Economic Partnership Agreements and Trade Liberalization An Analysis Based on New Trade Liberalization Ratios

Transcription

1 Economic Partnership Agreements and Trade Liberalization An Analysis Based on New Trade Liberalization Ratios By Keiichiro Oizumi Senior Researcher Center for Pacific Business Studies Economics Department Japan Research Institute Summary 1. Traditionally Japan has approached trade liberalization within the GATT/WTO framework. In recent years, however, the focus has shifted to economic partnership agreements (s). The aim of trade liberalization under s is, in principle, to achieve substantially all liberalization within a reasonable period, as stipulated in Article 24 of the GATT, by removing tariffs from at least 90% of imports between the partners within 10 years from the effectuation of the agreement. Japan s progress toward trade liberalization can be traced through the progress of its s. 2. There have been persistent accusations that Japan has been slow to liberalize its trade. Japan has also come in for criticism on other grounds, including the details of liberalization under s, and the methods used to calculate the level of liberalization. The interpretation of trade liberalization under s is an important perspective when considering Japan s approach to trade liberalization. For this article, we calculated trade liberalization ratios by comparing the removal or reduction of tariffs under schedules of concessions with trade data and effective tariff rates, in order to ascertain Japan s real progress toward liberalization. This comparison covered three countries with which Japan has signed s: Malaysia, Thailand and the Philippines. 3. Specifically, we calculated liberalization ratios not only on the basis of imports (import-based liberalization ratios) and effective tariff rates for specific items (tariff item liberalization ratios), but also on the basis of total exports from the partner countries (export-based liberalization ratios), in order to ascertain the level of market access for key export items from those partner countries. 4. Import-based liberalization ratios rise to over 90% on both sides within 10 years (by the 11th year) after the effectuation of the agreements. In the 11th year, Japan s liberalization ratio is lower than that of its partners. However, Japan has taken the lead in removing tariffs, while its partners are still in the process of a phased improvement in their liberalization ratios. However, import-based liberalization ratios can lead to over-estimation, since they do not to reflect progress toward the liberalization of restricted items. An analysis using liberalization ratios based on tariff items confirms that Japan s liberalization ratios are lower than that of its partners, and that many items are still subject to tariffs. On the Japanese side, this is especially true of agricultural products and foodstuffs, while the partner countries commonly apply tariffs to automobile-related items. Export-based liberalization ratios are generally high, indicating that liberalization ratios under the reflect the export mix of the partner countries. This can be seen as evidence that liberalization by Japan has made a significant contribution to export promotion and growth in the partner countries. 5. On the other hand, Japan s liberalization ratios for agricultural and food items remain low. The fact that many of these items are excluded from negotiations is indicative of the Japanese government s reluctance to discuss liberalization in this area. In addition, there is a strong possibility that Japan is limiting exports of key agricultural and food items from the three partner countries. 6. In terms of trade liberalization ratios, Japan has made substantial overall progress toward trade liberalization through s. The fact that its export-based trade liberalization ratio is especially high suggests that Japan s trade liberalization efforts have been of high quality and compatible with the export structures of its partners. However, there is clear evidence that Japan s trade liberalization ratio for agricultural and food items is low. The time has come for Japan to indicate at home and internationally the stance that it plans to take toward liberalization in this area. 2 RIM Pacific Business and Industries Vol. VIII, 2008 No. 28

2 Introduction For many years Japan has pursued trade liberalization within the GATT/WTO framework. In recent years, however, Japan s liberalization efforts have been based primarily on economic partnership agreements (s). In addition to trade liberalization, s are also designed to facilitate service trade and investment, ease restrictions on the movement of people, protect intellectual property rights and strengthen economic cooperations in a wide range of areas, including the establishment of frameworks for cooperation. To maintain compatibility with World Trade Organization (WTO) rules, s are based on the principle that substantially all trade will be liberalized within a certain fixed period. With WTO negotiations stalled, Japan s progress toward trade liberalization can be measured by its progress toward the establishment of s. Japan is frequently accused of being slow to open up its markets, and there has been persistent criticism about the liberalization of agricultural products in particular. There has also been criticism relating to the quality of s, including a comment by Ito [2007] that Japan is achieving a lower standard of liberalization than its partners. Hisano and Kimura [2007] are critical of the evidence used by the government to calculate liberalization levels. The method used to measure progress toward trade liberalization under s will be a key perspective when considering the future of liberalization in Japan. However, information released by the government merely provides an overview of the situation and not a full picture. For example, we cannot be certain about the path along which liberalization will proceed in the first 10 years after the effectuation of an, or what progress has been made toward the liberalization of agricultural and food items. The only information about liberalization levels consists of importbased calculations about levels 10 years in the future. For this article, we compiled a data base by collating timetables for the removal or reduction of tariffs under schedules of concessions with trade statistics and effective tariff rates for each country. We then calculated the percentages of tarifffree imports (hereafter import-based liberalization ratios), which are the usual indicators of levels of trade liberalization and the percentages of tariff items that are tariff-free (hereafter tariff-based liberalization ratios). Furthermore, because the purpose of an is to strengthen economic ties with the other partner, we introduced a new concept of calculating liberalization ratios based on the total exports of partner countries (hereafter export-based liberalization ratios). This concept can be used to indicate the level of liberalization in relation to the major export items of partner countries. Malaysia, Thailand and the Philippines, which have already signed s with Japan, were chosen for this analysis. Since an requires liberalization by both parties, we calculated liberalization ratios not only for Japan but also for these three partner countries. This article is structured as follows. In Part I, we confirm that Japan is implementing trade liberalization within the framework of s. In Part II, we analyze trade liberalization negotiations within s and examine the content of schedules of concessions. In Part III, we use calculations of import-based liberalization ratios to identify time differences in the tariff removal timetables of Japan and its partners. In Part IV, we list the results of calculations of tariff-based liberalization ratios and confirm that many items are still subject to tariffs on the Japanese side. In Part V, we use calculations of export-based liberalization ratios to show that there is a close correlation between trade liberalization on each side and the export mix of the other partner, and that the benefits of liberalization are generally substantial. In Part VI, we use the results of calculations of liberalization ratios for agricultural and food items to show that Japan is limiting imports of many key agricultural food items from its partners, and that the quality of the negotiations is being affected by the large number of items excluded from the negotiations by Japan. RIM Pacific Business and Industries Vol. VIII, 2008 No. 28 3

