Introduction
Free trade agreements (FTA) are essential for the economic growth of nations; they reduce trade barriers, thus, creating ease in the flow of goods and services across countries. The multiple benefits derived from the above treaties, including increased access to higher-quality and lower-priced commodities, are among the factors that drive the majority of the Western world governments to pursue bilateral and multilateral trade agreements. Similarly, some of the East Asian nations have FTAs with both neighboring states and countries from other regions such as Europe. An example includes the Japan-Mexico economic partnership agreement (JMEPA), which has been in place for nearly fifteen years. Despite the differences in geographical location, and the cultural diversity among the people, both countries maintain a close trade relationship, which is mutually beneficial. While the Japan-Mexico economic partnership agreement promotes trade creation, trade diversion, and opens up markets for foreign direct investment (FDI), it also exposes domestic exporters to financial losses due to the existence of cheaper imports, which necessitates a strategic change in their business plan to cope with the challenge.
Japan-Mexico Free Trade Agreement
Like other trade treaties, Japan-Mexico economic partnership agreement is based on the objective of reducing trade barriers between the two countries and promoting strong economic relations. Signed and effected in 2005, the JMEPA serves six main goals namely liberalise and enhance trade in goods and services between Japan and Mexico, facilitate and strengthen protection for FDI, equip suppliers with the opportunity to participate in government procurement, provide a framework for further bilateral agreements, promote cooperation for effective enactment and enforcement of competition laws, and create effective procedures for implementation of the agreement and resolution of disputes (“Economic partnership” 10). Through the trade agreement, Japan and Mexico manufacturers export goods across the nations’ boundaries without facing stringent tariffs. The JMEPA also enables individuals and firms to establish investments in foreign countries, taking advantage of benefits that may not be otherwise enjoyed while participating in the export market such as tax incentives and access to underutilised resources. Besides, the trade agreement protects the intellectual rights of foreign investors. The highlighted objectives of the JMEPA show that the treaty not only promotes free trade, but it also strengthens the bilateral economic relations between Japan and Mexico.
Importance of the Japan-Mexico Free Trade Agreement
Among the importance of the trade agreement between Japan and Mexico is the improvement of economic welfare, which is embodied in the effects of trade creation. As discussed by Darma and Hastiadi, trade creation refers to a significant “shift from high-cost domestic goods to goods with a lower cost from the FTA fellow member countries” (53). The aspect implies that an indicative characteristic of FTA includes access to low-priced commodities from partnering countries. Put into context, the trade treaty between Japan and Mexico is beneficial because it fosters trade that never occurred before the establishment of the agreement. For instance, studies conducted by Sanchez et al. revealed that some of the expected benefits of MJEPA would be growth in Mexican exports to Japan at a rate of 10% annually to 12 billion dollars by 2015 (20). These statistics were confirmed by a study conducted by Vargas-Hernandez and Gutierrez, which showed that trade between the two countries had grown by 73.4% from 12,758 to 22,129-million dollars in 2004 and 2015, respectively (525). Similarly, an analysis performed by Ando using the gravity equation showed that trade between Japan and Mexico had increased as a result of trade liberalisation linked to the EPA (Sanchez et al. 9). The information above reveals that the JMEPA facilitates economic welfare through the enhancement of trade between the two countries.
In addition to the improvement of trade, the effects of trade creation are evident in the efficient manner in which consumers access low-priced imports. For instance, Sanchez et al. argue that Japan has a limited territorial extension with suitable soil for agriculture (5). Taking the principles of economics into consideration, it is more likely that the demand for agricultural products in the country exceeds supply, making domestic products more expensive. However, the effects of trade creation between Japan and Mexico enhance the economic welfare of consumers as Japan can easily import cheaper agricultural products from its trading partner. Reports by the Secretariat of the economy reveal that Mexico supplies avocado, lemon, melon, mangos, beef, and other agricultural products to Japan, enabling consumers to gain access to cheaper imports (Sanchez et al. 6). As such, the trade treaty between Japan and Mexico improves economic welfare through trade creation, whereby consumers have access to relatively cheaper agricultural imports compared to locally produced goods.
Furthermore, the Japan-Mexico FTA is crucial because it facilitates trade diversion, thus enhancing the bilateral economic relations between the two countries. Darma and Hastiadi define trade diversion as the trade shift from lower-cost imports from non-member countries to higher-cost imports from member countries (53). In other words, nations that enter into FTA give preferential treatment to their trading partners by reducing tariffs to make imports from the latter cheaper and those from non-members more expensive. The mechanism of trade diversion is based on the fact that despite products from non-member countries being cheaper, they become more costly since exporters are subjected to trade tariffs (Darma and Hastiadi 53). Similarly, the trade agreement between Japan and Mexico is essential because it creates the possibility of trade diversion for various commodities, especially agricultural products. For instance, Mitsuyo and Shujiro argue that since 2004, a significant increase in imports of fresh, chilled, or frozen pork from Mexico into Japan following the reduction of tariffs under the EPA has been recorded (5). Although Japan imports pork from other nations, such as the United States and Denmark, the country gives preferential treatment to its bilateral trading partner by imposing a price-differential tariff, which makes imports from Mexico cheaper compared to those from the countries above. While scholars argue that a rise in trade diversion may cause detriment to member countries, the trade shift is equally essential because it strengthens economic relations by encouraging nations to reduce or eliminate import tariffs relative to those of their trading partners.
