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How Trade Agreements Can Reform Japan

Are free trade agreements the key to reforming Japan’s troubled economy?

July 10, 2002

Are free trade agreements the key to reforming Japan's troubled economy?

1. Japan has been a latecomer to the process of signing Free Trade Agreements (FTA's) with other countries. But it recently completed negotiations on an FTA with Singapore.

2. Japan's next FTAs will be negotiated with Mexico and South Korea. This reflects a firm strategy by Japan's policymakers to introduce, gradually, the discipline of free trade — especially in the agricultural sector.

3. By gradually adopting FTAs, Japanese leaders hope to break the policy deadlock inside the country — by demonstrating that special interests (such as the agricultural sector) can face competition and reform.

Japan is the world's second-largest economy and aspires to be Asia's leader in economic and political affairs. But the country faces significant roadblocks — economic, political and historical — on its way to that goal.

The historical roadblocks, of course, are rooted in Japan's relationship with the countries of Asia before and during the Second World War. As the primary regional power, Japan did not always treat its neighbors gently. The resentments linger on today.

The economic and political roadblocks are intertwined. They arise from Japan's political system and the power it grants to certain interests — such as farmers.

Those interests have long been able to block needed economic reforms. Attempts at frontal assault, flanking maneuvers and even cooption from abroad have not succeeded in making the Japanese agricultural sector — or retailing, or other services — more rational.

 Trading Partners
  Japan South Korea Mexico
 GNI (US$ billions, ppp) 3,436 818 861
 GNI per capita (US$ ppp) 27,080 17,300 8,790
 Exports (US$ billions) 529 206 180
 Exports per capita (US$) 4,165 4,383 1,837
 Exports (% of GDP) 10 45 31
 High-technology exports
(% of manufactured exports)
28.35 34.82 22.4

Concept and copyright © 2002 by The Globalist. Data: World Bank

Given all that, it is hard to imagine how to make reform gain traction in Japan. But Japan's leaders seem to have come up with a new method: trade policy.

By carefully crafting a set of free trade agreements, Japan's policymakers are slowly forcing the economic powers-that-be at home to face reality — and loosen their stranglehold on economic policymaking.

The tool of choice is the Free Trade Agreement (FTA). Under these arrangements, individual countries agree to eliminate all barriers to their bilateral trade.

FTA's have become quite popular in Europe and in the Americas. The essential idea guiding these arrangements is for two countries that have already built up political trust to simply lower all trade barriers to each other.

The United States, for example, started with Canada — and then the two countries brought in Mexico to create NAFTA. And the United States went further down this road, signing an agreement with Jordan and negotiating FTAs seriously with Chile and other Latin American countries.

Meanwhile, the EU — which is already a huge free-trade zone — has been expanding such agreements with a variety of countries in North Africa, Eastern Europe and even Latin America.

While all that happened, Japan basically sat on the sidelines. But recently there are now signs of movement. And those signs are most interesting.

In January 2002, Japan signed its first FTA with another nation. That nation was Singapore. Beside Singapore, Japan's other candidates for similar agreements are Mexico and Korea. The choice, it turns out, is quite shrewd. Each country's agreement can contribute to helping Japan to overcome its institutional roadblocks.

The FTA with Singapore — the