The Trade in Services Agreement (TiSA)

What is TiSA?

The Trade in Services Agreement (TiSA) is a trade agreement currently being negotiated by 25 members of the World Trade Organisation (WTO), including the EU. TiSA is based on the WTO’s General Agreement on Trade in Services (GATS), which involves all WTO members.

The talks are based on proposals made by the participants.  TiSA aims at opening up markets and improving rules in areas such as licensing, financial services, telecoms, e-commerce, maritime transport, and professionals moving abroad temporarily to provide services.

The meetings take place in Geneva. They are chaired alternately by the EU, Australia and the US. The talks and decision-making are consensus-based.

By July 2015, 13 negotiation rounds have taken place. The talks are progressing well.  There is no set deadline for ending the negotiations.

What does it consist of?

Services are an increasingly important in the global economy and a central part of the economy of every EU country.  The EU is the world’s largest exporter of services with tens of millions of jobs throughout Europe in the services sector.  Opening up markets for services will mean more growth and jobs. The talks will help kick start the stalled multilateral negotiations – the Doha Development Round or DDA – being carried out under the WTO.

25 WTO members are taking part in the TiSA talks:
Australia, Canada, Chile, Chinese Taipei, Colombia, Costa Rica, the EU, Hong Kong China, Iceland, Israel, Japan, Korea, Liechtenstein, Mauritius, Mexico, New Zealand, Norway, Pakistan, Panama, Paraguay, Peru, Switzerland, Turkey, the United States and Uruguay. Of these, the EU has no free trade agreements on services with Chinese Taipei, Israel, Pakistan or Turkey.

Moreover TiSA is open to all WTO members who want to open up trade in services. China has asked to join the talks. The EU supports its application because it wants as many countries as possible to join the agreement. TiSA is based on the WTO’s General Agreement on Trade in Services (GATS), which involves all WTO members.  This means that if enough WTO members join, TiSA could be turned into a broader WTO agreement and its benefits extended beyond the current participants.

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Assisting European SMEs on Public Procurement Opportunities in Japan

The service can be a portal for European SMEs to public procurement in Japan

The PP Quick Scan Service can be a portal for European SMEs to public procurement in Japan

According to the EU Commission, estimates of the purchases of the Japanese government organisations amount to 550 billion euro per year. This can present various opportunities for companies to place their bids for a chance to be awarded a contract. Examples include railway equipment, IT services, R&D, advanced technology and so on. Such purchases or tenders, being public information are to a large extent done through public competitive tendering procedures.  The main obstacle for companies is where to acquire such information in order to bid. This becomes more challenging for SMEs that lack the resources of large companies in order to search for such information.

 This issue was addressed by the Japan Tax and Public Procurement (JTPP) Helpdesk which offers the Public Procurement Quick Scan Service.  This service which will enable companies to get a first insight into market opportunities in Japan.  All that it is required is to input 10 keywords relevant to the business activities. Subsequently, a scan of past and current calls for tender is conducted by a Japanese company specialised in monitoring such calls.  The JTPP Helpdesk will then translate their analysis into English.

The PP Market Quick Scan is only available for free for EU-registered SMEs.

More information can be found at:

http://www.eubusinessinjapan.eu/issues/entry-strategy/government-procurement/public-procurement-quick-scan-service

 

The Japan-EU Summit Meeting

On his visit to Milan on October 16 2014, Prime Minister Shinzo Abe held a Summit Meeting with H.E. Mr. Herman Van Rompuy, President of the European Council, and H.E. Mr. José Manuel Barroso, President of the European Commission, in the conference room of the ASEM Summit Meeting, the 6th meeting in a period of approximately one year.

Both sides underlined the importance of the EU-Japan strategic partnership and encouraged further progress in the twin

The Prime Minister of Japan, Abe held a Summit Meeting with H.E. Mr. Herman Van Rompuy and H.E. Mr. José Manuel Barroso. Topics discussed were the EU-Japan EPA/SPA, Ukraine & disaster reduction.

The Prime Minister of Japan, Abe held a Summit Meeting with H.E. Mr. Herman Van Rompuy and H.E. Mr. José Manuel Barroso. Topics discussed were the EU-Japan EPA/SPA, Ukraine & disaster reduction.

negotiations on the Strategic Partnership and the Free Trade Agreement. Concluding ambitious and comprehensive agreements will allow the EU and Japan to work together more closely on matters of mutual interest. Prime Minister Abe said that together with the EU he wants to accelerate negotiations in order to reach agreement in principle on the Japan-EU Economic Partnership Agreement (EPA) during 2015, and also wants to continue to cooperate on concluding the Japan-EU Strategic Partnership Agreement (SPA) as rapidly as possible. In response, President Van Rompuy stated that he wants to advance negotiations with Japan on the EPA and the SPA, while President Barroso stated that the EU wants to maintain economic, trade and political dialogues with Japan and that he would like to finalize the EPA by negotiating it at full speed.

Additionally, President Van Rompuy expressed gratitude for Japan’s solidarity and cooperation regarding the situation in Ukraine, and Prime Minister Abe explained that Japan is working in step with the G7.

Prime Minister Abe said he hopes for participation from the EU in the Third United Nations World Conference on Disaster Risk Reduction being held in Sendai in March next year. President Barroso said he welcomes the opportunity to cooperate with Japan in the field of disaster reduction, and certainly wants the EU to participate in next year’s Conference.

JETRO Global Trade and Investment Report

Making Japan a base for international business circulation 

This report by the Overseas Research Department at JETRO explores how Japan can be a base for international business circulation. This can be both outbound (exports or outward direct investment) and inbound (tourism or inward direct investment). Recommendations were also made to expand international business, including SMEs and rural areas.

In order to achieve such aims,it is necessary for Japan to develop the business environment through economic partnerships such as the TPP or RCEP. Also Japanese society and companies must reinvent themselves to become a base for international business circulation by means of new intellectual property strategies including protection of trade secrets.

Key points of the Report

(i) World trade and investment are recovering & a slight resurgence of world economy

  • World trade (commercial goods export) slightly rose by 1.6% from 2012 to a record of $18.3 trillion driven mainly by China, EU and US although it was depressed by Japan and Russia. By commercial goods, trade volume of IC and mobile phone were increased, on the other hand natural resources such as a crude oil registered a decrease. Global FDI flows increased for the first time in two years to $1.45 trillion, up by 9.1% from the previous year.
  • The global economy has been recovering moderately. The economies of developed countries are on the path of recovery, while those of emerging and developing countries are growing slowly.

