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.

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East Asian FTA Proposal Aimed at Curbing Chinese
Influence
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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.

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APEC Broad but Not Deep; Alternatives Needed
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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

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process would necessarily be much slower than if the
proposed agreement were limited to ASEAN Plus Three
members alone, he maintained.

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"Neutralizing" Japanese Business Pressures on China
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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.

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Suggestion for "Track 2" FTA Discussions with U.S.
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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

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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.

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East China Sea: China Uncharacteristically Reasonable
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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."

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Iran: Japan Shares U.S. Goals Despite Energy
Dependence
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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."

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Comment
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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

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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