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

Section 2.
Ensuring a more affluent world

A. The world economy

1. Overview: the progress of globalization and tasks ahead

The free cross-border movement of people, goods, capital and information which has become so evident since the late 1980s is boosting economic efficiency on a global scale, and the progress of such globalization is already significantly affecting Japanese society. The G8 Cologne Summit in June also included globalization on its agenda, affirming that greater economic openness and dynamism have contributed to the widespread improvement of living standards and a significant reduction in poverty.

On the other hand, the downside of globalization is also emerging, such as the Asian currency and financial crisis and its worldwide repercussions. Although the world economy seems to be recovering gradually, as witnessed by factors such as the gradual recovery of the Asian countries from the 1997 Asian currency and financial crisis and the continued robustness of the U.S. economy, this cannot completely absorb the risks of globalization. There is recognition that further globalization offers great benefits not only to the Japanese economy but also to the world economy as a whole, although further measures are still needed to adequately materialize the potential of globalization.

The economic crisis that occurred from 1997 to 1998 demonstrated that the current international financial system is not sufficiently capable of responding to the reality of a new international economy centering on globalization. To prevent and deal with crises, it is vital that countries enhance domestic systems adequately. At the same time, however, the international financial architecture, centering on the International Monetary Fund (IMF), must also be strengthened and discussions on these issues are proceeding in a number of different fora. Given, for example, that the scale and speed of short-term capital flows can in some cases exert a devastating impact on a country's real economy, it is vital to strengthen international monitoring functions and to improve transparency.

At the G8 Cologne Summit in June, members identified key tasks in terms of strengthening the international financial architecture, and also established a framework for work in this regard. However, the consensus reached at the Cologne Summit still needs to be given greater substance and its global implementation must be ensured. Japan places particular emphasis on dealing with hedge funds and other short-term capital flows, involving the private sector, and reforming the IMF. Japan will continue to contribute actively to international discussion regarding these issues.

Moreover, in order to sustain the development of the world economy amidst ongoing globalization it has become more important to further promote worldwide trade liberalization and to establish rules to ensure fair competition. A key issue in this context is to maintain and strengthen the multilateral trade system under the World Trade Organization (WTO). However, the Third WTO Ministerial Meeting, held in Seattle at the end of November 1999, failed to launch a new round due to divergences in members' respective positions, effectively suspending work to date (see 2. later in this Section).

In recent years, moves to strengthen regional integration and cooperation have been accompanied by a new trend, namely the promotion of regional trade agreements. Japan believes that the development of such regional trade agreements should complement the WTO-centered multilateral free trading system and contribute to world economic development through stimulating economies (see 3. later in this section).

Turning to Japan, 1999 witnessed ongoing strong foreign pressure for the recovery and structural reform of the Japanese economy. Japan's continued efforts toward economic recovery in tandem with work on economic structural reforms are not only essential in terms of allowing Japan to respond to the tide of globalization, but could also be described as Japan's duty as the world's largest creditor and an economic power. Japan has thus far reformed its financial system and instituted a succession of economic policy packages and other measures. Although the economy has not yet got out of its severe situation, as the momentum for recovery in private demand remains weak, activities continue to improve moderately through the influence of these measures. These efforts have been warmly welcomed abroad. At the same time, Japan will need to continue seizing all available opportunities to fully explain the steps being taken.

The progress of globalization has created the need for new cross-border measures, such as the development of rules for e-commerce and responses to transnational organized crime. International efforts are also being made toward addressing the issue of food safety, including the safety of genetically-modified food products. In particular, the G8 Cologne Summit requested the Organization for Economic Cooperation and Development (OECD) to research and report on the safety of such food products. Through its relevant expert groups, the OECD has accordingly prepared for G8 personal representatives (Sherpas) reports on the study of the safety of genetically-modified food products from a scientific perspective. Along with this, the OECD is to establish a forum for dialogue with civil society and present G8 Sherpas with a report of this forum, reflecting the views expressed by relevant parties. Employment and social safety nets, both of which have traditionally been regarded as domestic matters too, are being discussed more frequently as challenges in the global economy. New efforts are also being launched. One example is education, another issue traditionally marked as the province of each government, which the Cologne Summit addressed as a key issue facing all countries, adopting the Cologne Charter: Aims and Ambitions for Lifelong Learning.

Other events in 1999 included Japan's tariffication of rice in April, which had formerly been subject to the special treatment under the WTO Agreement on Agriculture.