(ii) Japanese trade marks deficits for three consecutive years

  • Japan’s trade in 2013 declined in both exports and imports, resulting in a deficit for 3 consecutive years. A significant decrease was seen in transport equipment and electric equipment, compared to those of 2008 before the global financial crisis. General machinery performed quite well.
  • The current account surplus is continuing to decline to $31.7 billion in 2013, influenced by the increased trade deficit. Trade deficit in services decreased. The trade balance in transportation and travel improved. Trade surplus increased for royalties and license fees.

(iii) Japanese outward FDI reaches record high

  • Outward Japanese FDI broke its record for the first time in 5 years, reaching $135 billion with an increase of 10.4% over last year. While the investment toward ASEAN marked a record high of $23.6 billion, those toward China decreased by 32.5% to $9.1 billion.
  • Amount of return on outward FDI in 2013 totaled $68.2 billion. By region, investment returns from Asia were the largest, followed by N. America and Europe.
  • Rate of return on investments toward Japan has greatly increased, compared to those toward other countries. With the recovery of the Japanese economy, the Japanese market has become attractive for foreign companies.

(iv) Realization of FTAAP (Free Trade Area of the Asia Pacific) through the promotion of TPP (Trans Pacific  Partnership) and RCEP (Regional Comprehensive Economic Partnership)

  • Negotiations for 5 mega-FTAs, the TPP, RCEP, TTIP, Japan-EU and China-Japan-South Korea FTA, are currently progressing. The Japanese government’s Growth Strategy sets a target of raising the FTA coverage ratio to 70% (18.2% as of year 2013). If the FTAs currently under negotiation come in force, Japan will increase its coverage to 84.2%.
  • International Investment Agreements, including FTA investment chapters, are in force between Japan and 28 other countries and regions. Those agreements currently occupy 29.1% of Japan’s outward FDI stock.
  • Procedures for applying for a certificate of origin or satisfying rules of origin (ROOs) are a burden on Japanese companies using FTAs. Efforts to expand the utilization of self-certification system of approved exporters need to be continued.

 (v) Asian consumer markets (China, India and ASEAN) becoming solid both in scale and quality

  • Household consumption expenditures in Asia are 1.5 times those of Japan as of 2012. The market scale in Asia is continuing to expand due to the growth of population and an increase in income levels.
  • Consumption in Asia is changing in quality as well as quantity. Expenditure is growing more sophisticated. The demand is shifting from basic goods into durable consumer goods and further on to services.
  • Some capital cities of major ASEAN countries mark a per capita GDP of over $10,000

(vi) Strategic development of promising overseas markets

  • Export of agricultural, forestry and fishery products marked a record high of 550.5 bn in 2013, a 22.4% increase from the previous year. Overseas subsidiaries in the Japanese service industry (non-manufacturing) have been increasing by approximately 92% since 2003, showing that Japanese companies are rapidly expanding overseas.
  • Medical equipment markets are projected to grow centering in emerging countries such as China. It is expected that export competitiveness of the industry will be enhanced as the manufacturing companies play an active role in export.
  • Japan lags behind other countries in making inroads into Africa.

(vii) New developments among Japanese companies seen in reorganization of their overseas bases

  • Partly due to the rise in employment costs, Japanese companies are increasingly transferring their bases and functions to ASEAN countries out of China. Moreover, there has recently been a trend of Japanese companies in Thailand advancing into neighboring countries, called “Thai Plus One.”
  • 13.7% of Japanese companies, registered for JETRO’s individual assistance service for launching businesses in emerging countries, hope to enter countries other than those of East Asia or ASEAN. More SMEs hope to set up business in Latin America or Southwest Asia.
  • There are signs of a movement, called “Made by Japanese”, to export products to a third country from overseas bases. In South Africa, the number of Japanese-manufactured automobiles imported from Japan’s overseas bases such as India is as twice as big of that of from Japan.

(viii) Foreign-affiliated companies regard Japan’s expensive business costs as problematic – with signs of improvement

  • The benefits of FDI into Japan are its large-scale economy, sophisticated infrastructure and human resources. However, foreign-affiliated companies negatively evaluate expensive business costs including tax rates.
  • Comparing business costs, property costs in other cities in Asia can be higher than those of Tokyo. The differences in employment cost for some occupations have been significantly reduced.

(ix) Nationwide effort necessary to increase inward FDI into Japan

  • Presidents and prime ministers of major countries engage in promotion of their own countries.
  • JETRO has supported over 10,000 projects for investment into Japan since 2003, among which 1,136 companies have successfully established their bases in Japan – especially reaching out to industries of environment, health, tourism and retail or R&D bases.
  • The number of foreign travelers visiting Japan reached a record high of over 10 million in 2013, which had a positive impact on the Japanese economy.

(x) Challenges Japanese corporations face in making Japan hub of international business circulation

  • A shift from ‘measures on intellectual property’, those centered around the problems of counterfeiting, piracy, and patent rights, to ‘strategies on intellectual property’, those including protection of trade secrets, must be undertaken.
  • Support for small and medium-sized venture `companies to expand overseas is also necessary.
  • It is best that a ‘diversity in business’ be established with urgency, where foreign students and those with diverse backgrounds and abilities can perform at their full potential to create innovation.

Sealing the Japan-Australia Economic Partnership Agreement (JAEPA)

After 7 years of negotiation, Japan and Australia sealed a trade deal earlier this April. The FTA  (formally known as the Japan-Australia Economic Partnership Agreement, or JAEPA) would deliver cheaper Japanese consumer products to Australians and more affordable Australian food to Japan – the first major agricultural exporting economy to conclude such a liberalizing agreement with Japan. The pact should be officially signed when PM Abe visits Australia in July, coming into effect by the end of 2014.

A joint economic study conducted in 2006 estimated potential trade gains of A$68 billion to Japanese consumers and A$19 billion to Australians over a 20-year period, with GDP increasing by up to 1.79 percent for Australia and 0.13 percent for Japan. Two-way trade totaled nearly A$70 billion in fiscal 2013, with Australia’s exports of minerals, energy and beef making it Japan’s third-largest source of imports, while Australia serves as Japan’s 10th-largest export market, principally in auto-related products.

Cheaper Cars & Beef

Under the deal, Australia will eliminate 5 percent tariffs on Japanese electronic and household goods, while a 5 percent car tariff will end within 3 years, which would theoretically reduce the cost of a A$30,000 ($28,000) Japanese car by an estimated A$1,500.

In addition, the threshold for Australian regulatory review of Japanese private investment will be raised to more than A$1 billion from A$248 million, giving Japanese investors the same rights as South Korean companies under the trade deal with Seoul.

The Japanese market is potentially huge for Australia.

The Japanese market is potentially huge for Australia. However rice has been excluded from the deal, disappointing Australian growers.

