JAPAN RECONSIDERS U.S. ROLE IN REGIONAL

C O N F I D E N T I A L SECTION 01 OF 05 TOKYO 002715 SIPDIS SIPDIS STATE PASS USTR FOR AUSTR CUTLER USTR ALSO FOR BEEMAN/MEYERS, NEUFFER PARIS FOR USOECD TREASURY FOR OFFICE OF EAST ASIAN NATIONS COMMERCE FOR OFFICE OF JAPAN - NMELCHER BERLIN FOR EMIN CEKUTA E.O. 12958: DECL: 06/15/2027 TAGS: ECON ECIN ETRD PREL APECO JA SUBJECT: JAPAN RECONSIDERS U.S. ROLE IN REGIONAL INTEGRATION; BILATERAL FTA REF: TOKYO 2481 Classified By: Ambassador J. Thomas Schieffer. Reason: 1.4 (b,d). ¶1. (C) Summary: In contrast to a year ago, Japanese officials see the United States as a much more active and influential player in the discussion on regional economic integration. A senior official of the Ministry of Foreign Affairs (MOFA) indicated that Japan's participation in various regional integration schemes is largely a "facade," with the main focus really on more substantive bilateral economic agreements. Japanese support for ASEAN-driven regional proposals aims at buying time during which Japan can avoid having to choose among regional architectures dominated by other players. The Ministry of Economy, Trade, and Industry (METI) takes a more positive view of economic integration, particularly the once-taboo idea of free trade agreements with the United States and other developed countries, but is balking at the idea of a Japan-China FTA. Private experts confirm that the economic impact of Japan's current set of agreements is limited and argue that it should start negotiations with China on an FTA soon while its negotiating leverage remains relatively strong. End summary. -------------- -------------- The Context: FTAAP and KORUS FTA Put U.S. Back in the Game -------------- -------------- ¶2. (C) As part of the regular consultations of the three Northeast Asia Chiefs of Mission, the economic minister-counselors of Embassies Tokyo, Seoul, and Beijing met June 7 in Tokyo with a series of interlocutors from MOFA, METI, the private sector, and academia on the topic of regional economic integration. This year's consultations took place in a substantially changed policy environment. In April 2006, the Japanese government, anxious to offer an alternative to the Chinese-sponsored study on a regional economic agreement centered on ASEAN Plus 3, endorsed the concept of the "Comprehensive Economic Partnership with East Asia" (CEPEA) formulated at METI under the direction of then METI Minister Toshihiro Nikai, which would include the 10 countries of the ASEAN Plus 3 group along with Australia, New Zealand, and India (the so-called "ASEAN Plus 6"). At that point in time, the Japanese had determined that U.S interest and involvement in East Asian economic integration was waning. ¶3. (C) Times have changed. The U.S. proposal that APEC take on the long-term goal of establishing a Free Trade Area of the Asia-Pacific and, most importantly, the successful negotiation of a draft KORUS FTA has forced the Japanese to recognize the United States as once again an active player in process of economic integration in East Asia. In particular, the Japanese government, under pressure from Japanese business groups worried by strengthened Korean competition in the U.S. arising from the KORUS FTA, has moved incrementally toward the previously taboo idea of launching a formal study of a U.S.-Japan free trade agreement. In recent private meetings with a number of METI and MOFA officials, including those cited in this cable, a bilateral FTA is now typically discussed as an inevitability, not a possibility, while hinging in the short term on the outcome of the July Upper House elections. -------------- MOFA: Regional Initiatives Simply a "Facade" -------------- ¶4. (C) In his June 7 meeting with the three minister-counselors, MOFA Economic Affairs Deputy Director General Sumio Kusaka noted that Japan had traditionally seen its relations with the United States and the other rich OECD countries and its ties to the less developed states in Asia as two separate "pillars" of its external economic policy. Although this concept remained the basis of Japanese policy, Kusaka said, this distinction, in practice, had become TOKYO 00002715 002 OF 005 blurred over time as Japan's "indirect" economic relationship with the developed world through the fragmented regional production chains of Japanese firms had become increasingly important. In addition, efforts toward greater cooperation between Japan and its neighbors had been "eroded" by the poor political relationship particularly with China and South Korea during the tenure of former Prime Minister Koizumi. The United States and Japan shared the goal of a more stable, prosperous, and democratic East Asia, Kusaka asserted, but also hinted that U.S. and Japanese approaches to the region might necessarily differ. ¶5. (C) In particular, Japan's thinking with respect to regional economic integration, according to Kusaka, was to let ASEAN take the lead. Japan, he stressed, could not ignore movement toward a regional economic agreement led by China, but the U.S. proposal for an FTAAP was simply too distant a prospect to address Japan's near-term concerns. Consequently, Japan sought to strengthen links with ASEAN as a way of counterbalancing China's growing influence in the region. That said, Kusaka added, it would be a mistake to think that the Japanese government was inextricably wedded to the CEPEA ("ASEAN Plus 6") proposal. "Maybe