INTRODUCTION

Japan, the world’s third-largest economy after the United States and China, is a large market for Canadian exporters and investors. In addition to being a major energy importer and the world’s largest importer of food, Japan is a nation with considerable manufacturing and export capabilities.

Canada and Japan maintain excellent relations based on shared values and close ties between the people of the two countries. They are also partners in several international bodies, including the World Trade Organization and the Asia-Pacific Economic Cooperation forum.

Several economic and geopolitical advantages make Japan an important trade partner for Canada and a priority market for the future. Japan is the world’s fifth-largest merchandise importer and provides access to other Asian markets. Its manufacturing companies are a part of supply and value chains that reach across Asia and around the world.

Japanese companies are also prominent in foreign investment, which explains why Japan is the world’s top net creditor and holds the world’s second-largest foreign exchange reserves. Many Japanese multinational companies have invested in Canada in recent decades.

Like the economies of many other countries, Japan’s economy was affected by the recent global recession. In response to the economic challenges that the country is facing, the Japanese government recently proposed new measures to increase Japan’s exports, as well as to open the agricultural and services sectors to greater foreign competition. In particular, the government is focused on concluding free trade agreements with some of Japan’s key trading partners.

It is in this context that, in recent years, Canada and Japan began discussions designed to strengthen relations between the two countries. A joint study started in 2011 revealed that there was sufficient common ground to recommend launching negotiations for a Canada–Japan economic partnership agreement (EPA).[1] In March 2012, the prime ministers of Canada and Japan announced the start of EPA negotiations.

On 24 April 2012, the House of Commons Standing Committee on International Trade (hereinafter the Committee) decided to conduct a study on negotiations for an EPA with Japan. The Committee’s primary objectives were to identify the Canadian priorities as well as the views of stakeholders in this regard.

The Committee held hearings in Ottawa from May to November 2012 in order to obtain input from Canadian stakeholders with regard to the principal issues in these negotiations.As well, half of the Committee’s members travelled to Japan in late October and early November 2012 to meet with Japanese parliamentarians, officials of the Government of Japan, and stakeholders whoare involved in or have an interest in the EPA negotiations. The objective was to gain a broader understanding of the benefits and challenges of implementing a Canada-Japan EPA and to highlight Canada’s priorities in the negotiations.

This report provides information on current trade and investment relations between Canada and Japan as well as the issues under consideration during the EPA negotiations, describes the Committee’s meetings in Ottawa and Japan, and makes recommendations to the federal government.

BACKGROUND

Trade and investment relations between Canada and Japan[2]

Japan is Canada’s fifth-largest trading partner, after the United States, China, Mexico and the United Kingdom. In 2011, Canada’s merchandise exports to Japan totalled $10.7 billion and imports from Japan totalled $13.1 billion.

Japan is growing in importance as a destination for Canada’s merchandise exports. From 2006 to 2011, the value of Canadian exports to Japan rose at an average rate of 2.5% per year, compared to 0.3% for Canadian exports worldwide. Over the period, the value of Canada’s exports to Japan as a proportion of its global exports increased from 2.1% to 2.4%.

From 2006 to 2011, the value of Canadian imports from Japan declined at an average rate of 3.2% per year, compared to an average annual increase of 2.4% for Canadian global imports. Over the period, the value of Canada’s imports from Japan as a proportion of its global imports fell from 3.9% to 2.9%.

Table 1 — Canada’s Merchandise Trade with Japan, 2006-2011
$ millions

      Source: Statistics Canada

In 2011, the provinces of British Columbia and Alberta had the highest merchandise exports to Japan, with exports to that country valued at $4.7 billion and $1.8 billion respectively.

Raw materials accounted for 56% of the value of Canada’s exports to Japan in 2011, while manufactured goods accounted for the remaining 44%.

Table 2 — Top Canadian Exports to Japan, by industry, 2011
$ millions

      Source: Statistics Canada

In 2011, manufactured goods accounted for 99.8% of the value of Canada’simports from Japan. The top imports were cars and car parts, which together accounted for 35.3% of the value of Canada’s merchandise imports from the country.

Canada–Japan services trade totalled $2.6 billion in 2011; Canadian services exports to Japan were valued at $1.2 billion, while imports were valued at $1.4 billion. Commercial services were the principal source of Canada’s services trade deficit with Japan in that year; the value of Canada’s commercial services imports from Japan was $668 million, while commercial services exports to that country totalled $261 million. In that year, Canada reported a trade surplus in all other services categories with Japan, including travel, transportation and government services.

Investment continues to be an important part of bilateral relations between Canada and Japan. Japan is the largest destination for Canadian direct investment in Asia. The stock of Canadian direct investment in Japan totalled $8.4 billion in 2011, making Japan the 14th-largest foreign destination for Canadian investment. In that year, the stock of Japanese direct investment in Canada was $12.8 billion, making Japan the 8th-largest source of foreign direct investment in Canada.

Current Negotiations

Negotiations for a Canada–Japan EPA began at the February 2011 meeting of the Canada-Japan Joint Economic Committee, when consensus was reached to launch a joint study on the possibility of a Canada–Japan EPA.

On 7 March 2012, Canada and Japan published a document entitled Report of the Joint Study on the Possibility of a Canada–Japan Economic Partnership Agreement, which found that there was sufficient common ground to recommend launching negotiations to ratify an EPA between the two countries.

A joint modeling exercise concluded that both countries would derive economic benefits from an EPA. Gross domestic product (GDP) gains[3] were estimated to be between US$3.8 billion and US$9.0 billion for Canada and between US$4.4 billion and US$4.9 billion for Japan.[4]

The first full round of EPA negotiations between Canada and Japan took place in Tokyo on 26-30 November 2012.

EPA negotiations can be complex and technical, and can take several years to complete in order to achieve an agreement that meets the expectations of the parties involved. That said, the Committee was told that negotiations between Canada and Japan for an EPA could result in an agreement within a relatively short time frame; according to some participants with whom the Committee met in Japan, an agreement could be reached within 18 months.