For Australia, the prize was significant cuts to Japanese beef tariffs, with a 38.5 percent tariff on frozen beef to drop to 19.5 percent over 15 years, and a similar tariff on fresh or chilled beef to decline to 23.5 percent over the same period. According to the Australian beef industry, the tariff cuts could boost exports to its largest export market by A$5.4 billion over 20 years.

Australian cheese exporters also gained with duty-free cheddar exports to grow to 27,000 metric tons over 20 years, with other concessions for horticulture, seafood, sugar and wine. Australian services exports in such fields as education, financial, legal and telecommunications also obtained increased access to the world’s third-largest economy.

Japan imports 60 percent of its food and previous trade deals have excluded agricultural products including beef, wheat and rice, partly due to strong opposition from the farmers organization, JA Group.

The Australia pact has demonstrated Abes’ willingness to battle even elements of his own political constituency to boost the nation’s growth prospects, including tackling the tougher TPP negotiations which also include stronger defense ties wth the US, including joint development of weapons and equipment.

Win-Win Situation

On pure numbers, the biggest winner appears to be Japan: more than three-quarters of Australia’s exports to Japan are natural resources that are already tariff free, while 44.5 per cent of Japan’s exports to Australia in 2012-13 were motor vehicles, which are subject to a 5 per cent tariff.

The reduction in motor vehicle tariffs is a win for Australian car buyers – more than a third of new passenger cars are imported from Japan, with the automotive industry saying the 5 per cent tariff reduction should result in about a 3 per cent cut in the retail price of a new Japanese-made car.

In addition, the Australian legal, financial, education and telecommunications services providers will be big winners, with Japan offering market access equal to or better than any of its previous trade agreements with other nations.

The agreement also offered enhanced intellectual property (copyright and patent) protections for Australian innovators and artists, ensuring that protections are “broadly equivalent” to Australian laws.

More details about the FTA can be found here:

http://www.dfat.gov.au/fta/jaepa/downloads/jaepa-key-outcomes.pdf

Japan and Myanmar Sign Investment Pact

Myanmar President Thein Sein (left) and Japan Prime Minister Shinzo Abe at Mr Abe’s official residence in Tokyo yesterday.

Myanmar President Thein Sein (left) and Japan Prime Minister Shinzo Abe at Mr Abe’s official residence in Tokyo.

On the 15th of December 2013, Japan and Myanmar signed an investment treaty to establish closer business ties. Japan took the opportunity to establish closer links due to the result of the ‘opening’ of the once secluded South-east Asian country to foreign commerce. The deal was signed by Japanese Prime Minister Shinzo Abe and Myanmar President Thein Sein in summit talks following a gathering of leaders from the Association of Southeast Asian Nations (ASEAN) in Tokyo.

The major drive for the pact (as seen in previous posts on this blog) seems to have been coming from the Japanese businesses which been eager to invest in Myanmar especially after Mr Thein Sein’s reformist government came to power in 2011 after nearly 50 years of military rule. Japan’s Trade Ministry said the agreement is intended to provide greater protections and a stable legal environment for investors.

Myanmar’s resource-rich economy main aims now are to attract foreign direct investment and lending – crucial for expansion and development. The country has significant growth potential but is burdened with an inefficient farm sector. Myanmar also lacks a manufacturing base after decades of foreign sanctions and restrictive laws under military rule.

The Investment Pact calls for Japanese investors to receive the same protections provided to other foreign investors under international rules and prohibits the imposition of export, technology transfer or other requirements in exchange for such investments. It is also intended to improve transparency, key for a country struggling with endemic corruption.

Suffice to note that Japan is Myanmar’s largest aid donor. To help clear the way for the investment treaty, Tokyo agreed to forgive about US$5.32 billion (S$6.7 billion) in debt owed by Myanmar and extended bridge loans to help clear the rest.

Mr Abe has promised to help support Myanmar’s economic and political reforms with both public and private help, including fresh loans for infrastructure building and major development assistance that will support Japanese business interests in the South-east Asian nation.

Japan’s investments in Myanmar still lag behind those of China and India, though that is fast changing. Trading companies Mitsubishi, Marubeni and Sumitomo are leading a project to develop the 2,400ha Thilawa Special Economic Zone located near Yangon, Japan’s biggest investment in Myanmar so far.

Key Points of Agreement:

(i)National treatment and most-favored-nation treatment

(ii)Extensive prohibition of the performance requirements

(iii)Transparency of the administrative procedures

(iv) An obligation to observe any commitments made by the contracting countries with investors (known as an “Umbrella Clause”)

(v)Investment protection provisions, including compensation in expropriation, protection from strife, and free transfers

(vi)Settlement of investment disputes between investors and the contracting countries

The Agreement stipulates that it shall become effective on the 30th day from the day of exchanging the diplomatic documents between Japan and Myanmar that announce the completion of the domestic procedures required under the domestic laws to make the Agreement effective. In Japan, the Agreement should be approved by the Diet.

Experience Japan through the The Human Resources Training Programme

What is the Human Resources Training Programme?

Organised by the EU-Japan Centre for Industrial Cooperation, the 4-week Human Resources Training Programme (HTRP) – Japan Industry Insight offers EU executives the unique opportunity to experience and understand both the cultural and economic elements of doing business with Japan – by going directly to the source.

The programme consists of a combination of lectures, joint seminar and company visits and is designed to help participants become more knowledgeable about the actual conditions of Japanese business through practical analysis and research.

Who can participate?

HRTP is targeted at small, medium and large enterprises, more specifically at managers who:
– have a major role in defining and implementing their companies’ policies vis-à-vis Japan, or
– are to be transferred to Japan, or
– come from companies intending to supply Japanese companies at home or abroad, or
– wish to learn about management practices and technological developments in Japan.

The candidate:

– must be a citizen of an EU Member State;
– must work for an organisation that is an EU juridical person;
– must be supported by their employer and be able to participate in the entire programme;
– must have a reasonable command of English;
– should be a manager or an executive from industrial companies;
– should have a proven experience in industry.

Activities of the Programme

(i)Japanese language and culture courses

In addition to teaching useful words and expressions in daily life, topics are especially chosen to enable participants to survive in practical situations of self-introduction during business meetings, to order something or to speak on the phone, and so on.

Participants of the HRTP during a company visit

Participants of the HRTP during a company visit

(ii)Lectures
The lectures, for a good understanding of the Japanese society, are essential to approach fundamental topics such as Japanese history, the economy, politics and legal matters.

(iii)Joint seminar with Japanese business people
A joint seminar (in small groups) to discuss experiences with Japanese managers includes decision-making, team management and negotiation role-play exercises. Through this session with Japanese business people, participants study cross-cultural management methods.

(iv)Field trips (Sogo Shosha and Regional trip) 
A “Sogo Shosha” (general trading companies) visit is designed to understand the gigantic general trading companies, unique to Japan.
A regional trip is organised to allow participants to broaden their understanding of how Japan’s economy works outside Tokyo.

