Japan's New Regionalism: The Politics of Free Trade Talks with Mexico

I greatly benefited from the feedback offered by Ellis Krauss, Ed Lincoln, and Saadia Pekkanen to different versions of this work. Moreover, I was fortunate to receive exceptionally insightful and thorough comments from two anonymous reviewers. I am of course responsible for all remaining errors.

1. Panagariya, Arvind, Regionalism in Trade Policy: Essays on Preferential Trading (Singapore: World Scientific, 1999). Bhagwatti, Jagdish, “Regionalism and Multilateralism: An Overview,” in de Melo, Jaime and Panagariya, Arvind, eds., New Dimensions in Regional Integration (Cambridge: Cambridge University Press, 1993).

2. Ravenhill, John, “Competing Logics of Regionalism in the Asia-Pacific,” Journal of European Integration 18 (1995): 179–199. Hatch, Walter and Yamamura, Kozo, Asia in Japan's Embrace: Building a Regional Production Alliance (Cambridge: Cambridge University Press, 1996).

3. Higgot, Richard and Stubbs, Richard, “Competing Conceptions of Economic Regionalism: APEC Versus EAEC in the Asia Pacific,” Review of International Political Economy 2, No. 3 1995): 516–535.

4. Section “Super 301” of the U.S. Trade Act allows the government to unilaterally impose retaliatory tariffs if it deems that a foreign country is engaging in unfair trading practices. Japan has been a frequent object of 301 investigations in products ranging from oranges to photographic film to auto parts. The United States has identified several structural barriers that hinder the access of U.S. products and firms. Examples of such barriers include the distribution system, collusive business practices, government procurement policies, and so on. For a good overview of U.S.-Japan trade negotiations on these matters see Schoppa, Len, Bargaining with Japan: What American Pressure Can and Cannot Do (New York: Columbia University Press, 1997).

5. Improvements of the dispute settlement mechanism include coverage and automaticity. In other words the dispute settlement machinery applies to all components of the WTO agreement, a fixed calendar for the dispute settlement process has been created to avoid excessive delays in the rulings, and the possibility of a single member vetoing the entire process has been eliminated since the consensus formula has been reversed and now all members would have to agree to stop the implementation of a panel ruling (including the complainant, which is of course a highly unlikely event). Pekkanen, Saadia M., “Sword and Shield: The WTO Dispute Settlement System and Japan,” in Schaede, Ulrike and Grimes, William, eds., Japan's Managed Globalization in the 21st Century (Armonk, NY: M. E. Sharpe, 2002), pp. 7–9.

6. Krauss, Ellis S., “The U.S., Japan, and Trade Liberalization: From Bilateralism to Regional Multilateralism to Regionalism +,” paper presented at the conference titled “After the Cold War and Globalization: Changes in the Japanese International Political Economy,” Institute of Social Sciences, University of Tokyo, 2000.

7. In January 2001 MITI changed its name to Ministry of Economy, Trade, and Industry (METI).

8. In 1986, the United States and Japan signed a semiconductor agreement that for the first time specifically mentioned a 20 percent market share in Japan for U.S. companies to be achieved by the year 1991. Soon after signing the agreement, however, bitter disagreement ensued as to whether this specific figure represented a guarantee (the U.S. position) or merely a desirable target (the Japanese interpretation).

9. Ravenhill, John, APEC and the Construction of Pacific Rim Regionalism (Cambridge: Cambridge University Press, 2001), pp. 84–85.

10. Krauss, , “The U.S., Japan, and Trade Liberalization,” pp. 16, 20, 30.

11. As Krauss reminds us, the current FTA policy is not a complete break from the past. There are important continuities in the preferences of Japanese policymakers (the desire to preserve the relationship with the United States, support the global trading system, and play a leadership role in Asia). My argument, however, is that the embrace of preferential trading does represent in other ways a major departure since discriminatory liberalization is a first for Japan, as well as the experimentation with shallow or deep integration with selected trading partners. Krauss, Ellis S., “The U.S. and Japan in APEC's EVSL Negotiations: Regional Multilateralism and Trade,” in Krauss, Ellis S. and Pempel, T. J., eds., Beyond Bilateralism: The U.S.-Japan Relationship in the New Asia-Pacific (Ithaca, NY: Cornell University Press, forthcoming).