2. The multilateral trade system (Based on the results of the Seattle WTO Ministerial)

a) World Trade Organization

Since the Second Ministerial Conference in May 1998, the WTO has advanced its preparations toward the launch of a new round of negotiations, and Japan also has made an active contribution to this process. While the WTO Agreement stipulates that negotiations on agriculture and trade in services-also known as the built-in agenda-are to begin in 2000, Japan has been pressing for a more comprehensive round of negotiations, including industrial tariffs, the strengthening of rules on investment and anti-dumping measures, so as to respond to the diverse interests of different countries. From this standpoint, Japan has submitted 13 proposals on, for example, agriculture, industrial tariffs, investment, and anti-dumping, thus leading discussion at the WTO General Council in Geneva.

When WTO Director-General Mike Moore visited Japan in October, Prime Minister Obuchi told him that Japan would work actively toward the launch of a new round. Prime Minister Obuchi also noted that the WTO needed to address the following issues in order to maintain and strengthen the multilateral trading system: (1) to strengthen rules and promote liberalization; (2) to ensure more active participation of developing countries; (3) to respond to technological progress and globalization; and (4) to give due consideration to environmental issues and other concerns of civil society.

The drafting of the Ministerial Declaration began in September in the lead-up to the Third Ministerial Conference in Seattle, which was intended to launch a new round of negotiations, with a series of consultations held to bridge differences in members' respective views. Japan, the European Commission (EC; the body within the EU responsible for concluding WTO agreements) and others pushed for a comprehensive round including not only market access, but also the strengthening of WTO rules. Meanwhile, the United States was cautious in supporting a comprehensive round. In addition, some developing countries asserted that implementing the current WTO Agreements was more important than further liberalization negotiations, and expressed reluctance at widening the scope of negotiations beyond the built-in agenda. Finding common ground proved difficult given these wide differences among member countries regarding the scope and modality of negotiations. As a result, without much success at the prior working-level coordination in Geneva to produce a draft Ministerial Declaration which could be tabled for discussion at the Conference, the Third Ministerial Conference was held from 30 November to 3 December.

Attending the Ministerial Conference from Japan were Minister for Foreign Affairs Yohei Kono, Minister of International Trade and Industry Takashi Fukaya, and Minister for Agriculture, Forestry and Fisheries Tokuichiro Tamazawa. Representing the Japanese Government, Foreign Minister Kono stressed the importance of launching a new round in order to strengthen the multilateral trading system, and noted that the WTO needed to urgently address such issues as (1) measures to ensure that the developing countries can be the beneficiaries of the WTO system and (2) an appropriate response to the public concerns associated with further trade liberalization, such as the environment and food safety. However, as noted above, with the wide differences in members' positions, as well as a tighter conference schedule resulting from demonstrations by a number of groups, the time given for discussion was not sufficient to reach a compromise. The Ministerial Conference therefore did not succeed in launching the new round, suspending the work to date.

The Seattle Ministerial Conference again threw into relief the difficulty of handling issues linked to countries' domestic circumstances, such as agriculture, anti-dumping measures, and trade and labor issues. It also highlighted the importance of responding appropriately to the interests of developing countries, as well as the concerns of the general public, such as environmental issues.

Maintaining and strengthening the multilateral free trade system under the WTO is vital to the economic prosperity of not only Japan but all other countries, and Japan will continue working together with the United States, the EC and other WTO members to lead efforts toward the early launch of a new round in parallel with the negotiations on agriculture and services which are scheduled under the WTO Agreement to start in 2000.

b) Expansion of WTO membership: Creating a universal multilateral trading system

The widest possible WTO participation of countries and regions will be critical in strengthening the multilateral trading system under the WTO. In terms of further accession, Latvia joined in February and Estonia in November, bringing WTO membership to 135 as of the end of 1999. As Georgia's accession was also approved by the General Council in October, Georgia will become an official member once it has completed domestic approval procedures.

China, Chinese Taipei, Russia, Vietnam and 26 other countries and regions continue to be in the process of applying for WTO membership. Japan and China effectively concluded bilateral negotiations on China's WTO accession during Prime Minister Obuchi's visit to China in July. China's accession negotiations also received a significant boost with the conclusion of bilateral negotiations with the United States in November. Japan believes that the accession of China, which accounts for a substantial share of world trade, is important in creating a stronger and more universal multilateral trading system, as well as in making China a more constructive partner in the international community. Japan will therefore continue to support China's early accession to the WTO.

c) WTO dispute settlement mechanism

The WTO dispute settlement mechanism has created swifter and more automatic procedures than under the General Agreement on Trade and Tariffs (GATT), greatly improving the effectiveness of dispute settlement. The number of cases referred to panels has also increased dramatically since GATT days, with 90 requests for establishment of panels submitted in around five years since the WTO's establishment in January 1995 up to the end of 1999. Out of these panels' conclusions, 33 requests were made for review by the Appellate Body.