In addition to trade diversion being an essential facilitator of economic relations between Japan and Mexico, it also serves as a critical protectionist measure for both countries. Scholars argue that the bilateral trade deal between the two nations acts as an instrument to counter trade diversion abroad (Katada and Solis 71). With the JMEPA in place, both Mexico and Japan are often guaranteed preferential treatment by their trading partner relative to third party low-cost countries. For instance, the signing of the EPA in 2005 prompted an immediate elimination of tariffs on 91 per cent of products exported from Mexico, including vegetables, fruits, and tequila (Sanchez et al. 20). Hence, regardless of whether Mexico is a high-cost country for such products, it is guaranteed a consistent export destination for its commodities. Similarly, Japan uses the EPA as an instrument to counter trade diversion for fishery products to other low-cost countries. Therefore, the FTA acts as an essential protectionist instrument against trade diversion for Japan and Mexico.
Apart from trade creation and diversion, Japan-Mexico FTA is also crucial because it fosters FDI. Notably, Japanese investors benefit significantly from the existing trade treaty because they can quickly establish investments in Mexican territory and acquire protection against infringement of intellectual property rights from the government. For instance, previous studies reveal that in 2015, Japanese foreign direct investment in Mexico was $1,329 million, making Japan the first Asian investment partner and third worldwide (Vargas-Hernandez and Gutierrez 525). In addition to promoting trade flows, the FTA between Japan and Mexico enables firms to establish subsidiary companies within the member countries, making it easier for investors to access underutilised resources and create employment opportunities for individuals in the host nation. FDI also promotes the transfer of technological knowledge across the countries, which leads to improvement in the quality of life of those societies where the investments are established (Vargas-Hernandez and Gutierrez 525). For instance, the establishment of Japanese automotive firms in Mexico provides an opportunity for the local community to gain knowledge and skills on technological trends, which can, in turn, be used in their domestic industries to boost production, thus improving their living standards. As mentioned earlier, FDI between Mexico and Japan also allows manufacturers to take advantage of tax incentives, which may not be available in the export market. The fact that the free trade agreement promotes FDI makes the treaty a vital pact between the two nations.
The FTA is also essential because it promotes fair competition in international trade. Katada and Solis observe that the establishment of JMEPA was a critical decision aimed at leveling the playing field vis-à-vis the American and European rivals (71). Initially, American and European nations had a competitive advantage over Japan because they enjoyed preferential treatment through the North American Free Trade Agreement (NAFTA). Unlike Japan, the above states could efficiently trade with Mexico due to reduced trade barriers. Today, the signing and enforcement of JMEPA promote fair trade competition since both Japan and its American and European rivals enjoy a similar preferential treatment and access to the Mexican market. For instance, depending on the established import quotas, Japanese, American, and European industries can efficiently export the same quantity of automobiles and electronics to Mexico. In addition, Japan can establish firms in the Mexican territory and operate effectively free of discrimination by the host government. Hence, the FTA is an essential pact for Japan because it fosters a levelled playing field for international trade.
While the Japan-Mexico trade agreement, which facilitates tariff reduction and investment liberalisation, offers varying advantages, it also creates mutual benefits for member states. Thus, to elaborate, scholars state that for Japan, the condition of the trade agreement is to take advantage of Mexico as a platform to export commodities to the United States, Europe, and South America (Vargas-Hernandez and Gutierrez 524). The free trade agreement between Japan and Mexico fosters trade diversion, such that Japan can efficiently export some of its commodities to North America. Similarly, other scholars believe that the JMEPA represents an opportunity for Mexico to “boost its exports to the Japanese market, and attract investment to increase production, employment, and competitiveness” (Vargas-Hernandez and Gutierrez 524). This may explain the progressive growth of FDI in Mexico compared to Japan. Based on the information above, it is evident that both Mexico and Japan pursued the bilateral trade agreement for varying reasons. However, regardless of the discrepancies in the motives, both countries mutually benefit from the treaty in various ways, including enjoyment of trade flows, promotion of fair competition and bilateral cooperation, provision of equal chances for suppliers to bid for government procurement tenders across the territories, and development of economic welfare whereby consumers have access to quality and low-priced imports. The above information proves that Japan-Mexico FTA offers not only individual advantages but also mutual benefits to the member states.