3 I. Economic Partnership Agreements and Trade Liberalization by Japan (1) Japan s FTA Strategy For many years Japan has pursued multilateral trade liberalization primarily within the GATT/ WTO system. In this context, advocacy of regional free trade agreements (FTAs) and economic integration has actually been seen as working counter to the GATT/WTO system. However, in recent years three factors have caused FTAs to become the main focus of Japan s trade liberalization efforts (Urata [2007]). First, at the global level, there has been a dramatic increase in the number of FTAs signed. Between 1950 and 1989, only 19 FTAs were signed. Eighteen were signed between 1990 and 1994, 30 between 1995 and 1999, and 57 between 2000 and As the number expanded, there was a growing perception within Japan that delays in signing FTAs could disadvantage Japan economically. For example, Japanese companies exporting to Mexico were placed at a disadvantage after the North American Free Trade Agreement (NAFTA), linking Mexico with the United States and Canada, took effect in 1994, and after Mexico signed a FTA with the EU in When the Mexican government ruled limited government procurement to FTA partners, Japanese companies were also shut out of that market. To avoid discriminatory treatment in the Mexican market, Japanese companies pressured the Japanese government to negotiate an FTA with Mexico. This situation provided the impetus that led to the signing of the Japan-Mexico Free Trade Agreement. Second, the path to global-level multilateral negotiations was closed when the GATT/WTO Doha Round stalled. Thereafter, the WTO became involved in a wide range of areas, such as non-agricultural market access (NAMA), agriculture, services, development, rules relating to antidumping measures, subsidies and other aspects, trade facilitation, and intellectual property rights. However, progress was uneven because of Third World opposition to the liberalization policies sought by developed countries, and because of the EU s reluctance to liberalize agricultural products. Ultimately, the WTO negotiating process became dysfunctional. This situation focused attention on fact that progress could be achieved more rapidly by negotiating FTAs among a limited number of countries. There was also general acceptance of the view that the establishment of FTAs would complement the role of the WTO and accelerate the move toward trade liberalization on a global scale. Third, FTAs came to be seen as a policy tool for revitalizing Japanese economy. Japan s East Asian neighbors were enjoying remarkable economic growth, and there was increasing concern that Japanese companies would be at a disadvantage when using East Asian production networks if Japan failed to ride the FTA wave. Japan s growth potential has been weakened by a falling birthrate, demographic aging and a shrinking population. In this context, economic partnership agreements, including FTAs with East Asian economies, are seen as important policy tools for maintaining sustainable growth. (2) What is Economic Partnership Agreement? Since signing its first with Singapore in January 2002, Japan has since signed agreements with Mexico, Malaysia, the Philippines, Chile, Thailand, Brunei and Indonesia. Agreements with Table 1 Economic Partnership Agreements (March 2008) Start of Negotiations Signing Effectuation Singapore* January 2001 January 2002 November 2002 Mexico November 2002 September 2004 April 2005 Malaysia January 2004 December 2005 July 2006 Philippines February 2004 September 2006 Chile January 2005 March 2007 September 2007 Thailand February 2004 April 2007 November 2007 Brunei February 2006 June 2007 Indonesia January 2007 August 2007 All ASEAN April 2005 * The agreement with Singapore was revised in January 2007, signed in March, and took effect in September. Source: Compiled using data from the website of the Ministry of Foreign Affairs 4 RIM Pacific Business and Industries Vol. VIII, 2008 No. 28

