METI SAYS ASEAN PLUS 3 FTA "INEVITABLE"

C O N F I D E N T I A L SECTION 01 OF 03 TOKYO 003164

SIPDIS

SIPDIS

DEPT PASS USTR FOR AUSTR CUTLER
USTR ALSO FOR JNEUFFER, MBEEMAN
GENEVA PASS USTR
PARIS FOR USOECD

E.O. 12958: DECL: 06/08/2016
TAGS: ECON ETRD PREL APECO JA
SUBJECT: METI SAYS ASEAN PLUS 3 FTA "INEVITABLE"

Classified By: Deputy Chief of Mission Joe Donovan.
Reason: 1.4 (b/d)


1. (C) Summary: Japan is in no position to oppose an
almost certain Chinese-led consensus among the other 12
member countries of the ASEAN Plus Three to pursue a
regional free trade agreement (FTA),according to a senior
official of Japan's Ministry of Economy, Trade, and
Industry (METI). Therefore, the best outcome for Japan
would be subsequently to broaden (by including India,
Australia, and New Zealand) and deepen (by seeking coverage
of sectors like IPR and investment) the proposed FTA. The
official acknowledged the need for close U.S.-Japan
consultations on the Asian regional architecture and said
that METI Vice Minister Kusaka looked forward to discussing
this subject in Washington DC on June 14. End summary.

Relations with China Improving
--------------


2. (C) The May 27 meeting in Kyoto between METI Minister
Toshihiro Nikai and Chinese Commerce Minister Bo Xilai was
significant as it marked the first ministerial-level
exchange in Japan between China and Japan since the visit
of Chinese Vice Premier Wu Yi a year earlier, according to
METI Trade Policy Director Toshiaki Kitamura. Meeting with
U.S. Ambassador to APEC Michael Michalak on June 6,
Kitamura said that Nikai had held the meeting in the State
Guest House in Kyoto (where President Bush had stayed last
November) at the urging of Prime Minister Koizumi. Bo had
been visiting Japan to attend a Sino-Japanese forum on
energy saving and environmental protection, and Kitamura
emphasized that China had sent an impressive delegation,
including not only Minister Bo but also Vice Chairman Jiang
Weixin of China's National Development and Reform
Commission and the heads of a number of electric power and
steel companies. Kitamura indicated the forum signaled a
turn for the better in relations between China and Japan.

ASEAN Plus Three-based FTA Talks Inevitable
--------------


3. (C) Turning to activities surrounding the recent APEC
meeting of Ministers Related to Trade (MRT),Kitamura said
that Trade Minister Nikai had characterized the June 2
breakfast meeting of trade ministers from the United
States, Japan, Australia, and Singapore as having been very
helpful in allowing the ministers of those four key
economies to discuss serious issues in an informal and less
stilted setting than the main APEC meetings. Kitamura, who
had accompanied Nikai, noted that the remarks of Singapore
Trade and Industry Minister Lim Hng Kiang on the dynamic
surrounding regional free trade agreements deserved
particularly close attention. According to Kitamura, Lim
had stated flatly that the report of the group of experts
led by a Chinese academic on a framework for an ASEAN Plus
Three FTA would receive the endorsement not only of the
ASEAN Plus Three economic ministers in August but also of
the leaders of the thirteen ASEAN Plus Three countries when
they met at the end of the year. Kitamura said Lim then
outlined a three stage strategy in which the initial FTA
negotiations among the 13 ASEAN Plus Three states would
lead quickly to an "ASEAN Plus Six" negotiation including
Australia, New Zealand, and India. With the completion of
that agreement, the stage would be set for a subsequent FTA
negotiation to include all the economies of APEC. Kitamura
added that these remarks of Lim appeared to be the official
position of the Government of Singapore as Singapore
Foreign Minister George Yeo had outlined the same strategy
in a separate meeting.


