VZCZCXRO0139
RR RUEHCHI RUEHFK RUEHHM RUEHKSO RUEHPB
DE RUEHKO #2110/01 2130931
ZNY CCCCC ZZH
R 310931Z JUL 08
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 6231
INFO RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUEHLO/AMEMBASSY LONDON 2127
RUEHNE/AMEMBASSY NEW DELHI 8557
RUEHFR/AMEMBASSY PARIS 6211
RUEHPF/AMEMBASSY PHNOM PENH 0709
RUEHGO/AMEMBASSY RANGOON 2347
RUEHVN/AMEMBASSY VIENTIANE 1679
RUEHFK/AMCONSUL FUKUOKA 9145
RUEHNH/AMCONSUL NAHA 1519
RUEHOK/AMCONSUL OSAKA KOBE 2875
RUEHKSO/AMCONSUL SAPPORO 9728
RHEHAAA/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/TREASURY DEPT WASHDC
RUEHGV/USMISSION GENEVA 3382
RHHMUNA/HQ USPACOM HONOLULU HI
RUEHBS/USEU BRUSSELS
RUCNDT/USMISSION USUN NEW YORK 1033

C O N F I D E N T I A L SECTION 01 OF 03 TOKYO 002110 
 
SIPDIS 
 
STATE PASS TO USTR FOR CUTLER, BEEMAN 
TREASURY FOR IA - DOHNER, WINSHIP, POGGI 
COMMERCE FOR 4410/ITA/MAC/OJ 
GENEVA PASS TO USTR 
NSC FOR LOI 
 
E.O. 12958: DECL: 07/30/2018 
TAGS: ECIN ETRD EINV PREL ASEAN APECO JA
SUBJECT: JAPAN'S AGENDA ON REGIONAL ECONOMIC INTEGRATION 
 
TOKYO 00002110  001.2 OF 003 
 
 
Classified By: DCM James Zumwalt for Reasons 1.4 (b,d). 
 
¶1.  (SBU)  Summary:  The priority of trade liberalization in 
the future economic architecture of Asia dominated debate 
among the 16 country representatives preparing the 
Japanese-sponsored "Track II" study on a possible ASEAN Plus 
6 economic agreement. Japanese participants in the study 
group indicated substantial progress on trade liberalization 
would be difficult, even for Japan.  As a result, other 
issues -- energy and environment, economic cooperation, and 
trade and investment facilitation -- enjoy equal treatment 
with trade liberalization in the report which will be 
submitted to ASEAN Economic Ministers in August.  Despite 
acknowledgement by participants in the study of the 
importance of "open regionalism" in an ASEAN Plus 6 
framework, the impression remains that Japan's aim is to 
consolidate economic relations with its Asian neighbors 
without opening sensitive sections such as services and 
agriculture or diminishing its reliance on export-led growth. 
 End summary. 
 
Background 
---------- 
 
¶2. (SBU)  In the spring of 2006, Japan's then Minister of 
Economy, Trade, and Industry Toshihiro Nikai floated a 
proposal for a regional economic agreement that would include 
the 10 ASEAN member states along with Japan, China, South 
Korea, Australia, New Zealand, and India.  The main goal of 
the proposal was to present an alternative to a new regional 
architecture based on ASEAN Plus 3, a study for which was 
underway with Chinese sponsorship.  Japan's proposal to 
establish a group of experts from the relevant countries to 
study the feasibility of the ASEAN Plus 6 framework -- known 
as the "Comprehensive Economic Partnership with East Asia" 
(CEPEA) -- received the blessing of the ASEAN and other 
related economic ministers in August 2006, with the formal 
study beginning in May 2007.  The study's conclusions will be 
presented at the August 26-29 Singapore meetings between 
ASEAN economic ministers and their dialogue partners. 
 
CEPEA Debate Centers on Priority of Trade Liberalization 
----------------------------------------- 
 
¶3.  (SBU)  Substantial debate had emerged in the CEPEA study 
group over the elements to be included in the report, 
according to CEPEA Study Group Chairman Risaburo Nezu.  In a 
recent meeting with emboffs, Nezu - - a former Ministry of 
Economy, Trade, and Industry (METI) and OECD official and now 
senior managing director of the Fujitsu Economic Research 
Institute - - indicated the scholars from the 16 countries 
which would be part of CEPEA had agreed the arrangement would 
need to be more than just a trade pact. China and Korea 
argued emphasis on trade among the probable CEPEA 
participants would be premature.  Japan's insistence on 
promoting trade liberalization, however, ensured the topic 
remained a core element of the report, Nezu said.  (Note: 
Although the study group's formal members consisted of 
scholars drawn from each of the 16 countries covered by the 
initiative, Nezu acknowledged Japanese Foreign Ministry and 
METI officials were present at all meetings.  The 
representatives of the other governments participated only 
occasionally. End Note.) 
 
¶4.  (SBU)  As chairman, Nezu delegated the drafting of 
specific chapters on the report's main thematic elements to 
particular country representatives. Themes and assignments 
were:  trade liberalization (Australia); trade and investment 
 
TOKYO 00002110  002.2 OF 003 
 
 
facilitation (New Zealand); economic cooperation (India); 
energy and environment (China); and information technology 
(Malaysia).  Japan was charged with writing the roadmap 
portion containing specific policy recommendations.  Chinese 
representative, Chinese Academy of Social Sciences researcher 
Zhang Yunling (who had led the previous study on a possible 
ASEAN Plus 3-based FTA) prepared the chapter on energy and 
environment because that topic was politically less 
controversial for China.  In addition, each participant 
prepared an individual country paper.  The country papers are 
not a consensus product like the full report and are designed 
to help participants gain a clearer understanding of each 
country,s current preferential trade arrangements and goals 
they would like to achieve via CEPEA.  Nezu predicted the 
ASEAN Economic Ministers' meeting would most likely call for 
no more than an additional round of study on the CEPEA 
proposal either on the ostensibly unofficial "Track II" basis 
like the current report or potentially via a more official 
study group composed of government officials. 
 