Although studies show that the Japan-Mexico FTA prompts multiple benefits to the member states, it is also evident that it exposes domestic firms to numerous losses. In particular, some of the difficulties faced by local organisations in the member and non-member states arise from trade creation and diversion. As mentioned earlier, trade creation is associated with increased economic welfare, whereby consumers switch to lower-cost producers in the partnering countries. Increased supply of cheaper imports lowers the demand for high-cost local products, leading to a decline in producer surplus. Similarly, removal of trade tariffs by member states promotes trade diversion, which in turn increases or retains tariffs for non-member states. In such scenarios, firms in non-member countries may experience financial losses as the demand for their products in the export market declines. Therefore, the effects of the FTA on firms located in member and non-member states can either be positive or negative, depending on the outcomes of trade diversion and creation.
Ways of Coping with Losses Associated with FTA
Firms that experience losses due to the Japan-Mexico FTA can cope with the problem in different ways, including taking full advantage of some of the provisions in the EPA. For instance, scholars argue that despite Japan granting Mexico annual quotas of products that can be exported without paying tariffs, such as leather, footwear, and honey, domestic exporters often fail to maximise the opportunity (Vargas-Hernandez and Gutierrez 526). This may explain why Mexico experiences a trade deficit against Japan, despite both countries indulging in the elimination of import tariffs to facilitate trade flows. To minimise such shortcomings, Mexican exporters can shift their focus to products that are exempted from import tariffs in Japan. Such a move would imply changing their business plans to incorporate products that are highly demanded and free of tariffs in Japan such as footwear. Vargas-Hernandez and Gutierrez also emphasize that for exporters to take full advantage of the annual quotas, they ought to be provided with accurate information by the responsible agencies in order to carry out exports (526). With accurate data on exports and a strategic change in a business plan, firms can easily take full advantage of the trade tariffs and overcome some of the challenges associated with the FTA.
Furthermore, firms that experience losses due to the prevalence of tariffs on some products can cope with the problem by establishing subsidiary firms in the partner country’s territory. Among the objectives of JMEPA is to facilitate and strengthen FDI; thus, investments can be established within the member states (“Economic Partnership” 10). Besides, the EPA encourages the protection of intellectual rights; hence, investors are guaranteed efficient operations within a foreign land. Therefore, to cope with some of the problems related to the FTA, especially tariff imposition on some commodities, firms can indulge in FDI in order to maintain competitive prices within the trading bloc.
Conclusion
Overall, the free trade agreement between Japan and Mexico is critical to both countries. The treaty promotes economic welfare through trade creation, such that consumers can enjoy quality products from low-cost partner countries. Besides, the treaty fosters trade between Asia and North America, which is a critical base for future trade agreements within the two continents. The JMEPA also enhances trade diversion, which strengthens the economic relations between Japan and Mexico. In addition to the individual advantages, the countries also enjoy mutual benefits associated with the treaty, including exposure to trade flows, FDI, fair competition, among other aspects. Besides being highly beneficial to member states, the FTA policies are also detrimental to the interest of the majority of domestic firms located in member and non-member states. FTA has the potential to lower not only the consumption of high-cost local products but also reduce exports from non-member states. However, firms that experience such challenges can overcome the problem by taking full advantage of the provisions in the EPA such as changing their business plans accordingly and indulging in FDI to boost their competitiveness in the trading bloc. While the above study proposes potential ways of reducing the detrimental effects of the FTA, further research is required to determine some of the measures that governments are putting in place to curb the problems.
Works Cited
“Economic Partnership Agreement Between Japan and Mexico.” www.wipo.int/edocs/lexdocs/treaties/en/jp-mx/trt_jp_mx.pdf. Accessed 8 January 2020.
Darma, Wahyudi, and Hastiadi, Fithra. “Trade Creation and Trade Diversion Effects of the ASEAN-China Free Trade Agreement, ASEAN-Korea Free Trade Agreement, and ASEAN-India Free Trade Agreement Implementation on the Export of Indonesia’s Food and Beverages Industry Products.” International Journal of Economics and Financial Issues, vol. 7, no. 6, 2017, pp. 51-58.
Katada, Saori, and Solis, Mireya. Cross Regional Trade Agreements: Understanding Permeated Regionalism in East Asia. Springer Science & Business Media, New York, 2008.
Mitsuyo, Ando, and Shujiro, Urata. “Impacts of the Japan-Mexico EPA on Bilateral Trade.” RIETI Discussion Paper Series 11-E-020, March 2011, www.rieti.go.jp/jp/publications/dp/11e020.pdf. Accessed 8 January 2020.
Sanchez, Maria, et al. “Economic Impact of Economic Partnership Agreement Mexico-Japan (MJEPA).” SEIJO, 2016, www.seijo.ac.jp/research/economics/publications/reserch-report/jtmo420000000mul-att/keiken_green72_2.pdf. Accessed 8 January 2020.
Vargas-Hernandez, Jose, and Gutierrez, Anel. “Integration of Mexico-Japan in the Economic Association Agreement: Its Effects on the Mexican Trade Balance 2005-2017.” International Journal of Scientific Management and Tourism, vol. 4, no. 1, 2018, pp. 523-547.
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