4 five of these eight countries Singapore, Mexico, Malaysia, Chile and Thailand are already in effect (Table 1). In August 2007, Japan also reached basic agreement with ASEAN. Each of the agreements consists of the basic agreement and annexes. They are weighty documents, with some consisting of over 1,000 pages. Table 2 shows the contents of Japan s s with Malaysia, Thailand and the Philippines, together with the annex titles for each agreement. The common items covered in all three agreements are (1) the trade in goods, (2) rules of origin, (3) customs procedures, (4) the trade in services, (5) investment, (6) intellectual property, (7) cooperation, (8) the dispute settlement, and (9) competition. Agreements with some countries also Table 2 Comparison of Economic Partnership Agreements Preamble Chapter 1 General provisions General provisions General provisions Chapter 2 Trade in goods Trade in goods Trade in goods Chapter 3 Rules of origin Rules of origin Rules of origin Chapter 4 Customs procedures Customs procedures Customs procedures Chapter 5 Compulsory standards, voluntary standards, Paperless trading Paperless trading conformity assessment procedures Chapter 6 Sanitary and phytosanitary measures Mutual Recognition Mutual Recognition Chapter 7 Investment Trade in services Trade in services Chapter 8 Trade in services Investment Investment Chapter 9 Intellectual property Movement of natural persons Movement of natural persons Chapter 10 Controlling anti-competitive activities Intellectual property Intellectual property Chapter 11 Improvement of business environment Government procurement Government procurement Chapter 12 Cooperation Competition Competition Chapter 13 Dispute settlement Cooperation Improvement of business environment Chapter 14 Final provisions Dispute settlement Cooperation Chapter 15 Final provisions Dispute avoidance and settlement Chapter 16 Final provisions Annexes 1 Schedules in relation to Article 19 (Chapter 2) Schedules in relation to Article 18 (Chapter 2) Schedules relating to Article 18 (Chapter 2) 2 Product specific rules (Chapter 3) Product specific rules (Chapter 3) Product specific rules (Chapter 3) 3 4 Minimum data requirement for certificate of origin (Chapter 3) Reservation for existing and future measures (Chapter 7) 5 Financial services (Chapter 8) Schedule of specific commitments in relation to Article 99 (Chapter 8) Lists of most-favored-nation treatment exemptions in relation to Article 101 (Chapter 8) Source: Compiled from the respective economic partnership agreements Minimum data requirement for certificate of origin (Chapter 3) Annex on electrical products (Chapter 6) Schedule of specific commitments in relation to Article 77 (Chapter 7) Schedules in relation to investment (Chapter 8) Specific commitments for the movement of natural persons (Chapter 9) Minimum data requirement for certificate of origin (Chapter 3) Sectoral annex in relation to Article 61 (Chapter 6) Financial services (Chapter 7) Schedule of specific commitments and list of most-favored-nation treatment exemptions (Chapter 7) Reservation for existing and future measures (Chapter 8) Specific commitments for the movement of natural persons (Chapter 9) RIM Pacific Business and Industries Vol. VIII, 2008 No. 28 5

5 cover the movement of natural persons, government procurements, and the improvement of the business environment. The sections of the agreements relating to trade liberalization are Chapter 1 ( trade in goods ), Chapter 2 ( rules of origin ) and Chapter 3 ( customs procedures ). On the question of why Japan has opted for s rather than FTAs, the Ministry of Foreign Affairs stated in 2007 that given the economic reality of interdependence driven by Japanese direct investment, agreements should be comprehensive in their coverage and not limited to border measures, such as tariffs and foreign investment rules. In fact many Japanese companies are active overseas, and moves to strengthen Japan s economic relationships with other countries need to focus not only on the revitalization of trade, but also on the facilitation of the overseas activities of Japanese companies. In particular, the reinforcement of the production networks that Japanese companies have built in East Asia since the 1970s is seen as absolutely essential to sustainable growth in Japan. These s with their wideranging content can be seen as an evolved type of FTA. II. Liberalization Negotiations under Economic Partnership Agreements were partially clarified in the Understanding on the Interpretation of Article XXIV of the General Agreement on Tariffs and Trade, which was adopted during the 1994 Uruguay Round. Within a reasonable length of time is taken to mean within 10 years of the signing of an agreement, while calculations to determine whether measures relate to substantially all the trade have been based on weighted averages of the value of trade. No specific ratios have been provided for the latter criterion, but the EU regards 90% of trade (more precisely, 90% of imports) as the standard, and in recent years this figure has been used as a basic yardstick. Japan s moves toward trade liberalization through s conform to these broad WTO guidelines, since in principle Japan aims to eliminate tariffs on at least 90% of total trade (specifically imports) within 10 years (Table 3). For example, tariffs will be removed on 94.7% of Japan s imports from Malaysia and on 99.3% of Malaysia s imports from Japan within 10 years of the effectuation of the. The corresponding figures for the are 91.6% and 97.4%, and those for the are 91.6% and 97.0% respectively. (2) Trade Liberalization Negotiations Trade negotiations under s are handled col- (1) Compatibility with WTO Rules We will now look at the relationship between trade liberalization under s and the WTO. In principle, the WTO prohibits its member states from treating specific countries on a discriminatory basis. However, the WTO has adopted a stance of tolerating regional FTAs, provided that they result in the elimination of barriers on substantially all the trade within a reasonable length of time, on the grounds that closer integration between the economies of the parties to such agreements can contribute to the expansion of free trade. These ambiguous criteria within a reasonable length of time and substantially all the trade Table 3 Tariff Elimination Levels (within 10 Years of Effectuation) Japan Other Partner (%) Pre-Effectuation After 10 years Pre-Effectuation After 10 years Japan-Singapore Japan-Mexico Japan-Chile Japan-Brunei Japan-Indonesia Source: Council on Customs, Tariff, Foreign Exchange, Saikin no Kanzei wo Meguru Kokusaiteki Shomondai ni Tsuite [Recent International Problems Relating to Tariffs] 6 RIM Pacific Business and Industries Vol. VIII, 2008 No. 28

