The Making of Asia's First Bilateral FTA: Origins and Regional

AUSTRALIA–JAPAN RESEARCH CENTRE ANU COLLEGE OF ASIA & THE PACIFIC ASIA PACIFIC SCHOOL OF ECONOMICS AND GOVERNMENT THE MAKING OF ASIA’S FIRST BILATERAL FTA: ORIGINS AND REGIONAL IMPLICATIONS OF THE JAPAN–SINGAPORE ECONOMIC PARTNERSHIP AGREEMENT Takashi Terada PACIFIC ECONOMIC PAPERS NO. 354, 2006 PACIFIC ECONOMIC PAPER NO. 354 2006 The Making of Asia’s First Bilateral FTA: Origins and Regional Implications of the Japan–Singapore Economic Partnership Agreement Takashi Terada National University of Singapore [email protected] AUSTRALIA–JAPAN RESEARCH CENTRE ASIA PACIFIC SCHOOL OF ECONOMICS & GOVERNMENT © Australia–Japan Research Centre 2005 This work is copyright. Apart from those uses which may be permitted under the Copyright Act 1968 as amended, no part may be reproduced by any process without written permission. Pacific Economic Papers are published under the direction of the Research Committee of the Australia–Japan Research Centre. Members of the Research Committee are: Professor Jenny Corbett Executive Director Australia–Japan Research Centre The Australian National University, Canberra Professor Christopher Findlay Professor of Economics University of Adelaide Adelaide, South Australia Professor Emeritus Peter Drysdale Asia Pacific School of Economics and Government The Australian National University, Canberra Professor Stuart Harris Department of International Relations The Australian National University, Canberra Papers submitted for publication in this series are subject to double-blind external review by two referees. The Australia–Japan Research Centre is part of the Asia Pacific School of Economics and Government, The Australian National University, Canberra. ISSN 0 728 8409 ISBN 0 86413 3073 Australia–Japan Research Centre Asia Pacific School of Economics and Government The Australian National University Canberra ACT 0200 Telephone: (61 2) 6125 3780 Facsimile: (61 2) 6125 0767 E-mail: [email protected] URL: http://apseg.anu.edu.au ii CONTENTS List of tables and appendix ......................................................................................iv Introduction ..................................................................................................... 1 Features of FTAs .............................................................................................. 3 Major impetuses behind Singapore’s FTA strategy ............................................4 Why Japan? ...................................................................................................... 7 Japan and multi-layered trade policy ................................................................. 8 Origins of the JSEPA ...................................................................................... 10 Preparations ................................................................................................... 11 Why Singapore? .............................................................................................. 13 Features of trade policy-making in Singapore and Japan ................................. 14 Economic effects of the JSEPA ...................................................................... 17 Regional implications ..................................................................................... 19 Impacts on Japan’s trade policy ...................................................................... 22 Conclusion ..................................................................................................... 24 Notes ....................................................................................................................... 26 References ............................................................................................................... 26 iii TABLES Table 1 Agricultural products on which Japan imposes high tariffs ............ 16 APPENDIX Appendix 1 Areas covered by agreement between Japan and the Republic of Singapore for a new-age economic partnership (JSEPA) ........... 28 iv THE MAKING OF ASIA’S FIRST BILATERAL FTA: ORIGINS AND REGIONAL IMPLICATIONS OF THE JAPAN–SINGAPORE ECONOMIC PARTNERSHIP AGREEMENT * Japanese Prime Minister Junichiro Koizumi ushered in a new era in Japan’s international trade policy in January 2002 when he and his Singaporean counterpart, Goh Chok Tong, signed the Japan-Singapore Economic Partnership Agreement (JSEPA), the first bilateral Free Trade Agreement (FTA) signed between Asian countries. This trade strategy also reflected Japan’s interest in launching its so-called ‘multi-layered trade policy’ which meant the pursuit of bilateral and regional trading arrangements, including FTAs, in an attempt to complement multilateralism based on the GATT/WTO to reinvigorate efforts to achieve global trade liberalisation. This