METI VICE MINISTER EXPLAINS REGIONAL FTA PROPOSAL

C O N F I D E N T I A L SECTION 01 OF 04 TOKYO 002130 SIPDIS SIPDIS DEPARTMENT PASS USTR FOR CUTLER, NEUFFER, BEEMAN PARIS FOR USOECD GENEVA PASS USTR E.O. 12958: DECL: 04/19/2016 TAGS: ECON ETRD PREL ASEAN APECO JA SUBJECT: METI VICE MINISTER EXPLAINS REGIONAL FTA PROPOSAL REF: A. STATE 60291 ¶B. STATE 60256 Classified By: Joseph R. Donovan, Deputy Chief of Mission. Reason: 1.4 (b,d) ¶1. (C) Summary: Trade Minister Nikai's recent proposal for an East Asian free trade agreement (FTA) aims to balance a less-inclusive Chinese initiative, according to METI Vice Minister Kusaka. The proposal would also help to "neutralize" pressures within the Japanese business community for a bilateral Japan- China agreement, he claimed. Kusaka acknowledged that opposition to a bilateral U.S.-Japan FTA remained strong in both countries but suggested that an informal "Track 2" process be launched at the upcoming summit meeting. He also indicated GOJ -- and notably METI -- support for U.S. nonproliferation goals with Iran, despite continued Japanese reliance on Iranian oil. End summary. -------------- --- East Asian FTA Proposal Aimed at Curbing Chinese Influence -------------- --- ¶2. (C) Ministry of Economy Trade and Industry (METI) Minister Nikai's proposed "Comprehensive Economic Partnership in East Asia" (CEPEA) centered on floating a counterproposal to increased integration among the members of ASEAN plus Three, according to METI Vice Minister Kazumasa Kusaka. Meeting with Deputy Chief of Mission Donovan on April 18, Kusaka indicated that Japan had hoped that the Korean hosting of the Asia Pacific Economic Cooperation forum (APEC) in 2005 along with the possible creation of a regional forum consisting of the United States, Japan, South Korea, China, Russia on such issues as energy and the environment might strengthen U.S. engagement in Northeast Asia. Problems such as Japan's ban on the import of U.S. beef, however, had thwarted Japanese expectations of greater bilateral cooperation with the United States on "geo-economic" issues. ¶3. (C) In the meantime, "continental" economic integration centered on China had continued, Kusaka stressed. China's growing economic strength was exerting a kind of centripetal force drawing in the other regional economies, including Japan. Japan was seeking to counterbalance this force through building up the trans-Pacific economic ties of the region. It had also been successful in bringing Australia, New Zealand, and India into the East Asian Summit as a way to oppose Chinese dominance of that event. Japan, Kusaka noted, was interested in promoting only an East Asian community "with a small 'c'." Although some had proposed following the European pattern of integration, that model could not work in East Asia, Kusaka said, because of the lack of shared political and economic values among the countries of East Asia. At best, the region could achieve greater economic integration -- a de facto phenomenon that was occurring even without government intervention. -------------- APEC Broad but Not Deep; Alternatives Needed -------------- ¶4. (C) Although the United States played an important role in APEC and elsewhere as a "stabilizing force" in the region, APEC itself had failed to deepen economic cooperation among East Asian countries, Kusaka claimed. The idea of an East Asian free trade agreement, however, put forward by former South Korean President Kim Dae Jung had had substantial resonance within the region and the support not only of the Koreans but of the Chinese as well. Minister Nikai's proposal, however, aimed at slowing the FTA process among the ASEAN Plus Three members by introducing the other EAS countries: Australia, New Zealand, and India. With 16 countries involved, the negotiating TOKYO 00002130 002 OF 004 process would necessarily be much slower than if the proposed agreement were limited to ASEAN Plus Three members alone, he maintained. -------------- -------------- "Neutralizing" Japanese Business Pressures on China -------------- -------------- ¶5. (C) Kusaka also noted that Japanese business was pressuring METI to begin FTA negotiations with China. (Comment: We have not heard Japanese businesses tell us that they are pushing the GOJ for an FTA with China. End comment.) The Japanese Business Federation (Keidanren) had proposed such an agreement to the government, with the focus to be less on tariffs and other "border issues" and more on internal factors such as investment and intellectual property protection. METI, however, was endeavoring to resist the Keidanren proposal and instead wanted to base an agreement with China on its existing investment treaty with South Korea. The Chinese, for their part, were uninterested because the Japanese proposal did not allow enough "policy space" to allow China's own industries to develop. Nevertheless, METI hoped that the proposal of a three-way investment agreement with Korea and China along with Minister Nikai's CEPEA proposal would neutralize proponents of a bilateral economic agreement with China while creating a "bigger and more balanced" framework for regional integration. ¶6. (C) Kusaka acknowledged that Nikai's proposal was not interagency-agreed Japanese Government policy although it had been briefed to other ministries both individually and at the Cabinet's Council on Economic and Fiscal Policy (CEFP). (Note: This argument is somewhat disingenuous as key trade policy ministries like Agriculture, Health, Labor and Welfare, and Foreign Affairs are not members of the CEFP. Moreover this "briefing" occurred after Minister Nikai's announcement. End note.) He added, however, that