(v)Individual company visits (optional)
HRTP takes place over 4 weeks but an optional week can be included for individual company visits. Participants have the opportunity to carry out individual visits to either Japanese or European-owned firms of direct or potential interest to their work.

APPLICATION DEADLINE IS 13/02/2013

For more information about HRTP please visit:

http://www.eu-japan.eu/detail-business-programmes/HRTP

 

No progress for TPP talks

Ministers from the 12 Trans Pacific Partnership (TPP) countries, including Japan and the U.S., wrapped up a four-day meeting in Singapore in

After the Singapore meeting, progress for TPP have been slowed down.

After the Singapore meeting, progress for TPP have been slowed down.

December 2013. The U.S. and emerging nations remained far apart on such issues as eliminating tariffs, protecting intellectual property and reforming state-owned enterprises, preventing a deal. This resulted in missing the year end deadline and subsequently another ministerial meeting  in early January to try to iron out differences before the next ministerial conference.

A joint statement issued at the end of the meeting reported that there was progress toward an agreement but did not state anything definitive, noting only that the countries had identified potential “landing zones” for most of the main outstanding issues. The Japanese government representative Yasutoshi Nishimura, noted that progress was made in such areas as liberalizing investments, reforming state-owned enterprises and introducing tougher environmental standards.

Stalemate

Both the US and Japan locked horns in their bilateral trade talks. This happened mainly because Japan refused to end all tariffs on farm products and the U.S rejecting an appeal to eliminate automobile import duties.

In bileteral talks, the U.S. showed understanding toward Japan’s desire to keep tariffs on five farm products, including rice, but still insisted that they be eliminated in 10 to 15 years. In turn,  Tokyo was not willing to give an inch.

Japan had already made all the concessions it could in the automotive field, agreeing to a safeguard that allows the U.S. to temporarily restrict Japanese car imports. Tokyo argued that it was Washington’s turn to compromise, but American negotiators could not back down due to strong pressure from the farm lobby and conservative lawmakers back home seeking a larger U.S. share of Japan’s pork and other markets.

The stalemate in Japan-U.S. talks appears to have also involved emerging nations in TPP talks. Malaysia and Vietnam have stood firm against Washington’s calls for reforming state-owned companies.Malaysia pushed for a more flexible US stance, which has been making tough demands in such areas as intellectual property protection, the environment and labour.

Cooperation between Japan and the U.S. is seen as the key in progressing TPP talks – if negotiation fails between the two states, the TPP will ultimately be not feasible.

Establishing a Business in Japan (I) – Incorporating a Company in Japan

The following are ways for a foreign company to establish business presence in Japan:

(i) Representative office
The establishment of representative offices does not require registration. Representative offices are established to enable foreign companies to engage in full-scale business operations in Japan. These offices may conduct market surveys, collect information, purchase goods and implement publicity – but not permitted to engage in sales activities.  A representative office cannot ordinarily open bank accounts or lease real estate in its own name, so agreements for such purposes must instead be signed by the head office of the foreign company or the representative at the representative office in an individual capacity.

(ii) Branch office
The simplest means for a foreign company to establish a base for business operations in Japan is to set up a branch office. The branch office can begin business operations as soon as an office location is secured, the branch office representative determined, and the necessary information registered. A Japanese branch office is a business location that provides services in Japan decided upon by an organization authorized by the foreign company, and ordinarily is not expected to engage in independent decision making. A branch office does not have its own legal corporate status and therefore the foreign company is ultimately responsible for all debts and credits generated by the activities of its Japanese branch office. A Japanese branch office, however, may open bank accounts and lease real estate in its own name.

(iii) Subsidiary company
A subsidiary is a separate corporation from the foreign company, so the foreign company will bear the liability of an equity participant stipulated by law for all debts and credits generated by the activities of the subsidiary. Other methods by which a foreign company may invest in Japan using a Japanese corporation but without establishing a subsidiary are by establishing a joint venture with a Japanese enterprise or investment company, and by equity participation in a Japanese enterprise.

(iv) Limited liability partnership (LLP)
This type of entity is a partnership formed only by the equity participants, who have limited liability. LLPs are also distinguished by the fact that internal rules can be freely determined by agreement between the equity participants, and that taxes are levied on profits allocated to equity participants without LLPs themselves being liable for taxation.

Ministries of Japan III: The Ministry of Economy, Trade and Industry (METI) and other Ministries

METI

Ministry of Economy, Trade and Industry (METI)

The Ministry of Economy, Trade and Industry (経済産業省 Keizai sangyo sho) or METI was created by the 2001 Central Government Reform when the Ministry of International Trade and Industry (MITI) merged with agencies from other ministries related to economic activities. The main function of METI is to promote Japan’s overseas trade and commercial interests where it plays a vital role in Japan’s international trade negotiations, development policy and ODA distribution. METI is also supported by both MOF and MOFA to be the main driving force of Japan’s Free Trade Agreements (FTAs) and Economic Partnership Agreements (EPAs).

METI is divided into 7 bureaus and also possesses a number of agencies and special corporations such as the Japan External Trade Organization (JETRO).  The roles of JETRO encompass information gathering, trade tie ups and business support services. The Trade Bureau (successor to the International Trade Bureau) holds the chief responsibility for administering Japan’s multilateral economic relations with WTO, OECD, EU, IMF, ASEM, APEC and ASEAN. This bureau also deals with bilateral trade relations with all of Japan’s partners. The Trade and Economic Cooperation Buerau assists in the formulation of Japan’s ODA policy with more emphasis on economic and commercial development, especially in East Asia. METI is also the top ministry to formulate Japan’s environmental policy.

Ministry of Education, Culture, Sports, Science and Technology (MEXT)

The Ministry of Education, Culture, Sports, Science, and Technology (文部科学省 Monbu-kagaku-sho), also known as MEXT or Monbusho. The function of this Ministry is to centralize and regulate the education curriculum guidelines of Japan. MEXT is one of three ministries that run the JET Programme. It also offers the Monbukagakusho Scholarship, also known as the MEXT or Monbu-shō scholarship. It has also became embroiled indirectly in the textbook controversy with China and South Korea.

Ministry of Agriculture, Forestry and Fisheries (MAFF)

The Ministry of Agriculture, Forestry and Fisheries (農林水産省 Norin-suisan-sho) is responsible for oversight of the agriculture, forestry and fishing industries. The primary function of the ministry is to set quality standards for food products, supervise commodity markets and food sales, and to undertake land reclamation and land improvement projects. It has also take a protectionist stance in trade liberalization (especially with APEC) and FTA negotiations. It also has an important role in establishing international fishing rights with South Korea and China.