Optimism regarding a short duration for these negotiations is attributable in part to the support of most Japanese stakeholders for an EPA with Canada. Likewise, most Canadian experts and stakeholders from whom the Committee heard supported the EPA negotiations. Stakeholders from both countries also pointed out the complementarity of the Canadian and Japanese economies.

Officials from the Department of Foreign Affairs and International Trade (DFAIT) expressed the government’s desire to move forward as quickly as possible with the signing and implementation of an EPA with Japan. Ian Burney (Assistant Deputy Minister, Trade Policy and Negotiations Branch, DFAIT)[5] said:

From a Canadian standpoint, we'd like to move this forward as quickly as possible, but it takes two to tango in a negotiation, and we know that both countries have very full dance cards. In the case of Japan, we understand that they will soon be launching negotiations with the European Union. There's the possibility of a trilateral negotiation that's being discussed among Japan, China, and Korea. It's possible that might end up being a series of bilateral agreements. Japan has been discussing the possibility of negotiating with Mongolia. And from our perspective we also have a multitude of negotiating initiatives.[6]

Economic and political conditions in Japan

Economy

After several consecutive years of economic growth in the early 2000s, growth in the Japanese economy—like economic growth in many other countries—began to slow, and Japan entered a recession in 2008. The government responded by increasing public spending to stimulate the economy, which began to recover by late 2009 and into 2010, only to contract again in 2011 after the 9.0‑magnitude earthquake and subsequent tsunami, which significantly disrupted the country’s manufacturing sector.

On several occasions, the Committee heard that Japan’s economy is facing challenges that could have a significant impact on the long-term health of the country’s economy. These challenges include persistent deflation, high government debt,[7] and an ageing and shrinking population.

The Committee was told that the Japanese government has taken steps in recent years to increase its exports and to open up the agriculture and services sectors to international competition. Particular emphasis has been placed on negotiating free trade agreements with Japan’s key trading partners and on participating in the Trans-Pacific Partnership (TPP) negotiations.

In that regard, Ian Burney mentioned the Basic Policy on Comprehensive Economic Partnerships, announced by the Japanese government in 2010, which confirmed Japan’s commitment to promote high-level economic partnerships with major trading countries, including Canada, and to move ahead with fundamental domestic reforms to enhance Japan’s competitiveness.[8] The Committee was told that the Japanese Ministry of Foreign Affairs may exercise political pressure to conclude an agreement with Canada in order to advance this policy.

The Committee was informed that Japan’s desire to liberalize trade coincided with efforts by other Asian countries to integrate their economies. According to Wendy Dobson (Professor of International Business, Director of the Institute for International Business, University of Toronto), most Asian governments are actively liberalizing their trade and investment flows in order to keep pace with domestic companies and their cross-border initiatives.[9]

Wendy Dobson also commented that the Japanese business model is going through a period of change; the traditional keiretsu-based[10] model is being abandoned in favour of models promoting more diversification of business activities, and greater positions in Asian supply chains.[11]

Despite a greater integration of Asian economies, some of the individuals with whom the Committee met in Japan expressed concerns that South Korea seemed to be particularly active in pursuing liberalized trade, having recently signed free trade agreements with the United States and the European Union. These individuals felt that Japan’s less aggressive approach could negatively impact the competitiveness of Japanese companies in foreign markets, especially in the automotive sector.

The Committee’s Canadian witnesses and Japanese participants also mentioned that Japan, like Canada, is located next to a global economic power. Japan’s economy is increasingly integrating into China’s economy, which—while not surprising given the investment capacities of Japanese companies and China’s production capacity—is a concern for Japan’s political class and the Japanese public. Yves Tiberghien (Associate Professor, Department of Political Science, University of British Columbia) indicated that:

Japanese exports 10 years ago used to be just 10% to China and 20% or 30% to the U.S. Today we are at 22% to China, 18% to the U.S., and by 2020 we'll be 30% to China and 10% to the U.S. Japan is increasingly hooked to the Chinese mainframe, but this is not matched by a strong institutional capacity. There was no investment treaty—they've just signed one now—and in general, although Japanese industry is pushing for more East Asian integration, the Japanese politicians and Japanese public are a bit ill at ease with this growing integration with China. There's an interest in keeping a second strong leg across the Pacific with the U.S., and now Canada.[12]

The high value of the yen compared with major world currencies was another source of concern for the Japanese business people with whom the Committee met. Some said that, although a reduction in or elimination of customs tariffs would benefit many sectors of the Japanese economy, the relative value of the yen continues to be a much more important factor as far as the competitiveness of Japanese products in foreign markets is concerned.

Politics

Several witnesses spoke to the Committee about political conflict in Japan, and pointed to a lack of political stability in the country. Based on discussions with elected officials in Japan, the Committee nonetheless noted that negotiations for a Canada–Japan EPA would have the support of the country’s main political parties. The election of a new government is not expected to impact significantly the Japanese government’s pursuit of EPA negotiations with Canada.[13]

In his appearance, Julian Dierkes (Centre for Japanese Research, Institute of Asian Research, University of British Columbia) confirmed the consensus that seems to exist among Japan’s politicians with regard to negotiations with Canada. He said:

[W]e’ve seen a rapid turnover of Japanese prime ministers for some years now, and it hasn't had much of an impact on international relations or the policies the government has pursued. The prime minister can champion particular issues personally, and Prime Minister Noda has taken TPP as one of his causes as well. Still, I would suspect that even a change of government would not make much difference in the discussions over a Canada EPA.[14]

Doing business in Japan

The Committee’s witnesses often highlighted Japan’s unique business culture. They noted the importance of establishing relationships characterized by trust with Japanese partners before doing business with them. Although companies trying to enter the Japanese market could see this approach as a barrier, the reality is that it is a characteristic of Japanese society and culture. According to Bob Kirke (Executive Director, Canadian Apparel Federation), people seeking business partners in Japan must have a long-term strategy if they want to do well. He believed that, with such a strategy, many Canadian industries will succeed in the Japanese market.[15]

Stakeholders with whom the Committee met in Japan also said that it is important for Canadian companies to have a medium- or long-term strategy if they want to succeed in the Japanese market. Some participants indicated that the need for such an approach could be problematic for small- and medium-sized companies that may not have the human and financial resources to develop and implement such a strategy.