paper aims to examine how and why Japan and Singapore decided to pursue FTAs, what interests both perceived in their pursuit of FTAs, what elements contributed to both countries being linked in this trade policy arrangement, and what implications the JSEPA has had for the FTA movement in East Asia. It argues that the JSEPA was made possible mainly through Singapore’s initial offer to exclude agricultural products from tariff elimination. But Japan faced problems in seeking FTAs with other ASEAN countries which were less developed than Singapore and had a higher proportion of agricultural exports, as the exclusion of specific agricultural products, such as rice and sugar, would contradict Japan’s claim that its FTAs would bolster the WTO-based multilateral system. The proliferation of FTAs in East Asia may generate a ‘spaghetti-bowl’ effect with varying rules of origin that may divert and distort trade, but the ‘new age’ aspects of the Japan- Singapore agreement will also have some positive economic effects. Although the preferential trade elements of the agreement are detrimental, the smaller portion of tariff elimination results in a smaller trade diversion effect on trading partners. Therefore, the Japan-Singapore agreement carries symbolic meaning in terms of trade policy debates as well as signifying a paradigm shift in Japan’s international trade policy. Introduction Japanese Prime Minister Junichiro Koizumi’s visit to Singapore in January 2002 ushered in a new era in Japan’s international trade policy. Koizumi and his Singaporean counterpart, Goh Chok Tong, signed the Japan–Singapore Economic Partnership Agreement (JSEPA). This was the first bilateral Free Trade Agreement (FTA) signed by Asian countries that provided not only for the elimination of tariffs, but also for other measures including the liberalisation of investment rules, the harmonisation of Pacific Economic Papers competition policies, and the mutual recognition of standards. This was also Japan’s first FTA. The conclusion of the JSEPA meant that the fundamental significance of the free trade spirit and of the potential benefits to be obtained from bilateral economic cooperation for further growth had been mutually acknowledged by both nations. In fact, when the negotiations for trade liberalisation in global and regional levels bogged down, Singapore swiftly engaged in planning for and forging a vast array of FTAs, culminating in the creation of an FTA groundswell in the East Asian region. This was made possible mainly because of Singapore’s trade structure, which comprises few sectors that need protection at home, allowing 99.9 per cent of its imports to be tariff-free. It is this trade bilateralism that subsequently contributed to Singapore being recognised as a major mover in the international trade arena, despite its small size. This is evidenced by the fact that it has concluded FTAs with New Zealand (2000), Japan (2002), the European Free Trade Association (comprising Switzerland, Iceland, Liechtenstein and Norway) (2002), Australia (2003), the United States (2003), Jordan (2004), India (2005) and South Korea (2005). Singapore is presently engaged in FTA negotiations with countries including Bahrain, Mexico, Canada, Panama, Peru and Sri Lanka. After the JSEPA, Japan signed FTAs with Mexico and the Philippines in 2004, and is expected to conclude treaties with Malaysia, Thailand, and South Korea subsequently. Yet Japan is perceived as not developing its interest in FTA very easily or promptly. This is partly because Japan long had a ‘cast- iron commitment to the multilateral trading system’ (Reuters 25 October 2000). Japan was labelled ‘the staunchest multilateralist’ (New York Times 9 November 2001), due to its exclusive focus on global trade bodies — such as the General Agreement on Tariff and Trade (GATT) and its successor, the World Trade Organisation (WTO) — for the purposes of facilitating global trade liberalisation. In effect, Japan had long criticised FTAs as discriminatory against non-members and detrimental to the maintenance of the GATT/WTO-based international trading system. Thus, for many years FTAs were widely perceived among the trade policy intellectuals in Japan to be the last trade policy option that Japan would make. Japan’s decision to deviate from its traditional stance on international trade policy by negotiating a FTA was thus a surprise. Singapore lent Japan a hand for such a major trade policy change by proposing an agriculture-free FTA, which Japan could negotiate more easily for than other FTA partners like Mexico and Thailand. These countries showed a strong interest in the liberalisation of such agricultural products as pork and rice, respectively. It was claimed that the JSEPA added a considerable enrichment

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