Chapter II.
Sectoral Analysis of the International Situation and Japan's Foreign Policy

Section 2.
Securing global economic prosperity and development issues for developing countries

A. Ensuring a prosperous world economy

1. Overview

a) The progress of globalization and tasks ahead

Since the Asian economic crisis, which emerged in the summer of 1997, spilled over into Russia and Latin America, Japanese and Western financial institutions which had been financing emerging markets suffered major damage, with a global credit crunch ensuing. Behind this sequence lies the progress of globalization, whereby goods, capital, technology and information move across borders relatively freely, allowing the optimal combination of these elements, and thus increasing economic efficiency on a global scale. The current state of the world economy as such also epitomizes the new risks which accompany this major tide of globalization. The downside of globalization, including global environmental problems and transnational organized crime, has also become obvious, requiring adequate measures to be taken. At the same time, given the irreversible nature of globalization, we should take maximum advantage of it and to work toward world economic prosperity. In addition, in new economic areas, Japan needs to develop and disseminate standards and rules which are to its benefit.

b) Overcoming world economic turmoil

To overcome world economic turmoil and secure prosperity toward the 21st century, Japan has to engage actively in efforts such as revitalization of the Japanese economy, assistance to Asian nations, enhancement of the international financial and currency system, and development of multilateral trade and investment frameworks (see Chapter I, B.3., on the Asian economic situation).

  • Japan's efforts

    Firstly, revitalizing the Japanese economy and restoring confidence to it will be crucial to the stability and prosperity of Asia and the world. The international community wants to see Japan strengthen its efforts toward economic recovery and financial revitalization, expand imports through further deregulation and bring outward investments and loans back to former levels, and as the world's largest creditor, this is indeed Japan's duty. Japan is steadily implementing comprehensive economic measures and working toward financial revitalization based on the Financial Revitalization Act, while also moving swiftly forward with the design and implementation of the Emergency Economic Package, and these efforts have been widely welcomed. Japan must continue to design economic policies with an eye to the international economic situation, providing adequate explanations of Japan's efforts in consultations with other countries.

  • Strengthening the international financial and monetary system

    To improve international measures for the prevention of economic and financial crises and responses when crises do occur, a number of fora are currently deep in discussion on measures to strengthen the international financial system, including a review of International Monetary Fund and World Bank frameworks, strengthened measures in response to sudden and large-scale capital movements, greater transparency and the improvement of domestic financial systems. The G8 Birmingham Summit held in May presented a framework for strengthening the international financial system, while in September, many initiatives were also put forward by heads of states and governments. In October, the IMF and World Bank Annual Meetings and other meetings developed a variety of proposals on, for example, strengthening responses to capital movements. At the end of October, moreover, a declaration was released by the G7 leaders agreeing on a direction for strengthening the international financial system, with concrete measures to be considered toward the Cologne Summit scheduled to be held in June 1999. At the November APEC Economic Leaders' Meeting too, leaders agreed on the early establishment of a task force, which would include the systemically significant economies, to examine the questions of adequate transparency and disclosure standards for investment banks and hedge funds.

    In Europe, the single currency-the euro-introduced as of January 1999 could in the future have a significant impact on world financial markets as a new major international currency alongside the dollar. The emergence of the euro will also be a factor escalating so-called "mega-competition," as seen in the various global mergers of corporate giants which have taken place since 1997, and Japan must closely observe trends in this regard. In particular, given the strong possibility of a dollar-euro bi-polar currency system developing, Japan must work to raise the status of the yen as an international currency. Boosting the role of the yen as an international currency alongside the dollar and the euro would contribute to the greater stability of the international monetary system (see Chapter III, D., on the euro).