Ministry of Internal Affairs and Communications (MIC)

The Ministry of Internal Affairs and Communications (総務省 Somu-sho) oversees the Japanese administrative system, manages local governments, elections, telecommunication, post, and governmental statistics.

Ministry of Land, Infrastructure, Transport and Tourism (MLIT)

The Ministry of Land, Infrastructure, Transport and Tourism (国土交通省 Kokudo-kotsu-sho), or MLIT, is responsible for one-third of all the laws and orders in Japan and the largest Japanese ministry in terms of employees, as well as the second-largest organ of the Japanese government after the Ministry of Defense. The ministry has 4 external organs including the Japan Coast Guard and the Japan Tourism Agency.

Ministries of Japan II: The Ministry of Finance (MOF)

Being one of the top ministries of Japan, the Ministry of Finance (Zaimu-sho 財務省is responsible for the monetary and financial matters of the state. The Japanese people still use a former term Ōkura-daijin (大蔵大臣), meaning a person controlling a budget like housewife controlling the family budget. The Ministry’s main power lies on its control over the budget – even of other ministries ( grant and loan ODA for MOFA). After various financial scandals revealed in the 1990s, however, the Ministry lost its power over banking supervision to a newly established Financial Services Agency. It also lost most of its control over monetary policy to the Bank of Japan when the Diet passed a new Bank of Japan Law in 1998.

Roles and Responsibilities

One of the main responsibilities of the MOF is the protection of the domestic banking industry and fiscal rectitude by focusing on the survival of Japanese banks and cutting down on waste. Within the Ministry, the International Bureau is the only administrative arm of MOF devoted to international finance attributed to the fact of Japan being the largest providers of Official Development Assistance (ODA) and the largest creditor of the world.

Responsibilities of MOF include:

-The supervision of international activities of Japanese banks

-International exchange rate management

-Relations with global financial institutions like IMF, World Bank, G7/8 and OECD

-Bailout packages for debtor countries

The Ministry of Finance Building in Tokyo

The Ministry of Finance Building in Tokyo

The Role of MOF in the East Asian Region

MOF has been instrumental in the region particularly over yen loans to China and other states in the region. MOF has also been a powerful force in formulating the developmental policy of the Asian Development Bank (ADB) – a major recipient of aid from Japan. The International Bureau of MOF, together with other Japanese ministries have been instrumental in devising financial rescue packages for a number of states in the region following the Asian Financial Crisis in 1997.

MOF and the US

The Ministry of Finance frequently cooperates with the US Treasury in bilateral, regional and global development bank fora in order to stabilize the global economy. On the other hand, there were instances when MOF challenged (albeit non directly) the US’ global financial leadership. The International Bureau has been instrumental in developing strategies (in collaboration with ADB) which emphasize the role of state guidance in the promotion of private sector industries which contradicts the rapid financial and trade liberalization programmes favoured by the US and US led institutions like IMF and World Bank.

Ministries of Japan I: Ministry of Foreign Affairs (MOFA)

MOFAThe Japanese ministry of Foreign Affairs (MOFA) is responsible mainly for the day to day running of the Japanese diplomatic policy. The minisrty’s remit include:

-The creation and implementation of overall foreign political, economic and security policy

-Information gathering

-Protection of Japanese nationals overseas

MOFA is divided into 10 bureaus – 5 of which are functional (Foreign Policy, Economic Affairs, Economic Cooperation, International Legal Affairs and Consular) and the other 5 regional (North American, Asian and Oceania, European, Latin American/Caribbean and Middle Eastern/Africa). There is also an Intelligence and Service Analysis Service and the Department of Disarmament, Non Proliferation and Science.

MOFA also has partial responsibility for Japan’s economic diplomacy through its economic cooperation Bureau (ODA distribution). MOFA is also responsible for the management of Japan’s cultural diplomacy  through its funding of the Japan Foundation – which later became an independent administrative agency. It plays a crucial role in promoting Japanese culture abroad.

The most powerful of the bureaus is the North American Affairs Bureau (NAAB) – it supervises the bilateral relation with the US and staffed by the elite staff of MOFA – hence the tilt of Japanese foreign policy with the US. This is followed by the the Asian and Oceania Bureau – also known as the Asian Affairs Bureau (ABB) and also clashes frequently with NAAB because of conflict of interest. The European Affairs Bureau (later known as European and Oceania Bureau – EOAB) is the principal coordinating force between Japan and European political and economic relations. Prime responsibility for relations with the UN is the Foreign Policy Bureau – created after the Gulf War to give a more proactive role for Japanese foreign policy. The same bureau also promotes Japan’s PKO missions within the UN and pushes to secure a permanent seat for Japan in the UN.

MOFA functions as the coordinator of Japan’s international relations but its ability to direct and manipulate Japanese foreign policy is constrained by its own internal organizational limitations and frictions. One of the main problems is that the ministry is understaffed and underfunded compared to other diplomatic services of other states like the US and the UK. As a result, MOFA is weak to oversee ODA implementation and information gathering. Factionalism within the different bureaus also does not help.

MOFA has no strong political constituency within Japan to allow to push forward its agenda. This is illustrated by the ministry’s poor representation in the Diet (Japanese parliament). The top forces within the ministry are also hesitant to exercise leadership on controversial issues or to act against US interests. To add, there has been high profile scandals involving internal corruption related to misuse of funds.

To conclude, MOFA’s general political weakness and its lack in experience in working within the media spotlight has added to its tendency to eschew high risk political activities in favour of low key diplomacy.

O-BIC: The Osaka Business and Investment Centre

O-BIC is a not-for-profit organization that was established in April 2001 by the Osaka Prefectural Government, the Osaka City Government, and the Osaka Chamber of Commerce and Industry in a joint initiative. The aim of establishing O-BIC was to create a one-stop centre for business investing.

O-BIC’s wide-ranging services include:

  • General information on Osaka in English, Chinese, Korean, and Japanese
  • Real estate information regarding office space, locations for warehouses and plants, and residential properties
  • Information on investment incentives offered by Osaka Prefecture and Osaka City
  • Introductions to relocation services providing expertise in acquiring resident status and registering companies
  • Introductions to interpreters, translators, market researchers, attorneys, general and tax accountants, and other professional
  • Assistance in meeting potential business partners through websites, meetings, and seminars
  • Essential information on education, health, and other aspects of living in Osaka
  • Holding seminars for foreign consulates / economic organizations, and foreign-owned enterprises located in Osaka

O-BIC also provides prospective foreign investors with a comprehensive yet detailed support system. International companies, foreign government offices and economic organizations as well as foreign-capitalized companies located in Japan are invited to use the centre to obtain accurate information, data and advice for entering the market in Osaka.

Entering the Market in Osaka

Being Japan's second largest city, Osaka  has a population of 8.8 million and a gross prefectural product of Y38.808 trillion (US$388 billion).

