MOFA OFFICIAL VOICES CONCERN OVER FTA STRATEGY

C O N F I D E N T I A L SECTION 01 OF 04 TOKYO 003251

SIPDIS

SIPDIS

DEPARTMENT PASS USTR FOR AUSTR CUTLER
USTR ALSO FOR MBEEMAN AND JNEUFFER
PARIS PASS USOECD
GENEVA PASS USTR

E.O. 12958: DECL: 06/13/2016
TAGS: ECON ETRD PREL PGOV JA
SUBJECT: MOFA OFFICIAL VOICES CONCERN OVER FTA STRATEGY


TOKYO 00003251 001.2 OF 004


Classified By: Ambassador J. Thomas Schieffer.
Reason: 1.4 (bd)


1. (C) Summary: ASEAN Plus Three countries will
almost certainly launch free trade agreement (FTA)
discussions later this year. That development will
put Japan, which lacks a free-standing agreement
with ASEAN, in a difficult negotiating position,
according to the deputy director of the office in
the Japanese Ministry of Foreign Affairs (MOFA)
responsible for FTA affairs. Japan's own
negotiations with ASEAN are likely to fail, largely
due to the complexity of Japan's proposed framework
for the agreement and its inability to match the
concessions on trade in goods made by both Korea and
China in their own agreements with ASEAN. Such
failure could generate sharp political criticism of
Japan's FTA policy and the bureaucrats who manage
it. The official was not confident, however, that
Japan's political leaders themselves would be
willing to undertake the reforms and concessions
needed to secure the policy's success.
Nevertheless, Japan's bilateral discussions are
proceeding apace. Notably, prospects for
negotiations with Australia, controversial because
Australia wants to include agriculture in any
discussion, look brighter. End summary.

ASEAN Plus Three FTA Talks Not So Scary
--------------


2. (C) MOFA shares the view of the Ministry of
Economy, Trade, and Industry (METI) that the
endorsement by the member countries' leaders of an
experts group report calling for FTA negotiations
among the 13 countries of the "ASEAN Plus Three" is
practically inevitable, according to Kenju Murakami,
Principal Deputy Director of the Economic
Partnership Division of MOFA's Economic Affairs
Bureau. Speaking to econoff on June 9, Murakami
noted that the MOFA Economic Affairs Bureau had
heretofore paid little attention to the ASEAN Plus
Three exercise, which had fallen under the
jurisdiction of the Ministry's Asian Affairs Bureau.
The attitude in Asian Affairs, he indicated, was
that "anything that promotes regional integration is
good" and acknowledged that the Economic Affairs
staff should have been following the situation more
closely.


3. (C) MOFA, Murakami indicated, was not terribly
disturbed by the likely recommendation coming out of
the ASEAN Plus Three experts group: an agreement
including only trade in goods among ASEAN Plus Three
members but with consideration of both geographic
and substantive expansion in the future. He added
that the "ASEAN Plus Six" idea floated by METI
Minister Nikai had become an issue only in April
when the two of the three former METI officials
serving on the experts group had begun to push the
idea (presumably at METI's behest). According to
Murakami, Deputy Foreign Minister for Economic
Affairs Mitoji Yabunaka had indicated internally
that the current content of the experts group report
was sufficient to allow METI Minister Toshihiro
Nikai to "save face" when it will almost certainly
be endorsed at the ASEAN Plus Three economic
ministers' meeting in August.


4. (C) Murakami believed ASEAN Plus Three talks
would begin with a government-led study early in
2007 with formal negotiations beginning in 2008.
Interestingly, Murakami said that, by chance, he had
been the MOFA representative at the ASEAN Plus Three
economic ministers' meeting in 2004 where the study
group had been launched because all the more senior
MOFA officials had been otherwise occupied.

TOKYO 00003251 002.2 OF 004


According to Murakami, former METI Minister Shoichi
Nakagawa had pushed back hard on the original
proposal, put forward by Chinese Commerce Minister
Bo Xilai for a government-based study group, which
led to the current "experts group" composed of
academics from ASEAN Plus Three members.

Lack of Agreement with ASEAN Will Hamper Japan
-------------- -


5. (C) Japan will enter this process at a serious
disadvantage, Murakami stressed, because, unlike
China and Korea, it still lacked a trade agreement
with ASEAN itself. The reason for this, he
indicated, was that Japan's proposals for the
framework of the agreement, which is based on
existing bilateral arrangements with different ASEAN
members, have been too complicated for most ASEAN
officials to understand easily. (He admitted having
difficulty himself in fully comprehending the
Japanese proposal.) This delayed progress as ASEAN
officials, tied up with a range of other bilateral
initiatives, simply did not have the time to work
out the implications of Japan's offered framework.
In addition, because the leaders' statement
launching the Japan-ASEAN talks disallowed the
possibility of renegotiating elements of existing
bilateral negotiations between individual ASEAN
members and Japan, many countries had little reason
to devote much time to the proposed ASEAN-Japan
pact.