12. Scollay, Robert and Gilbert, John P., New Regional Trading Arrangements in the Asia Pacific? (Washington, DC: Institute for International Economics, 2001), pp. 3–4.

13. Munetaka, Naoko, “Evolution of Japan's Policy Toward Economic Integration,” Working Paper, Center for Northeast Asian Policy Studies, Brookings Institution, 2001, pp. 6–7, 11.

14. Hook, Glenn, “Japan's Role in the East Asian Political Economy: From Crisis to Bloc?” Asian Business and Management 1 (2002): 32.

15. Krauss, , “The U.S. and Japan in APEC's EVSL Negotiations,” p. 6.

16. Ibid., pp. 9–11.

17. AFR, November 2, 1998, quoted in Ravenhill, APEC and the Construction of Pacific Rim Regionalism, p. 103.

18. Krauss, , “The U.S. and Japan in APEC's EVSL Negotiations,” p. 22.

19. Ravenhill, , APEC and the Construction of Pacific Rim Regionalism, pp. 93–103.

20. It is important to note that the trade-diversion effects vary in each individual economic bloc. Examples of discriminatory FTAs are those that embrace complex rules of origin specifically designed to keep foreign producers out of the regional market, or that shield uncompetitive sectors from the liberalization process.

21. Baldwin, Richard E., “The Causes of Regionalism,” World Economy 20, No. 7 1997): 865–888.

22. Grossman, Gene M. and Helpman, Elhanan, “The Politics of Free-Trade Agreements,” in Bhagwati, Jagdish, Krishna, Pravin, and Panagariya, Arvind, eds., Trading Blocs: Alternative Approaches to Analyzing Preferential Trade Agreements (Cambridge: MIT Press, 1999).

23. Keidanren, , “Urgent Call for Active Promotion of Free Trade Agreements. Toward a New Dimension in Trade Policy,” http://www.keidanren.or.jp/english/policy/2000/033/proposal.html (2000), pp. 2–3.

24. Ibid., pp. 3, 9.

25. Ibid., p. 6.

26. “Dumping” refers to the predatory practice of selling goods in the international market for below the domestic price or normal value with the aim of driving competitors out of business. The GATT and now the WTO have authorized members to impose higher duties when cases of dumping are confirmed. However, antidumping cases are very controversial because it is not easy always to determine objectively the normal value of a good, and because national dumping laws can exhibit a bias against foreign producers. The concern that antidumping proceedings have been captured by protectionist interests is widespread among trade experts. See Palmetter, David, “A Commentary on the WTO Anti-Dumping Code,” Journal of World Trade 30, No. 4 August 1996): 43–69.

27. Pekkanen, Saadia, “At Play in the Legal Realm: The WTO and the Changing Nature of U.S.-Japanese Antidumping Disputes,” in Krauss, Ellis S. and Pempel, T. J., eds., Beyond Bilateralism: The U.S.-Japan Relationship in the New Asia-Pacific (Ithaca, NY: Cornell University Press, forthcoming).

28. I am thankful to Saadia Pekkanen for pointing this out to me.

29. MITI, “MITI List of Major Concerns Raised by the 2000 Report on WTO Consistency of Trade Policies,” http://www.meti.go.jp/english/report/data/gCT0004e.html (2000).

30. Keidanren, , “Urgent Call for Active Promotion of Free Trade Agreements,” p. 6.

31. Ravenhill, , APEC and the Construction of Pacific Rim Regionalism, pp. 28–29.

32. Krauss, , “The U.S., Japan, and Trade Liberalization”; Munetaka, , “Evolution of Japan's Policy Toward Economic Integration.”