the ministry across the road (i.e. METI) said that," Kusaka observed, but such an arrangement, he noted, could be even more difficult to realize than the FTAAP or any of the other proposals currently in circulation. ¶6. (C) According to Kusaka, the appeal of the ASEAN Plus 3 or ASEAN Plus 6 proposals lies in their possible contribution toward realizing the political goal of an eventual "East Asian Community." In terms of actual economic benefit to Japan, however, they would likely yield little, he acknowledged. Even the Japan-ASEAN economic agreement currently under negotiation, which Japan hoped to conclude by December, would have no value added to trade liberalization, he said. In fact, these regional efforts, Kusaka said, were really only a "facade." Japan's bilateral "economic partnership agreements" were all much deeper and more economically beneficial to Japanese interests, Kusaka stressed. ¶7. (C) Kusaka indicated that what Japan gained through its support for ASEAN-centered regional initiatives, however, was time -- time during which it will not be forced to choose a model of regional integration determined by others. At present, he noted, the Japanese government itself lacked a clear consensus of what the next steps toward regional integration should be. He cited as an example the Ministry of Finance (MOF) which had been enraged by the METI-driven CEPEA proposal because it undermined MOF's support for the Chiang Mai and Asian Bond Market Initiatives, both of which centered on the ASEAN Plus Three countries. -------------- U.S.-Japan Integration Inevitably but Slow -------------- ¶8. (C) Second North American Affairs Division Director Koichi Mizushima reinforced Kusaka's points by emphasizing that Japan did not want to be bound to any particular model of economic integration. Mizushima recounted a meeting he had had with representatives of the Japan Business Federation (Keidanren) who had asked whether the Japanese government believed a regional economic framework excluding the United States was possible. Mizushima asserted that Japan's participation in the discussions of regional integration proposals that exclude the United States were primarily a way to keep good relations with its neighbors by expressing support for the Asian community concept. The economic basis for an effective Asia-only agreement does not exist. ¶9. (C) At the same time, however, Mizushima believed progress toward greater integration between Japan and the United States would inevitably be slow because of the need to address complex structural "behind the border" issues rather TOKYO 00002715 003 OF 005 than the simpler task of just cutting tariffs. Although acknowledging the pressure from business to shore up the relationship with the United States in light of the KORUS agreement, Mizushima said that the "sandwich argument" of being caught between two larger economies, which had led to support in Korea for the FTA with the United States, would obviously not work in Japan. That said, Kusaka noted the "positive" discussion of a bilateral U.S.- Japan FTA during the Prime Minister's April 2007 meeting with the President. Separately, as reported reftel, VFM Yachi repeatedly has suggested the two countries consider launching a study of a bilateral FTA. -------------- --- METI: Integration Should Include Large Economies -------------- --- ¶10. (C) The KORUS FTA has freed up discussion of the possibility of Japan beginning talks with other large developed economies, including the United States, according to Trade Policy Director General Masakazu Toyoda. Also meeting with the economic minister-counselors on June 7, Toyoda said METI appreciated the "stimulation" provided by KORUS to the debate in Japan on a possible U.S.-Japan FTA, but he acknowledged that other agencies, notably the Ministry of Agriculture, Forestry, and Fisheries (MAFF),did not share METI's perspective. The reason that most of Japan's existing "economic partnership agreements" have been concluded with developing Asian countries is because, even though Japan could expect relatively little from these countries in terms of concessions on services, investment, and intellectual property protection, they also did not make too many demands on Japan to liberalize agricultural trade. From the METI perspective, however, Japan now needed to reach out to more developed economies both to ensure its access into major markets and, especially in the case of the Japan-Australia agreement under negotiation, to shore up Japan's supplies of essential commodities like coal and iron ore. ¶11. (C) A broad regional agreement like the METI-sponsored CEPEA in combination with an eventual bilateral FTA with the U.S. would contribute to the eventual realization of the FTAAP proposed by the United States, Toyoda argued. In contrast, an ASEAN Plus 3-based arrangement dominated by China and centered on tariff reductions only would probably not generate the degree of liberalization needed to allow for eventual U.S. participation. The addition of Australia, New Zealand, and India -- all three of which are already engaged in bilateral negotiations with ASEAN -- will strengthen movement toward more a more meaningful agreement. Even India, although difficult on trade, would bring to the discussions a relatively strong regime with respect to intellectual property protection and services, Toyoda noted, and effectively raise the level of ambition of