Global Policy Forum

By Hussain Khan

The failure of bilateral trade talks between Mexico and Japan on October 16 has shocked both sides, particularly Japan. The talks foundered on the question of what to do about Japan's farmers, among the most highly subsidized in the world and the power base of the ruling Liberal Democratic Party (LDP). Having reached a general agreement on non-agricultural issues, three ministries, including the Ministry of Economy, Trade and Industry (METI), thought they had reached an effective agreement to create Japan's most extensive free trade pact. The outline was to be announced in a summit statement, but the passages were omitted when Mexico refused to accept a pact that excluded farm products. The failure of the talks has dismayed Prime Minister Junichiro Koizumi, fresh off victorious party elections that analysts have interpreted as a mandate for change and reform of Japanese society.

The talks collapsed despite strong political will on both sides to conclude them and despite instructions from both Mexican President Vicente Fox and Koizumi to their working-level ministers to make the necessary concessions. President Fox had made a personal four-day trip to Japan in an attempt to seal the trade pact, which would have put an end to nearly a year of intensive negotiations that began last October.

However, the reasons for the failure go deep into Japanese society and extend back for centuries. Japan's political leaders still have no clear plan as to how they are going to compensate the country's politically powerful farmers, who, for instance, are protected by tariffs against foreign rice of up to 406 percent according to the World Bank. That drives Japanese consumers to pay on average twice as much for farm produce as they would if there were no price supports. Without first making such plans acceptable to its farmers, Japan is not in a position to offer tangible concessions to any trading partner. To expect a successful conclusion without risking the wrath of the LDP's power base was nothing more than wishful thinking. Japanese politicians are thus not prepared to face this bitter reality. They cannot think of any realistic plan that would really satisfy the farmers, who have kept the LDP in power for more than a half-century, since the end of World War II when the victorious United States ordered Japan to start its experiment with democracy. The LDP has lost power only for one extremely brief period during the last 50 years or more.

The party's base stems from a social system in place long before the Meiji revolution, or reformation, more than 150 ago. At that time, Japan's new era of modernity and industrialization gave birth to the leftist labor movement, which later flourished in the chaos of post-World War II as Marxist governments started to spread across Asia. Japan's main opposition, the Socialist Party, thrived on the support of the labor movement in industrialized areas and in the cities. Japan, however - and especially the LDP - never lost the traditions of its daimyos, the territorial magnates who dominated much of the country from about the 11th to the 19th century. Like the big landlords in almost all developing countries, the daimyo dynasties had a strong hold on the rural population over several centuries. This cultural and traditional background propped up the LDP and steered it safely through the postwar turbulence.

Most present LDP members of the Diet (Parliament) are the grandsons of first-generation parliamentarians. They have inherited their seats in the Diet like the landlords who inherited their ancestral lands and passed them on to later generations. Although the post-World War II land reforms wiped out the landlords, the traditional cultural and political influence of the daimyo dynasties still dominates Japanese rural society. This is a major reason why what started out as a multi-party democracy has been dominated for more than a half century by the LDP. Ruling party members have no intention of taking the risk of eliminating their own political existence for the sake of concluding an FTA with Mexico or any other country, which would spread discontent in their electoral college from an uprising by the farmers in their respective rural areas. Therefore, they seriously did not try to envisage any compensation plan.

The Japanese media, the trading companies and the manufacturers have been pressing the Japanese government hard to conclude as many FTAs as Mexico has - the country has signed more than 30 free trade agreements and famously enjoys the benefits of the North American Free Trade Agreement (NAFTA) with the United States and Canada. NAFTA not only almost tripled American trade with Mexico and nearly doubled it with Canada, but also made all three members more competitive internationally. NAFTA proved definitively that both developed and developing countries gain from free-trade partnerships. It enabled Mexico to bounce back quickly from its 1994 financial crisis, launched the country on the path to becoming a global economic competitor and supported its transformation to an open democratic society.

In 2002, Japan's exports to Mexico totaled 472.4 billion yen (US$4.3 billion), while Mexico's exports to Japan came to 225.3 billion yen, according to Japanese trade statistics. By taking a tough stand on farm products, Japan is costing its industrial exporters an estimated 400 billion yen a year.

In the beginning, negotiators had bridged gaps in most areas except for tariff-free quotas on items such as pork and orange juice, sources said. The main stumbling block has been Mexico's demand to remove tariffs on pork, which accounts for about 10 percent of Mexico's exports to Japan. Japan sought to break the impasse with low -tariff import quotas on pork and targeted their level to around double the current amount now imported from Mexico. According to Japanese officials, the proposal offered tariffs of around 2 percent on pork imports from Mexico, compared with the current 4.3 percent.

