A Closer Japan-U.S. Economic Relationship

IMGXYZ655IMGZYXIntroduction and Welcome

Minister Yutaka Yokoi

The United States and Japan have one of the most important economic relationships in the world, based on both the size of their economies and their technological sophistication. The two countries share the values of democracy and the free market economy, and Japan has had no closer ally or role model in this respect. New cooperation between the U.S. and Japan will benefit not only the two countries but also the whole Asia-Pacific region, possibly providing the building blocks for an Asia-Pacific partnership.

Panel 1: “The Strategic Context in Asia”

Sherman Katz, Carnegie Endowment, moderator

In recent years, we have heard repeatedly about “China rising.” Ken Pyle has recently published a book titled “‘Japan Rising’: The Resurgence of Japanese Power and Purpose.” In that book Pyle says, “After more than half a century of national pacifism and isolationism, Japan is preparing to become a major player in the strategic struggles of the 21st century.” He argues convincingly that the U.S. should welcome and nurture that development. The speakers on this panel will address this and other aspects of the Asian strategic context for a closer Japan-US economic relationship.

Kathleen Stephens, Principal Deputy Assistant Secretary for East Asian and Pacific Affairs, Department of State

The Bush administration understands the dynamism and strategic importance of Asia, both of which are central to global prosperity and peace. Secretary Condoleezza Rice has made a point of focusing on the challenges presented by Asia in recent State Department meetings, and it is significant that newly-installed Deputy Secretary John Negroponte’s first visit will be to Tokyo.

Asia is one of the world’s great success stories and an example of American diplomatic success. The story of the region today is one of deepening democratic roots, as evidenced by recent moves toward stronger democracy in South Korea, the Philippines, Indonesia, and even Cambodia.

India and China are reshaping the region, and the question then becomes: what kind of regional integration should the U.S. support? What mechanisms should be in place? The U.S. and Japan cooperate frequently on economic issues but less so on security and geopolitical issues. The six-party talks with North Korea indicate that cooperation in these new areas is progressing. Historical tensions and territorial disputes continue to persist (North Korea’s nuclear arsenal and isolationism, uncertainty in the Taiwan Straits) and present opportunities for new collaboration.

American involvement in East Asia has a long history, and 2004 was the 150th anniversary of the Treaty of Kanagawa. The same principles continue to provide the foundation for the U.S.-Japan relationship: freedom of commerce, navigation, and domination by any power of coalition. There is now $1 trillion in annual two-way trade between Japan and the U.S., $390 billion in total investment between the two countries, and $190 billion in investment by Japan in the U.S.

China presents major challenges and opportunities for both countries. Issues such as environmental degradation and political freedom/legitimacy, among others, continue to be areas of concern. China was influential in the resolution of the six-party talks and worked with the U.S. and Japan to find solutions to the common security problem posed by North Korea. China will consolidate its position in the coming years, but as its power has grown so too has the expectation that it act as a responsible stakeholder.

U.S.-Japan relations and the shared values on which they are founded provide the linchpin of American engagement in the region. The relationship continues to evolve and remains relevant. The Department of State and Department of Defense have realigned the U.S. military presence in Japan to ease tensions around existing military bases, and cooperation has improved in a variety of security areas including ballistic missile defense, counterterrorism and intelligence evaluation, and bilateral contingency planning. In addition, a trilateral strategic dialogue that includes Australia has been initiated.

The influence of the Japan-U.S. alliance is felt around the world, from Japanese support for the War on Terror to the $5 billion Japan has provided for Iraqi reconstruction to the deployment of Japan’s self-defense forces in southern Iraq (a landmark action) to the operational support Japan has provided to U.S. forces in the Middle East, including the stationing of a tanker in the Pacific Ocean for refueling vessels that intercept weapons destined for Afghanistan. The two countries have also cooperated closely in humanitarian and disaster relief efforts following the Indian Ocean tsunami in 2004, the earthquake in Pakistan in 2005, and the Java earthquake of 2006.

Some claim that Asia lacks effective regional institutions, but it does have some that are notable. On the pan-Asian front, Asia is more integrated in terms of regional trade than the NAFTA nations; encouraging signs can also be seen on the trans-Pacific level, where investment continues to grow. Community building in the regional will continue, and the U.S. welcomes this progress.

