The Promise of an EPA with Japan

Canada is in various stages of trade talks with dozens of different countries. Now is the time for Canada’s business and political leaders to focus their energies on those negotiations most likely to secure ambitious agreements that cover the array of issues important to Canadian businesses, such as the Japan-Canada Economic Partnership Agreement.

Canada and Japan have a long-standing relationship, which lays a strong foundation for deeper cooperation. Consider the contrasts between Canada’s introduction to Japan and that of other nations.  Most have heard of the “black ships” of Commodore Perry – the kurofune – that arrived in Tokyo Bay, demanding access, and threatening with their cannons. Fewer people know about a Canadian who also arrived by ship, and helped to introduce Canada to Japan.

In 1923 Commander Samuel Robinson brought his Canadian Pacific ship to Japan just in time for the worst natural disaster in Japan’s history – the Great Kanto Earthquake and tsunami. Captain Robinson kept his ship in the port at Yokahoma to serve as a rescue vessel. For twelve days he and his crew provided support to a stricken population. Then he transported several thousand people out of the devastated area to Kobe. Only three living civilians have ever been awarded Japan’s highest honour, the Grand Cordon of the Order of the Chrysanthemum. Two of them were members of the royal family. The third was Sam Robinson.

Even before diplomatic relations existed, Captain Robinson showed Canada’s instinct to be a positive force in the world. This has continued over time–when Japan applied to enter the General Agreement on Tariffs and Trade, Canada endorsed it, and we were one of only a few countries to later extend most-favored-nation status. Similarly, Japan was nominated by Canada to join the United Nations in 1956, and supported by Canada when it sought to enter the OECD in 1963. In 2011, in the general hysteria after the accident at Fukishima, more than 40 countries including the United States and Europe, imposed bans or strict conditions on Japanese food products. After three months, and having reviewed the facts, Canada was the first nation to drop restrictions.

In short, Canada has been – and continues to be – a friend of Japan. But the friendship of the last decade has prioritized steadiness over increases in productivity. We haven’t fought about anything, but we haven’t accomplished very much either. This might be fine, if others hadn’t decided to utilize their friendships with Japan to greater capacity.

In 2005, Japan was Canada’s third largest merchandise trade partner. Today it’s fifth; total two-way trade declined from $ 31 billion in 2001 to $24 billion in 2011. Japan is the third largest economy in the world, yet it represents less than 3 per cent of Canada’s merchandise trade. This stagnation is even more striking when you consider that our economies are so complementary–as a resource-poor island with a small land mass, Japan needs a reliable, politically stable source of energy, raw materials and food; no country is in a better position to respond these needs than Canada. Japanese firms are active foreign investors, and Canada needs more capital to feed the development of our enterprises and to help get our resource wealth out of the ground. Consider the services sector. Canada’s world-leading life insurance companies, for instance, have the expertise to help Japan’s aging society manage their retirement.

Economic symmetries are strengthened further by common values: both countries have strong labour and environmental standards, so there is no concern of undercutting each in these domains. Moreover, Canada and Japan are partners in the G20, G8 and other important groups. But despite these complementarities and commonalities, skeptics point to Japan’s low growth rates over the past 20 years to justify the lack of enthusiasm with which Canada has pursued this relationship and argue that we should instead focus on newer markets in Asia: China, India, Indonesia, the Philippines.

Far from a distraction, Japan is a window into emerging Asia. In 2011, Japanese companies invested nearly $40 billion into China, ASEAN and India. Canadian businesses could gain much by partnering and learning from the Japanese. Moreover, the story of Japan’s so-called stagnation is more nuanced than commonly portrayed. In fact, some economists—most notably Paul Krugman—have taken to calling it a myth, for once you’ve adjusted for the country’s unique demographics, economic output per person of working age has risen nearly on par with the US and Europe.

Japan has also grown much wealthier, with their net foreign assets rising by nearly $3 trillion. Putting this in perspective, the US saw their foreign liabilities grow by over $8 trillion over the same period. And the future looks even brighter. Upon arriving in office, the new government announced new fiscal and monetary policies and structural reforms aimed at fighting deflation and stimulating growth. The stock market has climbed in response.

Accessing the opportunities presented by the Japanese market is not always easy for Canadian companies, and can sometimes be downright impossible. An Economic Partnership Agreement should lower these barriers and put us at a competitive advantage over companies from countries without agreements in place. The agreement must be ambitious in scope, covering not only market access for Canadian goods and services, and equal treatment for our firms, but also covering the so-called “next generation” issues, such as investment protection, intellectual property rights, regulatory coordination, movement of professionals, government procurement and trade facilitation. More specifically, this means lowering tariffs and increasing quotas for Canadian beef, pork, grain, vegetable oil and seafood, as well as certain woods, processed metals and industrial goods.

It also means ensuring that our products are not subject to onerous regulations or standards that differ from common international practices and stack the playing field against Canadian companies. Japan’s recent move to allow beef imports from cattle aged over 21 months—which is expected to double the value of Canada’s exports—is a clear step in the right direction. But other farmers, not to mention manufacturers and service providers, continue to face restrictions and requirements that make it difficult to penetrate the market. Japan will need to show that it is serious about opening its market and creating real opportunities for foreign companies.

Beyond the basic economic benefits, an agreement with Japan would be a boost to our overall global trade strategy. Although we have entered the Trans Pacific Partnership talks, we cannot estimate how long that process will take. An interim agreement with Japan—becoming the only G8 country to have done so—would significantly strengthen our situation, while sending a clear signal to all our trade partners about Canada’s ambitions.

From Japan’s perspective, there is a lot to gain from an agreement as well. Although many Japanese cars sold in Canada are now locally-produced, those that are not are subject to relatively high duties. Reducing these is a key interest, especially if Europe improves its access to the Canadian market through the CETA agreement. Japan would also want assurances that their investments in the resource sector will be properly protected from arbitrary regulation and drastic tax increases.

Certain groups in Japan have traditionally objected to more open trade relationships, especially those negotiated at the bilateral level. But the failure of the WTO system to deliver new market access has helped build a consensus that the country needs to pursue regional deals such as the one with Canada. And an agreement with Canada—which has its own share of sensitive industries—is more politically friendly than an agreement with the broader, diverse group currently negotiating the Trans-Pacific partnership.

 The great thing about a bilateral negotiation is its flexibility so as to ensure the needs of both nations are met. This is especially important as Japan and Canada both confront some domestic challenges in the pursuit of freer trade. The critical thing is to make a deal–the time it takes time to implement may be the price of an ambitious effort. When I served in the Cabinet during the negotiation of the landmark Canada/US Trade Agreement, we encountered issues on which resolution was simply not possible. Rather than letting them stop the agreement, we put them into side processes that would continue after the deal was in place.  As Prime Minister Mulroney was fond of saying: “you can’t let perfection be the enemy of the good.” That pragmatic attitude produced one of the world’s most successful trade agreements. And it is that attitude that can bring a positive result between Japan and Canada, too.