In providing the perspective of the founder of a small company, Jacqueline Sava (Director of Possibilities and Founder, Soak Wash Inc.) told the Committee that her main concern is the availability of resources to help small companies benefit from an eventual Canada–Japan EPA. In her opinion, such resources need to be easier to access and to help companies identify the applicable standards and/or regulations that apply to the products they wish to export to Japan. She noted that Japan’s regulatory system can be extremely difficult for foreigners.[16]

Despite challenges posed by Japan’s business culture, the Committee was informed that, once the Japanese form a partnership, the partnership can last for a lifetime. Several witnesses described their experience in Japan and the loyalty of Japanese business people, including Ken Ilasz (Owner, Boulanger Bassin Bed and Breakfast). He stated:

Another thing I learned quite quickly was that the Japanese don't like to deal with lawyers. I've never had any legal agreement. I've never signed anything. It's always been done on word of mouth. I've been paid on time. It's a whole different approach to doing business. A lot of it is done on a handshake and on your word.[17]

Trans-Pacific Partnership

In October 2012, Canada was officially invited to join 10 other countries[18] in TPP negotiations. Although the Japanese government has expressed an interest in joining these negotiations, it has not yet made an official request.

Most Canadian witnesses from whom the Committee heard recommended that the Canadian government consider the negotiation of a Canada–Japan EPA and the TPP negotiations as two parallel processes. On that point, Joy Nott (President, Canadian Association of Importers and Exporters) believed that “it's imperative that Canada be included in the TPP and keep all of that going, but Japan is a slightly unique entity within Asia and we think that the [EPA] talks should definitely continue.”[19]

Donald Campbell (Senior Strategy Advisor, Davis LLP and former Canadian Ambassador to Japan) concurred, saying: “I am also a strong advocate for our participation in the Trans-Pacific Partnership, but I don't think it is a substitute for a Canada–Japan free trade agreement.”[20]

DFAIT officials told the Committee about the plan to move forward with two parallel negotiation processes, even if both Canada and Japan participate in the TPP negotiations.[21]

Jean-Michel Laurin (Vice-President, Global Business Policy, Canadian Manufacturers & Exporters) suggested nonetheless that Canada would have greater leverage in negotiating an agreement with Japan in the context of TPP negotiations, considering that it could benefit from the support and influence of its North American Free Trade Agreement (NAFTA) partners, especially the United States.[22]

During its meetings in Japan, the Committee learned from some stakeholders that the country’s potential inclusion in the TPP negotiations is strongly resisted by the Japanese public, while negotiations for an EPA with Canada are supported by both the stakeholders involved and the Japanese public. Among those commenting on the TPP issue, most of the Japanese individuals with whom the Committee met said that Japan’s inclusion in the TPP negotiations was controversial in their country because of the risks perceived by farmers and the likely uncompromising approach of some negotiating countries pursuing complete liberalization of merchandise trade.

Despite the large number of agricultural producers in Japan, Japanese government officials and representatives of Japanese agricultural associations described the country’s low level of agricultural self-sufficiency, which gives rise to concerns about food security. Agriculture—especially rice cultivation—has always been a stumbling block in the Japanese government’s negotiation of free trade agreements, and this issue is particularly relevant in the context of the TPP, given the large number of rice–producing countries at the negotiation table.

Support provided by the Canadian Trade Commissioner Service

As discussed earlier, and as explained by the Committee’s witnesses, unlike trying to enter markets where business relationships tend to be transactional in nature, Canadian companies trying to enter the Japanese market must make lengthy and expensive investments of time and resources in building solid business relationships with Japanese partners.

During its meetings in Japan, the Committee saw firsthand the priority that Japanese business people attach to the existence of relationships characterized by trust. The Committee was advised that it would be important for a Canada–Japan EPA to be accompanied by a promotional campaign within the Canadian business community, so that companies seeking to export their goods and/or services to Japan or to invest in that country could benefit from the new business opportunities that will result. The vital support provided by the Canadian Trade Commissioner Service in Japan was also mentioned.

Although Canadian and Japanese stakeholders seemed to be satisfied with the services provided by the Canadian Trade Commissioner Service, some were disappointed by the closure of the Canadian Consulate in Osaka in March 2007. The Committee was told that Osaka, which is the third-largest city in Japan and is located in the heart of one of the country’s most dynamic economic regions, offered numerous business opportunities for Canadian exporters and investors; from that perspective, an official Canadian presence in Osaka is needed in order to take advantage of these opportunities. Although he understood the financial considerations that led to the closure of the Canadian Consulate in Osaka, John Tak (Vice-President, International Business, Factors Group of Nutritional Companies Inc.) urged the government to reconsider the closure. In his opinion, the cost of reopening the consulate would be a worthwhile expense if the result was increased trade between Canada and Japan.[23]

Donald Campbell said that, in his opinion, Japanese discontent following the closure of the Canadian Consulate in Osaka was limited and that all governments must make tough decisions of that nature. He stated: “One of the really difficult things is the cost of an operation in Japan is significantly more, given the value of real estate and given the incomes of locally engaged staff, than it is in many other countries.”[24] That said, in his view, the Canadian government should reverse its decision given the unique nature of the business community in Osaka and the fact that the Kansai region alone has a GDP that is larger than that of Canada.

During its meetings in Osaka, the Committee saw that—despite the closure of the Consulate—the Embassy of Canada to Japan is proactive in ensuring that Canada continues to have some official presence in Osaka. For example, the Consulate of Canada to Japan in Nagoya recently opened an office at the Osaka Chamber of Commerce and Industry, and has one full-time employee working there. Moreover, Canada’s Consul in Nagoya spends several days each month in Osaka.

