ECONOMIC RESEARCH CENTERDISCUSSION PAPER

No.157

East Asia FTA&
Trade between Japan and China in Major Industries
byKoichi Ishikawa

May 2006

ECONOMIC RESEARCH CENTERSCHOOL OF ECONOMICSNAGOYA UNIVERSITY

East Asia FTA&
Trade between Japan and China in Major Industries
By
Koichi Ishikawa

Abstract

East Asia FTA will not be completed without Japan-China FTA. Among theproliferation of FTAs in East Asia Japan-China FTA is a missing link. Though businesscircle of Japan is positive about Japan-China FTA, Government of Japan has nevertouched upon FTA with China. One of the reasons for cautiousness may be “China
threat” in Japan and fear for devastating effect to agriculture and some manufacturesin Japan by intrusion of cheap Chinese products.
China is the biggest trade deficit creating country for Japan. Huge trade deficit is
one of the causes for “China threat”. Trade deficit with China, however decreases
considering export through Hong Kong to China. In 2004 Japanese trade with China
was in balance including trade through Hong Kong. China enjoys dominating status in
Japanese imports of labor intensive products such as apparel and toys. China
increases exports of machineries such as electrical apparatus and computer which
Japan enjoyed strong competitiveness with China. If we look at trade statistics indetail, we find that Japan is still very competitive in higher value added items. For
instance, Japan imports finished products and China import key components fromJapan. Trade between Japan and China is complementary one and Japan and Chinaneeds each other.

Visiting Research Fellow (From October 1, 2005 to March 31,2006), Economic ResearchCenter, School of Economics, Nagoya University
Professor of Institute of Asia Studies, Asia University
I would like to express many thanks to Professor Hitoshi Hirakawa for his invitation to
Economic Research Centre as a Visiting Research Fellow. I also appreciate Mr. Shin
Kawai and staffs of the Center for their cooperation and kindness to me.
1Import tariff of Japan is already very low except for agricultural products andapparel and that of China is relatively high in spite of tariff reduction committed at thetheir accession to WTO. Many products are, however traded without imposition oftariff due to concession provided to some business such as outward processing trade.
Therefore effects of FTA would be more limited than generally considered andJapanese side would be more beneficial. Various problems facing Japanese FDI firms
in China in relation to investment environment are expected to be improved in FTA.
Some of the Japanese businesses express concern that they would be seriously
damaged if other countries competing in business with China conclude FTA with China
in advance.

Ⅰ．FTAs in East Asia
In East Asia FTAs proliferate. FTA signed amounted to 6 and FTAs under negotiation
and/or study are more than 60(1). At the turn of century, there was virtually only one
FTA in East Asia. Therefore East Asia was called Empty box of FTA (2). East Asia hascaught up rapidly with the rest of the world in term of regional integration. East Asia ,however lags behind Europe and Americas. The reason is that East Asia lacks FTA
which covers entire region. EU expanded its members from 15 countries to 25 in 2004
and Free Trade Area of Americas (FTAA) has been negotiated for more than four years.
In East Asia, all of FTAs are bilateral and East Asia FTA (EAFTA) is a concept underconsideration.
Currently three “ASEAN plus one” FTAs proceed in parallel in East Asia.
ASEAN-China FTA, which started tax reduction in July in 2005, is most advanced
most among them. ASEAN-Korea FTA, negotiation of which was commenced in 2004
reached basic agreement in December 2005. Japan-ASEAN FTA is behind other two
because Japanese Government placed a priority on bilateral negotiation withindividual member of ASEA rather than total ASEAN. In northeast Asia, China
concluded CEPA with Hong Kong and Macao. China and South Korea started
governmental study in 2004. Japan-Korea FTA has been negotiated from December
2003, but negotiation is halted now. Between Japan and China, there has been no1.

Signed FTAs are AFTA, Japan-Singapore, Japan=Malaysia, China-Hong Kong,

China-Macau, South Korea-Singapore
2. Koichi Ishikawa(2003) “FTA stream in East Asia”, Fukunari Kimura eds.
Accelerating East Asia FTA , JETRO,Tokyo2