In December, a panel ruled in favor of Japan's position on a case brought by Japan with regard to Canada's import system for finished cars. A panel was also established in July with regard to the 1916 U.S. Anti-Dumping Act, on which consultations had been conducted between Japan and the United States based on WTO dispute settlement procedures. Japan also requested consultations in November on U.S. anti-dumping measures for hot-rolled steel products. When the United States referred a case to a panel and then an Appellate Body review with regard to Japan's plant quarantine system, it was ruled that Japan's measures were not consistent with the WTO Agreement. In response to this ruling, Japan took the necessary measures in December.

As demonstrated above, the WTO dispute settlement mechanism is contributing to the stability and predictability of the universal multilateral trading system by ensuring the implementation and application of the WTO Agreement through neutral and fair dispute settlement.

3. Regional economic cooperation

There was much activity with regard to regional economic cooperation again in 1999, including deeper intra-regional cooperation, while a trend also emerged toward more diverse and multi-layered cooperation, including tie-ups between regional economic groupings and cooperation with countries outside regions.

The North American Free Trade Agreement (NAFTA), which aims to reduce trade and investment barriers within the North American region (the United States, Canada and Mexico), is significant as a free trade agreement among countries with different degrees of market economy maturity, and the volume of trade among the parties has demonstrated steady growth. At the April Ministerial Meeting in Ottawa, the NAFTA harvest (a 75% increase in the total value of trade among the three countries since NAFTA entered into force in 1994) was affirmed in the joint statement commemorating the fifth anniversary of the Agreement. However, there is some argument within the United States that NAFTA is worsening the U.S. trade deficit and impacting negatively on employment, and as a result, a fast-track bill (covering, for example, negotiating authority over trade agreements) has been rejected by the House of Representatives. There have been no concrete moves toward passing this bill since September 1998, stalling progress in negotiations on Chile's accession to NAFTA.

In Latin America, the Southern Common Market (MERCOSUR), which comprises Argentina, Brazil, Paraguay and Uruguay, has contributed to the dramatic expansion of intra-regional trade since it was launched in January 1995. However, 1999 threw into relief the challenges MERCOSUR faces. Brazil, feeling the impact of a worldwide financial crisis, was forced to devalue its currency in January. This step altered price competitiveness among the products of MERCOSUR members and created trade friction particularly between Brazil and Argentina, two of MERCOSUR's largest economies, greatly reducing intra-regional trade. While the importance of consultation on macroeconomic policies for MERCOSUR's stable development has been highlighted, Brazil's currency devaluation brought this issue once again to the fore. In response to this situation, at the MERCOSUR Summit Meeting held in December agreement was reached to continue coordinating intra-regional macroeconomic policy. However, bringing members' respective economic policies into concert may take some time given the different economic scales and levels of development of MERCOSUR members. In terms of external relations, at a Summit Meeting held among MERCOSUR, Chile and the EU in June, leaders announced the initiation of substantive free trade negotiations with the EU. At the Second Summit of the Americas in April 1998, agreement had also been reached on launching concrete negotiations toward the establishment of the Free Trade Area of the Americas (FTAA). By pursuing both sets of negotiations for the establishment of free trade areas in tandem, MERCOSUR is attempting to strengthen its relations with Western states. This strategy should gradually lend MERCOSUR more weight, and Japan has come to stress stronger ties with the grouping, engaging in various types of inter-governmental consultations. Negotiations on a free trade agreement between Mexico and the EU were also effectively concluded in November.

The Caribbean Community (CARICOM), launched in April 1973, is working to conclude nine protocols toward the formation of the CARICOM Single Market and Economy by the end of 2000. Seven of these had been signed by 1999, encompassing services and capital liberalization, as well as industrial and trade policy, and future deliberations will be conducted on protocols for disputes settlement and rules of competition (see Chapter III, Part A on ASEAN, and Chapter III, Part D in regard to the EU).

As evidenced above, free trade agreements and other forms of regional trade cooperation have been expanding and developing around the world in recent years. As long as regional trade agreements are consistent with the WTO Agreement, they would promote open trade rather than acting as a barrier to non-member countries, contribute to the expansion of world trade, and complement the multilateral trading system. Based on such philosophy, in December, Japan also agreed to have representatives from government, industry and academia from Japan and Singapore to examine the possibilities for a Japan-Singapore free trade agreement. Mexico and Chile have also expressed interest in concluding free trade agreements with Japan. Further, in response to the proposal from the Republic of Korea in November 1998, the Japan External Trade Organization (JETRO) and the Korea Institute for International Economic Policy (KIEP) are currently engaged in research toward strengthening economic ties between Japan and the ROK, including a free trade agreement. Both research institutes are scheduled to announce their results by around June 2000, and seminars are scheduled to be held in both countries.