EXPECTED IMPACTS OF A CANADA–JAPAN EPA

Although numerous negotiation-related topics were addressed, the Committee noted that most of the issues raised by the Canadian witnesses and participants in Japan could be grouped into three categories: merchandise trade, specifically trade in agricultural and agri-food products, automobiles and natural resources; trade in services and labour mobility; and investment protection.

Overall impact

Most of the Committee’s Canadian witnesses were in favour of negotiations for a Canada–Japan EPA. Some felt that an EPA would serve as a catalyst in improving relations between the two countries. According to Ian Burney, “beyond the specific elements you have in a free trade agreement, you have positive momentum that is generated in a relationship by having a free trade agreement and all the publicity and attention associated with it.”[25] The Committee was also told that free trade agreements often generate economic activity that is not specifically related to any single provision in the agreements.

Yves Tiberghien believed that the signing and implementation of an EPA between Canada and Japan would lead to extensive media coverage in Japan, thereby stimulating Japanese tourism to Canada and increasing the number of Japanese students attending Canadian universities.[26] Japanese political and economic stakeholders confirmed that, for Japan, an EPA with Canada would have a significant symbolic value beyond the agreement itself, and could have positive economic and diplomatic effects.

Other witnesses said that, in order to give Canadian companies an edge in the Japanese market, it is strategically important for Canada to sign an EPA with Japan before it signs one with its main competitors. Sam Boutziouvis (Vice-President, Policy, International and Fiscal Issues, Canadian Council of Chief Executives) used the Canada–Colombia Free Trade Agreement as an example, as it has allowed Canadian exporters, including agricultural and agri-food producers, to benefit from the agreement with Colombia ahead of its competitors. He also said that, in the South Korean market, Canada will be at a disadvantage compared with the United States, as that country has already signed a free trade agreement with South Korea.[27]

The possibility of an EPA with Japan being a launching point into the Asian market for Canada was raised by a number of the Committee’s witnesses, including Janice Hilchie (Vice-President, Government and International Relations, Canadian Life and Health Insurance Association Inc.). According to her:

Japan can and should be seen as an effective beachhead for Canadian companies who operate in Asia. Given its democratic values, stable government, strong legal system, protection of intellectual property, world-class infrastructure, and Japan's own FTAs in Asia, it's an ideal starting point for Canadian companies looking to ease into the region. Similarly, Canada can provide entry for Japanese firms into the U.S. and the Americas. In order to fully leverage this potential, we need this economic partnership agreement.[28]

From a different perspective, other witnesses expressed concern that a Canada–Japan EPA could potentially worsen Canada’s trade balance in the manufacturing sector. James Stanford (Economist, Canadian Auto Workers Union) said that Canada’s trade balance in the manufacturing sector has deteriorated in recent years. In his view, signing an EPA with Japan will not reverse that trend in Canada’s favour.[29]

Stuart Trew (Trade Campaigner, Council of Canadians) concurred. In his opinion, before signing an FTA, Canada should consider both the possibility of increasing exports in certain sectors and the impact of imports on the Canadian economy. He believed that trade agreements signed by Canada in the past did nothing to improve Canada’s deteriorating trade balance and did not improve the value-added content of Canada’s exports. He suggested a different approach:

Instead of reinforcing this external dependence of the Canadian economy on exports or certain types of exports, perhaps trade negotiations should be conducted to further a national trade, economic, and sustainable development strategy. Canada’s existing free trade deals prohibit many but not all of the ways in which a government can seek to move its economy up the value-added supply chain by turning raw resources into finished goods here in Canada. The benefit of a more hands-on approach to developing our economy is that it allows you to do this in a much more sustainable way and to avoid the resource trap we seem to be getting into.[30]

With regard to Canada’s trade balance with Japan, Joy Nott mentioned that, in today’s global economy, it is difficult for Canadian manufacturers to source all of their components domestically, and the viability of Canadian manufacturers depends on imports. She said:

[I]mport[s] and exports are generally viewed as two discrete operations where imports are generally considered bad for the economy and exports are generally considered good for the economy. In today's global environment with the supply chains integrated the way they are, that's not really the case any more for business. In fact, I think it actually hurts Canadian companies when the philosophy is that imports are less than favourable for the Canadian economy, because no Canadian exporter can successfully export without importing at least something for the manufacturing process.[31]

Although negotiations for a Canada–Japan EPA were supported by most of the Committee’s witnesses, the Committee was told that an EPA is only one of the tools that Canadian companies need in order to expand business opportunities in Japan. Gordon Bacon (Chief Executive Officer, Pulse Canada) said that, to optimize the performance of Canadian companies in Japan, “a systematic approach to identifying and eliminating tariff and non-tariff barriers to trade, along with efforts to gain additional efficiencies for the entire logistics chain in Canada,”[32] are also necessary.

Regional Impact

The Committee was informed that the provinces and territories supported the launch of negotiations for a Canada–Japan EPA.

The Committee heard that a Canada–Japan EPA could be very beneficial for British Columbia, given its geographical location and the close relations between the province and Japan. That said, provinces with less of a geographical advantage also expect to benefit from an EPA between Canada and Japan. Allen Roach (Minister of Innovation and Advanced Learning, Government of Prince Edward Island) told the Committee that his province expected to benefit from an EPA with Japan, with opportunities in sectors such as seafood and aquaculture, agriculture and agri-food, tourism and manufacturing.[33]

Although Canada’s western provinces could benefit the most from an EPA with Japan, a number of witnesses mentioned that redirecting a greater proportion of exports from the western provinces to Japan would create opportunities for the other Canadian provinces to move into certain export markets currently served by the western provinces. Andrew Casey (Vice-President, Public Affairs and International Trade, Forest Products Association of Canada) summarized the situation by saying:

[I]f B.C. starts to ship a greater percentage of its overall production to Japan, that's going to open up market space elsewhere. While it does directly benefit the B.C. producers, the east coast producers are going to benefit because the B.C. guys are going to leave the U.S. marketplace or the European marketplace, and that will allow the east coast guys to move in.[34]

With regard to the degree of provincial and territorial participation in the Canada–Japan EPA negotiation process, Dana Hayden (Deputy Minister, Ministry of Jobs, Tourism and Innovation, Government of British Columbia) said that British Columbia had greatly appreciated the federal approach to the negotiation of the comprehensive economic and trade agreement (CETA) with the European Union (EU), where the provinces participated in the discussions. She hoped that this model would be adopted for the negotiations with Japan.[35] DFAIT officials confirmed that the provinces and territories would be consulted at every stage of the EPA negotiation process; however, they were not sure whether the provinces and territories would be directly involved in the negotiations, as has been the case with the Canada–EU CETA negotiations.[36]

Finally, representatives of the Japanese government informed the Committee that they hoped to gain greater access to the provincial and territorial government procurement markets as part of the negotiations for an EPA with Canada.