concrete movement toward FTA up to now.
East Asia FTA, which was agreed at ASEAN plus three summit in 2004 as a midterm target will not be completed without Japan-China FTA. Japan and China totally
account for more than 80% of GDP of East Asia, so East Asia FTA without Japan and
China FTA is less influential.
China offered a study on Japan-China FTA to Japanese side, but Japanese
Government made no official response (1). The reason may be that there persists“ China threat” and strong opposition to Japan- China FTA may affect adversely FTA
negotiation with other countries. In contrast to cautious stance of Government,
business people are positive about Japan- China FTA. Japan-China FTA is, however
most desired FTA by Japanese business circle according to various surveys andJapan-China FTA is most effective in term of raising GDP according to the simulation
done by Japanese Cabinet Office(2).
Ⅱ． Industry-by-Industry Analysis and Target Sectors
1. Why is industry-by-industry analysis necessary?
Trade between Japan and China is expanding rapidly both ways, and it continues to be
in deficit, although shrinking, for Japan. According to Japanese statistics, Japan’s
exports to the country amounted to $73.8 billion and imports $94.2 billion in 2004,
leaving a deficit of $20.4 billion. With China Japan ran the greatest deficit of any
countries of the world. Seen by major commodities or industries, the composition of thebilateral trade is quite variegated—including goods in which Chinese competitivenessis overwhelming, those of which Japan’s export is large in volume and continuing togrow, those in which ‘intra-industry trade” is taking place in both ways between thetwo countries.
Moreover, as to the mode of trade, it includes “consigned manufacturing” and“re-import” in which materials and components are exported from Japan for processing
in China into products to be shipped back to Japan. Not a few goods are listed as
1. Chinese ambassador to Japan proposed feasibility study in his contribution to Nihon
Keizai Shimbun dated February 22, 2005
2. Questionnaire survey conducted by JETRO shows that FTA with China was mostdesirable. Simulation result was reported in Nihon Keizsai Shimbun dated December
31, 2005

3

exports to Hong Kong in statistics, but actually they are re-exported to China.
While China’s domestic markets are said to be highly competitive and local firms
are said to have strong competitive advantage, many industries are marked by adivision of labor whereby high-performance and high-end products are Japanese-madeand popular or low-end products are Chinese-made, and in many cases, Chinesecompanies depend on imports from Japan for key components.
Under the circumstances, in order to get an accurate picture of bilateral tradeand relationship of competition and division of labor between the two countries, it isnecessary to examine the relationship of division of labor between the two countries’
markets, especially Chinese markets, product by product. It is also warranted to grasp
the mode of trade, Japanese firms’ moves into China, and Japanese trade with China
through Hong Kong. In order to assess the influence of FTA( free trade agreement),
should one come into existence, problems Japanese firms in China are facing in tradeand investment, such trade barriers as tariff rates, must be clarified.
2. Eight major industries that count large
This report takes up eight selected major industries from the above viewpoint andsurveys the actual situation of division of labor between Japan and China and theimpact of JAPAN-China FTA could have. The survey attaches importance to findings ofcanvassing of Japanese and Chinese firms, along with an analysis based on statistics
and documented materials.
The eight industries selected are electric machinery and electronic appliances,transportation equipment, machine tools, construction machinery, steels, chemicals,
textiles and foods. These eight sectors account for 67% of Japan’s imports from China(on the basis of HS2 digits, 2003), and 79% of Japan’s exports to China; they accountfor 84.5% of Japan’s total accumulated amount of manufacturing investments into
China (Table 1). They range from labor-intensive products to technology-intensive andcapital-intensive products, and include products in various forms of transaction, suchas trade via Hong Kong, processing on commission, and reverse imports. These
industries are fields in which intense competition is taking place, Japanese andChinese firms are joining hands in partnership, or Japanese companies are newly
moving into China. Analyzing these eight industries should make it possible to know
the relationship of division of labor between the two countries and the impact a free
trade agreement would have, should it be signed.

4

Table 1. Share of Eight Major Industries in Japan-China Trade (2003)(In %)
Japan’s imports

China’s imports

Electric machinery and electronics (HS85)

17.1

31.4

Machinery (HS84)

15.4

22.6

Transportation machinery (HS87)

1.3

5.4

Steels (HS72, 73)

2.3

7.2

Chemicals (HS28, 29, 38, 39)

4.0

10.7

Textiles (HS52, 54, 55, 60, 61, 62)

20.4

3.5

Food (HS 03,07,12,20,21)

6.8

0.2

Total

67.3

81.0

Note: Classifications above do not agree with classification in the analysis of eachindustry. For example, computers and white home electric appliances included in HS84
Machinery are discussed in the section on electric machinery and electronic
appliances.
Source: Trade statistics of the Ministry of Finance, and China’s customs statistics.