6 laboratively by the Ministry of Foreign Affairs, the Ministry of Economy, Trade and Industry, the Ministry of Agriculture, Forestry and Fisheries and the Ministry of Finance (known as the joint chair ministries ). The Ministry of Foreign Affairs coordinates activities by the other ministries and drafts agreement documents, while the other ministries handle negotiations in individual product areas. For example, minerals and manufactured goods are handled by the Ministry of Economy, Trade and Industry, agricultural goods, forest products and fish by the Ministry of Agriculture, Forestry and Fisheries, and liquor, tobacco and salt by the Ministry of Finance. The Ministry of Finance is also responsible for general negotiations concerning the administration of import tar- Major Sections Table 4 HS Codes and Items in Effective Tariff Schedules HS2 (Chapter) HS4 (Heading) HS6 (Item) (Items, %) Japan Malaysia Thailand Philippines HS9 Rate HS9 Rate HS9 Rate HS10 Rate 1 Live animals and animal products Vegetable products Animal or vegetable fats and oils and their cleavage products, prepared edible fats; animal or vegetable waxes Prepared foodstuffs; beverages, alcohol, vinegar; tobacco and manufactured tobacco alternatives Mineral products Products of the chemical or allied industries , , , , Plastics and articles thereof; rubber and articles thereof Raw hides and skins, leather, fur skins and articles thereof; saddlery and harness; travel goods, handbags and similar containers; articles of animal gut 9 Wood and articles of wood; wood charcoal; cork and articles of cork; manufactures of straw, of esparto or of , other plaiting materials; basketware and wickerwork 10 Pulp of wood or of other fibrous cellulosic materials; waste and scrap paper or paperboard; paper and paperboard and articles thereof 11 Textiles and textile articles , , , Footwear, headgear umbrellas, sun umbrellas, walkingsticks, seat-sticks, whips, riding-crops and parts thereof; prepared feathers and articles made therewith; artificial flowers; articles of human hair 13 Articles of stone, plaster, cement, asbestos, mica or similar materials; ceramic products; glass and glassware Natural or cultured pearls, precious or semi-precious stones, precious metals, metals clad with precious metal, and articles thereof; imitation jewelry; coins 15 Base metals and articles of base metal Machinery, mechanical appliances, electrical equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, , , , and parts and accessories of such articles 17 Vehicles, aircraft, vessels and associated transport equipment Optical, photographic, cinematographic, measuring, inspection, precision, medical or surgical instruments and apparatus; clocks and watches; musical instruments; parts and accessories thereof 19 Arms and ammunition; parts and accessories thereof Miscellaneous manufactured articles Works of art, collectors pieces, and antiques Total 1,250 6,344 9, , , , Source: Effective Tariff Schedule (January 2006) for Japan, World Tariff Data Base (downloaded November 2007) for Malaysia, Thailand and the Philippines RIM Pacific Business and Industries Vol. VIII, 2008 No. 28 7