Being Japan’s second largest city, Osaka has a population of 8.8 million and a gross prefectural product of Y38.808 trillion (US$388 billion).

Osaka, Japan’s second largest city, is the geographical and economic centre of the Kansai region. The city alone has a population of 8.8 million and a gross prefectural product of ¥36.384 trillion (US$363 billion). Osaka provides an ideal location for international companies seeking to invest with experienced and local partners.

Osaka is home to a range of skilled manufacturers in the electronics, pharmaceutical, machinery, device, chemical, food, and construction industries. High-tech industries such as biotechnology, new materials, and information & communications are also present. Unique businesses in the sports industry and game content sectors also add variety to the economy. In addition, diverse arrays of companies have chosen to establish their headquarters here including large, world renowned corporations as well as SMEs that hold a significant share of their respective global markets.

The First Zero Local Taxes System in Japan

In particular, Osaka has created the first ‘Zero local taxes’ system in Japan. Companies wish to apply for a tax reduction are have the possibility to submit a project plan as follows:

(i) Eligible Tax Items
• Prefectural tax
Corporate prefectural residents’ tax, corporate enterprise tax, real estate acquisition tax
• City tax
Corporate citizens’ tax, real estate tax, office tax, city planning tax

(ii)Eligible Businesses
New energy / life science businesses / business supporting new energy and life sciences

(iii)Contents of Reduction
• When newly moving to a special zone: no taxes for 5 years + 1/2 taxes for 5 years
• When moving from other areas inside the prefecture (city) to the special zone, corporate prefectural residents’ tax, corporate enterprise tax, corporate citizens’ tax and office tax are reduced depending on the rate of increase of the employees.
• Real estate acquisition tax will be ZERO for the real estate in the Special Zone obtained within 3 years after business plan approval.
• Real estate tax and city planning tax cuts apply to newly acquired real estate.

(iv)Method/Period of Approval
Method: The governor/mayor decides after having viewed a report of the review board regarding the project plan submitted by the applicant.
Period: 1st December 2012 – 31st March 2016

Website: http://o-bic.net/

Support for Japanese SMEs: The Mirasapo Portal

Concept and Aim
The concept of this support site is to have more informed and better equipped SMEs and Micro Enterprises in Japan. Mirasapo is a comprehensive portal site where SMEs can obtain the latest information about support that meets their needs, seek advice readily from experts in the field and more experienced managers and exchange information with other SMEs. This site began operating last July 2013 and is available at https://www.mirasapo.jp/
Main Functions
(i)Support Measures and provision of information:
Providing easily comprehensible information about support measures by the government and public institutions. Electronic application functions can be used for some subsidies.
Table and website format

Screenshot of portal

(ii)Formation of a Community:

Providing an online forum where users can exchange information with experts and more experienced managers about specific themes, e.g. starting a business or expanding overseas. Users can create new forums/communities tailored to their own issues.
(iii)Expert Counseling:
Developing a database of experts in each field, enabling users to choose an expert according to the particular issues they face and seek counseling online.
Plans for the Future
 In light of opinions from users and discussions by the Headquarters for the Growth of Small and Micro Enterprises, the functions will be expanded in future and the full version of the portal is due to start operating by the end of this year.
Mirasapo is a measure that aims to empower more the smaller industries and enable them to function better. The format of this information portal can be a good example to emulate for other countries that wish to better assist SMEs and Micro Enterprises.

Is there a Central Governing Authority in Japan?

A Fragmented System

Japanese Parliament

The Japanese Parliament. But is it here that the real power lies?

An intriguing question I was asked this week by a government official was to which authority should one approach in order to discuss investment or trade with Japan. This brings us to the question of whether or not there is a Central Authority in Japan. Is there a Central Government agency to which one can directly address in order to start negotiations with Japan?

The major fault here is to compare the Japanese state with a Western one. Unlike the West, power consolidation in Japan has indeed a very long tradition of semi autonomous groups. Most notably, the key players are powerful politicians and clusters of high officials/bureaucrats and businessmen. There are also the lesser ones which include powerful lobbies like agriculture, forestry, fisheries; the police, the media and even organized crime syndicates. All these forces constitute the System – and no one is ultimately in charge. These semi autonomous components , each with their own respective powers and authority, are not represented by any central body.

There is a complex (and even overlapping) hierarchy where there is no supreme institution with ultimate policy making jurisdiction.

A Capitalist, Free Market Economy?

Most Western economists and scholars lump the Japanese System in the ‘capitalist,free market’ category. This is a common mistake among Westerners to exaggerate the role of the market in the Japanese system.  The universal theories of a successful economy which has to be capitalist with a free market does not hold ground as regards Japan.

Together with other Asian states like South Korea and Taiwan, the notable political scientist Chalmers Johnson has classified these nations as ‘Capitalist Developmental States’ (CDSs). The strength of CDSs lies in its partnership between bureaucrats, businessmen and politicians.

Another key characteristic of such CDSs is the way they treat the private enterprise. Regulations are carefully weaved so as not to obstruct the entrepreneur and big companies/corporations. Bureaucrats never attempt to gain full power over non governmental corporations. They merely guide the economy and maintain control of what is happening by constant monitoring. In turn, the economy prospers because the industry is stimulated by fiscal policies favoring investment. Important industries are constantly taken care of and protected against foreign competition. The firms that are in trouble are protected to give them an opportunity to diversify.

To conclude, the bureaucrat-businessmen partnership is sealed by a shared industrial policy and trade strategy. Market freedom is not considered to be an important goal in itself but as a means to achieve economic prosperity and business expansion.

STEP IN JAPAN – Free Logistic Support Scheme

STEP IN JAPAN is a support initiative for SMEs through the EU-Japan Centre for Industrial Cooperation. This service is offered free of charge which the aim of acting as a landing pad for EU-based SMEs planning on entering into or expanding within Japan. STEP IN JAPAN compromises a full range of important support measures for SMEs:

  • a ‘hot desk’ in Tokyo on the Centre’s premises that includes an internet connection and telephone (*) for up to 1 month;
  • full access to meeting and seminar facilities within the Centre’s premises;
  • a help desk for all information inquiries on business in Japan;
  • assistance with using the Enterprise Europe Network service while in Japan.

The EU Centre for Industrial Cooperation strongly recommends that companies who take part in Step in Japan to subscribe to the services of the Enterprise Europe Network business matching platform. It is important to note that the Centre does not offer support with business translations, ( except the translation on  EEN profile), nor for secretarial matters.

To download the application form click here

step in japan

Incentive Programs for Investing in Japan

Below is a list of incentive programs with the aim of facilitating investment in Japan. These incentives are offered by the Japanese government and are divided into respective sections with a brief overview as well as the responsible authority (with link) . In the future, Japan Trade will delve into more detail about such incentives.