Ⅲ. Japan-China Trade in Various Forms
1. Trade through Hong Kong
Trade through Hong Kong is declining in proportion year by year owing to the buildup
of port facilities in many parts of the Chinese mainland, yet it still retains importance,with China’s imports from Japan through Hong Kong accounting for 23% of China’s
total imports from Japan in 2003. The proportion of Japan’s exports through Hong
Kong varies widely from product to product. In machinery, for example, it is high at
35% for electric machinery, but at a low 7% for transportation machinery (Table 2).
The trade statistics is compiled on the basis of a rule to list exports according todestination, and imports according to the country of origin; in Japanese export
statistics, exports to China through Hong Kong are treaded as those to Hong Kong,
making the amount of exports to China smaller than they actually are for products forwhich the export ratio through Hong Kong is high.

5For example, bilateral trade in 2003 was in Japan’s deficit of $18 billion.
According to Hong Kong trade statistics, re-export to the Chinese mainland of products
from Japan as the country of origin amounted to $16.9 billion. When this is added toJapan’s export to China, Japan’s deficit shrinks to $1.1 billion. On the hand, since
China’s import from Japan is listed as products from Japan as the country of origin,including those through Hong Kong, it is believed to be closer to Japan’s actual export
to China. If China’s import from Japan is regarded as Japan’s export to China, Japan’s
trade with China in 2003 was in Japan’s deficit of $1.4 billion. It is known that thetrade balance in the past five years is pretty close to the balance in which re-export
through Hong Kong is added(1).
For industries and products in which the proportion of trade through Hong Kongis high, accurate assessment of the relationship of division of labor and competitive
power is impossible without taking trade through Hong Kong in consideration. For
products for which imports from China or exports from Japan constitute an
overwhelmingly large proportion, the relationship of division of labor or competitive
power cannot be missed, even if trade through Hong Kong is not counted. But whereintra-industry trade is in an advanced stage in which the two countries sell each otherproducts in the same industry, Japan’s deficit turns into surplus when trade throughHong Kong is added as in the case of electric machinery and electronic appliances (HS85). For the assessment of competitive power, examination of trade through Hong Kongis necessary. For that reasons, this survey sheds light on trade through Hong Kong forindustries where the proportion of such trade is high.

1.

For detail refer to Koichi Ishikawa (2004) “Rethinking Japan-China trade”

International Trade and Investment Quarterly No.58, August 2005, Institute forInternational Trade and Investment
6

Table 2 Proportion of Re-Export to China through Hong Kong
HS

Products

1999

2000

2001

2002

2003

Total

35％

32％

29％

26％

23％

16

Prepared foods

7％

22％

58％

60％

65％

29

Organic

13％

9％

7％

6％

5％

chemicals
39

Plastics

39％

40％

34％

30％

25％

55

Staples of man

14％

10％

9％

7％

7％

- made fiber
72

Steels

32％

24％

19％

18％

16％

84

General

28％

25％

23％

20％

20％

47％

45％

43％

41％

35％

37％

15％

10％

12％

7％

machinery
85

Electric
machinery

87

Transportation
machinery

Note: Ratio of re-export = (Japan as country of origin ＋re-export from Hong Kong ofproducts bound for China ) ÷China’s imports of products from Japan as the country oforigin.
Source: Customs statistics.

2. Japan-China trade as part of East Asian intra-region trade
Next, let’s turn to the position of Japan-China trade within East Asia. The region isreplete with multilateral, closely-knit trading networks. To take the example of electricmachinery, one of the major commodities in intra-regional trade in East Asia, such aclose trading network is in existence, showing the progress of de facto economic
integration in the region (Figure 1). Here, Japan runs surplus with all the countries
and territories, including China, while China runs deficit with all the countries andterritories (Table 3). South Korea and Taiwan are in heavy deficit vis-à-vis Japan andin surplus vis-à-vis China. Such a pattern illustrates the importance of Japan as asupplier of capital goods and that of China as a market; it also shows clearly that

7

Japan’s exports to China consist not only of direct sale to that country but also
shipment of products assembled using components exported to Southeast Asia, that isindirect export, which constitutes a major percentage of the total. China’s importanceas an export market for Japan, it may be said, is far larger than is explicit in bilateral
trade.
Figure 1 Trading Pattern in East Asia
(Electrical machinery, in 2002, in 100 million dollars)

Japan
44

163
104

87
285

China
183

108

38

74
71

117
68

South Korea

165

108

ASEAN

34
25

54

29

25

Taiwan26

Note: Based on import statistics.
Source: Trade statistics of each country.