33. Munetaka, Naoko, “How Trade Agreements Can Reform Japan,” The Globalist http://www.theglobalist.com/DBWeb/StoryId.aspx?StoryId=2560 (2002); Hiranuma, Noboru, “Japan's New Regional Trade Policy—Which Country Comes Next After Singapore?” http://www.iie.com/papers/hatakeyama0302.html (2002), p. 5.

34. Munetaka, , “How Trade Agreements Can Reform Japan,” p. 3.

35. The insightful observations of the two anonymous reviewers and of Ed Lincoln greatly influenced my thinking on this matter.

36. Stiglitz, Joseph E., Globalization and Its Discontents (New York: W. W. Norton, 2002).

37. Okita, Yoichi, “Japan Needs More Free Trade Agreements.” Glocom Platform, http://www.glocom.org/opinions/essays/200203_okita_japan/ (2002).

38. Keidanren, , “Urgent Call for Active Promotion of Free Trade Agreements,” p. 5.

39. Rajan, Ramkishen S. and Sen, Rahul, “The Japan-Singapore ‘New Age’ Economic Partnership Agreement: Background, Motivation, and Implications,” Discussion Paper no. 0208, Centre for International Economic Studies, Adelaide University, March 2002, pp. 8–9.

40. Japan-Mexico Joint Study Group on the Strengthening of Bilateral Economic Relations, “Final Report,” www.mofa.go.jp/region/Iatin/mexico/relation0207 (2002).

41. It is important to acknowledge that the specific mix of motives for the selection of each individual FTA partner is different. For example, there are political and security considerations in negotiating with Korea that are not present in other Japanese bilateral trade negotiations. Given that Korea itself has recently embraced preferential trading, an FTA affords both countries the opportunity to improve diplomatic relations, and to further involve Japan in the peninsula at a time of high uncertainty due to the reactivation of North Korea's nuclear program.

42. Mattli, Walter, The Logic of Regional Integration: Europe and Beyond (Cambridge: Cambridge University Press, 1999). Baldwin, , “The Causes of Regionalism.”

43. Solís, Mireya, “Sharing the Spoils of Economic Integration? Japanese Direct Investment in North America,” in Whiting, Van R. Jr., ed., Regionalization in the World Economy: NAFTA, the Americas, and Asia Pacific (Delhi: Macmillan India, 1996), p. 29. Toru Yanagihara and Koji Serita, “Strengthening Japanese-Mexican Ties Through FDI,” manuscript, 1996, p. 17.

44. Japanese Embassy in Mexico, JETRO, and Japanese Chamber of Commerce and Industry in Mexico, 7998 Mekishiko Nikkei Kigyô Shinshutsu Ichiran [A glance at Japanese companies in Mexico], 1998, p. ii.

45. These observations notwithstanding, it is important to note that FDI data underestimate the real scale of Japanese investment in Mexico. A significant amount of Japanese investment takes place through the U.S. subsidiaries of Japanese companies and, therefore, is registered as U.S. investment. The latest survey of Japanese firms in Mexico shows that 35 percent of their capital was supplied by the U.S. subsidiary of a Japanese company. In the case of maquiladoras the weight of U.S. subsidiaries is even greater: they provided 63 percent of the capital of the company established in Mexico. Ibid., p. iv.

46. With rollup, a component's origin is attributed to the country of majority content, so that a part with 51 percent of U.S. content is considered 100 percent American when it crosses the Canadian border, for example. De Remes, Alain, Fitzpatrick, Timothy, and Ortiz, Antonio. “NAFTA and the Automotive Industry,” in Whiting, Van R. Jr., ed., Regionalization in the World Economy, p. 125.

47. Magnusson, Paul and Treece, James B., “Honda: Is It an American Car?” Business Week (November 18, 1991), p. 112.

48. Fujita, Masahisa and Ishii, Ryoichi, “Global Location Behavior and Organization Dynamics of Japanese Electronics and Their Impact on Regional Economies,” Discussion Paper Series no. 423, Kyoto Institute of Economic Research, 1995, p. 234.