Meltdown of Japan-ASEAN Negotiations?
--------------


6. (C) Murakami was, in fact, strongly pessimistic
that a Japan-ASEAN FTA could be achieved. Japan, he
confessed, was offering less coverage of trade in
goods in its current proposal to ASEAN than either
China or Korea already have provided in their
respective agreements with ASEAN. China and Korea
have covered 98-99 percent of existing trade in
goods, he said, while Japan's proposal only covered
92 percent, with agriculture largely excluded.
Murakami predicted that this discrepancy would
become much more obvious at the time of the ASEAN
Plus Three and East Asian Summit (EAS) meetings at
the end of the year. Japan had hoped that it could
compensate for its relatively weak offer on trade in
goods with promises of ODA, but this was a difficult
commitment to maintain, Murakami said. In addition,
arguments like those made by MOFA Economic Affairs
Bureau Director General Kaoru Ishikawa that the
investment benefits for ASEAN of a Japan-ASEAN
"economic partnership agreement" would make up for
the lack of liberalization in trade appeared to be
increasingly less credible to the ASEAN negotiators.
(Murakami added the Indian representatives in the
ongoing Japan-India FTA study group discussions had
dismissed the investment argument early on, and he
believed that achieving an actual FTA with India
would be difficult, if not impossible.)

Bureaucrats Fear Scapegoating If ASEAN Talks Fail
-------------- --------------


7. (C) His biggest concern, Murakami said, was
that Japan's FTA policy would become the target of
domestic political criticism following the EAS as
the degree to which the Japanese had fallen behind
China and South Korea in their negotiations with
ASEAN became more apparent. The Foreign Ministry
had come under harsh criticism from the LDP
leadership, notably Policy Research Committee
Chairman Hidenao Nakagawa, earlier this year for the
apparent lack of progress in Japan's FTA talks.
Murakami expected more of the same could be

TOKYO 00003251 003.2 OF 004


forthcoming after the 2006 EAS meeting.

Reform Needed for Success Remains Unlikely
--------------


8. (C) The crux of the problem, he confessed, was
Japanese refusal to liberalize its agricultural
trade. Nevertheless, the politicians would likely
prefer to bash the bureaucracy than to challenge the
Japanese farm lobby, with the end result possibly
being the creation of a USTR-like trade negotiating
body to respond to the criticisms without actually
resolving the basic policy problem. According to
Murakami, hopes that Japan's entry into FTA
negotiations might spur domestic economic structural
reform also had not been realized. Unless the
negotiations involved a critical strategic partner
(i.e., the United States) or, as in the WTO, were
global in nature so that Japan risked isolating
itself from the rest of the world if it did not
yield, domestic constituencies, particularly
agriculture, could effectively block possible
concessions, Murakami stated. He had little hope
that any of the current contenders to succeed Prime
Minister Koizumi could or would take on the domestic
vested interests in a way that would allow Japan to
make the concessions needed to pursue serious, high
quality FTAs with its trading partners.

Bilateral Efforts More Positive; Australia FTA Talks
Possible
-------------- --------------


9. (C) Murakami was far more upbeat over Japan's
bilateral FTA negotiations. Although the talks with
Korea remained suspended, other discussions were
progressing or had hope to progress, albeit at
varying paces. Plans for a meeting between the
Japanese Prime Minister and the Philippine President
to commemorate the fiftieth anniversary of the
resumption of diplomatic relations hold the
potential to advance the stalled negotiations with
the Philippines, although Murakami cautioned that
even the President herself might not be able to
control the penchant of her government's negotiators
to seek to reopen issues. The agreement with
Thailand had largely been vetted through the
Japanese government's legislative mechanism and only
awaited a resolution to the uncertain political
situation in Thailand so that it could be signed.
The negotiations with Indonesia had run into a hitch
because Japan sought investment provisions that
would require amending Indonesia's foreign
investment law. However, these talks faced no other
major substantive obstacles. Discussions with the
Chileans were proceeding smoothly; Murakami praised
their expertise and tact. The Chileans, he added,
might, however, be under a false assumption that the
Japanese negotiators are under more political
pressure to conclude an agreement quickly (because
of the ties of the Japanese Ambassador in Santiago
to the Prime Minister's faction in the ruling party)
than they, in fact, are.


10. (C) More surprising was Murakami's relative
optimism over the prospects for FTA negotiations
with Australia. Heavyweights within the LDP were
becoming increasingly supportive of the idea of a
Japan-Australia FTA. As a result, the opponents of
starting talks in the Ministry of Agriculture,
Forestry, and Fisheries and in the Diet have found
themselves more and more isolated. Murakami
speculated that negotiations could be announced as
early as an expected session between the Japanese
and Australian Prime Ministers at this year's APEC
Leaders' Meeting.


TOKYO 00003251 004.2 OF 004


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


11. (C) Murakami seemed significantly more
downbeat in this discussion than in our previous
exchanges. Should his fears of the political
fallout over the failure of Japanese economic
diplomacy that might come to light with the onset of
ASEAN Plus Three FTA talks be realized, the key
question is whether Japan's leaders will learn from
the experience or hunker down in denial, thus by
default paving the way for what they ostensibly fear
most, a Chinese growing influence in the region.
SCHIEFFER