4. (C) Kitamura said the mechanism by which the ASEAN
Plus Three FTA negotiations would begin was unclear. One
possibility was that the 13 countries might initiate a
joint study group; another was for negotiations to start
directly at some appropriate time in 2007. Whatever the
mechanism, however, and despite Japan's reservations
regarding the probable exclusion of issues important to

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Japan such as intellectual property protection and
investment provisions, Japan, Kitamura stressed, was in no
position to oppose the growing consensus within the ASEAN
Plus Three to move forward on an agreement. Both China and
South Korea, he noted, had completed their own individual
free trade agreements with ASEAN and, consequently, had no
reservations regarding the establishment of a broader ASEAN
Plus Three arrangement.

China Not Interested in "Serious" FTA
--------------


5. (C) China, Kitamura stated, viewed these free trade
agreements as more of a political than an economic exercise
and were not interested in the creation of a serious,
advanced regional free trade agreement. The Chinese were
enticing the ASEAN countries into their orbit with the lure
of the vast Chinese domestic market. Kitamura stressed
that the recent proposal for a regional FTA that included
Australia, New Zealand, and India raised by Minister Nikai
had aimed at countering the Chinese-backed ASEAN Plus Three
proposal. As a result of Nikai's proposal, the ASEAN Plus
Three experts group had now had to address the Nikai
proposal's main points in their own report, which left the
door open to expanding (through the addition of Australia,
New Zealand, and Singapore) and deepening (by including
provisions on intellectual property and investment) the
ASEAN Plus Three-based initiative likely to be endorsed at
the end of this year. Kitamura indicated satisfaction that
METI's action had positively affected the experts' group
report, which is due to be completed at the end of June.
Even the Chinese leadership had had to take note of
Minister Nikai's proposal, Kitamura added.


6. (C) Amb. Michalak commented that China had proffered a
great deal of resistance to the FTA model measures being
discussed in APEC and asked Kitamura for METI's analysis of
the impact of the existing FTA between China and ASEAN.
Kitamura responded that the China-ASEAN FTA had, in the
near term, clearly benefited the ASEAN countries by
offering increased access to the Chinese market for ASEAN-
produced agricultural exports. In the midterm, however,
China would likely have the greater advantage because of
increased access for its manufactured products to ASEAN.
In addition, China, which had no significant investments in
ASEAN, was not eager to expand the content of its existing
FTA with ASEAN beyond trade in goods. For Japan, which has
extensive investment in Southeast Asia, however, it would
be imperative for any agreement with ASEAN to include
investment-related provisions such as IPR protection and
dispute settlement mechanisms, Kitamura stressed.

Leadership Transition Complicates Interagency Response
-------------- --------------


7. (C) Kitamura indicated that interagency discussions by
the GOJ on how to respond to the likelihood of the
endorsement of the proposal for an ASEAN Plus Three FTA
were progressing. The fact that the ASEAN Plus Three
economic ministers' meeting in August would take place
during the term of the current Japanese Cabinet but that
the leaders' meeting would take place following the
installation of a new Prime Minister and Cabinet
complicated these discussions, he added. According to
Kitamura, METI Vice Minister Kazumasa Kusaka was looking
forward to discussing the issue of future economic
architecture in East Asia in the June 14 sub-cabinet
dialogue in Washington.

Comment
--------------


8. (C) Even as he noted the current improvement in
relations with China, Kitamura highlighted once again
Japan's fear of separating itself from other Asian
countries in the face of China's growing influence -- and
the degree to which it has proven incapable of addressing
that concern. Nikai's proposal for an ASEAN Plus Six FTA

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appears increasingly as a "face-saving" measure for the
Minister. It allows him to claim a minor victory -- the
hope of eventual consideration of an expanded regional
agreement including Australia, New Zealand, and India --
even as he accepts the consensus on an ASEAN Plus Three FTA
proposal. Although Kitamura criticized China for putting
politics ahead of economics in its FTA strategy, the extent
to which the Japanese seem prepared to put aside ostensible
"imperatives" for any FTA in order to avoid isolation
suggests the Chinese are not the only parties placing
priority on their political interests in the region.


9. (U) Ambassador Michalak did not have a chance to clear
this message before his departure.
SCHIEFFER