  • Development of multilateral trade and investment frameworks

    At the World Trade Organization (WTO) Ministerial Conference and the 50th Anniversary Meeting of the GATT held in May 1998, as well as in the October G7 Leaders' Statement, participants agreed that the recent economic and financial crises should not lead to protectionism. Accordingly, Japan and the other developed countries need to enhance their efforts toward the economic recovery of the emerging markets and work toward providing the necessary markets. The next negotiations in the WTO for trade liberalization will begin in 2000. In these negotiations, Japan intends to promote its economic interests amid the tide of globalization, at the same time promoting comprehensive trade and investment liberalization toward world economic development as well as contributing actively to the formation of rules to this end. It is also important to simultaneously press forward with the structural reform of Japan's domestic industries in accordance with international rules. At the same time, the fact that APEC member economies managed to come to an agreement on the Early Voluntary Sectoral Liberalization (EVSL) despite differences in views indicates firm support for the APEC position of maintaining the momentum of trade and investment liberalization and facilitation.

c) Responses to new issues accompanying globalization

The advance of globalization is increasing the need for rule creation in the area of investment and new economic areas such as electronic commerce which showed rapid growth in recent years. At the same time, international interest is also rising over issues which have traditionally been dealt with internally, such as employment and welfare, as well as global-scale issues which cannot be resolved on a single-country basis, such as destruction of the global environment and transnational organized crime. At the Birmingham Summit of the Eight, transnational organized crime and employment stood alongside global economic issues (the Asian economy, the environment, trade, development, etc.) as the main pillars of discussion, with a close exchange of views taking place. Coordination among summit participants on such issues seems likely to become increasingly important in the coming years.

  • Investment (Multilateral Agreement on Investment, etc.)

    Negotiations on the Multilateral Agreement on Investment (MAI) were held from 1995 onward within the OECD with the aim of developing international rules on investment. However, while scheduled to reopen in October, an announcement of non-participation by France thwarted the continuation of negotiations. At informal consultations in December, members agreed that the MAI negotiations were no longer taking place, but that it was important to continue discussions at the OECD. Considerations are also underway in the WTO Trade and Investment Working Group in regard to issues including the creation of international rules on investment, and APEC has developed a list of policy measures for the improvement of the investment environment, including national treatment and greater transparency. This list was created as a reference from which APEC members are to select investment environment measures to incorporate into their own Individual Action Plans. The list will be regularly revised from 1999 onward.

  • Electronic commerce, Y2K issue

    Expectations have grown in Japan and abroad in recent years of electronic commerce as an area which could act as an engine for world economic growth. Because electronic commerce is basically borderless in nature, international rules urgently need to be developed toward the expansion and development of this area, and from this perspective, Japan has been contributing toward the construction on new rules, not only engaging in consultations with the United States, the EU and other countries making frontrunning efforts in this area, but also participating actively in multilateral consultations in the G8, WTO, OECD and APEC, etc. Japan is also making active efforts in regard to the Y2K issue, engaging in international coordination through international fora such as the G8 and other multilateral consultations, as well as bilateral consultations with countries such as the United States and the Republic of Korea, and contributing to the creation of international measures through knowledge derived from exchanges of information with the various countries and joint private sector-government efforts.

  • Convention on Combating Bribery of Foreign Public Officials

    The OECD-adopted Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, recognizing that obtaining business through the undue provision of benefit to foreign public officials damages fair international business transactions, aims to institute international crackdowns on such behavior to ensure an environment in which companies can compete fairly. Japan adjusted domestic laws (partial amendments to the Unfair Competition Prevention Law) to deposit the instrument of acceptance of this Convention on 13 October as one of the earliest signatories, second only to Iceland.

2. The multilateral trade system and regional economic cooperation

a) The multilateral trade system-World Trade Organization [WTO]

  • The Second Ministerial Conference of the WTO and the upcoming negotiations for further liberalization