Merchandise trade

Most of the Committee’s Canadian witnesses expressed the view that an EPA between Canada and Japan would benefit Canada’s economy overall. According to Sam Boutziouvis, although such an agreement would likely cause job losses in certain sectors, it would provide a net benefit to the economy and employment in Canada. In his view, a Canada–Japan EPA would provide opportunities for Canadian businesses in all sectors.[37]

Reminding the Committee that Canada has a significant trade surplus in raw materials and an equally significant deficit in manufactured goods, Jean-Michel  Laurin said that he feared an EPA with Japan could worsen the latter. He expressed the hope that such an agreement would address the structural barriers to the Japanese market, and that the end result would be free and reciprocal access to both nations’ markets and a net benefit for Canadian manufacturers.[38]

That said, DFAIT officials spoke to the Committee about the potential benefits of an EPA with Japan for Canada’s manufacturing sector. Ian Burney stated: “There are a lot of high-value products within the resource sectors that are going to Japan, and the percentage of our exports to Japan that are in high-valued manufactured and processed goods is actually growing as well. It’s entirely possible that trend would be accelerated in the context of free trade.”[39]

Wendy Dobson emphasized how important it is for Canada to participate in high-value-added niches in supply chains that are now global in scope. She argued that, in negotiating an EPA with Japan, Canada “should explore the possibilities for promoting more intra-industry trade in which Canada and Japan exchange different components, materials and services in the same industries.”[40]

Vicky Sharpe (President and Chief Executive Officer, Sustainable Development Technology Canada) told the Committee that Japanese companies are first-rate partners in cutting-edge technology sectors, such as clean energy technologies. In her view, they have significant resources that can be invested in joint projects. Moreover, she indicated that Japan is an important market for Canadian companies involved in the development and marketing of energy-efficient and renewable energy products and processes.[41]

Other witnesses explained that Canada has strategic assets that will enable it to benefit from the special access to Japan that an EPA should provide. In addition to Canada’s natural resources, the positive Canadian brand image in Japan and the two countries’ common values, Canada has logistical advantages. From this perspective, Greg Stringham (Vice-President, Oil Sands and Markets, Canadian Association of Petroleum Producers) noted:

Not many people recognize that we are actually strategically advantaged by the distance between ourselves and Japan when it comes to shipping routes. That gives us a competitive advantage over other regions, such as the Middle East and even Australia, which is competing in this market right now. It provides a good reason for us and for Japan to look at capitalizing on that opportunity, simply because, even though we often think how long the flights are from here to Japan, it really is close in commodity shipping terms.[42]

Agriculture and agri-food

Japan’s agricultural sector is relatively small. While Japan is normally self-sufficient in rice, the Committee was told that the country is highly reliant on foreign markets for agri-food products. According to Ray Price (President, Canadian Meat Council), 60% of the agri-food products consumed in Japan each year are imported.[43]

Japan is one of the largest importers of agri-food products in the world. In 2011, it imported C$82.5 billion worth of agri-food products, 6% of which came from Canada,[44] making Canada the country’s fourth-largest source of these imports.[45] Each year, Japan is Canada’s second-largest agricultural export market.[46] In 2011, Canada’s top three agricultural exports to Japan were canola seeds, pork and non-durum wheat.[47]

During its meetings in Japan, the Committee noted that the absence of rice production in Canada and Canada’s generally balanced approach to trade liberalization are two factors that have lessened Japanese farmers’ traditional resistance to freer trade in agricultural products. Representatives of Japan’s national farmers’ associations confirmed that they are not opposed to an EPA between Canada and Japan that recognizes sensitivities in both countries.

Considering Japan’s many sensitive products in the agricultural sector, the Committee was told that the tariff protection of products under Canada’s supply management systems should not be affected by negotiations for an EPA with Japan. On this subject, Ian Burney asserted: “I think you can be confident that we would not be negotiating away our supply management system. I think I could also add that during all of the exploratory discussions we’ve had with Japan, we’ve been given no reason to believe that represents an offensive interest for them.”[48]

Many Canadian witnesses noted that the Japanese market is extremely strict about the safety of its food products and imposes high food safety standards on its importers. Jacques Pomerleau (President, Canada Pork International) noted that Japanese standards are similar to those in Canada, which are also very high, but that Japanese consumers have much higher expectations because of past food safety incidents. Japanese importers often require additional measures to reassure their buyers and distributors.[49]

That said, the Committee was also told that Japanese consumers are prepared to pay a higher price for high-quality products, which explains the appeal of this market for Canadian agricultural and agri-food producers that can meet Japanese standards.

