1. (C) Summary: METI Minister Nikai's proposal for an Asian
FTA was an alternative to an "aggressive" Chinese push for an
ASEAN 3 FTA, METI Trade policy DG Toshiaki Kitamura told
visiting EAP/PDAS Kathleen Stephens on May 29. The Chinese
plan, which will be recommended by an ASEAN 3 expert group
soon, would be objectionable because it would increase
China's influence over ASEAN and would set a poor standard by
covering only trade in goods. Therefore, the Nikai idea
expanded the proposed FTA to include India, Australia and New
Zealand and to cover services, IPR and investment. While
Japan, and METI in particular, remained committed to
strengthening APEC, APEC could not serve as an effective
alternative to the Chinese proposal because it was not
realistic to talk about an APEC FTA for decades, Kitamura
said. Nevertheless, he proposed the need to agree on a
roadmap to strengthen APEC by the ministerial to be held in
Tokyo in 2010. Stephens said that the U.S. would be
concerned with a pan-Asian organization that could undermine
trans-Pacific ties and that the U.S. approach to the region
emphasized APEC, ARF and robust bilateral FTAs, which were
the most practical. Both agreed to continued discussions on
East Asian economic architecture.



2. (C) On related issues, Kitamura said the lack of U.S.
cabinet-level participation in ASEAN meetings in recent
years, the change of USTR at a critical junction in the Doha
round, and the hold placed on Ambassador Schwab's nomination
created a negative impact in the Region. Stephens stressed
that Secretary Rice was looking forward to participation in
the ASEAN ministerial and that we expected Ambassador
Schwab's confirmation would move forward. Stephens also
stressed the need to resolve the beef issue. End Summary.



3. (C) Stephens opened by noting that the issue of East
Asian economic architecture was being closely studied in
Washington. While the process was not complete, there were
several areas of clear agreement: APEC was extremely
important and needed to be more outcome oriented; ties with
ASEAN should be strengthened; robust FTAs should be pursued
in the region, and it was more practical to do this on a
bilateral basis; and, we should talk to allies about how
these elements and others fit together. In this context, the
U.S. was surprised by Nikai's proposal for an Asian FTA.



4. (C) Kitamura explained that ASEAN, as a group, was
becoming the "hub" of a system of FTAs. They had concluded
one with China and the Korea agreement will take effect in
the middle of the year. Japan and ASEAN had agreed to
conclude their FTA by March 2007. ASEAN was also negotiating
FTAs with India and Australia and New Zealand and was aiming
to finish those in 2007. It was only logical that once these
FTAs were finished that they form the basis for an Asia wide
FTA.



5. (C) As if to address the "surprise" issue, Kitamura noted
that since January of 2002 PM Koizumi had been supportive of
an East Asian Community. What prompted Nikai to make his
proposal now, however, was that an ASEAN 3 expert committee
would recommend to the ASEAN 3 summit in August that an
ASEAN 3 FTA that covered trade in goods only be negotiated
soon. This was the latest in an "aggressive" push by China
for such an FTA. Japan had initially opposed creation of the
expert group as premature, but consented when it was
isolated. A Chinese scholar who was controlled by the
government chaired the group, but the GOJ did not control
Japanese participants. If there were no other alternative on
the horizon, the "Chinese" proposal would be accepted. If
such an FTA were concluded, it would increase Chinese
influence in ASEAN while at the same time providing an FTA
without several protections important to Japanese business.
Therefore Nikai felt he had to act quickly and without
consultation. The proposal would fix the Chinese plan by
adding India, New Zealand and Australia and expanding the
scope to cover IPR, investment and trade in services.
Kitamura admitted that so far the plan was "just a concept by
METI". Kitamura understood that Ambassador Schwab had said
in Paris the previous week that the U.S. was "not excited"

TOKYO 00003105 002.2 OF 002


about the Nikai plan. However, which would the U.S. rather
have, the Nikai plan or the Chinese, Kitamura asked.



6. (C) Turning to APEC, Kitamura said METI was committed to
APEC, which was "our brainchild". However, an APEC wide FTA
was decades away so the idea would not be enough to trump the
Chinese proposal. However, at the APEC Trade Ministerial in
Hanoi that week, Nikai would try to talk to the U.S.,
Australia and New Zealand about strengthening APEC. Little
could be expected from the Hanoi and Lima APEC summits. What
Japan would like is a road map of how to strengthen APEC by
the time of the Tokyo summit in 2010. Japan's commitment to
APEC was demonstrated by the offer to host the summit, which
would be in a critical year for APEC, the year in which the
trade liberalization ideals for developed countries in the
Bogor declaration were supposed to be fulfilled. As an
aside, Kitamura said that the change in USTR, the hold put on
Ambassador Schwab, and the lack of U.S. cabinet participation
in APEC meetings in recent years created a bad impression in
the region.



7. (C) In response, Stephens said that, while Japan and the
U.S. had the same objectives, they had different approaches.
Although the development of pan-Asian organizations was
natural, the effect of such proposals on trans-Pacific
relations needed to be considered. In terms of FTAs, it was
better to concentrate on strong bilateral FTAs than to try to
include too many countries and end up with weak agreements.
The U.S. commitment to the region was shown in the robust
FTAs it was pursuing. While the Chinese favored FTA would be
a concern to the U.S., Nikai's plan is perhaps not he best
alternative. We need to consult. The U.S. is interested in
strengthening APEC and the Australians are committed to doing
this in the summit they will host in 2007. We would like to
hear more about the roadmap and we need to develop concrete
ideas for APEC, Stephens said. Kitamura and Stephens agreed
on the need for Japan and the U.S. to continue to consult on
East Asian economic architecture.



8. (U) PDAS Stephens has cleared this cable.
SCHIEFFER