1. Incentives for Promoting Asian Site Location

1.1 The Act for Promotion of Japan as an Asian Business Center

Overview: The Japanese government will take support measures for certified global companies, including tax breaks and patent fee exemption, in order to motivate global companies to locate their R&D facilities or regional headquarters in Japan. Effective from November 1st, 2012

Competent Authorities: Trade and Investment Facilitation Division, Trade and Economic Cooperation Bureau Ministry of Economy, Trade and IndustryTo other site

1.2 Subsidy Program for Projects Promoting Asian Site Location in Japan

Overview: The subsidy Program for Promoting Asian Site Location in Japan is intended to sustain and strengthen high value-added business sites in Japan and to help achieve sustainable growth for the Japanese economy by supporting the establishment of new high value-added sites in Japan by global companies operating internationally, such as regional headquarters or R&D sites, which have been proven to have a significant impact on the Japanese economy, and by strategically and proactively inviting and building high value-added business functions that match the strength of the Japanese economy.

Subsidy Rates/Maximum Amount: Up to 1/2 for SMEs; Up to 1/3 for non-SMEs ; Up to 2/3 for disaster afflicted areas

Competent Authorities: Trade and Investment Facilitation Division, Trade and Economic Cooperation Bureau, Ministry of Economy, Trade and Industry , METITo other site

2. Incentives Regarding Special Zones

2.1 Comprehensive Special Zones

Overview: Special regulatory measures, tax reduction, etc. are available for companies with business plans in designated 7 zones.*Hokkaido, Ibaraki, Tokyo, Kanagawa, Aichi/Gifu, Kyoto/Osaka/Hyogo, Fukuoka has been selected. It is important to note that special regulatory measures differ from one designated region to the other.

Competent Authorities: Regional Revitalization Bureau, Cabinet SecretariatTo other site

2.2 Special Zones for Reconstruction

Overview: Special regulatory measures, tax reduction, etc. are available for companies with business plans in disaster afflicted areas.

Competent Authorities: Reconstruction AgencyTo other site

3. Immigration Treatment Incentive

3.1 Points-based preferential immigration treatment for highly skilled foreign professionals

Overview: The points-based system that provides highly skilled foreign professionals with preferential immigration treatment started on May 7, 2012. Under the points-based system, foreign professionals who earn 70 points or more will be recognized as “highly skilled foreign professionals” and will be given preferential immigration treatment.

Competent Authorities: Foreign Residents Information Center, Immigration Bureau, Ministry of JusticeTo other site

4. Government Subsidies

4.1 Subsidy Program to Promote Investment in Advanced Equipment as Measures to Deal with Yen Appreciation and Energy Constraints

Overview: Meet either of the following requirements: (i) latest production equipment that can dramatically improve resource productivity (ii)  specialized equipment for the production of high-value added core parts/materials. This subsidy will refund a portion of the cost of installing latest equipment.

Subsidy Rates/Maximum Amount: Up to 1/2 for SMEs; Up to 1/3 for non-SMEs.

Competent Authorities: Business Investment Promotion Office, Regional Economic and Industrial Policy Group, METITo other site

4.2 Subsidy Program for New Business Establishment in the Areas Recovering from Tsunami and Nuclear Disaster towards Employment Creation 【Reconstruction】

Overview: A subsidy program for establishment of new business facilities of manufacturing industry and business support service industry, such as call centers, so as to activate the regional economy through employment creation in the  areas in the prefectures inundated by the tsunami and restricted areas in Fukushima prefecture severely affected by the nuclear power station accident and where the evacuation order has been lifted.

Subsidy Rates/Maximum Amount: Up to 2/3 for SMEs; Up to 1/2 for non-SMEs

Competent Authorities: Industrial facilities Division, Regional Economic and Industrial Policy Group, METITo other site

The Japanese Private Sector Business Community

The Businesses in Decision Making

The voice of the businesses is an important factor in determining policy in Japan. Together with government and bureaucracy, the business sector forms part of the policy making process of Japan, also referred to as the ‘Iron Triangle’. This post will give a closer look at the voice of the private sector in Japan and how it determines policy.

The business community in Japan consists mainly of the big Trans National Corporations (TNCs), business conglomerates and associations. SMEs and cooperatives are also a wider part of the business community. Business interests exercise influence over the domestic and foreign policy making process because of their close financial and human network connections with the major political parties (especially the Liberal Democratic Party) and the major line ministries. The role that they play is focused mainly on serving in government committees or in prime ministerial study groups for the ultimate aim to advance profitable private sector links with the US, Asia, Europe and elsewhere.

Representation

The Japanese Private Sector Business Community is represented mainly by these 3 Business Federations:

(i) Federation of Economic Organizations (Keidanren) – In 2002, it became known as the Japan Business Federation (JBF) after the amalgamation with the Japan Federation of Employers’ Associations (Nikkeiren). It is compromised of of 1,285 representative companies, 127 nationwide industrial associations and 47 regional economic organizations (as of March 29, 2012) which makes it the leading voice of the big businesses in Japan. The JBF has taken the lead in promoting Japanese Foreign Direct Investment (FDI) abroad and the liberalization of the Japanese economy. In some cases there are also conflicts with Agricultural Cooperatives because of their liberalization stance in international bodies like the WTO and APEC.

Website: http://www.keidanren.or.jp/en/

(ii) The Japan Chamber of Commerce (Nihon Shoko Kaigi Sho) – Representing the chambers of commerce of Japan, it is mainly focused towards SMEs and their interests.

Website: http://www.jcci.or.jp/home-e.html

(iii) The Japan Association of Corporate Executives (Keizai Doyukai) – Is an organisation which was formed in 1946 and today has 1,2800 top executives as members from over 900 corporations.

Website: http://www.doyukai.or.jp/en/

The Power of the Business Community in Foreign Policy Decision Making

The Chairman of the Japan Business Federation (Keidanren) at the World Economic Forum. The voice of the major businesses in Japan is important in shaping Japan's domestic and international policy.

The Chairman of the Japan Business Federation (Keidanren) at the World Economic Forum. The voice of the businesses is important in shaping Japan’s domestic and international policy.

The Business community is active internationally in a number of ways due to their extensive information gathering abilities on economic and political conditions worldwide – sometimes even exceeding those of government ministries. Business intelligence is also backed by networking.

Lobbying capacities are also strong, especially in Europe and the US with active agents petitioning in key decision making institutions. The competition between states to attract FDI means that private businesses can exercise their power over national governments to bargain for the best investment conditions.