The Committee was informed that Japan’s rigorous approach to food safety has had collateral benefits for Canada’s agri-food sector. According to Jean-Guy Vincent (Chair of the Board of Directors, Canadian Pork Council):

These requirements have enabled the Canadian pork industry to develop high-quality food safety programs, such as the Canadian quality assurance program. These programs have assisted the industry in accessing Japan and other international pork markets.[50]

In their appearance before the Committee, Canadian agri-food stakeholders said that an EPA with Japan should address that country’s escalating tariffs.[51]

Richard White (General Manager, Canadian Canola Growers Association) said that his organization would like the tariffs on all edible oils to be eliminated. In his opinion, if the tariffs remain, they should be converted to ad valorem duties, that is, duties calculated as a percentage of the value of the product, rather than fixed duties.[52]

Other witnesses indicated that Japan’s ability to apply safeguard duties on beef and pork products if a certain volume of imports is exceeded is a major barrier for Canadian producers. Jacques Pomerleau told the Committee that Mexico and Chile were exempted from these safeguard duties when they signed an EPA with Japan.[53]

The complexity of the Japanese regulatory system was also cited as a significant barrier to trade with Japan. For example, Dan Paszkowski (President and Chief Executive Officer, Canadian Vintners Association) explained that the Japanese regulatory system governing winemaking practices can be difficult to navigate and is a costly obstacle to trade. He hoped that mutual recognition of winemaking practices and processes as well as product characteristics, along with a process to deal with new or modified winemaking practices, can be part of a Canada–Japan EPA.[54]

Finally, the Committee was told that Canada and Japan still have not reached an organic products equivalency recognition agreement, which seriously complicates the task of Canadian organic producers seeking to export their products to Japan. To have their products recognized as organic, Canadian producers must go through the Japanese certification process. This situation is especially problematic because the United States already has such an agreement with Japan, giving American organic producers an advantage in the Japanese market.

Forest products

Japanese culture promotes the use of wood, and Japan is a major consumer of high-value wood products and structural lumber for housing. In 2011, Canadian forest product exports to Japan totaled $1.4 billion.[55]

Andrew Casey explained the unique nature of the Japanese market, stating:

One of the interesting things about the lumber that we do ship there is that it's a premium grade lumber. It's called J-grade or Japan-grade lumber. To make an agricultural analogy, it's like taking the beef tenderloin and shipping only that. It's the best part of the tree, the straightest part with the fewest knots. They love it, and they pay a premium for it. From that standpoint, it's a very important marketplace.[56]

During its meetings in Japan, the Committee learned that Japanese demand for Canadian forest products has weakened in recent years because of the country’s stagnating population growth and weak economic growth. Moreover, Japan’s demographic trends—including a declining and ageing population—are expected to have a negative effect on the country’s home construction market for the foreseeable future.

The Committee was informed that, to promote the use of wood in non-residential buildings, the Japanese government recently passed a law to promote the use of wood as the principal construction material for all government-funded buildings. In the medium and long term, the reconstruction effort in Japan following the earthquake and tsunami of 2011 could also benefit Canadian businesses that already export forest products to Japan or that wish to enter the Japanese market.

Witnesses told the Committee that Canadian forest product exports to Japan face customs duties of between 0% and 7.5%. The same duties apply to forest product exports from the United States and the Scandinavian countries, which are Canada’s main competitors in the Japanese lumber market. Canada’s principal competitors in the markets for particle board, veneer and plywood are the Southeast Asian countries, such as Indonesia, which have preferential access to these product markets because they have EPAs with Japan. Eliminating or reducing Japan’s tariffs on Canadian forest products would give Canadian producers an advantage over their key competitors in products such as lumber and would level the playing field with countries that currently export processed products, such as particle board, to Japan.

As with agricultural and agri-food products, witnesses expressed the hope that a Canada–Japan EPA could address technical trade barriers resulting from the Japanese regulatory system. Paul Newman (Executive Director, Market Access and Trade, Council of Forest Industries, Canada Wood Group) summarized the complexity of the Japanese regulatory system for the certification of foreign forest products as follows:

Japan has a tendency to develop unique regulations and requirements when it comes to standards and requirements, and this makes it difficult for international exporters to comply with local standards and local building requirements. One example would be in the area of conformity assessment. Products used in construction, say, are assessed and deemed suitable for use. Japan typically doesn't recognize foreign certification systems or foreign certification organizations, and they usually require registration under their own system. That adds costs and complexity for foreign exporters.[57]

Representatives of Canadian forestry companies and of Japanese forest product importers with whom the Committee met in Japan also cited Japan’s excessively long approval times for forest products. They hoped that an EPA between Canada and Japan will encourage the latter to accept North American standards for certifying forest products, mainly in the area of innovative construction methods.

The Committee also learned that Canadian forest sector stakeholders are worried about the Japanese government’s efforts to increase the market share of domestically produced lumber. Paul Newman explained that Japan has preferential buying policies for Japanese lumber and that the government subsidizes the local industry. He also expressed concerns about the policy of some local governments in Japan that allows reduced mortgage rates for Japanese home owners who use local wood to build their homes.[58] Japanese participants also indicated that other non-tariff barriers exist, including social pressure to use Japanese wood in renovation projects and subsidies for the purchase of mill equipment.

Energy resources

Like food security, energy security is a critical issue for the Japanese government and the Japanese public in general, especially now, when virtually all of the country’s nuclear reactors have been offline since the earthquake and tsunami of March 2011.[59] As pointed out by Vicky Sharpe, Japan completely revised its energy supply strategy after March 2011 and committed, for example, to reducing energy consumption and diversifying its energy sources.[60]

Under these circumstances, Canada is seen as a reliable supplier—the most reliable, according to some with whom the Committee met in Japan—of energy resources for Japan. The Committee learned that Canadian energy exporters could experience long-run benefits from Japan’s shift in energy production if it turns to resources like natural gas, oil or coal. Restarting Japan’s nuclear reactors would also present opportunities for Canadian uranium producers. Donald Campbell expressed the view that Canada could benefit from Japan’s revised energy supply plans, and said:

[Japan] finds itself in a very difficult situation with most of the oil that it uses coming through the Strait of Hormuz in the Middle East, and with natural gas. It's the largest importer in the world of natural gas, which comes from the Middle East, from Australia, and from Indonesia, which is a declining market. There is a sense of vulnerability. There are enormous opportunities in energy for Canada.[61]

In this context, the Committee was told that there is enormous potential for Canada to supply liquefied natural gas to Japan over the medium and long term. However, Canada will need to build the required infrastructure in order to take advantage of these market opportunities.

