**Note** This is a re-run. Apologies for the technical glitch in the last posting by Mr. Katz. Also, please note that the SSJ forum sends out postings as plain text, which minimizes the size of each email file but does not support text formatting options such as bold, italics and colors.

Mark Manger wrote

> The Enabling Clause, product of
the 1979 Tokyo Round, allows
> developing countries to delay liberalization
indefinitely and to
> exclude virtually all trade from their RTAs.
> Cleverly, Korea is classified as a developing country
in the WTO.
I suppose they once were one, but by now it primarily allows Korea to > avoid liberalization.
> 1. Why could Korea pull off an FTA with the US?

RK replies:
If I understand correctly, the suggestion is that Korea's FTAs are a bit of sham, or at least there is a lot less than meets the eye. I disagree

By all sorts of measures, Korea has a pretty liberal trading regime, especially in comparison with Japan. The trade:GDP ratio, share of manufactures in imports, intra-industry trade (i.e., being willing to import products that compete with those you export ), imports from competing firms (rather than "reverse imports" from a country's foreign affiliates) etc.are all well within international norms, if not higher, (with the notable exception of motor vehicle imports). And both trade and inward foreign direct investment have been on a steady increase since the end of military rule. One reason is that the Kim Dae Jung forces saw trade and direct investment liberalization as an aid to democratization; I heard a Cabinet minister explain that DPJ saw the chaebol as part of the anti-democratic forces built up under Park Chung Hee and felt trade-FDI liberalization would take them down a peg.

In Japan, by contrast, it not just overall imports and manufactured imports that are low by international norms (for a country of its GDP and population), but also its exports. If Japan imported more, it could export more.

As for the Korean FTA with the US, according to a Congressional source, when it came to farm issues in KORUS, aside from rice and the "mad cow" issue, "the Koreans gave us almost everything that we sought on farm issues." If and when KORUS is ratified, two-thirds of US farm exports will immediately become tariff-free and most of the rest will be phased out over ten years.
Despite mad cow, US beef exports to Korea have soared since beef under 30 months old (more than 90% of US beef exports) can come in; most of the beef lobby supports Korea because it eliminates Korea's 40% tariff on beef over 15 years. And the farm lobby is enthusiastic. Beyond agriculture, tariffs would be abolished immediately on more than 82 percent of U.S.
imports and more than 80 percent of Korean imports. This rises to 99% and 98% respectively by year ten. The US International Trade Commission study expects a substantial rise in trade in both directions across a broad range of sectors.

Vis-a-vis the EU, tariffs on 94% of EU products and 81.7% of South Korean products will be abolished immediately. In 5 years, at least 99.6% of EU's products and 93.6% of South Korea's products will be shipped without any tariff. By contrast, Japanese automakers will still face a 10% tariff on exports to the EU. And in electronic goods, Japanese firms will face tariffs as high as 14% on some items.

Paul Midford wrote:
> His points regarding the role of
Japan's political structure in
> preventing free trade deals seems largely on target,
especially
the
> inability of the Foreign Ministry to effectively lead
these talks
in
> all sectors under negotiation.

RK replies:

The veto power of individual ministries is not something enshrined in law, but only in custom, as was the past notion that the Prime Minister could not initiate legislation except by going through assorted ministries. In my view, this is not simply an issue of politicians versus bureaucrats as the DPUJ would have it, but of allied politicians and ministries with clients in one sector vs. allied ministries and politicians with opposing clients. As far as I know, Kan has not tried to correct this veto power.

PM wrote:
> His point about malapportionment
is also largely correct, although I
> would note that malapportionment in the case of the
US Senate...
> shows an even stronger bias toward agricultural/rural
interests

RK replies:

I agree, and that leads to all sorts of problems, from ethanol subsidies and farm subsidies in general to who can get the Presidential nomination and win. But, when it comes to trade, US farming is very competitive, so they tend to push for trade agreements. As in other countries, it is the exporters who form the strongest lobby for trade liberalization, and in the US, agriculture is an exporting industry. The anti-FTA bloc is most strongly based in firms and unions in the import-competing manufacturing sectors (e.g. Ford's opposition to KORUS out of fear of imported Korean light trucks down the road).