the ASEAN Plus 6 undertaking vis-a-vis the ASEAN Plus 3 version. ¶12. (C) Within Northeast Asia, however, although the Chinese, Japanese, and Korean leaders had endorsed both the launching of negotiations on a three-way investment agreement and a study on a possible free trade agreement during their meeting in January, Toyoda indicated that greater integration among the three major economies of the region remains problematic. China, he said, was reluctant to accept the terms of the "almost perfect" Japan-Korea investment agreement that would form the basis of the three-way pact. In addition, the Japanese themselves were unenthusiastic about the idea of a free trade agreement with China. According to Toyoda, not only was MAFF worried about the prospect of increased Chinese agricultural imports, but METI itself had concerns about the extent to which hidden subsidies might give Chinese manufactured products an advantage in the Japanese market. As for the stalled Japan-Korea bilateral free trade agreement negotiations, Toyoda voiced the opinion that, while most observers had focused on Japanese unwillingness to meet the Koreans' demand that Japan liberalize 90 percent of its agricultural trade, TOKYO 00002715 004 OF 005 the Koreans, in the METI view, harbored concerns over competition from Japanese manufacturers as well that had led to the impasse in the talks. ¶13. (C) As for the United States, Toyoda asked that the USG continue to advocate for the Free Trade Area of the Asia-Pacific while at the same time pursuing its bilateral negotiations with other Asian countries such as Malaysia. He hoped for quick congressional approval of KORUS as a boost for trade liberalizers in Japan. Toyoda also suggested the United States should consider arranging for private experts to study the feasibility of a U.S.-Japan free trade agreement. -------------- -------------- Private Analysts: Japan Needs Agreement with China -------------- -------------- ¶14. (SBU) According to Keio University Professor Fukunari Kimura, an expert on regional integration, the reason for the difficulty in achieving greater integration among the three Northeast Asian economies lies mostly with Japan, which is hesitant to negotiate an economic agreement with China. He cited three types of Japanese interests that would resist free trade agreement negotiations with China: farmers who hope to maintain their sheltered markets, manufacturers that want to gain greater investment protections from China before liberalizing trade, and individuals worried about adding to China's growing geo-strategic influence. As a result, even the three-way investment agreement will take 2-3 years to negotiate, Kimura estimated. Nevertheless, Nomura Securities economist C.H. Kwan noted that several studies had shown that the economic benefits of a China-Japan free trade agreement outweighed those of any other possible arrangement because of the large size of the two economies, their complementarity, and the high tariffs maintained by China on a number of goods. Both Kimura and Kwan believed that the sooner Japan began negotiations on an free trade agreement with China the better as Japanese leverage would decline as China's rapid economic growth continued. ¶15. (SBU) As for Japan's other "economic partnership agreements," Kimura indicated that his research had shown them to be of little significance. Because Japan had chosen the trade volume rather than tariff line modality, the agreements generally covered less than 90 percent of tariff lines. Even the agreement with Australia currently under negotiation will have a relatively small economic impact. In Kimura's view, agreements that improve the investment climate in the region hold more potential for stimulating economic growth in the region than measures aimed at liberalizing trade in goods. -------------- - Comment: Now That We Have Their Attention.... -------------- - ¶16. (C) Although China's growing regional influence remains foremost in the minds of our Japanese interlocutors, it is clear that events over the past year have reaffirmed to them U.S. determination to have a role in whatever regional economic architecture emerges in East Asia. For their part, however, the Japanese have yet to achieve a consensus among themselves on what the architecture should look like and want to keep their options open. Although the Japanese will continue to make positive noises regarding the Asians-only models for regional architecture to show solidarity with their neighbors, the KORUS agreement in particular has raised the question of whether an agreement, either regional or bilateral, that includes the United States is not only possible but perhaps even necessary for Japan. ¶17. (C) In recent private discussions with MOFA and METI officials, including some of those cited above, the ease with which a possible FTA with the U.S. is discussed has become astounding. A year ago the topic was taboo; even six months ago the most favorably inclined raised the notion only with TOKYO 00002715 005 OF 005 great caution. Now it is casually bandied about in private conversation as an inevitability. Publicly, however, the topic is still handled with great care due to political sensitivities especially in the agricultural community. If the Upper House elections reaffirm an Abe administration, we expect the GOJ will approach us on an FTA, perhaps as VFM Yachi did to propose a joint study. SCHIEFFER