C O N F I D E N T I A L SECTION 01 OF 03 TOKYO 001851

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DEPT PASS USTR FOR AUSTR CUTLER
GENEVA PASS USTR
PARIS FOR USOECD

E.O. 12958: DECL: 04/04/2016
TAGS: ETRD ECON PREL PGOV JA
SUBJECT: JAPAN'S TRADE MINISTER PROPOSES EAST ASIA ECONOMIC
PARTNERSHIP AGREEMENT

REF: A. TOKYO 1484 (NOTAL)


B. TOKYO 1634 (NOTAL)

C. TOKYO 1635 (NOTAL)

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Classified By: Ambassador J. Thomas Schieffer. Reason: 1.4 (b,d)


1. (C) SUMMARY: METI Minister Nikai announced on April 4 an
ambitious new proposal for a region-wide "comprehensive
economic partnership agreement" paired with a new regional
policy think tank along the lines of the OECD. Foreign,
Finance and Agriculture Ministry senior bureaucrats had no
prior knowledge of Nikai's proposal, according to a senior
MOFA official. At first glance, Nikai's proposal appears to
run counter to recent GOJ decisions to scale back the
ambitions of new bilateral trade negotiations. However, METI
contacts characterized the proposal as a natural and logical
extension of Japan's current regional trade agenda,
explaining that it attempts to establish a proactive regional
economic agenda that both counters and includes China. METI
suggested that East Asia economic relationships be discussed
at a bilateral sub-cabinet meeting and stressed that the
proposal had nothing to do with the East Asia Summit. END
SUMMARY.


2. (U) METI Minister Toshihiro Nikai outlined an ambitious
new strategy to negotiate a region-wide "economic partnership
agreement" (EPA) in East Asia in remarks to the press on
April 4. He also floated the possibility of establishing an
economic policy think-tank modeled on the OECD that would be
dedicated to supporting East Asian regional integration.
Nikai told journalists that he will pitch this new strategy
to the Prime Minister's Council on Economic and Fiscal Policy
(CEFP) on April 7.


3. (U) The new proposal for a region-wide EPA would entail
launching negotiations in 2008 and targeting 2010 to conclude
a single agreement with fifteen other countries: the ten

ASEAN members, China, Korea, India, Australia and New
Zealand. The agreement would be "comprehensive" in its
inclusion of investment rules and services, but Nikai
reportedly did not mention agricultural trade.


4. (SBU) Nikai first floated the "East Asian OECD" proposal
on March 31. While working-level METI contacts initially
sought to downplay the implications of Nikai's remarks on the
think-tank aspect, his April 4 comments reiterated the goal
of an OECD-like organization with a broad mandate ranging
from trade and investment to finance, energy and the
environment. As a first step, Japan would propose an East
Asian Economic Research Center.


5. (SBU) METI Trade Policy Director General Kitamura told
EMIN April 5 that the region-wide EPA concept was intended as
a "mild" proposal and that it should be considered as a
natural extension of Japan's current trade policy agenda. By
2007, East Asian trade integration will be centered around
ASEAN as a hub, he noted, since Japan and other regional
partners expect to complete bilateral "free trade agreements"
with ASEAN members and with ASEAN as a whole by then. But
this will not address the need for stronger "lateral"
linkages among non-ASEAN countries in the region. Thus a
region-wide EPA was the logical next step for the medium
term, post-2007 regional trade agenda. Kitamura pointed out
that ASEAN 3 leaders had called for a study of a regional FTA
when they met two years ago. The results of that study were
due to be announced this summer, so this was an appropriate
time to be formulating proposals, Kitamura said.


6. (C) Kitamura acknowledged that a sense of competition with
China was one motivation for the proposal, and he expressed

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concern over the prospect that China's "low threshold" trade
agreements with ASEAN would set a low de facto standard for
regional integration unless others in the region put forward
a more ambitious model. Kitamura also apologized for not
having briefed the USG on the proposal in advance of Nikai's
announcement. Kitamura said he had wanted to raise it with
Deputy USTR Bhatia and U.S. APEC Ambassador Michalak during
their recent visits, but the proposal was not ready at the
time, and then the details were reported by the press sooner
than expected.


7. (SBU) METI Director for the Americas Akaishi echoed DG
Kitamura's points in a conversation with ECOUNS on April 5,
adding that the concept of an ASEAN 3 FTA had been floated
for some time. Nikai,s thinking, although not yet "rigid,"
was to see if it might be time to think about a comprehensive
regional FTA, for which negotiations would begin in 2008, as
a follow-on to the various bilateral FTAs to be completed by

2007. Given the similarity in political and economic values
between Japan and the U.S., Akaishi said, it would be in the
U.S. interest for Japan to lead such an exercise. Akaishi
confirmed that the idea was not interagency cleared, that it
would be discussed at the April 7 CEFP, and that
inter-ministerial consultations would take place after that.


8. (SBU) Turning to reports of surprise in Washington,
Akaishi claimed that DG Kitamura had "always" talked about
the possibility of a comprehensive East Asian agreement with
USG officials. Kitamura had asked the U.S. to consider what
the landscape would look like in 2008 and what the U.S.
reaction would be if there were a comprehensive East Asia
economic agreement in the 2011-2015 time frame, Akaishi said.
Akaishi suggested that the whole issue of East Asian
economic relations should be the subject of a "secret"
sub-cabinet level meeting. Finally, Akaishi was at pains to
stress that Nikai's proposal was distinct from the East Asia
Summit (EAS). Characterizing EAS as a "top down" approach,
Akaishi said what Nikai was suggesting was more of a building
block approach.


9. (SBU) Foreign Ministry Director General for Economics
Ishikawa also confirmed that Nikai's comments were not
coordinated with the Foreign, Agriculture, or Finance
Ministries in advance. Either unaware of or unconvinced by
METI's view that a region-wide EPA would be a distinct "next
step" following the conclusion of Japan's current
negotiations with the ASEANs, Ishikawa told EMIN on April 5
that Nikai's proposal was simply "not workable" due to human
resource constraints, and he also cited political
difficulties with China and Korea as an obstacle. While
Ishikawa doubted that Nikai's proposal had "legs," he added
that MOFA would have to pay attention since Nikai was a
powerful and influential politician who obviously wants to
accelerate economic integration with Asia.


10. (C) COMMENT: At first glance, METI Minister Nikai's EPA
proposal appears to run counter to recent GOJ moves to scale
back its ambitions for future bilateral trade deals in a
MOFA-led effort to accelerate negotiations; that policy
shift reportedly has the blessing of LDP Policy Research
Council Chairman Hidenao Nakagawa and the Cabinet
Secretariat. The comprehensive approach described by Nikai

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explicitly includes areas like investment rules that would be
dropped under the streamlined "model text" approach described
to us by MOFA officials (refs A and B).


11. (C) COMMENT CONTINUED: Nevertheless we do not interpret
Nikai's abrupt move simply as an effort by the METI
bureaucracy to retake initiative on GOJ trade policy-making
from MOFA. Nikai's announcement before the METI bureaucracy

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had a chance to roll out the proposal or brief the USG is a
strong indicator that METI's concept has Nikai's strong
support, even as it complicates METI's efforts to build
consensus with other bureaucratic players. Known as the
cabinet member closest to China, Nikai has nonetheless
publicly voiced concern that Japan is falling behind China
(and Korea) in economic diplomacy, a view shared by Japanese
business leaders. Nikai appears to be attempting to set a
proactive agenda to catch up in a way that would include
China -- unlike the MOFA-inspired strategy of streamlined
bilateral agreements with regional trading partners. END
COMMENT.
SCHIEFFER