign Affairs, Japan’s FTA Strategy, October 2002. Found at
[ h t t p : / / www.mo f a .go.j p/ pol i c y/ economy/ f t a/ st r a t e gy0210.ht ml ] .

As shown in Table 1, 11 East Asian countries (China, South Korea, Taiwan,
Hong Kong, Thailand, Singapore, Malaysia, Australia, the Philippines, Indonesia,
and Vietnam) purchased nearly 50% of Japan’s total exports in 2004, up from 33%
in 1998. Similarly, Japan is sourcing a growing share of its imports from these 11
countries as well. As shown in Table 2, these countries supplied Japan with 47.86%
of its imports in 2004, up from 39.59% in 1998.
Accordingly, in developing its FTA strategy, the GOJ placed the highest priority
on negotiating FTAs with the Republic of Korea and the four largest ASEAN
member states (Thailand, the Philippines, Malaysia, and Indonesia). An FTA with
Mexico, now in effect, was also made a priority due to the relatively high tariffs
Japanese companies face compared to those companies from the United States,
Canada, and European Union. The latter enjoy duty free treatment for the most part
due to NAFTA (1994) and the EU-Mexican FTA (2000).
After achieving FTAs with priority countries, the GOJ views China and
Australia as the next most promising candidate partners. Consideration is also being
given to countries outside East Asia, including Chile and Switzerland.12
Since Japan launched its first FTA negotiation with Singapore in 2000, progress
has been hampered by a defensive agricultural position. While some liberalization
has been achieved, the amount so far has been greatly constrained by an inability to
offer major reductions in its most protected crops — beef, rice, starches, wheat, and
dairy — and to open up its borders to foreign labor. Some critics have argued that
Japan, following a course of least resistance, could end up with numerous watered-
down FTAs that neither harm nor energize the Japanese economy. According to this
view, the FTAs with the largest benefits for Japan, such as Australia, China, and
South Korea, are also the most politically challenging and the most likely to fail.13
A short synopsis of the main features and significance of Japan’s FTA program
follows. The negotiations are divided into four categories: (1) those already entered
into force; (2) those agreed to in principle; (3) those under negotiation; and (4) those
that are in the pipeline or under consideration.
FTAs Entered Into Force — Singapore and Mexico
The Japan-Singapore Economic Partnership Agreement (JSEPA), Japan’s first
EPA/FTA, was entered into force in November 2002. Tariffs were eliminated on
98% of the merchandise trade between the two countries, and further liberalization
took place in services and investment. Given that there is virtually no agricultural
trade between the two countries, and tariffs were already very low, it reportedly was
a very easy FTA to conclude.

12 “Government Adopts FTA Policy Focusing on Partners in Asia,” The Japan Times,
December 22, 2004.
13 “Japan Settles for ‘Low-Risk, Low-Return’ FTA Goals,” The Japan Times, April 22,


According to one report, other than some increase in imports of Japanese beer,
Singapore has experienced no major changes from the FTA. The minimal impact
may be due to the fact that tariffs were low to begin with and some chemical products
in which Singapore companies have a competitive edge, were excluded from the
agreement. From Japan’s perspective, the significance of this initial FTA seems to
be good learning experience for its negotiators in how to negotiate an FTA.14
Japan and Mexico signed an FTA/EPA in September 2004 and it went into
effect in April 2005. Under the agreement (formally called an EPA), tariffs on 90%
of goods that account for 96% in total trade value will be phased out by 2015, making