7 iffs. Before negotiations begin, each country prepares requests and offers to be presented to the other party. The negotiating process starts with the exchange of these requests and offers, and specific negotiations are based on each country s schedule effective tariff rates. These schedules are compiled according to the nomenclature in the International Convention on the Harmonized Commodity Description and Coding System (HS Codes). The HS system is divided into 21 major sections, which are subdivided into 97 in 2-digit codes (chapters), approximately 1,250 in 4-digit codes (headings), and approximately 6,350 in 6-digit HS codes (items), together with 9-digit or 10-digit codes. Down to six digits, the same codes are used throughout the world, but the more detailed 9- and 10-digit categories are left to the discretion of individual countries. For example, Japan has 9,108 in 9-digit codes, while Malaysia has 10,577, Thailand 8,314, while the Philippines has 10,770 in 10-digit codes (Table 4). Liberalization negotiations for s cover vast numbers of items on each side, and different items may be linked together as focal points for these talks. For example, when Japan and Thailand negotiated their, Thailand asked Japan to liberalize agricultural products in exchange for a reduction in import tariffs on motor vehicles and steel. Furthermore, negotiating cards are not necessarily goods. Japan uses ODA and other forms of cooperation as negotiating cards when discussing tariff reductions with other countries. (3) Schedules of Concessions Items for which tariffs have been reduced or removed as a result of trade liberalization negotiations are listed in schedules of concessions. Tables 5 and 6 are extracts from the schedules of concessions for the (1). Outcomes from trade liberalization negotiations are broadly divided into the following six categories. The first category is immediate removal, shown in the table as A. In these cases, tariffs are removed from the date on which the agreement takes effect, and items that have zero tariff rates before the date of effectuation are also included. Japan s effective tariff rates on most mineral and manufactured goods are set to zero from the dates on which agreements take effect. The second category is phased removal (B). Tariffs on items in this category are removed over a specified number of years. Sometimes items in this category may be designated as B5 or B7. Tariffs on B7 items are removed over seven years, which means that tariff rate falls to zero in the seventh year after effectuation (2). In the annex to the with Thailand, items in this category are designated simply as B, but a reduction schedule is also shown (Tables 5, 6). Usually tariffs are reduced by the same percentage each year. The third category is phased reduction (P). Tariffs on these items are gradually reduced but not entirely removed. For example, the tariff on chicken meat imported from Thailand to Japan falls from 11.3% immediately after the took effect to 8.5% in the sixth year and is maintained at that level after that time. Items in the fourth category (Q) are subject to quotas, and low or zero tariffs are applied to the items in question within quantitative limits. Normal tariff rates (effective MFN rates) apply to imports in excess of these quotas. Examples include bananas imported into Japan and steel imported by partner countries (3). The fifth category (R) consists of items scheduled for renegotiation after a specific period. Examples include palm oil imported from Malaysia into Japan. Items in the sixth category (X) are excluded from negotiations and are not covered by any commitments made during negotiations. Many items in this category are agricultural products, such as rice in Japan and tobacco in Malaysia and Thailand. Detailed conditions may also be added to agreements as notes. For example, the with Thailand provides for an import quota of 440,000 tons with a zero tariff rate for Japanese steel in the first year, with subsequent quotas to be determined by consultation. In some cases there is no timetable for the removal of tariffs, and notes stipulate that 8 RIM Pacific Business and Industries Vol. VIII, 2008 No. 28

8 Table 5 Schedule of Concessions under (Japanese Import Tariffs) Column 1 Column 2 Tariff item number Chapter 9 Column 3 Column 4 Description of goods Category Note Coffee, tea, mate and spices Column 5 Rate of customs duty 1st Year 2nd Year 3rd Year 4th Year 5th Year 6th Year 7th Year 8th Year 9th Year 10th Year 11th Year 12th Year 13th Year 14th Year 15th Year As from 16th Year Coffee, whether or not roasted or decaffeinated; coffee husks and skins; coffee substitutes containing coffee in any proportion Coffee, not roasted Not decaffeinated A Decaffeinated A Coffee, roasted Not decaffeinated R Decaffeinated R Other A Tea, whether or not flavored Green tea (not fermented) B 15.9% 14.9% 13.8% 12.8% 11.7% 10.6% 9.6% 8.5% 7.4% 6.4% 5.3% 4.3% 3.2% 2.1% 1.1% Other green tea (not fermented) Waste, unfit for beverage A Other B 15.9% 14.9% 13.8% 12.8% 11.7% 10.6% 9.6% 8.5% 7.4% 6.4% 5.3% 4.3% 3.2% 2.1% 1.1% Black tea and partly fermented tea in immediate packings of a content not exceeding 3 kg Black tea B 10.9% 9.8% 8.7% 7.6% 6.5% 5.5% 4.4% 3.3% 2.2% 1.1% Other B 15.9% 14.9% 13.8% 12.8% 11.7% 10.6% 9.6% 8.5% 7.4% 6.4% 5.3% 4.3% 3.2% 2.1% 1.1% Other black tea and partly fermented tea Waste, unfit for beverage A Source:, Annex 1 the provisions of the ASEAN Free Trade Agreement (AFTA) and the ASEAN Korea Free Trade Agreement (AKFTA) will apply mutatis mutandis. negotiations proceed from basic agreement to signing, followed by effectuation. Liberalization negotiations concerning goods are completed at the basic agreement stage. This means that if too much time is taken between the basic agreement stage and the signing and effectuation stages, the full benefits of trade liberalization may not be achieved. For example, timetables for the removal of tariffs in schedules of concessions are reckoned from the date on which the takes effect (such as in the sixth year after effectuation). If the interval between basic agreement and effectuation is too long, there will be proportionate delay in the timetable. In fact, political instability in Thailand caused the effectuation of the Japan- Thailand to be delayed longer than expected after basic agreement was reached, with the result that the prevailing tariff rates were actually lower than the tariff rates in the schedule of concessions. The Philippines also lost its advantage because of delays. Negotiations with the Philippines began around the same time as negotiations with Thailand, but the schedule of concessions for imports from the Philippines was more favorable, including early tariff reductions. However, this advan- RIM Pacific Business and Industries Vol. VIII, 2008 No. 28 9