    The year 1998 marked the 50th anniversary of the GATT/WTO system, and the Second WTO Ministerial Conference and 50th Anniversary of the GATT were held in May in Geneva. The Ministerial Conference saw vigorous discussions on implementation of the WTO Agreement and efforts toward the next negotiations, affirming that the WTO was generally functioning effectively, as well as the importance of steady implementation of the WTO Agreement in further entrenching WTO credibility. Being concerned with the Asian economic crisis, members expressed awareness of the need for countries to continue to open their markets without introducing protectionist measures and for the benefits of the multilateral trading system to be adequately extended to developing countries as well. In terms of future liberalization, one key point was the modality of the next trade negotiations, to be launched in 2000, and Japan supported comprehensive negotiations which included not only the built-in agenda stipulated in the Uruguay Round agreements, namely negotiations on agriculture and services, but also negotiations on such issues as industrial tariffs and formation of investment rules. The EU and other parties also supported comprehensive negotiations. Developing countries, on the other hand, were reluctant to start new negotiations, claiming that the implementation of agreement itself imposed too heavy a burden. It was decided to launch the preparatory process so that appropriate decisions on the next negotiations could be made at the Third Ministerial Meeting to be held at the end of 1999 in the United States, and discussions for the next trade negotiations have been underway since September 1998, spearheaded by the General Council. Moreover, given the rapid expansion of electronic commerce in recent years, members also agreed to establish a comprehensive working program to examine all trade-related issues relating to global electronic commerce, and to continue the current practice of not imposing customs duties on electronic transmissions until the Third Ministerial Meeting, and these decisions were issued in the form of a declaration.

    The Second Ministerial Meeting was held amid increasing concern over protectionist pressure caused by the Asian economic crisis, but it was highly significant that members again expressed their support for the multilateral trading system and their commitment to efforts to strengthen it. Japan needs to give urgent consideration to its approach to the upcoming negotiations, paying due attention to the position of the relevant industries and private sector groups. It will also be important for Japan to coordinate its positions with other countries, actively participating in a preparatory process in order to launch comprehensive negotiations.

    Much discussion has also been conducted with regard to the treatment of the future handling of measures exempting Japan's rice import regime, which has been subject to Special Treatment (exemption from the "tariffication"), and in December, Japan decided to introduce tariffication from April 1999.

  • Liberalization of trade in services

    Of the areas in which negotiations were extended after the Uruguay Round, the basic telecommunications area saw the Fourth Protocol to the GATS, which compiles the results of liberalization negotiations in this area, entered into force in February 1997. In the area of financial services, agreement on liberalization was reached in December 1997, and the Fifth Protocol to the GATS created in February. In the area of professional services, a multilateral discipline designed to ensure that domestic regulations on accounting services are based on objective and transparent criteria and do not impose any unnecessary trade restrictions was adopted by the Council on Trade in Services in December. Japan has taken a positive role in the progress of these liberalization negotiations, for example, by ratifying the Fifth Protocol to the GATS in June.

  • Universalization of the multilateral trading system-expansion of membership

    In order to further strengthen the WTO multilateral trading system, it is important to secure wider WTO participation. In October, the accession of Kyrgyz and Latvia was approved, with Kyrgyz completing domestic consent procedures to formally accede to the WTO in December as the 133rd member country. However, some 30 countries and regions are still applying for accession, including China, Taiwan, Russia, Saudi Arabia and Viet Nam, whose accession negotiations have not proceeded entirely smoothly in 1998. Japan has provided the technical cooperation necessary for the early accession of these countries and steady post-accession implementation of the WTO Agreement, utilizing dispatches of experts and other forms of technical assistance.

  • Dispute settlement system

    Ensuring more prompt compliance and enhancement of automaticity has greatly improved the effectiveness of the WTO dispute settlement system. The number of requests for consultation has also increased dramatically from the annual average of 6.6 under the GATT to 154 requests on 117 cases over approximately four years since the WTO was established in January 1995 to the end of November 1998. Of those 117 cases, the fact that 28 complaints were lodged solely by developing countries indicates the universality with which these procedures are being used. Neutral and fair dispute settlement procedures also prove to be useful in ensuring the stability of the multilateral trading system. Review work is currently underway toward further improvement of the dispute settlement system, and it will be important that members continue to respect this system and further increase the effectiveness and credibility of the WTO.

b) Regional economic cooperation

Free trade agreements, tariff unions and other regional trade agreements numbered 102 as of November 1998 (according to WTO information), and are expected to increase further. For such regional economic cooperation to complement the multilateral trading system, it must be consistent with the spirit of the WTO Agreement and not act as a barrier to extra-regional countries, instead promoting open trade. The WTO Committee on Regional Trade Agreements has been examining the consistency of individual regional trade agreements with the WTO Agreement to ensure that these agreements do not damage the multilateral trading system. The Committee has also been examining rules regulating regional trade agreements. With a view to strengthening the multilateral trading system, Japan has been actively participating in the Committee, submitting proposals on clarification of Article XXIV of the GATT and the other provisions on regional trade agreements and on the reporting procedure on implementation of those agreements.