The U.S. must find its own role in a new Asia. The landscape for cooperation has been shaped by the success of the six-party talks and the increasing prominence of ASEAN. The APEC group of nations, in which the U.S. is a leader, has an important role to play in facilitating regional free trade, investment, and capacity building. The U.S. has increased its contributions to APEC, which will serve as the primary vehicle for multilateral cooperation in Asia for both the U.S. and Japan. The U.S. will need to figure out how to position itself within the “alphabet soup” of emerging groupings in a way that ensures that regional integration remains open.

The U.S.-Japan economic relationship is embedded in the broader strategic relationship and continues to be vitally important. Japan is America’s third largest export market and the second largest investor in the U.S. Japanese automobile companies have invested $28 billion in the U.S. manufacturing sector and created 70,000 jobs for American workers.

With that said, we can do better. Japan is only the ninth largest market for U.S. investment and that figure should be higher. Better cooperation is necessary in areas of mutual interest, such as intellectual property rights, secure trade, and energy security. The U.S. should support Japan’s movement toward economic reform and welcome Prime Minister Abe’s commitment to reinvigorating the Japanese economy. The help of key business organizations, such as Keidanren, the U.S.-Japan Business Council, and the American Chamber of Commerce in Japan, will be important in this effort.

The U.S. will continue to move forward in the region on the trade front, building on existing free trade agreements with Singapore and Australia. The U.S. hopes to conclude an FTA with South Korea next and has not forgotten about Malaysia and Thailand, despite the lull in active negotiations. Whatever administration is in power, whatever problems erupt on the world scene, the U.S. will always appreciate the importance of East Asia, and it could not hope to have a better partner than Japan.

There are some lessons to be learned from the history of U.S.-Great Britain relations. When President Clinton took office, some on both sides of the Atlantic feared there might be a deterioration in the “special relationship.” Those fears proved to be baseless, in large part because of the deeply-held values shared between the two countries. This example should give us confidence that the U.S.-Japan relationship will remain strong in the future as well.

Kurt Tong, Director for Asian Economic Affairs, National Security Council

The first point to consider in evaluating the U.S.-Japan strategic relationship is the changing shape of the region and where the U.S. fits into this new order.

In the 1990s, trade between the U.S. and Japan was $38 billion, and Japan was firmly placed as our second largest trading partner. From 1990-2006, U.S.-Japan trade experienced a growth rate of 50%, which is significant but less impressive if put in context: it showed the slowest growth of any of the U.S. top ten trading partners. Trade with China jumped over 1000%, with most other countries in the 120-130% growth range. In macroeconomic terms, Japan is not growing as fast as many other countries.

The clichés of the times have changed significantly. There used to be a lot of talk about the “flying geese,” with Japan always leading one step ahead of the Southeast Asian nations and transmitting technology and expertise to others. There was the Cold War metaphor of the “unsinkable aircraft carrier,” in which Japan helped the U.S. keep the Soviet Union at bay. People like former Ambassador Mike Mansfield spoke of the U.S.-Japan relationship as the “most important bar none” for the twenty-first century. This phrase is heard less frequently now, but it is unclear whether that development is important or not.

Now, the talk in Asia is of China becoming a “responsible stakeholder”; of the complex playing field presented by the “spaghetti bowl” of trade agreements in the region; and of ASEAN + (one or two or six). ASEAN has established itself as a player, a shaper as well as a participant in regional dynamics. Whereas before there was one giant entity demanding attention in Asia – Japan – there are now at least three, including China and ASEAN.

Our political alliance is strong but we may be missing opportunities to cooperate more on economic issues. The U.S. and Japan should coordinate their approaches and think together about how to implement the most effective regional architecture. Cooperation is also needed on climate change, clean energy and nuclear power, the Doha Development Agenda, and smart development strategies that include better coordination of overseas development assistance.

A subcabinet mechanism already exists and meets regularly at the vice-ministerial level to discuss some of these issues, but both countries can do more to show global leadership in economics and development. Direct U.S.-Japan economic integration is growing at a respectable if not dramatic pace, but it is not accelerating. Any steps taken to strengthen the bilateral relationship will also strengthen both countries. Since the U.S. and Japan are the world’s largest and second largest economies respectively, any free trade agreement would have to be almost perfect if it were to contribute to driving the global trade liberalization agenda.

Tadakatsu Sano, Former Vice-Minister for International Affairs, METI

Much has changed in Japan in the 1990-2006 period. First and foremost, a demographic shift has resulted in a declining and aging population. There is some reason to be pessimistic about Japan rising because it will be difficult to maintain 3-4% growth for several years given the country’s demographic reality. Massive innovation and productivity increases would be necessary, but even these will be difficult to achieve without strong growth. While the nature of this change does not necessarily decrease Japan’s importance, it does present a difficult challenge.