The role that the business sector plays can also complement and assist the role of the government in fostering good relations with other countries. East Asia has been an attractive region for businesses with its raw materials, low cost labor and a growing market for consumer goods. Hence the business sector has been on the forefront to push the Japanese government to engage more actively in the region. This can also work against those states that seem to have no particular commercial interest to the Japanese corporations and SMEs. A clear example is North Korea were the lack of business interest has rendered immobile Japan’s engagement policy towards this state.In short, if a state wants to engage Japan and establish close ties, it cannot ignore the needs and interests of its strong private business community.

Explaining Tariffs in International Trade (2)

Made in China, Mexico etc.

This second post about tariffs in international trade is going to delve into more detail about the different types of tariffs, the shift from tariffs to Non Tariff Barriers (NTBs) and their various types and finally who benefits or not from such measures.

Types of Tariffs

There are primarily two types of tariffs:

(i)Specific Tariffs 

A fixed fee levied on one unit of an imported good which can vary according to the type of good imported. A country could levy a $15 tariff on each pair of shoes imported, but levy a $300 tariff on each computer imported.

(ii)Ad Valorem (according to value)Tariffs 

This type of tariff is levied on a good based on a percentage of that good’s value. An example of an ad valorem tariff would be a 15% tariff levied by Japan on U.S. automobiles. The 15% is a price increase on the value of the automobile, so a $10,000 vehicle now costs $11,500 to Japanese consumers  making it more expensive for them.

Transition from Tariffs to Non Tariff Barriers in International Trade

As we have seen in the last post about tariffs,the role of tariffs in international trade decreased thanks to International Organisations such as GATT and WTO. However there was an increase in Non Tariff Tariff Barries (NTBs), especially from the more developed, industrialized countries. This is because developed countries have alternate sources of income other than tariffs which are considered an early form of government funding. This explains the fact that the majority of developing countries still rely on tariffs as a way to finance their spending. On the other hand, developed countries can afford not to depend on tariffs alone and instead develop such NTBs:

(i) Import Licenses

A license is granted to a business by the government, and allows the business to import a certain type of good into the country. For example, there could be a restriction on imported meat, and licenses would be granted to certain companies allowing them to act as importers. This creates a restriction on possible competition and increases prices  for the meat lovers.

(ii) Import Quotas 

An import quota is a restriction placed on the amount of a particular good that can be imported. This sort of barrier is often associated with the issuance of licenses. The government may place an import quota on the volume of imported meat that is allowed in the country.

(iii) Voluntary Export Restraints (VER) 

This trade barrier is “voluntary” because it is created by the exporting country rather than the importing one. A voluntary export restraint is usually levied at the expense of the importing country, and could be accompanied by a reciprocal VER. For example, Brazil could place a VER on the exportation of sugar to Canada, based on a request by Canada. Canada could then place a VER on the exportation of coal to Brazil. This increases the price of both coal and sugar, but protects both domestic industries.

(iv) Rules of Origin (RoOs)

Origin is the “economic” nationality of goods in international trade -(Eg: Made in …). There are two kinds, non-preferential and preferential.

  • Non-preferential is for determining the origin of products subject to all kinds of commercial policy measures (such as anti-dumping measures, quantitative restrictions) or tariff quotas. It is also used for statistical purposes. Other provisions, such as those related to public tenders or origin marking, are also linked with the non-preferential origin of the products.
  • Preferential origin confers certain benefits on goods traded between particular countries, namely entry at a reduced or zero rate of tariff.

Who Benefits from Trade Barriers?

A tariff is basically a tax on trade so the government will see increased revenue as imports enter the domestic market. Domestic industries also benefit from reduced competition since import prices are artificially inflated over their products.  The burden is on the consumers – both individual and businesses – higher import prices mean higher prices for goods.  In short, tariffs and trade barriers tend to be pro-producer and anti-consumer.

In the long term, effects can be different. Local businesses protected by tariffs may see a decline in efficiency due to  lack of competition. Consumers can also go for substitutes of their products. making them lose profits. For the government, the long-term effect of subsidies is an increase in the demand for public services, since increased prices, especially in foodstuffs, leave less disposable income.

 

Explaining Tariffs in International Trade (1)

Free trade might seem an ideal concept where you have more exports, more variety, foreign products and an increase in international trade. However free trade does not necessarily benefit both parties. That is where tariffs come in.  Simply put, tariffs are taxes on imports of commodities into a country or region. Tariffs are used to protect infant countries in developing countries, but they are also used in developed countries to limit the flow of foreign competition. But why do governments implement such taxes and barriers to trade?

(i) Protecting domestic employment – The possibility of increased competition from imported goods can threaten domestic industries and this is where the political decisions. These local enterprises may encounter stiff competition, lay off workers or shift production abroad to cut costs which means higher unemployment and a less happy electorate.

(ii) Protecting the health of consumers – A government may introduce a tariff on products that it feels could endanger the health and well being of its population.

(iii)Protecting infant industries – The use of tariffs to protect infant industries can be seen by the Import Substitution Industrialization (ISI) strategy employed by many developing nations. The government of a developing economy will introduce tariffs on imported goods in its chosen local industries. This increases the prices of imported goods and creates a domestic market for domestically produced goods, while protecting those industries from being forced out by foreign competition. It protects the employment of the country and allows developing countries to shift from agricultural products to finished goods. However if an industry develops without sufficient competition, it could be comfortable producing lower quality goods, and the subsidies required to keep the state-backed industry afloat could be a heavy burden on the country’s economy.

(iv) National Security – Tariffs are also employed by developed countries to protect certain industries that are deemed strategically important, such as those supporting national security. Defense industries are often viewed as vital to state interests, and often enjoy significant levels of protection. For example, while both Western Europe and the United States are industrialized, both are very protective of defense-oriented companies.

(v) Retaliation – Countries may also set tariffs as a retaliation technique if they think that a trading partner has not played by the rules. For example, if France believes that the United States has allowed its wine producers to call its domestically produced sparkling wines “Champagne” (a name specific to the Champagne region of France) for too long, it may set a tariff on imported meat from the United States. If the U.S. agrees to tackle improper labeling, France is likely to stop its retaliation.

How a tariff works. Consumers will have to pay more for an imported product.

How a tariff works. Consumers will have to pay more for an imported product.

WTO and Free Trade

The introduction of international organizations designed to improve free trade, such as the World Trade Organization (WTO) had an important role to decrease the use of tariffs in international trade. Such international organizations make it more difficult for a country to impose tariffs and taxes on imported goods and retaliation. Many developed countries have reduced tariffs and trade barriers, which has improved global integration and brought about by globalization. Thus multilateral agreements and enforcement decreased the role of tariffs in international trade. This made countries shift to non-tariff barriers (NTBs), such as quotas and export restraints.

The next post will delve into more detail about the various types of tariffs and the effects of tariffs in general.