From this perspective, considerable attention is given to APEC, which advocates open regional cooperation, as a unique form of regional cooperation extending the fruits of trade and investment liberalization and facilitation even to non-members. APEC comprises a diverse membership in terms of social backgrounds, economic systems and stages of development, shaping relaxed inter-governmental cooperation through concerted unilateral action by members in line with APEC's goal of promoting trade and investment liberalization and facilitation and economic and technical cooperation. Discussions at the Economic Leaders' and Ministerial Meetings held in Kuala Lumpur, Malaysia, in November focused on the world economy and responses to the Asian currency and financial crisis, trade and investment liberalization and facilitation, economic and technical cooperation and electronic commerce. (See Chapter I, B.3 on responses to the Asian currency and financial crisis.)

In terms of Early Voluntary Sectoral Liberalization (EVSL), the position of those economies wanting to push ahead actively with intra-regional liberalization conflicted with Japan's position, which was that APEC liberalization should be grounded in the accumulation of voluntary actions based on a spirit of community. Ministers ultimately affirmed that EVSL would be implemented in APEC based on the principle of voluntary action, and that the launching of WTO negotiations would be sought in regard to tariff measures in nine priority areas (forest products, fish and fish products, energy, environmental goods and services, chemicals, medical equipment and instruments, gems and jewelry, toys, and a telecommunications mutual recognition agreement).

In Southeast Asia, efforts continue through the framework of ASEAN to promote further intra-regional cooperation, including maintenance and enhancement of trade and investment liberalization, as well as to build cooperative relations with extra-regional countries while putting emphasis on the efforts to overcome the economic crisis. At the Sixth ASEAN Summit Meeting held in Hanoi in December, the "Hanoi Declaration of 1998," the ASEAN Vision 2020 "Hanoi Plan of Action" and the "ASEAN Statement on Bold Measures" were adopted in order to overcome the economic crisis and to strengthen ASEAN solidarity and cooperation toward the 21st century, and concrete vision and measures for the promotion of regional cooperation were laid out. The "ASEAN Statement on Bold Measures," in particular, included such measures for the acceleration of trade and investment liberalization as front-loading of the target years for implementation of the ASEAN Free Trade Area (AFTA) and the ASEAN Investment Area (AIA), expansion of the scope of products subject to tariff reductions, and concrete, country-specific measures for encouraging investment.

The Asia-Europe Meeting (ASEM), which was launched in 1996 as a forum for dialogue linking the two regions, held the second meeting of leaders in London in April, agreeing to work together toward overcoming the Asian economic crisis. In addition to the Chairman's Statement, a statement was also released on the financial and economic situation in Asia. (See Chapter III, A for details on ASEM.)

The North American Free Trade Agreement (NAFTA), which aims to reduce trade and investment barriers within the North American region comprising the United States, Canada and Mexico, is significant as a free trade agreement among countries with different maturity of their market economy, and the volume of trade among the parties shows steady growth (U.S. imports from Mexico grew 115 percent, exports to Mexico 71.6% over 1993-97). However, there is some argument within the United States that NAFTA is expanding the U.S. trade deficit and impacting negatively on employment, and in September, a fast-track bill (covering, for example, negotiating authority over trade negotiations) was rejected by the House of Representatives. As a result, negotiations on Chile's accession to NAFTA have been stalled. (Both Canada and Mexico have already concluded and put into effect bilateral free trade agreements with Chile.)