> What I really want to focus on
here is an issue Rick did not raise,
> but one that while it might not matter as much for
the proposed
TPP > is nonetheless a very big issue in other free trade talks, namely
> Japan's intransparent non-tariff trade barriers.

RK replies:

I completely agree with Paul. That is one reason I have never been all that enthused about the economic impact on Japan of a US-Japan FTA because I felt it would not address those issues particularly the business practices problems raised by Ira Wolf (see below). It is also why the Europeans are so reluctant to enter talks with Japan; in this case, it is not farm issues, but regulatory issues in other sectors that bugs the EU.

But this is a double-edged sword. One of the reasons that reformers within METI are so hot-to-trot about FTAs is that this gives them a seat at the table to address issues of domestic reform that would not ordinarily be in METI's turf. It is only by being part of trade talks that METI can try to lobby on farm issues or regulatory barriers in service sectors (some of them tend to ignore analogous problems in the manufacturing sector). Of course, others in METI would end up raising anti-competitive practices in Japan on both the domestic and international side if they succeed in their notion that Japan's leading firms should merge to form even stronger oligopolies.

In any case, Jeffrey Sachs co-authored a wonderful paper back in 1995 called "Economic Reform and the Process of Global Integration." He argues persuasively that, in most countries undergoing successful reform, globalization has been a vital part of the recipe. It strengthens domestic reformers and breaks the power of domestic vested interests. That is why I have long felt that globalization on the trade, FDI and financial fronts was a sine qua non for successful reform in Japan.

Why, then, did I focus on agriculture? Because, when Kan raised the issue of Japan's participation in Trans-Pacific Partnership (TPP) talks, it was clearly the farm lobby and its allies in the Diet (both LDP and DPJ) and the Ministries (including the METI minister, but not the officials) who blocked it. Keidanren, by contrast, supported it. Certainly, if Japan had entered the talks, it would have been resistant to liberalize across a range of issues--one of the reasons the US, among others, was not eager to have Japan join before the pact framework was settled. But at least it would have negotiated. By contrast, it was the farm lobby that prevented Kan from even asking to join.

Ira Wolf wrote:
> In the [Kodak] film case [at WTO],
the issue was a complex of
> business practices tolerated by the government that
effectively
> closed the distribution system to foreign
photographic film. ..
None of the activities was a WTO
> violation. However, if you look at the way in which
they all
> affected the market, the result was a barrier,
albeit, again, not
a > violation of anything.

RK replies:

Again, one of the reasons I'm skeptical about how much changing official rules will change results in Japan, whereas I'm under the impression that, for the most part (not always), changing rules in Korea does change practice.

The WTO only deals with acts by the government, but in Japan many things that would be acts of government elsewhere are, in fact, "delegated" to private actors in Japan and, even if the government has changed its view, remain as legacies. However, my memory is that, even thought Kodak lost its case, WTO expanded the definition of what constitutes an act of the government to include "invisible barriers" if it can be shown that they are delegated to private actors by the government rather than purely private anti-competitive barriers.

My view is that globalization and domestic reform can be part of a virutous cycle for Japan. The greater the true globalization--e.g. more inward FDI more imports from competitors (e.g. Samsung cell phones or Lucky Goldstar TVs as opposed to Panasonic TVs made in Malaysia)--then the more the economic and political power of domestic "cartels" is broken down and the more the power of reformers is enhanced. That allows further steps that would help globalization, and so on. At this point, if the government does nothing, anti-competitive practices can remain part of the status quo. What is required are active anti-trust steps as well as more entry by foreign players who are not part of the club. Things have improved, but not enough.

The trick, as in the Large-Scale Retail Store Law, or the financial deregulation talks that began in the 1980s, or the cell phone negotiations, is to find cases where the needs of foreign firms and domestic firms fighting to break into entrenched areas coincide. Len Schoppa's book "Bargaining with Japan" is very insightful on this.

Ira Wolf wrote:
> That [TPP] framework, assuming one
believes all the rhetoric, will go
> far beyond traditional FTAs and include much more on
the regulatory
> and domestic law side of things.

RK replies:

How, if at all, would TPP address the business practices problems such as those Kodak complained about? They are not dictated by law or regulation. Would there be antitrust provisions requiring govt action against purely private activities deemed to be "in restraint of trade."?

Richard Katz
The Oriental Economist Report