Globalization has complicated our notions of investment and made foreign direct investment difficult to track, perhaps resulting in an undercount of investment between the U.S. and Japan. Japanese automobile companies, which build factories in the U.S. and employ American workers, act like U.S. corporate citizens, often reinvesting their profits in the U.S. In addition, investment by private equity funds, which are very active in both countries, are not counted by the IMF because they are not long-term investments.

Figures often do not tell the whole story, but U.S.-Japanese relations and integration continue to deepen. There are, for example, fewer antidumping and countervailing duty cases between the two countries now than there were fifteen years ago. The two countries should get together, whether in an economic partnership agreement, an economic integration, or whatever one wants to call it, to promote a good model to the region and the world based on shared values of democracy, market-oriented economies, rule of law and human rights.

The two countries should pursue an “economic partnership agreement” (EPA) rather than an FTA as defined by the WTO at Cancun. The economic relationship needs to go beyond trade and WTO issues. Negotiations over trade in goods should occur through WTO mechanisms and proceed on a nondiscriminatory basis. Areas for a potential EPA could include: services, mutual recognition of standards for drugs and medical equipment, harmonization of sanitary and phytosanitary regulations, and investment and competition policy.

There is some disappointment in Japan that the so-called “Singapore issues” were abandoned in the WTO. The U.S. picked up the drive for a multilateral investment agreement, but its efforts were blocked by the EU. Any agreement on investment would need a dispute settlement mechanism in order to be effective, and this is one area that could provide a way forward for U.S-Japan economic cooperation.

Protection of intellectual property rights in Asia is one area that could be addressed in an EPA, and secure trade is another. Japan is advanced enough to be treated like an American state, and the two countries could work together on secure trade through supply chain management issues. Energy, environment and clean air might also be fruitful areas of cooperation. These are not bilateral issues, but they are one place the two countries could get started. They could combine efforts to engage China to be a good global citizen. The Chinese are beginning to take environmental issues seriously, especially with clean coal development, but they are still not investing enough.

An EPA could be a vehicle for developing an alliance that would be a model for the region. Beyond U.S. access to Japan’s market, the U.S. could help Japan fix its capital markets and rebuild confidence in Tokyo. Many new companies choose to list their stocks in Hong Kong, Singapore and Shanghai, but not Tokyo – even though Hong Kong’s status in China is questionable. Japan should open itself to more private equity and learn from the U.S about how to do this.

Regarding the ASEAN+ model, Japan should positively acknowledge the initiative taken by ASEAN over the last fifteen years. ASEAN has been trying to coordinate the huge countries surrounding it, but the dynamics of Northeast Asia are not so easy to navigate. It is difficult to find common ground among these countries because of a lack of shared values, but ASEAN helps bridge this gap. Therefore the U.S and Japan should encourage ASEAN to be involved in the region both tactically and strategically.

We should recognize the importance of APEC, but more as a long-term target since major action is unlikely in the next few years. The plummeting costs of sea transportation, which connects Shanghai to Los Angeles, Singapore to Chile, and San Francisco to Japan, should encourage Japan to take advantage of the promise of APEC.

Panel Discussion.

Kurt Tong asked former Vice-Minister Sano how a U.S.-Japan bilateral agreement would be constructed if, as Sano suggested, its goal was to build on the strengths of the Japanese economy and not address its weaknesses. How could such a relationship be accepted by Congress when American constituencies, such as the agricultural community, are upset about market access? In addition, Japan often uses the EPA Framework with countries that are not as industrialized as the U.S. and where the foundation of the relationship does not extend  far beyond trade. What is the difference between an EPA and an FTA?

Sano replied that trade would not be excluded from an agreement completely but that in order for deeper economic ties to be meaningful they would have to go beyond trade. Japan is starting to come around on the prospect of compromise in the agriculture sector. The Japanese government established a study group in preparation for the Japan-Australia FTA with the understanding that there would be no way to exclude agriculture products from an agreement—more so than would even be the case with the U.S.

The atmosphere is gradually changing in Japan, but agriculture should be dealt with in the WTO first on a nondiscriminatory basis. This should be one of Japan’s contributions to the Doha Round. It should also be remembered that agriculture reforms do not just involve crops, by also byproducts such as the cotton products that have sparked so much controversy between the U.S. and African nations. It would be discouraging to think that agriculture could be at the center of a U.S.-Japan EPA.