98% of exports from Japan and 87% of imports from Mexico duty free. Previously,

only 16% of Japanese exports received duty-free treatment from Mexico, whereas

70% of Mexican exports entered duty free.15

From Japan’s perspective, the agreement helps eliminate the disadvantages its
companies have incurred in competing against North American and European firms
since NAFTA went into effect in 1994 and the EU-Mexican FTA went into effect in
2000. Facing an average Mexican tariff of 16%, Japan saw its share of Mexican
imports drop sharply, from 6.1% in 1994 to 3.7% in 2000.16 Since the FTA became
operational, its import share increased to 4.8% in 2001, to 5.5% in 2002, and 4.4%
in 2003.17
Japan’s auto and steel companies are expected to benefit the most. The FTA
offers a new tariff-free export quota for Japanese cars, in addition to the existing
quota of about 30,000. The duty-free quota will make up 5% of the Mexican market
in the first year and the quotas will be expanded before being completely lifted by
2011. With the abolition of the tariffs, exports of Japanese-finished cars are expected
to double in the next few years. Steel tariffs are also being eliminated over a 10-year
The agreement is notable in that Japan agreed to reduce some protection of
agricultural products. While the details remain sketchy, Japan reportedly cut tariffs
on a variety of products such as pork, orange juice, fresh oranges, beef and poultry
although these commodities will still will be regulated by quotas. (Actual tariff rates
are to be negotiated after the FTA is in place for two years). Yet, the value of
Mexico’s agricultural products exempt from import tariffs will still be less than 50%
of its total agricultural exports to Japan.19 Furthermore, Mexico supplies only 1% of

14 “Singapore, Thailand Reap FTA Rewards,” The Nikkei Weekly, May 30, 2005.
15 “FTA with Mexico Paves Way for Talks with Asian Nations,” The Nikkei Weekly, March

15, 2004.

16 Ministry of Foreign Affairs, Promotion of Economic Partnership Agreements (EPAs) and
Free Trade Agreements (FTAs), p. 35.
17 IMF Directions of Trade Yearbook -2004.
18 “With Mexico FTA set, Japan turns toward Asia,” The Japan Times, March 12, 2004.
19 “FTA with Mexico Paves Way for Talks with Asian Nations,” The Nikkei Weekly, March

Japan’s total imports of agricultural products, suggesting that the limited
liberalization will not pose much of a threat to Japanese producers nor be a precedent
for other FTAs.20
FTAs Agreed in Principle — Philippines and Malaysia
Negotiations with the Philippines began in February 2004 and a basic EPA was
reached in principle at a bilateral summit in November 2004. The agreement, which
covers investment, trade in services, customs procedures, intellectual property, and
competition policy, is expected to be finalized this year and become effective in


A key bargain in the agreement calls for the Phillippines to lowers its tariffs on
most steel products and autos by 2010 in exchange for lower Japanese tariffs on
pineapples and bananas. Bananas are not grown in Japan and pineapples are only
grown in a small area of Okinawa. For the most part, Japan negotiated not to open
its market further to sensitive agricultural products such as rice, wheat, barley,
designated dairy products, beef, pork, starches and selective fishery products.
Liberalization of Japan’s protection of raw cane sugar will be reconsidered after the
agreement has been in effect for four years. In return, Japan agreed to allow more
Philippine nurses and care givers to work in Japan if they pass Japanese qualification
examinations (in Japanese). The number and selection process of such care providers
has not yet been determined, and remains a major stumbling block to finalizing the
agreem ent . 22
Negotiations with Malaysia began in January 2004 and a basic EPA agreement
was reached in May 2005. The two sides hope to sign the agreement before the year-
end, putting it into effect in 2006. One estimate is that the agreement will increase
Japan’s gross domestic product by 0.08% in real terms and boost Malaysia’s real
GDP by 5.07%.23 The FTA will eliminate or reduce tariffs on industrial goods by
2015. Of particular interest to Japan, Malaysia has agreed to immediately remove
tariffs on all parts imported for local car production (used for the so-called
breakdown format, under which components are imported to Malaysia for
assembling). Customs duties on most finished vehicles (i.e. large cars that do not
compete with Malaysian cars) and other car parts will be gradually removed by 2010.
Japanese automakers that manufacture locally can cut production costs if tariffs on
auto parts from Japan are removed. Tariffs on small vehicles which compete with
Malaysia’s Proton “national car” will be abolished in stages by 2015. The grace
period is designed to shield the market for small Malaysian-made autos, like those

19 (...continued)

15, 2004.