Under the plan, the lower tariff would have been applied to 70,000 to 80,000 tonnes of Mexican pork. However, Mexico was not impressed, and made a counter demand for a 250,000-tonne tariff-free quota. "Considering the reaction of domestic farmers, 70,000 tonnes is the most we can compromise," commented a senior Japanese official in the Agriculture Ministry. A representative of the Mexican negotiating team said the proposal did not even amount to a compromise. But Japan rejected the plan to protect its 9,000 domestic pig farmers, who are spread over all 47 prefectures of Japan. It would have affected all LDP electoral seats throughout all rural areas of Japan.

Mexico first accepted Japan's proposal to increase low-tariff imports of pork to 75,000 tonnes from 40,000 tonnes over five years, on condition that the agreement be reviewed after three years. But later, Mexico increased its demand over orange juice. Mexico initially wanted Japan to phase out tariffs on imports of orange juice over 10 years. Japan rejected this and later proposed creating a tariff-free quota on orange juice imports, sources said.

Mexico agreed on the idea of a quota but pushed for a larger volume, which the Japanese then rejected. The Japanese side agreed to establish a low-tariff quota for pork imports but rebuffed the Mexican tariff-free juice plan, a product that Mexico has nearly no track record of exporting to Japan.

The failure of the agriculture provisions opened up other problems. Mexico recently started excluding companies from nations with which it has no FTA from participating in bids for government procurement contracts. Mexico argues that the pact should cover a variety of agricultural and other products. Aside from pork, which makes up nearly half of Mexico's agricultural exports to Japan, Mexico wants access to product markets of which it exports little now but sees substantial potential for growth, such as chicken, beef, sugar, flour, alcohol and leather products.

Meanwhile, Japan is demanding that Mexico change its stance on the "rule of origin" on steel imports. Mexico has offered to open its market for steel imports but has imposed a rule that would make it impossible for Japanese steel makers to move into the market. The ore used to make the steel products must be from Japan - a subterfuge at best. Japan, a nation with few natural resources, imports virtually all of its iron ore. The country had sought a shortening of the grace period set by Mexico for the repeal of tariffs on automobile imports and the deregulation of limits on steel production origins as well.

A Japanese official slammed Mexican negotiators after the meeting. He said that despite an agreement earlier in the day between Koizumi and Fox to "agree on the FTA by the end of the day", the Mexican side came up with demands too tough for Japan to swallow. Observers attributed the breakdown to political pressure on both sides, making it difficult to compromise.

Both countries are at precarious stages politically. In July, Fox's National Action Party lost seats in its lower-house election for Congress. Fox's public support has declined amid a struggling domestic economy, and pressure has mounted from industry groups. Representatives of these groups accompanied the Mexican delegation. Japan, meanwhile, will have its own lower-house election in November and an upper-house election is scheduled for next summer. The negotiations have been overshadowed by a looming general election for the House of Representatives on November 9, making Japan hesitant to make concessions that could hurt domestic farmers, one of the main support groups of Koizumi's Liberal Democratic Party.

In an interview with reporters on Tuesday, Fernando de Jesus Cabales Clariond, Mexico's secretary of the economy, said that agricultural issues inevitably become political, given Japan's impending elections. Analysts suggest that Mexico, understanding that the Japanese government is reluctant to compromise before the general election, may be counting on gaining further concessions by postponing negotiations. Fox has said the issue is not the timing of the FTA but its content.

As the ministerial talks resumed, the Mexican side showed no sign of compromising. In fact, a request to establish a tariff-free quota for orange juice could have been interpreted as a conscious effort to delay the negotiations. "Their demands are too high," said Agriculture Minister Yoshiyuki Kamei, sealing the fate of the latest round of talks. He blamed the impasse on Mexico, complaining that Mexico "presented too high a hurdle" over products such as orange juice and pork.

The FTA with Mexico would have been Japan's second, following one with Singapore signed in January 2002. It was a litmus test for Japan, which is lagging in bilateral agreements compared to Europe, America and even China. Japan was feeling restless on the speed with which China was concluding FTA agreements China with the South Asian countries and it wanted to compete with China in this respect. After the success with Mexico, Japan wanted to conclude such agreements with other Southeast Asian countries. Koizumi had expressed such a desire in a recent Association of Southeast Asian Nations (ASEAN) conference held in Indonesia. At an upcoming ASEAN summit meeting in December, the Japanese government plans to agree to FTA talks with Thailand, Malaysia and the Philippines.

But after noting Mexico's negotiating stance, domestic farming interests are likely to strengthen their guard. Given that the Asian countries are demanding a lifting of restrictions on worker mobility, the negotiations may be even more difficult than those with Mexico. Unless Japan structurally reforms its agriculture and labor markets, it will fall behind in the global trend of securing FTAs. The schedule for future talks has not been set, putting the original plan to sign an FTA within the year in doubt. This does not bode well for the future FTA negotiations with such Asian nations as Thailand, which will require even more compromises on agricultural imports.

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