The EPA terminology, or EIA as proposed by the American Chamber of Commerce in Japan study, has been contaminated. Japan prefers the EPA Framework, but it is the concept rather than the label which is important.

Question and Answer Session.

(1) Devin Stewart of the Carnegie Council on Ethics and International Affairs asked who is driving the shared values, Asian countries or the U.S, corporations or countries.

Kathleen Stephens said that sometimes there is too much focus on government-to-government relations, perhaps as a result of the close relationship between President Bush and former Prime Minister Koizumi. The underlying trends are important to recognize and the U.S. and Japan should not take each other for granted.

Mr. Sano said government officials are usually not the initial drivers and have much to learn about what is actually going on in the private sector. To give one example on supply chain management: a Finnish company sent a letter to suppliers in India and China requiring compliance with values on labor, environment, etc. in order to continue conducting business together. Chinese companies have started complaining that a proliferation of such letters from numerous business partners makes compliance overly burdensome. They would prefer a single form, and this is one area where the U.S. and Japan could collaborate. Accounting standards are another area. Japan is considering creating its own regulatory framework modeled on the U.S.’s Sarbanes-Oxley law and would benefit from American assistance. The goal should be seamless integration of business between the U.S. and Japan, not just trade.

(2) Sherman Katz of the Carnegie Endowment noted that both Stephens and Tong put APEC at the center of Asian economic integration. But would Asian countries agree, given that APEC includes the likes of Chile and Canada.

Kathleen Stephens said trade agreements need to be open and transparent as well as goal-oriented. Greater trans-Pacific integration would be one such goal. The ideas of Asian and trans-Pacific integration are not mutually exclusive, and there is room for overlapping groupings. A close alliance between the U.S. and Japan would help shape progress.

Kurt Tong said that because APEC includes the U.S. it is the most important regional grouping to the U.S. by definition. The trans-Pacific element is important to the economic and political dynamics of the region. Because APEC is a consensus-based group, it moves slowly and this led to disappointment in the 1990s. APEC activity is, however, beginning to speed up.

Stephens added that the trans-Atlantic experience has some relevance here. NATO began as a trans-Atlantic security alliance, but the vehicle for economic integration, the EU, was regional not trans-Atlantic. Asian security is less developed multilaterally, but the economic network is pretty well developed regionally.

(3) Bernard Gordon of the University of New Hampshire asked whether the U.S. and Japan were out of step with developments in East Asia. The East Asian Summit has already had its second meeting and it is clearly more than a “talking shop.” ASEAN loves center stage and China knows that: are we losing the rhythm?

Tong said it is not in the interests of the U.S. or Japan to go it alone; rather, there are benefits to leveraging the relationship, specifically in terms of promoting a shared view of how the situation should evolve. Like APEC, ASEAN is also a consensus-based organization and thus so are the ASEAN-centered groups. The question of rhythm is a significant one and various ASEAN-centered initiatives do differ in this respect. A closer community and more coordination in the region would help harmonize the rhythm.

(4) Pete Kasper of Inside U.S. Trade asked whether Doha was becoming a problem and whether it would behoove us to declare it dead. Is the question of trade promotion authority extension becoming a distraction, and is the failure of the Round an excuse for Japan not to anything on agriculture?

Tong said foreign economic policy is constitutionally located in Congress (tariffs, etc.). Because of this, any U.S.-Japan bilateral agreement would have to be very near “perfect” to pass congressional review.

Panel 2: “The Japan-U.S. Economic Relationship”

Sherman Katz, Carnegie Endowment, moderator

The second panel is designed to focus on how we can translate shared values in new forms of economic integration. Besides the ACCJ and the U.S.-Japan Business Council, the Business Roundtable in the U.S. and Keidanren in Japan have endorsed closer economic ties between the two countries. What are the prospects?

Wendy Cutler, Assistant U.S. Trade Representative for Japan, Korea and APEC Affairs

Given the nature of the deepening ties between the U.S. and Japan – a mature economic relationship between the world’s top economies – it is natural to ask the question: why not an FTA? Calls for an FTA from respected sources have raised the profile of this debate.

But it is one thing to call for an FTA and quite another to launch, negotiate and conclude one. Korea, for example, has nineteen simultaneous negotiations proceeding at the moment, and an agreement with Japan would be even more complex. The expectations from stakeholders would be very high, and the agenda would have to be ambitious.

