METI'S ASIAN FTA PROPOSAL: TACTICS WITHOUT STRATEGY

C O N F I D E N T I A L SECTION 01 OF 04 TOKYO 002283

SIPDIS

SIPDIS

DEPARTMENT PASS USTR FOR CUTLER, NEUFFER, BEEMAN
PARIS FOR USOECD
GENEVA PASS USTR

E.O. 12958: DECL: 04/27/2016
TAGS: ECON ETRD EINV PREL ASEAN APECO JA
SUBJECT: METI'S ASIAN FTA PROPOSAL: TACTICS WITHOUT STRATEGY

REF: A. TOKYO 2130

B. TOKYO 2240

Classified By: Joe Donovan, Charge d'Affaires, a.i.
Reason: 1.4 (b,d)


1. (C) Summary: METI Minister Nikai's recent
regional FTA proposal is a tactical move to counter an
expected Chinese-backed regional FTA proposal to be
presented to an August ASEAN Plus Three Economic
Ministers' meeting. METI however, seems not to have
considered the longer-term implications of this
proposal on APEC or on the U.S. presence in the region
and largely ignored other GOJ agencies in formulating
its proposal. Nevertheless, because it has the strong
backing of Minister Nikai, this proposal could gain
momentum. End summary.

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METI Officials Stress Fears of Chinese Dominance
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2. (C) In his meeting with the DCM on April 18 (ref
A) Economy, Trade and Industry Vice Minister Kazumasa
Kusaka explained that Minister Toshihiro Nikai's
proposed "Comprehensive Economic Partnership in East
Asia" (CEPEA) centered on countering ideas for
increased regional integration limited to members of
ASEAN Plus Three. China's growing economic strength
was exerting a kind of centripetal force drawing in
the other regional economies, including Japan, Kusaka
said. Japan was seeking to counterbalance this force.
Kusaka acknowledged that Nikai's proposal was not
interagency-agreed Japanese Government policy but
added that the Minister's initiative, in being made
public, had already advanced an alternative to an FTA
among ASEAN Plus Three members alone. If accepted by
the other ASEAN Plus Three Trade Ministers, Nikai's
proposal would "broaden the base of the mountain" and
"make the summit higher," thus necessitating a longer
climb through a series of "base camps" -- i.e.,
bilateral FTAs -- along the way, according to Kusaka.
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.


3. (SBU) Meeting with EMIN on April 20, METI Trade
Policy Director General Toshiaki Kitamura further
stressed that Japan wants the United States to stay
engaged in the Asia-Pacific region. He explained that
the genesis of METI's idea for an East Asian FTA was
in response to Chinese moves in the region. METI's
proposal was driven by the need to table another
proposal before the August ASEAN Plus Three Economic
Ministers meeting which would discuss a study group
report advocating an ASEAN Plus Three FTA. METI saw
the study group proposal as unacceptably limited both
in terms of membership and coverage and as strongly
influenced by the Chinese. Japan would not be able to
accept this proposal and therefore risked being left
out of a possible China-Korea-ASEAN regional FTA
attempt. Kitamura also claimed that Japanese business
strongly supported METI's approach. Kitamura said
Japanese businesses were not interested in an FTA with
China but did seek stronger rules-based behavior by
the Chinese.


4. (SBU) With respect to the Asian Pacific Economic
Cooperation forum (APEC),Kitamura felt that 2006,
with Vietnam as host, would not be a good time to
revitalize APEC. He suggested that the United States,
Australia, and Japan work together in preparation for
Australia's turn to host in 2007 and devise a more
systematic vision to guide APEC from 2007 to 2010,
when Japan will host APEC.

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5. (C) Econoffs received a much less nuanced
presentation of METI's thinking from Tetsuya Watanabe,
the official in the Trade Policy Bureau tasked with
drafting the METI "Global Economic Strategy" report on
which the Minister's regional FTA proposal had been
based. METI did not propose using APEC as the channel
for its regional FTA concept to avoid "frightening
away" the ASEAN countries with the prospect of having
the United States at the negotiating table, Watanabe
said. The Japanese proposal, he acknowledged, would
also initially aim at a fairly low level of
liberalization; it would be broad but not deep.
METI's vision of East Asia's regional architecture was
one of a set of different fora -- i.e., APEC, EAS,
ASEAN Plus Three -- with overlapping membership. On
the other hand, China, Watanabe said, sought a more
centralized EU-like architecture that it would
dominate. Watanabe stressed that the main substantive
difference between what METI had proposed and what was
likely to emerge from the ASEAN Plus Three study group
was not the difference in scope or participation but
rather that the former would be a Japanese initiative
and the latter Chinese.

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Foreign Ministry Discounts METI Proposal
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6. (C) In a meeting with the Charge on April 24 (ref
B),Deputy Foreign Minister for Economic Affairs
Mitoji Yabunaka confirmed that Minister Nikai's
proposal had not been coordinated with other
ministries and that it was simply a "grand concept"
yet to be organized and vetted within the Japanese
government. He noted, nevertheless, that there might
be a case over the longer term to seek a regional FTA
rather than a network of bilateral FTAs. He went on
to say that, even though APEC confirms the U.S.
interest in East Asia and Japan appreciates the
forum's inclusive nature, the United States and Japan
needed to re-energize its activities.