20 “Mexico Expects Bonanza in FTA with Japan,” The Nikkei Weekly, March 28, 2005.
21 “EPA Deal Makes Philippines Third Free Trade Partner,” The Nikkei Weekly, December

6, 2004.

22 “Japan to Allow Nurses from Philippines,” The Nikkei Weekly, November 22, 2004.
23 “Japan-Malaysia FTA Gets Chiefs’ Approval,” The Japan Times, May 26, 2005.

produced by Proton Holdings, from outside competition for five years. National car
Proton and privately manufactured Perodua, have more than 70% of the market in
Malaysia. Malaysia also agreed to eliminate tariffs on essentially all steel products
within 10 years.24
Japan for its part will eliminate tariffs on selective farm and fishery products
within 10 years, with immediate abolishment of tariffs on such products as mangoes,
durians, papayas, okra, shrimp, prawns, jellyfish, and cocoa. The tariff on margarine
will be lowered from 29.8% to 25% in five years, and up to 1,000 tons of bananas
will be duty free immediately. Tariffs on all forestry products except plywood, which
is one of Malaysia’s top exports to Japan, will also be eliminated immediately. But
sensitive products such as rice, wheat, barley, dairy, beef, pork, starches, and fishery
items under import quota are excluded from liberalization.25
FTAs Under Negotiation — Republic of Korea, Thailand, and
Japan’s negotiations with Korea, which began in December 2003, are currently
stalled. The two sides initially planned to submit liberalization offers by January
2005, but both countries developed reservations. Reportedly, Japan expressed
reluctance to abolish tariffs on agricultural and marine products, while South Korea
hesitated to cut tariffs on industrial goods, particularly those that could affect its auto
sector. South Korean officials are also worried that an FTA could exacerbate its
large trade deficit with Japan. Prospects for more flexible negotiating positions were
not helped by a recent WTO case that Korea filed against Japan’s import quotas for
dried laver seaweed. Korea reportedly took a hard line on this marine product that
it does not export in great quantities to symbolize its protest over Japan’s refusal to26
negotiate “seriously” on agricultural issues.
Japan’s negotiation with Thailand, which began in February 2004, has proved
difficult due in large part to agriculture. Japan and Thailand initially agreed that rice
— long considered the main obstacle in the negotiations — would not be subject to
tariff cuts. But Thailand still continues to demand elimination of Japan’s tariffs on
chicken, sugar, starch and forestry and fisheries products. Thailand also wants Japan
to accept more chefs and spa specialists. Japan’s demands on Thailand center on
autos and steel. Cuts on Thai auto tariffs — which are 80% for Japanese built cars
— are complicated by heavy Japanese foreign direct investment in the Thai auto
sector. Japanese companies control over 80% of the production, sales, and exports
of autos in Thailand.
Japan and Indonesia agreed in June 2005 to launch FTA/EPA negotiations with
a view to reaching agreement by June 2006. The agreement would cover trade in
goods and services, investment, labor flows, technological exchanges, and

24 Joint Press Statement: “Japan-Malaysia Economic Partnership Agreement,” found at
[ ht t p: / / www.mof a .go.j p/ r e gi on/ asi a -paci / mal aysi a/ j oi nt 0505.ht ml ] .
25 “Japan-Malaysia FTA Gets Chiefs’ Approval,” Japan Times, May 26, 2005.
26 “FTA Talks with Seoul Deserve Fresh Start,” The Nikkei Weekly, March 7, 2005.