An FTA with Japan is not a short-term possibility and talks of it are premature. But an FTA is not the only model for strengthening economic ties between the two countries. The Economic Partnership for Growth, the framework initiated by President Bush, has achieved some results, and efforts at regulatory reform have largely been successful.

There are five core challenges to a U.S.-Japan FTA.

(a) The first is agriculture. This is an area that has prevented Japan from taking a leadership role in the Doha Round, even though the U.S. and Japan are partners on services and non-agricultural market access issues. Agriculture is not covered in comprehensive fashion in any other Japanese FTAs. The issue is important on its merits, but even more important as a symbol to the agricultural community, whose members are big advocates of free trade and whose support will be necessary for future trade deals.

(b) Secondly, an FTA with Japan would look very difference from any of the U.S.’s other FTAs. Japan’s average tariff rate on goods is only 2.5%, even lower than that of the U.S. The focus of an FTA would have to be on non-traditional non-tariff barriers, such as intellectual property rights, import licenses, and standards. Sophisticated barriers such as regulatory transparency, access to advisory groups that make de facto policy decisions, favoritism in Japan’s regulatory regime, and secure trade would all have to be addressed. The agreement would have to be both cutting-edge and of “gold standard” quality.

(c) Third, many American constituencies would push for a broad offensive agenda. U.S. automakers, for example, would likely want the issue of currency manipulation to be included in the negotiations. Japan will certainly have its own offensive interests and, since the U.S. is already so open, remaining hurdles in our market will be very sensitive. These might include the metric system, the Jones Act, and antidumping laws.

(d) Sustained, strong political leadership would be necessary to see an FTA through to completion. Even former Prime Minister Koizumi, a bold reformer in many areas, was not willing to make the kinds of concessions on agriculture that would be necessary to strike a deal.

(e) Finally, bureaucracy in the Japanese government will be a challenge for negotiators. An FTA would require the participation of many ministries (health, transportation, environment, to name just a few). These ministries tend not to be very forward leaning, in part because they are focused on domestic issues. Their help would be vital to an FTA’s success.

In summary, the conditions are not right for an FTA at present. There are several steps that could be taken, however, to lay the groundwork for an agreement.

(a) Progress could be made on more practical issues such as transparency, regulatory barriers, and secure trade.

(b) Joint efforts could be made in setting high standards for the Asia- Pacific region in areas like intellectual property rights.

(c) Each country could begin to build the necessary political support for an FTA among domestic constituencies as well as in the Diet and Congress.

(d) Stronger leadership could be demonstrated in the region and globally by developing APEC, cooperating on the Doha Development Agenda, and crafting a strategic response to China’s emergence.

Atsushi Yamakoshi, Chief Keidanren Representative, Washington, D.C.

On behalf of Keidanren, Yamakoshi put forward a concrete proposal in March 2006 for an FTA+ or EPA agreement.

There are numerous difficulties involved in establishing an EPA, including a number of sensitive areas that need to be addressed, such as agriculture, antidumping, and the Jones Act. In addition, tariffs are already low between the two countries. While a building block approach might be more realistic, a strong economic framework is needed.

Keidanren North American conducted a study group on EPA that released a report in November 2006. Although economic relations between the two countries remain strong – Japanese companies employ 600,000 American workers – the importance of the bilateral relationship has been weakening, and a political statement is necessary to revitalize them. A U.S.-Japan EPA would be a bridge between East Asia and the U.S., and possibly the basis for an Asia-Pacific free trade area.

Keidanren surveyed its members about areas of interest and concrete symbols of closer ties that an EPA could address and came up with the following list.

(a) Consular and visa procedures, which were tightened after September 11, should be simplified.

(b) Secure trade should be improved, in terms of efficiency as well as security.

(c) Remaining tariff barriers should be lowered on such products as flat-screen televisions, auto parts, and ball bearings in the US and agriculture in Japan.

(d) Standards in areas such as intellectual property rights should be harmonized.

(e) Government procurement should be further liberalized to cover areas not currently under the GATT/WTO framework.

(f) Antidumping measures should be reformed.

(g) Convergence of environmental standards, which currently differ from state to state, should be prioritized.

(h) Tax measures should be harmonized to eliminate double taxation.

Closer engagement would itself mitigate the degree of sensitivity on issues like agriculture that are hurting the prospects of negotiations. Keidanren and the Business Roundtable issued a joint statement on January 19, 2007 endorsing a series of first steps in launching FTA negotiations. A comprehensive agreement would offer a high-quality template for dealing with the difficult issues Yamakoshi had outlined.