49. Interview by the author with managers from JVC Industrial de Mexico, Tijuana, November 1996.

50. Solís, , “Sharing the Spoils of Economic Integration?” p. 210.

51. Mexico now exempts the payment of the lower of two import duties: the one paid for the import of inputs into Mexico, and the one paid for the import of the final product in the United States. For example, if the tariff in Mexico for the import of component X is 9 percent and the tariff on the import of the final product Y in the United States is 2 percent, the tariff to be paid in Mexico is 7 percent.

52. The “twin plant system” refers to the practice among some Japanese companies of operating plants on both sides of the U.S.-Mexico border that closely coordinate their production strategies.

53. Keidanren, , “Report on the Possible Effects of a Japan-Mexico Free Trade Agreement on Japanese Industry,” http://www.keidanren.or.jp/english/policy/pol099.html (1999), p. 6.

54. JETRO, “Report of the Committee for Closer Economic Relations Between Japan and Mexico,” http:www.jetro.org.mx/JetroMXJPFTAFullEng.doc (1999). Solís, Mireya, “Mexico and Japan: The Opportunities of Free Trade,” report commissioned by Mexico's Ministry of Trade and Industry, http:www.economia-snci.gob.mx/sphp_pages/publicaciones/mexjapesp.pdf (1999).

55. Solís, , “Mexico and Japan.”

56. Ibid.

57. In addition to NAFTA, Mexico has signed trade agreements with numerous Latin American countries: Chile, (1992), Venezuela, and Colombia, (1995), Rica, Costa (1995), Bolivia, (1995), Nicaragua, (1998), El Salvador, , and Guatemala, and Honduras, (2001). Outside the continent, Mexico has an FTA with the European Union and one with Israel (both became effective in 2000).

58. Japan International Cooperation Agency (JICA), “Master Plan for Promotion of Supporting Industries in Mexico” (JICA internal document, 1996), pp. 2, 4–9.

59. JETRO, “Report of the Committee for Closer Economic Relations Between Japan and Mexico,” p. 22.

60. In the 1990s, these bilateral investment treaties greatly proliferated as developing countries sought to promote foreign investment into their economies. Although there is a great deal of variation in the hundreds of BITs signed to date, some of the most noteworthy components include the most-favored-nation and national-treatment principles (i.e., that multinational corporations [MNCs] from a nation party to the BIT will not suffer discrimination vis-à-vis other multinationals or domestic enterprises); elimination of some performance requirements previously imposed by the host government on MNCs; the principle of prompt and adequate compensation in case of nationalization; and MNC access to international arbitration panels in case of a dispute with the host government. Graham, Edward M., Fighting the Wrong Enemy: Antiglobal Activists and Multinational Enterprises (Washington, DC: Institute for International Economics, 2000).

61. Interview with officials from Mexico's Ministry of the Economy, Mexico City, June 2002.

62. Japan-Mexico Joint Study Group, “Final Report,” p. 14.

63. The Japanese business community has some novel ideas on rules of origin for trade in parts. It is widely understood that a Japan-Mexico FTA would not completely solve the problem for Japanese enterprises that import substantial amounts of components from Asia and other third countries. Therefore, Keidanren has circulated the idea that rules of origin in a Japan-Mexico FTA should allow parts made in Asia with some value added in Japan to enjoy zero tariff concessions in Mexico. Whether Mexico will agree or not to such rules is not clear yet. Keidanren, , “Report on the Possible Effects of a Japan-Mexico Free Trade Agreement on Japanese Industry,” p. 9.

64. Keep in mind that NAFTA's investment chapter is unprecedented: For the first time Mexico allowed foreign investment disputes to be heard in binding international arbitration panels (and not in national courts); and it grants for the first time private foreign investors legal standing in that they can directly initiate a dispute settlement proceeding when they believe host state policy is in violation of the NAFTA treaty.

65. Japan-Mexico Joint Study Group, “Final Report,” pp. 18, 22.