intellectual property rights. Indonesia, which is a major provider of crude oil, coal,
and natural gas to Japan, hopes to see the agreement facilitate a large-scale increase
in Japanese foreign investment. Japan’s agricultural protection, along with
Indonesia’s protection of its auto and steel sectors, are likely to be divisive issues.
Other FTA Candidates
Japan is considering FTA/EPA negotiations with a number of other countries,
including Australia, Chile, China, and Switzerland. In addition, after concluding
agreements with Malaysia, the Philippines and Thailand, Japan hopes to expand
those agreements (including the one with Singapore) to ASEAN as a whole.27
Malaysia, the Philippines, and Thailand account for about 75% of Japan’s trade with
ASEAN.28 The conclusion of an FTA with either the United States or the European
Union is not being considered, due largely to constraints on liberalizing trade in
agricultural, forestry, fishery products.
Australia is an important trading partner for Japan and a key supplier of Japan’s
oil, coal, iron ore, and natural gas. Two years of FTA discussions, however, have
not progressed far reportedly due to Japan’s resistance to open its market to more
beef, rice, and dairy products from Australia. While a high-level agreement was made
in April 2005 to continue discussing the feasibility of an FTA, most observers think
that Australia won’t enter into negotiations if agriculture is not on the table. In
effectively downplaying the prospects for this FTA, Prime Minister Koizumi noted
that an FTA with Australia that included beef would have an adverse effect on
relations with the United States.29
While many Japanese officials are intrigued by the possibility of negotiating an
FTA with China, the consensus is that it is much too early to move forward. For the
present, Japan wants to monitor China’s fulfillment of WTO obligations, the status
of its state-owned sectors, and progress in Doha Round of multilateral negotiations.30
Switzerland is what one Japanese trade official calls a good pipeline project.
An attractive feature of this prospective negotiation is that the Swiss do not want to
liberalize agriculture so there would be no major impediment to a negotiation.
Lacking much liberalizing content, such an agreement would have mostly geo-
political merit.31

27 “Japan, ASEAN Seek Trade Rules,” The Nikkei Weekly, April 18, 2005.
28 The 10 members of ASEAN (the Association of Southeast Asian Nations) are Brunei,
Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and
29 “Japan, Australia to Mull FTA,” The Japan Times, April 21, 2005.
30 Interview with Ichita Yamamoto, Upper House Diet Member, Liberal Democratic Party,
June 23, 2005.
31 Interview with Norio Nakazawa, METI Counsellor for Regional Cooperation, June 28,


Challenges to Advancing FTA/EPA Negotiations
Japan’s ability to promote its economic interests through an aggressive
FTA/EPA program is constrained by protection of its agricultural sector and rigid
immigration policies. While the FTA/EPA negotiations themselves provide
pressures for more open policies, the ministries charged with these portfolios
(Agriculture and Justice, respectively) have not yet advanced effective reform
policies that would make a substantial difference.
Agriculture accounts for only 1.3% of Japan’s GDP and 4.6% of its total
employment, but remains heavily supported and protected from import competition.
According to the OECD, support to producers as a percent of gross receipts was 58%
in 2002-04, down from 61% in 1986-1988, but still almost twice the OECD average.
Rice, wheat, other grains, meat, sugars, and dairy are the most heavily supported
commodities. Tariff-rate quotas are employed to shield these commodities from
international competition, resulting in food prices that in Tokyo are on average 130%
higher than the rest of the world.32
Many in Japan believe that support for agricultural protection will disappear
over time. They cite the declining share of the population engaged in agriculture and
the high percentage of farmers (60%) who are over 65 years old and who derive the
majority of their income from non-agricultural activities. In the process, the hold of
the agricultural lobby is said to be slipping as evidenced by the slippage of the LDP
in the 2004 Upper House election.33 The LDP derives most of its support from rural
areas, in part, due to Japan’s disproportionate electoral districting system; each rural
vote is worth an estimated 2 urban votes.34
However, policy reforms to help move Japan away from considerable
agricultural protection have been slow to materialize. While the Ministry of
Agriculture, Forestry, and Fisheries has released papers that have raised the idea that
Japan should stop wasting resources on crops that can be imported more cheaply,
little follow-up has occurred. These reports advocate consideration of policies that
would increase competition in the sector by encouraging new entrants and providing
direct compensation to farmers through tax incentives in lieu of price controls and
high tariffs.35 In large measure, this is due to opposition from influential members
of the LDP’s “farm tribe.” In the absence of a substantive reform plan to make

32 OECD, “Agricultural Policies in OECD Countries: Monitoring and Evaluation 2005.”
33 Although the LDP largely held its own in the vote — it lost one seat, to bring its total in
the 245-seat Upper House to 115 — the election was largely seen as a significant setback
for the LDP because the Democratic Party of Japan (DPJ) won 12 new seats to bring it to

82 seats.