Tim Richards, Director for International Energy Policy, General Electric, Washington Office

There is tremendous commonality between the U.S. and Japan in the energy sector in terms of both interests and business connections. TEPCO was GE’s top customer for many years, and GE has recently sold some highly efficient, cutting-edge gas turbine equipment to TEPCO. For its part, the U.S. imports steam turbines and power generation equipment from Japan. The two countries exchange technology in addition to selling each other capital goods.

Cooperation is closest in the nuclear sector. GE, Toshiba and Hitachi have collaborated on fuel projects, and GE and Hitachi have significant cross-investment. The recent Toshiba-Westinghouse merger is another example of strengthened ties in this sector.

The interests of both the U.S. and Japan are aligned in the energy sector: energy security, environmental protection, stable prices, and incentives for renewable energies. Both want to develop advanced energy technologies, including solar power, goal gasification techniques for cleaner burning, and state-of-the-art nuclear fuel cycles.

Japan has a lot to teach the U.S. about energy efficiency. Japan’s energy consumption is expected to decline between 2004 and 2010, largely because of growth in efficiency.

Tariffs on energy equipment between the two countries are minimal: zero in Japan and only about 2-5% in the U.S. The energy services sector, however, would benefit from further liberalization. Success in liberalization of both countries’ electricity markets has been limited, though this is unlikely to change in Japan as a result of any bilateral agreement with the U.S.

Potential short-term building blocks on the multilateral level are:

(a) The Doha Round, which presents a tremendous opportunity for Japan to take a more aggressive leadership role, particularly on services and non-agricultural market access. Japan should also be out front in any negotiations involving the energy sector;

(b) APEC, which has been publishing reports on the energy sector;

(c) The Asia-Pacific Partnership for Clean Climate.

We must be careful not to slip into economic nationalism. Japan favors domestic manufacturers of wind turbines, which harms American companies like GE. Japan also gives priority to locally developed technologies (e.g. clean coal).

Overall, the energy sector is already a success story in the U.S.-Japan economic relationship and a potential building block for future progress.

Ira Wolf, Chief Representative, PhRMA, Tokyo

Yogi Berra once said: be careful if you don’t know where you’re going because you might never get there. This is relevant for the U.S.-Japan economic relationship. The world has changed completely in the last decade, and now global supply chains are the name of the game, thanks in some part to the efficiency of Asian express shipping services.

Pharmaceuticals are the most globalized sector in the international economy. GlaxoSmithKline, for example, is a British company with management located in Pittsburgh and a French executive in charge of its Japanese operations.

Some facts about the Japanese pharmaceutical industry are surprising:

• Of the top-selling drugs in the world, one-third of them are unavailable to Japanese patients. When they are available, it is often after a five to six year delay, now known in Japan as the “drug lag.” For one recently developed drug targeting cervical cancer, a two-year delay is expected.
• Japanese pharmaceutical companies develop 50% of their drugs outside of Japan, largely because the home market does not reward innovation in this field. This has come to be viewed in Japan as the “hollowing out” of the pharmaceutical industry.
• The average hospital stay in Japan is thirty days; in the U.S. it is only six.
• Japanese doctors are allowed to prescribe drugs for a maximum of fourteen days. Because of this, many Japanese say of the experience of visiting a doctor: “wait three hours, get three minutes.”

History, culture and politics all play a role in the inefficiencies of the Japanese pharmaceutical market. At the same time, Japanese citizens have the longest life spans of any nation in the world, and they have universal health care. The infant mortality rate is one-third that of the U.S.

While the present picture is enviable, the problem for Japan is the future. In the rapidly-aging, slow-growing society ahead for Japan, the inefficiencies that are currently obscured will become apparent. Size does matter, and more money is needed for research and development. The science and marketing of drugs are globalized businesses, but Japan is not a full participation.

The pharmaceutical industry wants to see that Japanese patients get drugs promptly, that they have access to superb medical services in Japan, and that innovation is rewarded. These goals are shared by the Japanese government, but the costs of change are viewed as a burden rather than an investment.