The Southern Common Market (MERCOSUR), which comprises Argentina, Brazil, Paraguay and Uruguay, is contributing to the dramatic expansion of intra-regional trade. Negotiations began in 1997 toward liberalization of services. In 1998, a framework agreement was concluded with the Andean Community (Bolivia, Colombia, Ecuador, Peru and Venezuela) toward creation of a free trade area from 2000, while an investment and trade cooperation agreement was also concluded with Canada, evidence of moves toward deepening and expansion. In regard to the establishment of the Free Trade Area of the Americas (FTAA), the launching of concrete negotiations was announced at the Second Summit of the Americas in San Diego in April, and it was also reaffirmed that negotiations would be completed by 2005, but the delay in clearing the U.S. fast track legislation and the cautious attitude being taken by MERCOSUR over early FTAA establishment suggest that progress in this area will not be easy. In addition, together with the summits and minister-level meetings to be held between the Latin American countries and the EU in June 1999, a summit is also scheduled between MERCOSUR and the EU, and these occasions may see free trade negotiations launched between the two regions. Japan, too, places weight on strengthening relations with MERCOSUR and, following on from last year, held its third inter-governmental consultations with the group in October. The Caribbean Community (Caricom), launched in April 1973, is currently engaged in eliminating intra-regional tariffs, establishing common external tariffs and developing macroeconomic policies toward the formation of a single market in 1999 and monetary integration in 2000.

The European Union (EU) made progress toward the deepening of integration and regional expansion through, for example, the commencement of the third stage of Economic and Monetary Union (EMU) in January 1999 (introduction of the euro) and accession negotiations with Central and Eastern European countries and Cyprus. The EU is working toward concluding "European Agreements" with the 10 Central and Eastern European countries which are candidates for EU accession, also strengthening economic ties; at the same time, it is also engaged actively in the expansion of regional cooperation, concluding, for example, agreements for the enhancement of economic and trade cooperation with MERCOSUR and the Mediterranean countries. The EU also reached basic agreement with the United States in May on the Transatlantic Economic Partnership (TEP), with both parties agreeing to deepen cooperation in the WTO and other multilateral fora toward the facilitation of U.S.-EU trade and economic relations. It is significant that Europe, which has an economic scale on a par with that of the United States, is now moving much more clearly to build external economic ties through its identity as the EU.

3. Energy and food issues

a) Energy issues

The environment surrounding energy issues has been undergoing major change; the remarkable downturn in oil prices since the end of 1997 with the effect of the recent Asian economic crisis which brought about sluggish energy demand, and the acceleration of reorganizing the international oil industry through mergers, etc. The world energy demand is forecast to expand by approximately 50% over the next 20 years. Accordingly, the long-term stable supply of energy and environmental issues such as global warming have become important, as we move toward the 21st century. Thus, there is a growing need to build international cooperative relations to that end.

In this context, the following moves occurred in 1998. In January, the First Japan-Russia Energy Consultation was held in Moscow, with views exchanged on the development of the investment environment in the energy sector and bilateral energy cooperation. In March and April, the G8 Energy Ministers' Meeting which was also held in Moscow, discussed energy supply and demand forecasts, how to create competitive markets, and basic policies in regard to environment issues, etc. Further, at the Third APEC Energy Ministers' Meeting held in Okinawa in October, members discussed cooperation and policy coordination which should be undertaken in the energy area. At the meeting, based on forecasts of increased energy demand in the APEC region over the medium- to long-term, members also agreed on measures for the development of natural gas and other energy-related infrastructure, as well as for the improvement of energy efficiency, also agreeing to strengthen policy dialogue and industry dialogue.

b) Food issues

Global interest is growing on the topic of food security, given the rapid rise in population and higher food consumption levels in developing countries with high levels of economic growth, as well as concern about natural resources and environment issues. In addition, regional food shortages arose in 1998 due to factors such as economic crises and abnormal weather conditions thought to be the influence of the El Niño phenomenon. According to the UN Food and Agriculture Organization (FAO), the number of countries which needed emergency food assistance had risen to 37 as of November 1998, compared to 25 in 1996. Given these circumstances, it will be important to follow up on the World Food Summit, held in November 1996, with a view to reducing the number of undernourished people to half the present level by no later than 2015. Japan has been undertaking cooperation in a variety of forms, including food aid and aid toward increased food production, directing these efforts both through international organizations and on a bilateral level.

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