9 Table 6 Schedule of Concessions under (Thai Import Tariffs) Column 1 Column 2 Column 3 Column 4 Column 5 Tariff item number Description of goods Category Note 8473 Parts and accessories (other than covers, carrying cases and the like) suitable for use solely or principally with machines of heading to Rate of customs duty 1st Year 2nd Year 3rd Year 4th Year 5th Year 6th Year 7th Year 8th Year 9th Year 10th Year As from 11th year Parts and accessories of the machines of heading B 11.25% 7.50% 3.75% Parts and accessories of the machines of heading of the electric calculating machines of subheading , or A other A Parts and accessories of the machines of heading Parts and accessories of the machines of heading Parts and accessories equally suitable for use with machines of two or more of the heading to A B 11.25% 7.50% 3.75% A Machinery for sorting, screening, watshing, crushing, grinding, mixing or kneading earth stone, ores or other mineral substance in solid (including powder or paste) from; machinery for agglomerating, shaping or moulding solid mineral fuels, ceramic paste, Sorting, screening, separating or washing machines A Source:, Annex 1 tage was negated by delays in putting the into effect. Another problem is that the HS Codes used during negotiation were based on the 2002 standards, while current effective tariff rates are based on 2006 revised standards. This makes the s more difficult to administer (4). III. Import-Based Liberalization Ratios We will next look at trade liberalization levels under s, as measured according to the proportion of the value and number of items for which tariffs have been removed (the liberalization ratio) (5). Liberalization ratios are typically based on the value of imports (import-based liberalization ratios) or the number of tariff items (tariff-based liberalization ratios). For this article, we have also added new liberalization ratios based on partner countries shares of exports to the world (exportbased liberalization ratios). Calculations of these liberalization ratios are based on items from which tariffs have been removed, which are shown in 10 RIM Pacific Business and Industries Vol. VIII, 2008 No. 28

10 schedules of concessions in Category A (immediate removal) or Category B (phased removal) (6). The calculation methods for liberalization ratios and the results of those calculations are shown below. An import-based liberalization ratio represents zero-tariff items as a percentage of the total value of imports in a given year. This method, which is advocated by the WTO, is used to calculate Japan s liberalization ratio. The formula is as follows. A s import-based liberalization ratio = Total value of zero-tariff items imported from B by A Total value of A s imports from B 100 To calculate the import-based liberalization ratio, we need to collate detailed import data corresponding to the schedule of concessions. For the purposes of this article, we used import data from the World Trade Atlas. Liberalization ratios published by the government are based on imports in the year in which negotiations commenced (2004). For this article, we used the average value of imports in 2004, 2005 and The results are shown in Table 7. While these figures differ somewhat from official data published by the government, they confirm that over 90% of imports will be tariff-free on both sides in the 11th year. However, there are also a few items with low liberalization ratios. For example, the liberalization ratio for Japan s imports from Malaysia are below 70% in Section 1 (animal products), Section 3 (animal or vegetable fats), Section 4 (prepared foodstuffs), Section 9 (wood and articles of wood) and Section 19 (arms and ammunition). The ratio for Section 3 (animal or vegetable fats) is especially low at just 19.0%. There are two sections in which imports from Thailand have liberalization ratios below 70%: Section 1 (animal products), Section 2 (vegetable products) and Section 4 (prepared foodstuffs). While the number of sections is smaller than for Malaysia, 15% of items in Section 7 (plastics) and Section 12 (leather products) are excluded from the negotiations, even though the liberalization ratios for these sections are over 80%. This indicates that many items imported from Thailand are still subject to tariffs. The only section with a liberalization ratio below 70% for imports from the Philippines is Section 8 (leather products). However, the ratio for that section is very low at 58.8%, and 41.2% of items are excluded from negotiations, indicating that Japan has not yet sufficiently opened up its market to leather products from the Philippines. An analysis of import-based liberalization ratios for the partner countries reveals that tariffs are still applied to a wide range of manufactured goods. The liberalization ratios for Section 17 (automotive products) are especially low at 88.4% for Malaysia, 73.2% for Thailand and 21.7% for the Philippines. Malaysia s ratio for Section 4 (prepared foodstuffs) is also low at 70.2%, as is Thailand s ratio for Section 1 (animal products) at 80.6%. The Philippines ratio for Section 14 (precious metals) is only 33.9%. High liberalization ratios were not achieved on both sides immediately after the s came into effect, and Japan has led the way in removing tariffs (Figures 1, 2). Japan removed tariffs on most minerals and manufactured goods immediately after effectuation, resulting in first-year liberalization ratios of 94.0% for Malaysia, 86.5% for Thailand and 89.4% for the Philippines. Although Japan has been criticized for having lower liberalization ratios than its partner countries (Ito [2007]), none of the three countries studied will achieve higher liberalization ratios than Japan until the 11th year. The slower rise of liberalization ratios in the partner countries is attributable to the fact that tariffs on minerals and manufactured goods have been removed in phases. For example, all three countries have introduced numerical quotas for steel. The quotas and tariffs will not be removed until the 11th year. Malaysia will remove quotas and tariffs on passenger cars over 3000cc by 2010, but this measure will not be extended to all assembled vehicles until In terms of import-based liberalization ratios, trade liberalization advances substantially on both sides when an takes effect. However, it is important to recognize that import-based liberalization ratios do not reflect delays in liberalizing RIM Pacific Business and Industries Vol. VIII, 2008 No

