China fears spur Japan trade deal push

Business Asia, Dec, 2003 by David DeRosa

Japan is desperate to enter into trade deals with the rest of Asia. Imagine that, free market ideals are blooming in Asia and all because of Japan.

The cause of this frenetic competition on Japan's part has to be fear of China's success as an exporter. Japan, the original "export or die" nation, has a competitor, China, breathing down its neck.

China has already carved out a permanent role for itself as an exporting giant vis-a-vis the West. One look at China's huge and ever-growing surplus with the US shows a future Japan may not like to face.

Wisely, though belatedly, Japan is wondering where it stands in its own backyard--Asia. The message that Asian trade isn't to be taken for granted appears to have finally sunk in with Japan's policy markers.

Accordingly, Japan is seeking trade deals with other Asian nations. That's good, but Japan is late. It has been reduced to playing catch up with what China has already done.

So with much fanfare in December, Japan agreed to sign the Treaty of Amity and Cooperation with the Association of South-East Asian Nations. China, of course, already is a signatory to the treaty.

Free trade

Furthermore, Japan also in December agreed to begin free trade talks with Malaysia, Thailand and the Philippines. These three nations account for 57 per cent of Japan's trade with ASEAN.

Consumer spending in Japan is weak and exports are the key to Japan expanding its economy. Those exports accounted for two-thirds of Japan's 0.3 per cent economic expansion in the last quarter.

What makes all of this unusual is that Japan appears to be ready to compromise the interests of its politically powerful farmers.

These agreements with Asia can't work unless South-East Asia has something to sell to Japan. And since what they have to export is food, Japan is going to have to open its agricultural markets to South East Asian food products, In exchange, Japanese manufacturers will get to sell more of their goods in ASEAN markets.

Historically, the farm lobby in Japan has been insurmountable. Japanese people pay far too much for ordinary foodstuffs that are produced far cheaper in other parts of Asia and around the world.

Not surprisingly, Japan's sole free-trade agreement to date is with tiny Singapore, a country that's not a threat to Japanese farmers.

Rice farmers historically have enjoyed flexing political muscle. They've long argued that rice, being a staple of Japanese diet, is special.

Japanese Rice

Rice must be farmed in Japan to avoid creating a strategic weakness in the country's national defense strategy. Japan must grow its own rice, the argument goes, no matter that land prices make rice farming a ridiculous misallocation of land use.

That may at long last be weakening because of the emergence of China.

Japanese Prime Minister Junichiro Koizumi said Japan would be willing to discuss agricultural issues in free trade agreement talks.

"The agriculture issue cannot be avoided," Koizumi said during a recent press conference. "Agricultural issues are a very significant issue for all countries. We will concede on issues that we need to concede and change issues that need to be changed."

Exactly how ardent is Japan's new felt love of the rest of Asia? Quantitatively speaking it is US$3 billion ($4.05 billion).

Japan didn't show up empty-handed to meet the ASEAN nations. It pledged US$1.5 billion for education and job training in ASEAN countries. It also threw in another US$1.5 billion for economic development in Vietnam, Cambodia and Thailand. Japan is ready to deal.

It has to because it is desperately unsure of its permanent role in Asia's economic future.

* David DeRosa is a columnist for Bloomberg.