Given Japan’s energy situation, few barriers apply on energy products entering Japan. As Greg Stringham indicated, “all we want to entrench in a free trade agreement is something that ensures those tariffs would not come in the future and would remain as open as they are today.”[62] In this regard, he believed that the goal of Canadian negotiators regarding an EPA with Japan should be to guarantee barrier-free access to the Japanese market for energy product exports.

Witnesses also informed the Committee that Japanese companies are major investors in the Canadian energy sector and that Canada benefits from this source of capital. As well, they pointed out that Japan was the first foreign country to invest in the Alberta oil sands, having done so in 1978.

Representatives from Japan’s energy sector spoke about Japanese companies’ many substantial projects in Canada. These projects involve the oil sands, natural gas, shale gas, solar energy, uranium and metallurgical coal. Japanese firms are also interested in various strategic minerals found in Canada, including rare earths, copper and zinc, which are essential to the electronics, clean technologies and automobile sectors. The Committee heard that Japan’s energy sector considers Canada to be one of the most open and barrier-free markets in the world.

During the Committee’s meetings in Japan, Japanese mining sector representatives expressed interest in reducing restrictions in relation to foreign involvement in Canada’s uranium mining industry. Currently, non-residents cannot own more than 49% of a company that mines uranium in Canada.

Automobiles

According to some of the Committee’s witnesses, improved access to the Canadian automobile market is one of Japan’s most important offensive interests in negotiating an EPA with Canada.

At present, Canada applies a 6.1% duty on light vehicles from countries that are not NAFTA signatories, and Japanese manufacturers would like this tariff to be eliminated. David Worts (Executive Director, Japan Automobile Manufacturers Association of Canada) said that removing the tariff would help these manufacturers “better compete in the market in Canada, particularly with advanced technology vehicles, because they tend to be higher cost, and we would be able to introduce environmentally friendly, fuel-efficient and safer vehicles.”[63]

The Committee was also informed that, since 1993, Canada has been a net exporter of Japanese-brand vehicles. Since the 1980s, Japanese manufacturers—led by Toyota and Honda—have assembled vehicles in Canada and in 2011, Canada exported at least three times more Japanese-brand vehicles than it imported from Japan.

Regarding the removal of the tariff on Japanese automobiles entering Canada, DFAIT officials told the Committee that the Government of Canada received 32 submissions from Canadian stakeholders as part of its consultations on an EPA with Japan; the only submissions deemed “critical or concerning” referred to the potential effects of eliminating the tariffs on automobiles imported from Japan under such an agreement.[64] According to James Stanford, such an agreement could exacerbate the bilateral trade imbalance in automotive products in Japan’s favour. Accordingly, he recommended that this sector be excluded from an EPA with Japan. He said:

It's not realistic for me to understand any scenario in which a free trade agreement with Japan would generate benefits for our auto industry. I suspect that in the wake of a free trade agreement we would see a widening of the bilateral auto trade imbalance to the order of $7 billion to $8 billion, instead of $5 billion, and tens of thousands of lost jobs as a result.[65]

A study conducted for DFAIT predicted that the effects of an EPA with Japan on the Canadian automotive sector would be minimal, with no more than a 0.3% change in automobile production in Canada.[66] DFAIT officials also told the Committee that Canada could take advantage of the access to the Japanese market that would result from an EPA between the two countries.[67]

Regarding Canadian access to the Japanese automotive market, the Committee was told that, even though the Japanese tariff on foreign vehicles is 0%, more than 95% of the vehicles sold in Japan are made there. Mark Nantais (President, Canadian Vehicle Manufacturers’ Association) and James Stanford explained that foreign manufacturers have trouble penetrating the Japanese market for reasons such as consumer preferences, different vehicle standards, the lack of opportunities for stakeholders to participate in developing standards and regulations, and the obstacles to developing distribution and service networks. In their view, an EPA with Japan will not make it easier for North American manufacturers to enter the Japanese market.[68]

Representatives of Japanese manufacturers with whom the Committee met did not share the view that the Japanese market is closed to foreign automobiles. In their opinion, the low market share of foreign automotive manufacturers in the Japanese market, mainly North American manufacturers, is more a reflection of the effort they have made to access the Japanese market. Moreover, the Committee was told that North American automakers often manufacture and prefer to market larger vehicles, which are not popular in Japan. The example of European manufacturers was cited to demonstrate that foreign vehicles can be sold in Japan, as they have experienced steady sales growth in recent years owing to a sustained effort and models that correspond to Japanese consumer preferences.

Trade in services and labour mobility

Trade in services comprises a significant portion of bilateral trade between Canada and Japan. According to the Committee’s witnesses, the issues in this area should pose a lesser challenge to negotiators than those concerning merchandise trade.

When negotiating free trade in services, Canada and Japan have typically used the same approach, whereby everything is included except what is specifically excluded. This similarity should result in greater liberalization of trade in services between the two countries if an agreement is reached.

According to DFAIT officials, Canadian financial and insurance service providers already have a significant presence in Japan, and there are opportunities for growth in these sectors. Furthermore, they believed that there are many opportunities in the areas of professional services and energy services.[69] The Government of British Columbia has reached the same conclusion and wants barriers preventing Canadian service providers from taking full advantage of business opportunities in Japan to be removed. From this perspective, Dana Hayden said:

We also believe on the services side that there are huge opportunities in British Columbia. For example, in the technology sector, the international education sector, and the tourism sector, we have an opportunity to increase the services flow in the provision of services from British Columbia into Japan. There's certainly an interest in that market in what we have to offer, but there are barriers that prevent us from realizing the extent of those opportunities, which we would like to see eliminated through an agreement.[70]

That said, representatives of Canadian personal insurance companies spoke to the Committee about the Japanese government’s involvement in the delivery of financial and insurance services by Japan Post. Janice Hilchie explained that, from the perspective of the association she represents, the bill passed last spring to reform Japan Post violates Japan’s international trade obligations and grants Japan Post Insurance special exemptions that give it a competitive advantage over private insurers.[71]

During its meetings in Japan, the Committee learned that certain Japanese labour mobility measures negatively affect Canadian suppliers’ ability to provide their services. For example, the Committee was informed that it is impossible for a foreign pilot to obtain a pilot’s licence in Japan even though demand for them is strong and Canada has notable expertise in this field. Similarly, many Canadian construction workers attempted to go to Japan following the March 2011 earthquake and tsunami to help rebuild the affected areas, but it was very complicated—if not impossible—for them to obtain work permits.