Areas where pharmaceuticals would benefit from an EPA include:

(a) Drug approval. Japan’s equivalent of the FDA, the PMDA, is understaffed and has been reluctant to accept foreign test data, instead requiring repeat testing even where data on ethnic groups exists;

(b) Clinical trials and research. Japan’s clinical trial architecture is relatively undeveloped. There are few incentives for development of patents and for hospitals, and worst of all the Japanese people are unaware of these problems. Also, Japan has been a latecomer to the harmonization of drug regulations, and better cooperation and mutual recognition between the FDA and PMDA is necessary;

(c) Rewards for innovation. Japan’s reimbursement and pricing policies are the lowest among all OECD countries. Problems include regular general price reductions, reductions in price if a drug has new “indications” (a powerful disincentive to innovation), and pricing of new drugs according to the prices of old drugs.

Piecemeal change is insufficient. The benefits of reform would be substantial: faster access to drugs, jobs for the Japanese people, and improvements to the quality of life of everyone in Japan, especially for the aging.

Oakley Johnson, Senior Vice President for Corporate Affairs, American International Group, Washington Office

The EPA idea has been around for a while but has acquired new energy and momentum of late. A signal is needed from the top that the relationship must change to address current issues that only the U.S. and Japan can deal with together.

A few years ago, Japan indicated a willingness to put agriculture on the table, but nothing came out of it. The process of negotiations exposes problems and prepares domestic constituencies for change by itself.

The U.S.-Japan insurance agreements of 1994 and 1996 have proven to be highly successful bilateral deals. Many benefits, including greater pricing flexibility, have already been realized thanks to these agreements and the addition of the WTO services agreement in 1997.

AIG is not a company complaining about market access or national treatment, but there are strategic benefits to progress in the insurance sector. We should build on the foundation of existing agreements to achieve greater regional and institutional cooperation between the SEC and the Ministry of Financial Services as well as the New York Stock Exchange and Tokyo Stock Exchange.

Abe has called Japan a conduit for financial services between Asia and the world, which makes this sector an ideal starting point for future integration. Japan is not the financial services market of choice in Asia, but a U.S.-Japan agreement would help change that. Japan needs this FDI for its future growth prospects.

An EPA could set the standard for the rest of Asia in a number of areas, such as equity limits on FDI, and could help open markets in the region. The process of negotiating an EPA could remove any lingering traces of economic nationalism in both countries, and would provide an opportunity for the U.S. to break down its barriers as well.

We should hope that Abe and Bush will get the process started, following up on upcoming reports on quantitative benefits. The activity of business coalitions and possible congressional hearings on the subject of an EPA would help advance the process.

Panel Discussion.

Oakley Johnson asked whether the partner country has in every case been the party that initiated FTA negotiations with the U.S. If so, is Japan in a position to ask for the launch of negotiations? Atsushi Yamakoshi said that Keidanren can ask the government to initiate a preparatory study.

[OFF-THE-RECORD begin] Wendy Cutler said there is often a lot of flirting going on, and it is unclear who approached whom. She doubted that her counterparts in Japan would ask. Commencing negotiations would be difficult because it would require a complex interagency dialogue including the Ministry of Agriculture. The decision to launch an FTA would have to be a bold one from the top level of Japanese government. This would be required to get the ministries in shape to discuss these issues. We can start by working through each country’s list of priorities and figuring out what is and is not reasonable. Lots of preparatory work would be involved, and no one would want the leaders to commit to a failed process. [OFF-THE RECORD end]

Tim Richards asked whether an FTA would have to be structured in a manner consistent with both countries’ WTO commitments. Would dealing with agriculture make a U.S.-Japan bilateral deal non-compliant with WTO rules? Are there reasons behind the shift in nomenclature?

Wendy Cutler responded that any deal reached would need to be WTO-consistent in terms of tariffs. Perhaps there are some in Japan that want to get around these obstacles. The existing Economic Partnership for Growth framework is on the cutting edge of many pressing business issues.

Atsushi Yamakoshi offered his personal view that businesses are not concerned with terminology. But an entrance into discussions is needed in order to get at the tough problems that would be involved in an FTA. For Keidanren, an EPA means FTA+, not FTA-.

Ira Wolf remarked that the demographics of the agriculture sector in Japan are astonishing. Almost no farmers will be left within a generation. He asked if the power of the agriculture lobby will dramatically decline in the next five to ten years. Yamakoshi offered his personal opinion that even if the statistics tell a story of decline, the political influence of the lobby may even increase..

Sherman Katz asked if the panel agreed that a signal from the top is important now. Are there ways to take an issue like secure trade to make it such a signal? Wendy Cutler said the EPG is six-years old, and the administration is looking for ways to update the partnership on specific issues, among which are secure trade and intellectual property rights. These can go a long way in laying the groundwork for integration.