the Minister's initiative, in being made public, had already achieved much of its desired effect of putting forward an alternative to an FTA among ASEAN Plus Three members alone. Kusaka believed that formal GOJ adoption of Nikai's proposal could even wait for a decision by Junichiro Koizumi's replacement as Prime Minister in September. Under current circumstances, Nikai could still take his proposal to the meeting of ASEAN Plus Three economic ministers in August. If accepted by the other ASEAN Plus Three ministers, Nikai's proposal would "broaden the base of the mountain" of achieving a regional FTA and "make the summit higher," thus necessitating a longer climb through a series of "base camps" -- i.e., bilateral FTAs -- along the way. As a result, Japan would seek to finalize the bilateral agreements it currently has under negotiation before being drawn into a multilateral exercise tied to ASEAN Plus Three. -------------- -------------- Suggestion for "Track 2" FTA Discussions with U.S. -------------- -------------- ¶7. (C) Kusaka expressed the view that Japan should find a way to restart its stalled FTA talks with South Korea, particularly now that the United States had announced the launch of negotiations with the Koreans. Once the United States and Japan had both come to agreement with Korea, the missing part of the "triangle" would obviously be a U.S.-Japan FTA, he noted. Kusaka admitted, however, that a "Track I" initiative for an FTA between the United States and Japan would face opposition in both countries. He suggested encouraging a more robust "Track II" process that could involve academic and private sector representatives and develop ideas for an eventual agreement. In addition, the Australians, Kusaka said, were eager to begin FTA negotiations with Japan and had started a Track II process with Japan. Progress in the Doha Development Agenda negotiations in the World Trade Organization would also lower the barriers TOKYO 00002130 003 OF 004 to further trade liberalization in bilateral talks. ¶8. (C) Kusaka suggested that in the meantime, however, the United States and Japan could further economic cooperation in areas such as harmonization of standards, particularly in politically influential industries such as pharmaceuticals. This could not only spur more activity in areas such as research and development but also potentially build up constituencies in both countries for greater bilateral economic cooperation. The summit meeting between Prime Minister Koizumi and President Bush, Kusaka indicated, might also endorse the "Track II" process toward an eventual FTA he had outlined. It would then fall to the new Prime Minister to launch a new initiative with the United States, should he choose to do so. Kusaka expressed disappointment, though, that U.S. insistence on resolution of the ban on imports of U.S. beef had slowed preparatory work on the economic content on the summit agenda. ¶9. (SBU) The DCM responded to Kusaka's extended monologue with the points provided ref A expressing U.S. concerns regarding the development of East Asian regional architecture and the potential to undermine the primacy of APEC. He stressed that the launch of U.S. FTA negotiations with Korea highlights the ongoing extent of American engagement in Asia. Kusaka reiterated Japan's desire to strengthen trans-Pacific ties even as it sought to deepen regional integration in East Asia. -------------- -------------- East China Sea: China Uncharacteristically Reasonable -------------- -------------- ¶10. (C) Noting that China's "correction" of an announcement regarding demarcation of an area in the East China Sea where sea traffic had been prohibited appeared to have prevented a quarrel with Japan, the DCM asked for Kusaka's view of the current situation. (By amending the latitude from 27 degrees 7 minutes to 29 degrees 7 minutes, the prohibited area was moved across the disputed boundary line into China's exclusive economic zone.) Kusaka replied that this constructive decision was "quite un-Beijing like." He credited China's desire to avoid generating a controversy on the eve of President Hu's visit to Washington for Beijing's "reasonable action." -------------- Iran: Japan Shares U.S. Goals Despite Energy Dependence -------------- ¶11. (C) Turning to the issue of Iran, the DCM stressed that Japan should use its strong commercial relationship with Iran to encourage Iranian cooperation with the international community regarding its nuclear program. Even though Japan imports a substantial portion of its oil from Iran, that fact should not get in the way of the shared political objective of obtaining Iranian cooperation, Kusaka responded. He acknowledged Japan's commercial ties with Iran and the leverage that relationship provided. He said that Japan was "very much committed" to the nonproliferation goal and would continue to send the appropriate message on cooperation to Iran "as a friend." -------------- Comment -------------- ¶12. (C) Kusaka was obviously on the defensive regarding Minister Nikai's unexpected proposals, and his extended remarks suggested well less than full acceptance, at least on his part, of the Minister's trial balloon. Kusaka has clearly received the U.S. message that Japan needs to consult in advance with the United State prior to launching major new trade TOKYO 00002130 004 OF 004 policy initiatives and that Japan also needs to consider the impact on organizations like APEC. His comments on Iran represent the strongest support we have heard regarding that country from METI, which has traditionally sought to safeguard Japan's economic interests despite security concerns. SCHIEFFER