According to the Committee’s witnesses, trade in services is an important facet of the negotiations for the Japanese government and Japanese stakeholders. That said, they provided few examples of barriers in Canada that affect them, other than the foreign-ownership restrictions in the telecommunications sector.

Investment protection

As pointed out to the Committee on numerous occasions, a major component of Canada’s economic relationship with Japan is direct investment. Ian Burney summarized the importance of this relationship, indicating:

In 2011 Japan was Canada's single largest source of foreign direct investment from Asia, even ahead of China. At the end of 2011 Japan had a foreign direct investment stock of $12.8 billion in Canada. More than 330 Japanese subsidiaries and affiliate companies now operate in Canada, employing tens of thousands of Canadians. Not surprisingly, many Canadian companies are active in Japan as well, with the stock of Canadian direct investment in Japan totalling $8.4 billion in 2011. For example, companies such as Manulife, Magna, Linamar, Celestica, Bombardier and Scotiabank all have a direct and active presence in the Japanese market.[72]

The Committee heard that Japan has considerable potential as an investor in Canada and is also a market for Canadian investors, and that an EPA between Canada and Japan would enable this potential to be realized.

Some witnesses believed that including an investment chapter in an EPA between Canada and Japan would likely protect foreign investors from discriminatory treatment in the host country. The main advantage of investment protection provisions in trade agreements is the degree of certainty and stability they provide to foreign investors. The inclusion of such provisions is typically important for agreements with developing countries, which may have unstable or rudimentary legal systems that can deter foreign investors.

While Japan has an advanced, predictable and stable legal system, DFAIT officials told the Committee that a rule-based framework would provide an additional level of stability and security for Canadian and Japanese investors.[73]

In speaking from the perspective of the Government of Prince Edward Island, Allen Roach believed that an investment promotion and protection chapter in a Canada–Japan EPA would have a positive economic impact on the province. He said:

As well, we see an opportunity in inward investment. Negotiating predictable investment rules and guaranteeing access to Japanese markets will help create a level playing field for Prince Edward Island investors and businesses and reduce the risks associated with investing abroad. This would lead to a greater two-way investment that would help create jobs and long-term prosperity for hard-working Islanders.[74]

The inclusion of clauses that make it possible for investors and states to settle their disputes directly was discussed by the Committee’s Canadian witnesses, who were divided on the issue. Some believed such clauses in an EPA or an FTA ensure that governments uphold their obligations under the agreements that they negotiate. Moreover, the Committee was told that not having to petition their government to act on their behalf every time they have a problem that relates to a foreign investment would be an added advantage for Canadian investors.

Other witnesses said that giving investors the option of taking legal action against a government if it adopts legislative or regulatory provisions that affect their ability to make profits restricts legislatures’ ability to meet their public policy objectives. These witnesses believed that such provisions should not be included in a Canada–Japan EPA, especially since, in their view, such provisions have not historically made it easier for investment to flow between Canada and its trading partners or encouraged new investors either to begin or to cease investing in Canada.

Among those commenting on the inclusion of clauses for an investor-state dispute resolution mechanism in a Canada–Japan EPA, most of the participants with whom the Committee met in Japan supported the idea.

CONCLUSION

Based on the testimony heard in Ottawa and the meetings in Japan, the Committee believes that most Canadian and Japanese stakeholders support negotiations for an EPA between Canada and Japan. In the Committee’s view, the economic impact of liberalizing trade between Canada and Japan should be positive for both countries, and an EPA could strengthen relations between Canada and Japan.

The Committee feels that it can be difficult to access and/or penetrate the Japanese market, and believes that patience and resources are usually required to overcome the barriers to access. By eliminating certain tariff and non-tariff barriers, an EPA could facilitate access to the Japanese market for Canadian exporters and investors, and make it easier to establish partnerships. The Committee is aware, however, that some barriers are cultural in nature and require a longer-term investment by Canadian companies. Nevertheless, the reward for those who successfully enter the Japanese market is very loyal partners and extremely solid partnerships. Given the unique characteristics of the Japanese business world, Canadian companies will still need resources—such as the Canadian Trade Commissioner Service—to support them as they establish themselves in Japan and to ensure that they benefit fully from a Canada–Japan EPA.

Furthermore, the Committee recognizes the existence of high quality and safety standards for goods exported to Japan, but also realizes that the Japanese consumers are prepared to pay a relatively higher price for high-quality products. In this context, and recognizing the quality of Canadian products and the good reputation of Canadian institutions in Japan, Canada has a clear interest in working with Japan during the EPA negotiations to ensure the compatibility of standards and certification methods.

Consequently, the Committee recommends:

Recommendation 1

That, as soon as possible, the Government of Canada conclude an economic partnership agreement with Japan that provides a net benefit to Canada.

Recommendation 2

That, in relation to the goods and services of interest to Canada, the Government of Canada ensure access to the Japanese market that is at least equivalent to the commitments made by the Japanese government to other countries.

Recommendation 3

That the Government of Canada negotiate a reduction in or elimination of Japan’s escalating tariffs, especially those in relation to processed agricultural products.

Recommendation 4

That, concurrent with the negotiations for an economic partnership agreement with Japan, the Government of Canada advance negotiations on an organic equivalency recognition agreement between the two countries.

Recommendation 5

That, following the entry into force of an economic partnership agreement between Canada and Japan, the Government of Canada develop an action plan to support Canadian exporters and investors seeking to access the Japanese market.

Recommendation 6

That, following the conclusion of an economic partnership agreement with Japan, the Government of Canada review its diplomatic presence in Osaka.