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Academic Stresses Japanese Isolation in Region
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7. (SBU) Waseda University Professor Shujiro Urata,
one of the Japanese academic participants in the ASEAN
Plus Three study group on a regional FTA, told econoff
on April 21 that participants in that exercise had
only begun to exchange reference documents for the
study at a meeting held in Tokyo the previous week.
Urata noted that he is the only Japanese academic
participating in the study who is not a former METI
official and acknowledged that it had been rather
awkward for his (former METI) colleagues at the latest
meeting who felt obliged to advocate the METI position
on additional membership in the proposed regional FTA.


8. (SBU) In Urata's view, Japan's chief concern over
Chinese dominance of the ASEAN Plus Three economic
integration exercise stemmed from the tendency of
major Chinese firms to base production and investment
decisions on political rather than economic factors.
This behavior, if extended throughout the region,
would distort markets in East Asia. (Comment:
Professor Urata's concern over the influence of
politically motivated Chinese corporate behavior in
the region seems excessive and more an effort to
rationalize Japanese fears than to postulate a
probable outcome. End comment.) Japan, Urata
stressed, was the only large developed economy in the
ASEAN Plus Three group and was, consequently,
isolated. Developing countries dominated ASEAN, and
they tended to focus on the near-term benefits of

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immediate liberalization in trade in goods with China
rather than worry about long-term systemic distortions
in the regional economy. In addition, ASEAN's
developing members themselves lacked solid market-
based economic systems and were not as interested in
establishing a comprehensive, rules-based regional
economic regime as Japan.


9. (SBU) Urata saw the Chinese as pursuing a
gradualist strategy on economic integration, starting
with liberalization on trade in goods and expanding
step-by-step into other areas such as investment and
intellectual property protection. Urata acknowledged
that this was the usual Chinese approach to reform and
agreed that it made sense in the context of a
developing country. Japan, he noted, as a developed
economy could not accept such an approach, however.
There were too many important economic constituencies
in Japan that would insist on more progress regarding
investment and IPR for Japan to be satisfied with
anything less than a much more comprehensive agreement
than what the Chinese were advocating.


10. (SBU) Urata believed that Japan would have no
choice but to accept the report coming out of the
ASEAN Plus Three study group in August but added that
Japan should continue to advocate for expanding
membership in the proposed regional FTA. Keeping the
door open for additional members like Australia and
India was about all Japan could hope to accomplish in
the near term, Urata said. Nevertheless, he doubted
the ASEAN Plus Three could negotiate any FTA agreement
quickly. He noted that some had said a regional
agreement could be based on the separate agreements
that China, South Korea, and Japan are all negotiating
or have negotiated with ASEAN, with latter two
expected to be completed by the end of 2007. This
concept was unlikely to work out, however, because all
three agreements have substantially different content
in such areas as rules of origin. It would most
likely be necessary to negotiate an ASEAN Plus Three
agreement from scratch.

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Australians Also See Strategic Vacuity at METI
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11. (SBU) Our Australian Embassy counterparts share
our assessment that METI's proposal is primarily
tactical in nature in that it attempts to seize the
initiative from China, but lacks a longer-term
strategic vision for the region. Australian Embassy
Deputy Chief of Mission Penny Richards told EMIN April
20 that her soundings of various Foreign Ministry,
Agriculture Ministry, and METI officials had indicated
strong opposition to METI's proposal. METI Trade
Policy Deputy Director General Akira Miwa (who is a
former Japanese APEC Senior Official) had emphasized
to Richards concerns over the report of the ASEAN Plus
Three study group but had also failed to show any
appreciation of the broader implications for APEC and
other regional initiatives if the METI proposal were
realized.

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Comment: Deck Chairs on the Titanic?
--------------


12. (C) METI has been somewhat taken aback by the
strong negative interagency reaction to Minister
Nikai's proposal and to U.S. expression of concern.
In all of the above-mentioned meetings we have
conveyed the strong view that the United States is an
Asia-Pacific nation and we want to remain engaged in
the region's economic architecture. METI recognizes
it committed a blunder by not utilizing a stream of

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high level visits (Vice Minister Kusaka's trip to
Washington DC, Deputy USTR Bhatia's visit to Tokyo) to
brief us on its thinking in advance of the Minister's
announcement.


13. (C) Underpinning Minister Nikai's initiative is a
visceral fear of ASEAN drifting too far into China's
orbit. Nikai's proposal, missed an opportunity to
redirect regional integration energies toward more
inclusive approaches that might include the United
States into the regional economic architecture or
revitalize APEC. Neither does METI offer an answer
for how Japan plans to handle the Taiwan problem in
its Asian trade integration proposal. The most benign
assessment of METI's proposal could be that it
attempts to delay changes to the status quo in East
Asia by complicating the process of regional
integration. The Japanese probably would be content
to see an ASEAN Plus Three trade liberalization
process stall -- thereby avoiding having to choose
between protecting domestic constituencies or regional
isolation. Other Asian countries, however, may not
allow Japanese inertia to hinder continued, albeit
limited regional trade liberalization. Moreover,
Nikai remains an influential figure in the ruling
party and, with Japan facing a leadership change in
September, his thinking could win over Prime Minister
Koizumi's successor.
DONOVAN