Turning to economic cooperation beyond the borders of Asia and the Americas, the Asia-Pacific Economic Cooperation (APEC) embraces a wide range of regions, including Asia, to which Japan belongs, Oceania, North America, Latin America and Russia, attracting international attention due to its unique style of regional cooperation. Since its establishment in 1989, APEC has actively addressed a variety of activities geared toward the sustainable development of the Asia-Pacific region, shaping these around the three pillars of trade and investment liberalization, investment facilitation, and economic and technical cooperation. At the APEC Leaders' and Ministerial Meetings held in Auckland, New Zealand in 1999, member economies resolved to ensure the recovery of Asian member economies from the financial crisis by strengthening the functioning of markets with specific areas comprising regulatory reform, promotion of competition, structural reform (including the upgrading of industrial structures) and human resources development, thus propelling the region toward prosperity. In this context, Prime Minister Obuchi outlined a Japanese assistance package for Asia totaling around US$80 billion, expressing that the revitalization of the Japanese economy was essential for the revitalization of the Asian economy and the growth of the world economy, a task which Japan would approach with unflagging resolve. In terms of strengthening functions of markets, Japan proposed two initiatives as effective prescriptions for overcoming the economic crisis-one designed to strengthen human resources development for structural reform, and the other a comprehensive package for strengthening markets-and also submitted a report on the APEC Symposium on the Asian Economy, co-hosted with Thailand in July. Looking ahead to the Third WTO Ministerial Conference in Seattle, APEC also delivered a strong message toward the successful launch of a new round of WTO negotiations. Asia-Pacific leaders further expressed a strong interest in responding to Y2K issues and efforts to promote the global development of electronic commerce, affirming their resolve to cooperate in these endeavors. APEC's efforts to deal with the many issues and challenges facing the region will remain vital in building an Asia-Pacific region filled with hope for the 21st century.

The Asia-Europe Meeting (ASEM), launched in 1996 as a forum for strengthening dialogue and cooperative relations between the two regions, held a Foreign Ministers' Meeting, a Finance Ministers' Meeting and an Economic Ministers' Meeting in 1999, working to further promote ASEM activities in the various spheres. In the economic arena in particular, members engaged in a lively exchange of views on a follow-up to the Asian economic situation, a central theme at the second meeting of leaders in 1998, as well as the impact on both regions of the 1999 introduction of the euro, the WTO, and exchange with business. Activities were also conducted to further promote inter-regional trade and investment (see Chapter III, Part A for further details on ASEM).

4. Energy and food issues

a) Energy issues

As Japan depends on overseas sources for around 80% of the energy on which economic activities and Japanese daily life are premised, the security of energy supply is a critical component of Japan's foreign policy. The Government therefore continues to closely monitor oil prices and other aspects of the energy situation, having set in place coordination mechanisms with other developed countries to respond, if necessary, to supply disruptions, while also pursuing consultation and cooperation with major energy producers and consumers.

In 1999, negotiations were held on the renewal of the extraction right of the Arabian Oil Company which would expire, unless extended, in February 2000. (These negotiations ended without reaching agreement, with the Arabian Oil Company right claimed back by the Saudi Arabian Government. However, the Saudi Arabian Government indicated its willingness to continue supplying oil to Japan. Therefore, no adverse effect is expected in the oil supply from Saudi Arabia to Japan.)

In terms of the 1999 energy situation, at the March 1999 meeting of the Conference of the Organization of Petroleum Exporting Countries (OPEC) agreement was reached to reduce the volume of oil production. The subsequent skyrocketing of crude oil prices from less than US$10 per barrel at the beginning of the year to around US$22 per barrel in December demonstrated OPEC's impact on crude oil prices. Against this backdrop, the International Energy Agency (IEA), which celebrated its 25 anniversary in 1999, reaffirmed at its Ministerial Governing Board in May that ensuring a stable energy supply is a central role of the Agency.

Furthermore, with deregulation of the energy sector becoming an international issue, the Japanese and U.S. Governments held an Energy Expert-Level Group Meeting on Energy Deregulation in November, following its 1998 meetings, engaging in a detailed exchange of views on the state of progress of deregulation. The Second Japan-Russia Energy Consultation was held in Moscow in July, with both countries discussing their energy situations and energy cooperation. Against any possible Y2K-related problems, all possible contingency measures to ensure a stable energy supply were taken, in collaboration with the IEA and APEC.

It is important for Japan to sustain these various efforts, while also working to improve Asian energy security.

b) Food issues

Global interest remains high on the topic of food supply, given the rapid rise in population and the higher food consumption levels resulting from the economic growth of developing countries, as well as concern over natural resources and environmental issues. Moreover, in 1999, not only did drought and other natural disasters lead to food shortages, but food supplies were also short in regions experiencing civil wars and other domestic unrest. According to the Food and Agriculture Organization of the United Nations (FAO), the number of countries needing emergency food assistance had risen to 34 as of November 1999. Given these circumstances, it will be important to follow up on the goals of the World Food Summit, held in November 1996, such as 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 bilaterally and through international organizations.

Back to Index