11 Table 7 Import-Based Liberalization Ratios Liberalization ratios based on imports into Japan (%) Major Section HS Code Liberalized Excluded Liberalized Excluded Liberalized Excluded All Liberalization ratios based on imports into partner countries Major Section HS Code Liberalized Excluded Liberalized Excluded Liberalized Excluded All Source: Calculated using Annex 1 of each, Effective Tariff Schedule (January 2006) for Japan, World Tariff Data Base and World Trade Atlas items that are subject to controls. For example, Thailand levies high tariffs on assembled vehicles imported from Japan. As a result, even though motor vehicles are a major export item for Japan, they make up only 2% of Thailand s imports. If Thailand retained its tariff on assembled vehicles while removing tariffs on all other items, its import-based liberalization ratio would be 98%. In fact, Thailand agreed to cut tariffs on passenger cars over 3000cc from 80% to 60% by the fourth 12 RIM Pacific Business and Industries Vol. VIII, 2008 No. 28

12 (%) Fig. 1 Japan s Import-Based Liberalization Ratios (Year) Source: Calculated using Annex 1 of each, Effective Tariff Schedule (January 2006) for Japan, World Tariff Data Base and World Trade Atlas Fig. 2 Import-Based Liberalization Ratios for Partner Countries (%) (Year) Source: Calculated using Annex 1 of each, Effective Tariff Schedule (January 2006) for Japan, World Tariff Data Base and World Trade Atlas year, but the subsequent schedule is subject to renegotiation. The tariff on passenger cars up to 3000cc will also be renegotiated in the sixth year, but Thailand has not undertaken to reduce tariffs. The fact that its liberalization ratio for Section 17 (automotive products) is high at 73.2%, while its overall liberalization ratio will reach 95.7% is attributable to the fact that Thailand currently controls imports of assembled vehicles from Japan. In this sense, import-based liberalization ratios can result in the over-estimation of liberalization levels. The same applies to assessments of Japan s progress toward the liberalization of imports of agricultural goods. IV. Tariff-Based Liberalization Ratios We next need to examine the types of items on which import tariffs are retained. Tariff-based liberalization ratios indicate the percentage of items for which tariffs have been removed, based on the effective tariff schedules. The following formula is used to calculate these ratios. A s tariff-based liberalization ratio = Number of zero tariff items imported from B by A Number of items subject to tariffs in A 100 Schedules of concessions are based on effective tariff schedules. However, the following two processes are required in order to calculate tariffbased liberalization ratios. First, the sections used in schedules of concessions were based on the 2002 standard for HS Codes, but in January 2007 the codes were revised to reflect the 2006 standard. The codes will therefore need to be adjusted for use with current effective tariff schedules. To minimize the adjustments required, we used Japan s effective tariff schedule for January 2006, which is based on the 2002 HS code standard. However, only current tariff schedules (7) were available for Malaysia, Thailand and the Philippines, so adjustment was required. Second, in Japan s schedule of concessions, items with the same tariff reduction/removal schedules are combined into the next highest code level, which means that this data must be compared with the effective tariff schedule in order RIM Pacific Business and Industries Vol. VIII, 2008 No

13 to ascertain the number of items with zero tariff rates. This applies only to Japan s schedule of concessions. The other countries list their tariff reduction/removal schedules for each item down to 9- or 10-digit HS codes. The results of these calculations are shown in Table 8. Japan s liberalization ratios in the 11th year will be lower than its import-based liberalization ratios, at 87.5% for Malaysia, 86.0% for Thailand, and 91.7% for the Philippines. The percent- Table 8 Tariff-Based Liberalization Ratios Liberalization ratios based on imports into Japan (%) Major Section HS Code Liberalized Excluded Liberalized Excluded Liberalized Excluded All Liberalization ratios based on imports into partner countries Major Section HS Code Liberalized Excluded Liberalized Excluded Liberalized Excluded All Source: Calculated using Annex 1 of each, Effective Tariff Schedule (January 2006) for Japan, World Tariff Data Base and World Trade Atlas 14 RIM Pacific Business and Industries Vol. VIII, 2008 No. 28