Katz asked the panel to elaborate on changes proposed for the EPG. Cutler said the changes have an issue-specific focus. A concrete program is sought to build momentum for change. The goal is to develop a good track record gradually rather than risk the failure associated with high expectations. Yamakoshi added that secure trade is already discussed in this forum, but an EPA could facilitate progress on that front.

Katz asked about the feasibility of taking a building-block approach – progress in one area at a time, such as energy – to help the U.S. and Japan rediscover the rhythm of regional integration. Yamakoshi said this is already happening. Something more comprehensive, like an EPA, is necessary to demonstrate real political will.

Oakley Johnson suggested that exposure to the problems associated with agriculture in the public mind of Japan will lead to political change. We need to create such exposure through high-level, public negotiations. The EPG is a very important process, but it is not widely known in the public and will thus be unlikely to produce political change. Pursuing a building-block approach outside high-level processes will not be sufficient.

Ira Wolf reminded the audience that there are signs of political progress in public awareness of the pharmaceutical industry. Patient groups have become more involved and vocal, and they have applied pressure to members of the Diet to also become more involved. But there is almost no public debate about agriculture and the costs (human as well as financial) of resisting reform to Japanese society. Once the Japanese people understood the “drug lag,” calls for reform have begun to emerge. We should encourage bright spots like this in the pharmaceutical industry.

Question and Answer Session.

(1) Jim Fatheree of the U.S.-Japan Business Council asked if the benefits to industry were being forgotten. It would behoove the government to reframe the debate, perhaps turning the controversy about agricultural liberalization into a conversation about food security. If one broadens the context, it might be easier to start reforms as a method of transition. Agriculture could change from a form of protectionism to payments to support the transition of Japanese farmers. Groups like Keidanren need to help change the continued moaning about differences on agriculture into something positive. Otherwise, it could be another decade before anything is accomplished.

Yamakoshi said discussions are ongoing on this topic. The Japan-Australia FTA talks were unexpected, but the Minster of Agriculture is at the table.

(2) Kaori Iida of NHK asked if any of the panelists could comment on the record about calls in the Armitage report for FTA talks.

Ira Wolf said he views that report as a disappointment and a missed opportunity. We should be focusing on how to cooperate to maintain stability in Asia. There are opportunities for the U.S. and Japan to form an economic architecture on how trade flows and supply chain management work in Asia. Right now this is missing.

(3) Takuya Higuchi of Jiji Press asked if, in the absence of negotiations, a government study along the lines of that proposed by Keidanren and the Business Roundtable might have a place on the long-term agenda.

[OFF-THE-RECORD begin] Wendy Cutler explained that the U.S. government does not conduct studies as a way of initiating negotiations. The U.S. prefers government-to-government information sharing and the collection of expert analysis. Although such studies are typical in Japan, the administration is not convinced they are the best use of resources. Private sector studies, however, would be welcome. USTR prefers concrete negotiations with its Japanese counterparts. [OFF-THE-RECORD end]

Tim Richards agreed with a previous point that we should not lose sight of the benefits of an EPA or FTA in the face of the challenges. A study could enumerate the potential benefits of a deal in the early stages.

Yamakoshi said such studies have a good record in Japan and are not necessarily academic in nature.

(4) Charles Uthus of the Automotive Trade Policy Council brought up the systemic trade deficit between the U.S. and Japan of the last twenty years. He suggested this was the elephant in the room in the discussion. Why was this not mentioned as a potential hurdle to an EPA or FTA?

Cutler said that domestic stakeholder support is important, and questions on this topic will be asked now that Congress is paying greater attention to the trade deficit. Our trade deficit with Japan has been overshadowed by the massive deficit with China.

(5) A reporter from Asahi Shimbun asked if the U.S. government had the capacity to negotiate several FTAs at once and whether capacity would be strained by negotiations with Japan.

Cutler wondered if Japan has the capacity for such negotiations. Japan currently has ten FTA negotiations underway, while the U.S. has fewer. If a decision were made to launch talks, it would not be a problem to find adequate resources at USTR.

(6) Bernard Gordon of the University of New Hampshire asked whether the U.S. government would consider an EPA that covered everything but the dying Japanese agriculture industry.

Cutler, speaking personally, said probably not, but that does not mean discussions could not be started on other issues. This would help prepare the way for an EPA or FTA when Japan was ready to deal with agriculture.

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