¶5.  (SBU)  Nezu recounted disagreements over wording.  For 
example, the South Korean participant opposed the term "open 
regionalism," labeling it self-contradictory.  Nezu indicated 
he had stressed the importance of the reference to open 
architecture because of the political message it carried that 
CEPEA would not aim at creating new trade barriers and could 
be extended to other economies.  It was particularly 
important to communicate this point to the United States, 
Nezu asserted.  Nevertheless, he acknowledged while the 
current report lacks a section analyzing how CEPEA would 
interact with the U.S., EU, or APEC, it will be important to 
assess how it will relate with these entities should it come 
into being. 
 
¶6.  (SBU)  Nezu also emphasized that Asia needs an 
institution like the OECD to act as a secretariat that 
facilitates, records, and disseminates research and policy 
discussions.  Japan, he observed, has supported establishment 
of the Economic Research Institute for ASEAN and East Asia 
(ERIA) in Jakarta, Indonesia, which could serve as the basis 
for such an institution.  (Note:  ERIA also emerged from then 
METI Minister Nikai's 2006 initiative.  Its executive 
director is Hidetoshi Nishimura, a retired METI official who 
was previously an advisor to the Japan External Trade 
Organization (JETRO) and executive managing director of the 
Japan-China Economic Association, both organizations with 
close ties to METI.  End note.) 
 
METI, Industry Unwilling to Battle Opponents of Free Trade 
--------------------------------------------- -------- 
 
¶7.  (SBU)  Waseda University Professor Shujiro Urata, one of 
the Japanese representatives on the CEPEA study group, noted 
the debate over whether the ASEAN Plus 3-based East Asia FTA 
(EAFTA) or the CEPEA is the optimal architecture.  In a 
meeting with emboffs, Urata expressed concern that open 
acceptance among other Asian countries of CEPEA as the model 
for future regional architecture could damage their relations 
with China and even possibly South Korea, both of which 
support the EAFTA model.  He predicts, supporters of EAFTA 
will come back with recommendations in 2009 to reinvigorate 
interest in an ASEAN Plus 3-centered architecture. 
Nevertheless, Urata had conducted a simulation comparing the 
economic benefits of CEPEA and EAFTA.  He found CEPEA 
ultimately proved to deliver larger gains, although Urata 
cautioned the results depended to a great extent on the 
assumptions used in the model. 
 
 
TOKYO 00002110  003.2 OF 003 
 
 
¶8.  (SBU)  The Japanese bureaucracy, not business, is the 
driving force behind Japan,s proposals for regional economic 
architecture, Urata observed.  Japanese multinationals, he 
said, show little interest in supporting any particular model 
of regional architecture.  In this regard, METI has been 
disappointed because Japanese business is hesitant to express 
its ideas.  Without clear support from Japanese industry, 
METI is reluctant to take on the Agriculture and Health 
Ministries where many oppose to trade liberalization. 
Internationally, the GOJ also tends to let the U.S. take the 
lead on promoting a global trade agreement to avoid frictions 
with Japan's other major trading partners. 
 
Fukao: Japan's Trade Agreements Reactive, Little Impact on 
Domestic Economy 
--------------------------------------------- --- 
 
¶9.  (SBU)  Hitotsubashi University Professor Kyoji Fukao, a 
participant in the study group that laid the groundwork for 
Japan's (stalled) economic partnership negotiations with 
South Korea, observed Japan has approached trade agreements 
primarily as a defensive measure.  When Japan's trade 
partners look set to conclude an agreement, the GOJ begins 
negotiations with the relevant parties to minimize the 
diversionary impact on Japanese trade. The focus, he notes, 
is not an ambitious trade liberalization agenda. Without an 
institution like USTR, each GOJ ministry, Fukao stressed, can 
block possible concessions in any negotiation that might harm 
its constituency among Japanese business or the public at 
large. 
 
¶10. (SBU)   Fragmentation of overseas production and the 
current situation where exports nurture most of Japan,s 
economic growth, signals a need for domestic reform.  Fukao 
stressed that METI also recognizes the need to create 
incentives for inward investment in order to remain 
economically competitive.  Fukao cited the example of Toyota, 
which he estimated has half of its total employees overseas 
and continues to invest most of its profits abroad, mainly to 
avoid paying Japanese corporate income tax.  Fukao also 
suggested the need for Japan to diversify industries 
receiving FDI.  Japan's service sector, for example, has yet 
to internationalize despite the dramatic growth in global 
services trade.  Hence, despite language barriers, there is a 
great potential for globally competitive services firms to 
invest in Japan. 
 
Comment 
------- 
 
¶11.  (C)  Although our interlocutors -- two of them direct 
participants in the CEPEA study -- spoke positively about the 
benefits of CEPEA's "ASEAN Plus 6" architecture, none of them 
indicated this proposal would spur economic reform within 
Japan itself.  Their comments tended to reinforce the 
perception CEPEA would serve Japan as a medium to allow it to 
consolidate economic relations with Asian neighbors without 
opening sensitive sections such as services and agriculture 
or diminishing its reliance on export-led growth.  In 
addition, Nezu and Urata clearly understood the importance of 
references to "open regionalism" in order to mollify possible 
U.S. opposition to further development of CEPEA. 
Nevertheless, their account of the CEPEA discussions along 
with Prof. Fukao's exposition of the bureaucratic dynamics 
involved in Tokyo lead to suspicions that any references to 
an open architecture in the August report will be largely 
rhetorical. 
SCHIEFFER