34 CRS Issue Brief IB97004, Japan-U.S. Relations: Issues for Congress, by Mark Manyin
35 Fujisue, Kenzo and Koike, Masanari, “Opening Up, Reluctantly,” Far Eastern Economic
Review, April 2005.

Japan’s farm sector more efficient, agriculture is bound to continue to be a major
stumbling block for concluding economically meaningful FTAs/EPAs.
Among industrial nations, Japan maintains the tightest policy towards accepting
foreign workers and remains extremely cautious about changing course. However,
due to a declining birthrate and an aging workforce, Japan’s decision-makers are
under increased pressure to accept more foreign workers to keep the economy from
stagnating. The demands of FTA negotiating partners such as the Philippines and
Thailand to liberalize Japan’s labor market prohibitions have brought added pressures
and debate about a more open door policy.36
A 1999 government employment plan called for Japan to promote foreign
employment in “specialized and technical areas,” but a “careful approach based on
national consensus” towards manual workers. Despite the needs in certain sectors
to accept more foreign workers, such as nurses and care providers, public support is
lacking. Concerns about increased crime rates, the social costs of accepting more
foreigners, and an adverse impact on Japanese homogeneity tend to dominate, along
with the resistance of labor unions. In addition, neither the LDP or the Democratic
Party stand clearly in favor of liberalizing immigration.37
The significance of the immigration issue transcends the problems it creates for
Japan reaching closure on FTA negotiations with its Asian partners, such as Thailand
and the Philippines. The continuation of exclusionary immigration policies may also
undercut Japan’s ambition to play a leading role in a more integrated and
interdependent Asian economy.
Implications for U.S. Interests
Japan’s FTA program, assuming the current defensive course persists, may
have varied effects on U.S. interests. On the one hand, it is likely to provide a
positive, yet small, boost to increasing Japan’s role in the economics and political
economy of East Asia. It is also likely to be favorable to bilateral trade ties as other
Asian trading partners, instead of the United States, pressure Japan to open its
agricultural market further. In the absence of a Japan-U.S. FTA as a realistic option,
other forms of comprehensive engagement may be considered. On the other hand,
lack of a meaningful agricultural reform program bodes poorly for positive support
from Japan in the agricultural negotiations of the Doha Round. There are also
concerns that a defensive and weak FTA program pursued by Japan could allow
China to play a more dominant role in the Asian economy — perhaps even creating
an exclusionary Asian trading bloc.

36 “Foreign Workers at the Gate,” Japan Times, August 23, 2004.
37 Fujisu, Kenzo and Masanari Koike, “Opening Up, Reluctantly,” Far Eastern Economic
Review, April 2005, p. 39.

Japanese Growth
More than a decade ago, there was concern in the United States that Japan was
an economic threat because its economy was too strong. Subsequently, U.S.
policymakers have come to believe that Japan is more of a problem when its
economy is weak. A lackluster growth position in Japan not only affects U.S.-Japan
trade and financial ties adversely, but also undermines growth of the East Asian
economy. Moreover, an economically strong Japan is needed to serve as a
counterweight to a rising China.38
Despite regaining a good deal of financial stability in recent years, Japan’s
economy remains weak. With growth projections of no more than 1.3%-1.6% over
the next five years, Japan will not be in a position to play much of a locomotive role
either for the United States or the region. This assessment is not likely to be altered
by the estimated weak impact of Japan’s FTA program on growth. Lagging China
in FTAs with Asian countries, as well in other trade and investment linkages, Japan
currently cannot be said to be moving rapidly to establish itself as a credible
counterweight to a rising China.39
U.S.-Japan Economic Ties
Post 9/11, U.S.-Japan trade relations arguably have received less attention than
security issues. With the exception of Japan’s ban of the imports of beef from the
United States, there have been few bilateral trade disputes and tensions. Perhaps due
to a declining share of the U.S. trade deficit and a stagnant economy for much of the40

1990s, Japan’s economy is no longer seen as threat to major U.S. industries.

