Bilateral Free Trade - In pursuit of a New Partnership

In Pursuit of a New Partnership
by Yoshio Nakatani

On March 29, Yoshio Nakatani, president of Toyota Canada, spoke to a full house at the Akasaka Prince Hotel on the importance of pursuing a Canada-Japan free trade agreement. Excerpts from his enlightening speech have been reproduced below.

All too often, people make the mistake of underestimating Canada's importance. If this is nothing new, at least it is a consistent theme. The philosopher Voltaire is reputed to have said "What's all this fuss over several acres of snow-covered land? Mind you, he also said, "The more I read, the more I meditate; and the more I acquire, the more certain I am that I know nothing. Former Soviet foreign minister Andrei Gromyko referred to Canada as "the boring second fiddle in the American symphony." Even former Canadian Prime Minister Lester Pearson was so accustomed to being asked, "Are you an American?" that he took to answering, "Yes, I am a Canadian."

But what does this have to do with a possible free trade agreement between Canada and Japan? The answer is the fundamental obstacle of "attitude."

One-Tenth of the US?
I recall listening to a Japanese ambassador to Canada some years ago describing Canada as just "one-tenth of the United States," and accordingly limited in its ability to contribute to the international arena. This "one-tenth" perception leads to a misunderstanding of Canada's worth, not just in economic terms but in terms of its potential contribution to cultural and political issues.

In fact, the 10:1 rule only applies to population. The gap is even larger for GDP, which stood at only 6.8 percent of the US in 1999.

Yet Canada is the world's fourth-largest exporter after the EU, the United States and Japan. Canada's exports stand at 34 per cent of the corresponding US value, while its imports were almost 21 percent of the US total. And plays a key role in the G-8 and other key international economic bodies. Therefore, Canada's influential role is out of proportion to its population or GDP, but is entirely in keeping with its economic importance to the world.

A Substantial Player in the Global Auto Sector
The automotive industry demonstrates why the notion of Canada as "one-tenth' of the US is wrong.

Germany leads in global automotive exports, followed by Japan, the US and Canada. But Canada's 11 percent global share follows very closely behind the US's 11.5 percent share. And that narrow gap is closing: Canada is already the world's largest per capita automotive producer, enjoying a 2:1 advantage over the United States, while Ontario is poised to surpass Michigan in total annual production.

Even more significantly, Japanese car assembly plants in Canada are among the world's best. Both Toyota's and Honda's plants in Canada have been recognized globally for their manufacturing excellence, earning the right to be exclusive North American producers of their companies' highest-profile vehicles.

Clearly this relationship has been good both for Canada and the Japanese companies that have made investments in the sector, and Canadian companies are beginning to make significant investments in Japan. I believe that Canada offers the potential to be a much closer, stronger trading partner of Japan. But are the two countries ready for a bilateral trade agreement?

Japan-Singapore Free Trade Agreement
This past January, the Government of Japan entered into official negotiations with Singapore on bilateral trade liberalization. A successful outcome will lay the foundation for future bilateral discussions with other countries. Korea and Mexico have also approached Japan, while Australia and the US are exploring the possibilities.]

Canadian businesspersons put forward a proposal in 1999 to explore expanded economic relations, including a possible free trade agreement and, in May 2000, representatives at the 23rd annual Canada-Japan Business Conference (CJBC) in Tokyo formally adopted a similar proposal. Studies are now being carried out by the private sector and government in both countries.

The Post-Singapore Pack
Who comes after Singapore? In my view there is no clear leader, which leaves an opening for Canada.

It would be natural for Japan to consider special trade ties with its closest geographic neighbour, Korea, but the countries' similar structures result in little economic complementarity. Entrenched interests on both sides may make also make [consensus difficult].

As for Mexico, the NAFTA-mandated termination of its duty-remission program raised concerns for some Mexico-based Japanese manufacturers, while the Japanese government may have reservations about a free trade agreement with a country it sees as neglecting the spirit of the WTO.

Free trade with the US has been proposed in the past, but has always failed to materialize. Achieving such an agreement represents an enormous task.

Australia was a late entrant to the race. So if Singapore is a "done deal" by year-end, the Japanese government will select its next bilateral free trade partner, and I believe that Canada can be a contender.

Why Canada?
Free trade between Canada and Japan promises great economies of scale. Canada has more than tripled its exports and enjoyed at least a ten-fold increase in direct investment during 11 years of NAFTA.

Secondly, a new partnership between Canada and Japan will help expand the cause of the WTO, as [both countries are key economic players].

Dealing More Effectively with the US
Canada's close trade ties with the United States offer another reason for considering Canada as a potential partner. The linking of the United States' two major trading partners could have important implications. Aside from the inherent benefits that accrue to Canada and Japan in terms of bilateral trade, a new trading relationship between the United States' two major trading partners would help to counterbalance the problematic trade issues that have often affected both countries' dealings with the US.

I am not proposing an alliance against the US, as both Canada and Japan should look to expand their positive trade relations with the US. But combining voices on the international stage would help to promote truly global trade and investment rules and offset the protectionist sentiment that sometimes takes hold in the US.

A Supporter during Difficult Times
Historical ties of friendship and mutual respect are another reason for pursuing a closer relationship. Many Japanese remember well that Canada supported Japan's efforts to return to the international arena after WWII. The Canada-Japan commercial treaty of 1954 was one of the first to grant Japan Most Favoured Nation status. And it was partly with Canada's support that Japan was able to gain approval of its application for UN membership.

I would be remiss if I didn't also mention the important contributions of individual Canadians to the development of Japan such as missionaries Helene Paradis and Alexander Shaw and Nagano-born diplomat Herbert Norman.

It is through such rich cultural and human interchanges that truly meaningful partnerships are born, and such is the case for Canada and Japan. Everyone in this room further is further contributing to that interchange.

A Catalyst for Growth
While the US will certainly remain dominant as Canada's principal export market, near-term export growth is likely to slow along with the US economy and highlights the need for Canada to expand the volume of its non-US trade. Asia represents an obvious target, given that the region currently accounts for only five per cent of Canada's exports (and half of that to Japan).

Canada has been pursuing a possible Free Trade Area of the Americas, comprehensive talks with EFTA, and struck bilateral arrangements with Israel and Chile. None of these initiatives, however, promises the immediate economic impact of a Canada-Japan pact.

For its part, Japan is suffering through a prolonged economic downturn that has resisted repeated efforts to stimulate growth through domestic economic policies. The best way to shock the Japanese economy back to life may be to embark on a new trade agenda, opening new market access abroad for Japanese businesses.

The benefits are clear and an opening exists. I encourage everyone here today, along with our colleagues in business and government in both Canada and Japan to take hold of this issue and promote the benefits of free trade at every opportunity.