Business Interests

Canadian and Japanese trade officials will meet next week (April 22-26) for the second round of trade negotiations toward a free trade agreement (or as the parties prefer to call it, an “Economic Partnership Agreement” or “EPA”). The EPA negotiations are taking place at a critical juncture in Japan’s recent history and Canadian business has a clear interest in helping to shape these negotiations.

Following more than a decade of deflation and stagnant growth, Japan’s recently elected government led by Prime Minister Abe is pursuing an ambitious trade agenda. The Japanese government has clearly signaled that it is prepared to come to grips with protectionist forces in certain segments of its business and public sectors, and among the broader public at large, in order to stimulate growth. Japan’s recent decision to request participation in the Trans-Pacific Partnership (“TPP”) negotiations with 11 Pacific countries (including Canada and the U.S.), against strong opposition among segments of the population during the election, sends a clear message to this effect. The Japanese government has recognized that a more liberal trade and investment regime, both inbound and outbound – export and import – are essential to secure the country’s long-term economic interests. This is a dramatic acknowledgment for a country that practically created the notion of an export-led economy.

Japan is the third largest economy in the world. It is a leading exporter (industrial, automotive, electronic goods), but also a major importer (energy, natural resources, and a wide range of advanced industrial, commercial and consumer goods and services).  Canada’s trade and investment relationship with Japan is already significant. Japan is Canada’s 5th largest trading partner and 6th largest source of foreign investment. Given the complementarities between our two economies, the relationship offers immense potential for expansion.

Canada’s ability to meet this potential will be a challenge for both Canadian trade negotiators and Canadian business. In particular, it is essential that Canadian companies devote the management attention and resources early in the negotiations to identify the scope for future expansion of their trade with Japan and communicate their interests to Canadian negotiators. Trade is not a theoretical exercise. Bargaining chips and negotiating leverage in the international trade and investment arena are a scarce resource and are best spent in an informed manner in exchange for valuable consideration. The information resides in corporate boardrooms and executive suites, not at the Department of Foreign Affairs and International Trade. It is essential that this information is conveyed to Canada’s negotiators early in the process so that they can focus their efforts where it counts and use it to secure the greatest advantage for Canadian companies and their employees.

The potential is plainly evident in some sectors given Japan’s dependence on energy imports (mostly from politically unstable regions) and its large market for natural resource imports more generally. However, Japan presents an attractive market for a much broader range of goods and services, including in agri-food, fisheries, professional services and energy-related services. Its population is one of the wealthiest in the world on a per capita basis, but also one of the oldest with a rapidly increasing median age, thus presenting opportunities in health services and technology.

Gaining market access in areas of interest to Canada will require a focused negotiating strategy that carefully balances Canada’s export interest in breaking through non-tariff barriers in a range of agri-food, fisheries and industrial goods and commercial service sectors against Japan’s interest in eliminating tariffs (currently 6.1%) in the auto sector as well as securing access to Canadian energy and natural resources. This is more easily said than done. To take auto trade as an example, reducing tariffs for imports of Japanese vehicles will presumably have an impact on Canadian automotive production, including by Japanese companies who have invested in Canadian production (Toyota and Honda). Canadian negotiators will want to ensure that trade gains do not become investment losses. Among other things, Canadian negotiators will want to ensure that Canada’s “offensive” trade and investment interests, including access to Japan’s auto industry for Canadian parts manufacturers, are clearly articulated and to press diligently to address market access barriers identified by Canadian companies.

The fact that Japan has signaled its desire to join the TPP negotiations sets the stage for Canada and Japan to move diligently to bring their bilateral negotiations to an early conclusion. There are clearly difficult areas that will require attention (autos on the Canadian side and fisheries, forestry and agricultural sensitivities on the Japanese side). However, some of the more contentious subjects that have constrained Canadian trade negotiators in the past (supply management and special treatment for cultural industries, to name just two) do not play a significant role in the bilateral Canada – Japan context. Negotiators will be thinking tactically to identify areas where progress is more attainable at lesser cost in a bilateral (EPA) or plurilateral (TPP) context and adapt negotiating positions accordingly. Indeed, it may well be in the interest of both parties to reach agreement on certain issues bilaterally sooner rather than later in order to leverage their respective bargaining positions in the TPP process going forward.

In conclusion, the tactical and strategic trade-offs that Canadian negotiators will be required to make during the Canada-Japan EPA negotiations are best made with the full engagement and participation of Canadian stakeholders, and in particular businesses and their employees who stand to gain the most from an expanded trade and investment relationship.