The reduction in bilateral tensions has been accompanied by Japan’s FTA
negotiating partners replacing the United States as demanders of agricultural trade
liberalization. To the extent that these pressures lead to cuts in Japan’s agricultural
protection or agricultural reform proposals, this will be helpful to U.S. agricultural
interests not only in bilateral context, but also in the context of the Doha Round.
Unfortunately, slow movement or progress along these lines is occurring.
At the same time, Japan’s FTAs could diminish the benefits that the United
States has obtained from FTAs. The Japan-Mexico FTA and the Japan-Singapore
FTA are cases in point, moving Japan towards an equal footing with these trading
Although proposals have been made in the past for negotiation of an FTA
between Japan and the United States, Japan’s reluctance to reduce its agricultural
protection has proved a formidable stumbling block. Nothing has changed in recent

38 Katz, Richard. Testimony before the House International Relations Subcommittee on
Asia and the Pacific, April 20, 2005.
39 Ibid.
40 CRS Report RL32649, U.S.-Japan Economic Relations, Significance, Prospects, and
Policy Options, by William H. Cooper.

years to alter that calculation, but concerns have been raised that the respective FTA
programs of the two sides could allow the bilateral economic relationship to drift and
weaken as Japan engages increasingly with its Asian neighbors and the U.S. seeks
new partnerships throughout the world. One consequence could be lost economic
opportunities for the two largest economies in the world, as well as a weakening of
political and security cooperation. In this context, one former U.S. trade negotiator
has proposed consideration of what he calls a “Comprehensive Economic Initiative”
(CEI) between Japan and the United States. The CEI is seen as a way for Japan and
the United States (both governments and private sector representatives) to consider
actions to promote trade, investment, financial flows, and deregulation, and to
harmonize standards and coordinate competition policy.41
Rising China
China has been much more aggressive than either Japan or the United States in
negotiating FTAs. Beijing has concluded a partial FTA with ASEAN ahead of Japan
and South Korea.42 China has also opened its tropical farm products to Thailand in
a partial FTA, and has also agreed to start FTA negotiations with Singapore,
Australia, and New Zealand. Moreover, China’s long-term goal may be to form the
center of an East Asian trade bloc.43
Given that the United States has a limited FTA agenda with Asian countries
(FTAs in place with Singapore and Australia and talks contemplated with only South
Korea), an East Asian trade bloc could have the potential for substantial
discrimination against U.S. exports. In addition, such a bloc could have adverse
effects on U.S. influence in the region.44
Also worrisome is the possibility of a Japan-China FTA. Much of Japan’s
private sector reportedly is enthusiastic about such a deal.45 A Japanese government
sponsored study found that a China FTA could boost Japan’s GDP by 0.5%, the most
among any potential partner country or region.46 While many big obstacles stand in
the way of a Japan-China FTA, the possibility should give pause to U.S.

41 See interview with Glen S. Fukushima, in The Asahi Shimbun/International Herald
Tribune, June 28, 2004.
42 The China-ASEAN pact took effect on July 1, 2005. The agreement is less than
comprehensive, with only 40% of goods subject to a reduction in tariffs to 5% or less. The
accord will seek to broaden the range of goods to 60% of imports within two years, but the
agreement has also incorporated many exceptions for sensitive products. See “Japan needs
trade pact with Asean,” The Yomiuri Shimbun, July 19, 2005.
43 Mastel, Greg. “How China Threatens America,” The International Economy, Spring 2005.
44 Ibid.
45 “Many Unlikely Voices back FTA with China,” The Nikkei Weekly, July 5, 2004.
46 “China Deal Could Boost Japan’s GDP 0.5%,” The Nikkei Weekly, January 11, 2005.