14 ages of excluded (X) items are especially high, at 7.5% for Malaysia, 9.5% for Thailand, and 7.4% for the Philippines. The major sections in which Japan s liberalization ratio is below 70% are Section 1 (animal products) and Section 4 (prepared foodstuffs). Malaysia and Thailand have low ratios for Section 2 (vegetable products) at 68.1% and 67.3% respectively, indicating that their progress toward the liberalization of agricultural products has been slower. Their ratios for Section 12 (headgear, footwear, etc.) are only 42.2% and 39.8% respectively, which reflecting the fact that tariffs are still imposed on labor-intensive manufactured goods. The liberalization ratios for partner countries are 96.7% for Malaysia, 89.2% for Thailand, and 91.3% for the Philippines. The ratios for both Malaysia and Thailand are lower than their importbased ratios. However, all have lower percentages of excluded items, at 1.1% for Malaysia, 0.3% for Thailand and 0.2% for the Philippines. All three countries have liberalization ratios below 70% for Section 16 (automotive products). Malaysia s ratio is 61.6% and Thailand s 40.7%, while that for the Philippines is just 34.9%. Thailand s results are characterized by low liberalization ratios for Section 14 (precious metals) and Section 15 (steel, etc.). While Japan s liberalization ratio exceed 80% immediately after the s take effect, those of its partners are lower. Malaysia s ratio is relatively high at 74.4%, but those for Thailand are low at 37.6% and 57.0% respectively (Figures 3, 4) (8). Malaysia s ratio first surpasses Japan s in the eighth year, while Thailand and the Philippines overtake Japan in the 11th year, when the ratio for the Philippines climbs from 69.7% to 91.3%. It remains to be seen whether this dramatic liberalization can be achieved, and whether Japan can ensure the fulfillment of these undertakings. Both Japan and its partner countries have tariffbased liberalization ratios that are lower than their import-based ratios. Some observers believe that to speed up trade liberalization, tariff-based liberalization ratios should be included in the deliberation process (Kimura [2007], Council on Economic and Fiscal Policy [2007]). Fig. 3 Japan s Tariff-Based Liberalization Ratios (%) (Year) Source: Calculated using Annex 1 of each, Effective Tariff Schedule (January 2006) for Japan, World Tariff Data Base and World Trade Atlas Fig. 4 Japan s Tariff-Based Liberalization Ratios (%) (Year) Source: Calculated using Annex 1 of each, Effective Tariff Schedule (January 2006) for Japan, World Tariff Data Base and World Trade Atlas RIM Pacific Business and Industries Vol. VIII, 2008 No

15 V. Export-Based Liberalization Ratios The preceding analyses have focused on import-based ratios and tariff-based liberalization ratios. A problem with these ratios is that they do not provide an accurate picture of the level of liberalization in relation to the key export items of partner countries. This problem is illustrated by Japan s imports of rice from Thailand. Thailand is the world s biggest exporter of rice, but Japan severely restricts rice imports by imposing a tariff of 490 per kilogram. If this import tariff were removed, imports of rice from Thailand would generally increase. However, Japan has retained its tariff on rice while removing tariffs from other items, with the result that its liberalization ratio rose to 99.7% in This ratio is based on total imports of $14.76 billion and rice imports of just $5 million (0.3%) from Thailand. Japan s tariff-based liberalization ratio rises to 99.9%, since tariffs are levied on just eight 9-digit items relating to rice (HS1006). Japan s claim that its liberalization ratio is close to 100% is unlikely to be find acceptance in Thailand while Japan continues to impose a tariff on rice, which is a key export item for that country. To take this factor into account in this article, we included the concept of liberalization ratios based on the total exports of partner countries. Export-based liberalization ratios are calculated using the following formula. A s export-based liberalization ratio = Total value of exports from B to the world that are tariff free in A Total value of exports from B to the world 100 On this basis, while Japan (A in the above formula) maintains a tariff on rice from Thailand (B), Japan s liberalization ratio will be reduced by 2%, since rice makes up 2% of Thailand s exports. Since the purpose of an is to strengthen economic relations between the partner countries, the liberalization ratios for key export items from the other partner should rise. A high export-based liberalization ratio can thus be seen as sign of highquality trade liberalization in keeping with the aims of the. Conversely, even if the importbased or tariff-based liberalization ratios are high, a low export-based liberalization ratio suggests the quality of trade liberalization is poor from the perspective of the other partner. In other words, export liberalization ratios indicate the level of affinity with the other partner s exports. However, it can be difficult to calculate exportbased liberalization ratios. As with the importbased liberalization ratios, we used data from the World Trade Atlas. Unfortunately, the inclusion of data in greater detail than 6-digit HS codes is left to the discretion of individual countries, which means, for example, that Thailand s export data (9-digit HS codes) cannot be collated against Japan s schedule of concessions or effective tariff schedule (9-digit HS codes). We therefore decided to calculate liberalization ratios using 6-digit HS codes, which are the smallest units used throughout the world. If there were differences in schedules for the reduction/removal of tariffs at a more detailed level than 6-digit HS codes, we calculated liberalization ratios for the fastest and slowest liberalization scenarios. As shown in Fig. 5, we assumed that the fastest liberalization scenario for any product will be Category A (immediate removal), and that the slowest will be Category X (excluded from negotiations). This means that export-based liberalization ratios will fall within such as a range of 85-90%. The results of these calculations are shown in Tables 9 and 10. Japan s liberalization ratios are all high at % for Malaysia, % for Thailand, and % for the Philippines, indicating that Japan s trade liberalization has a strong affinity with the export mixes of its partners. As Fig. 5 Export-Based Liberalization Categories 6-digit HS codes Product 1 9-digit HS codes Immediate removal (A) Removal in 5th year (B5) Excluded from negotiations (X) 16 RIM Pacific Business and Industries Vol. VIII, 2008 No. 28