policymakers. Some observers opine that the United States would actively work to
deter Japan from entering into an FTA with China.47
At the same time, China’s aggressive FTA program is said to being used by
Tokyo’s opposing FTA negotiators for negotiating advantage. Trade negotiators
representing ASEAN, for example, reportedly have played this “China card” by
telling Japan that China is more forthcoming and willing to negotiate an FTA than
Japan.48 Presumably, this kind of gamesmanship could nudge Japan to take more
aggressive and trade liberalizing FTA positions.
How this confluence of FTA developments in Asia ultimately impacts U.S.
interests is uncertain. What seems clear, however, is the need for U.S. policymakers
to give appropriate attention to how U.S. trade policies can best affect trends in the
region to evolve in a direction favorable to U.S. interests.

47 “Japan, U.S. Set for Game of Diplomacy on FTA,” The Nikkei Weekly, June 7, 2004.
48 Japan Settles for Low-Risk, Low Return FTA Goals,” The Japan Times, April 22, 2005.

Table 1. Japan’s Top Export Markets,
1998, 2000, 2002, and 2004
(% share)
Country 1998 2000 2002 2004
United States30.5329.7328.5122.45
China 5.18 6.33 9.59 13.07
South Korea3.976.416.877.82
T a iwan 6.60 7.50 6.30 7.43
Hong Kong5.815.676.106.26
T hailand 2.41 2.84 3.17 3.58
Germany 4.92 4.17 3.39 3.35
Singapore 3.81 4.35 3.40 3.18
United Kingdom3.763.102.872.65
Netherlands 2.80 2.63 2.54 2.37
Malays ia 2.41 2.90 2.64 2.22
Australia 2.07 1.79 2.0 2.09
Philippines 1.87 2.14 2.03 1.70
Indonesia 1.11 1.58 1.50 1.60
France 1.60 1.56 1.47 1.48
Canada 1.63 1.56 1.76 1.35
Belgium 1.16 1.09 1.10 1.28
It aly 1.10 1.21 1.07 1.14
Panama 1.57 1.35 1.10 1.07
Mexico 1.09 1.09 0.90 0.92
Spain 0.68 0.67 0.63 0.86
United Arab0.740.530.710.82
Saudi Arabia0.730.640.900.65
V i etnam 0.34 0.41 0.51 0.56
Russia — — 0.230.55
Source: World Trade Atlas.

Table 2. Japan’s Top Suppliers of Imports,
1998, 2000, 2002, and 2004
(% share)
Country 1998 2000 2002 2004
China 13.22 14.52 18.31 20.73
United States23.8919.0117.2113.73
South Korea4.325.394.594.84
Australia 4.64 3.90 4.15 4.27
Indonesia 3.87 4.31 4.21 4.11
Saudi Arabia2.563.743.454.06
United Arab Emirates2.983.913.444.03
Germany 3.82 3.35 3.68 3.75
T a iwan 3.65 4.72 4.02 3.67
Malays ia 3.10 3.82 3.31 3.10
T hailand 2.91 2.79 3.11 3.10
Canada 2.73 2.29 2.12 1.85
France 2.05 1.69 1.94 1.84
Ir an 0.87 1.41 1.41 1.82
Philippines 1.58 1.90 1.93 1.81
Qatar 1.00 1.54 1.56 1.73
It aly 1.82 1.40 1.61 1.52
United Kingdom2.091.731.601.46
Singapore 1.68 1.69 1.48 1.38
K uwait 0.84 1.31 1.25 1.26
Russia 1.04 1.21 0.97 1.25
Switzerland 1.08 0.86 0.98 1.06
South Africa0.830.790.861.01
Chile 0.85 0.75 0.64 0.92
V i etnam 0.62 0.70 0.75 0.85
Source: World Trade Atlas.