Table 3 Balance with Japan and China in Electrical Machinery Trade(In 100 million dollars)
Balance with Japan

Balance with China

South Korea

△43

53

Taiwan△36

92

ASEAN５△75

40

Source: Trade statistics of each country.

8III. Relationship of Division of Labor between Japan and China
1. Complementary relationship between Japan and China
When examined industry-by-industry, Japan-China trade is grouped into three
categories: products in which Japan maintains highly strong competitiveness (wherebalance is surplus, or, tautologically speaking, Japan’s trade specialization coefficientin trade with China is near 1); products in which China maintains highly strong
competitiveness (Japan’s balance in trade with China is deficit, or Japan’s trade
specialization coefficient in trade with China is close to minus 1); products in which
both export and import (intra-industry trade) are taking place between Japan and
China (where the trade specialization coefficient is near 0). Automobiles, steel sheets
and construction machinery represent items in which Japan possesses strong
competitiveness, while apparels and footwear and toys (the two items which are notcovered in this survey) are typical products in which China has strong competitive
power. Intra-industry trade is taking place for such products as electrical machineryand plastics.
Japan is strong in components and materials, especially those based on a highlevel of technology, such as steel sheets for automobiles. For textiles as a whole, China
has a preeminent competitive edge, but so far as man-made fibers are concerned,
Japan sells more to China than it buys from China, enjoying particularly strong
competitive power in high-function textiles. China is strong in labor-intensive products,
goods processed from natural materials such as foods and wood products, general
purpose goods and low-priced goods. Among products in which intra-industry trade istaking place, to take the example of plastics, Japan exports resins, and imports
household goods and plastic products for package use. Despite the existence of a broad
area of competition, Japan-China trade as a whole is characterized by relationship ofdivision of labor which is basically complementary—with Japan possessing
competitiveness in products of high value added and high technological level, such as
high-grade materials, high-function components, and with China competitive in
products of lower value added and technological level, such as general purpose
merchandize and low-end products. A similar relationship of division of laborpresumably exists on the Chinese domestic market as well.

92. Real forms of versatile trade
The forms of trade between Japan and China are diverse. Export through Hong Kong,to take the example of audio-visual equipment components, occupied a large proportion,
as much as 83%, in 2003. Much trade is done by exporting raw materials andcomponents from Japan, to be processed or assembled into finished products in China
for shipment in their entirety to third country markets or to Japan. Such a form oftrade is called consignment processing trade in China. In this form of trade, import of
raw materials and components is permitted without import duty on condition that
products from them be exported entirely.
The institutional support for such trade on the part of Japan is what is called“Article ８ of Temporary Tariff Measures Law “ which is widely used in textile trade.
Also, much of trade is accounted for by supply of components and materials for use by
Japanese manufacturers operating in China. Such trade looks certain to grow in the
future along with the start of full-fledged production by Japanese automakers in
China.
Trade between Japan and China is being carried out in such versatile forms, with,moreover, a lot of transactions being done between Japanese firms, some within thesame firms. The amount of trade by Japanese firms cannot be grasped statistically, but
it is assumed to account for a fairly large percentage of Japan-China trade, in view ofthe fact that 51% of China’s exports is being accounted for by foreign companies (in2003).
IV. Salient Points of Industry-by-Industry Analysis
What follows is a survey of the current state of the division of labor between Japan and
China, as well as possible impacts of a bilateral free trade agreement.
1. Electric and electronic appliances
In trade statistics, electrical and electronic appliances denote: “electric appliance andtheir components, recording machines, sound playback equipment, appliances forrecording and playback of television images and sound and their components andaccessories”(HS85),“computersandrelatedcomponents”,“officemachinerycomponents,” “air conditioners,” “washing machines,” and “liquid crystal device”

10

(HS9013), which are included in “nuclear reactors, boilers, machinery andcomponents ” (HS84).
Electric machinery and electronics products constitute the largest category of
items in Japan-China trade, accounting for 30% of Japan’s exports to China and viceversa. They, moreover, are growing year after year. The trade specialization coefficientof electric machinery and electronics products is minus 0.10 on the Japanese statistics,
but when recalculated by replacing imports into China with exports from Japan, thecoefficient stands at 0.11, indicating Japan’s maintenance of competitiveness. The
reason for this is the high level of trade through Hong Kong; the re-export ratio from
Hong Kong of Japan’s total exports to China stands at 35% for electric machinery andelectronics products (HS84) and 20% for machinery (HS84). Although the re-export
ratio is on a decline, it is still important in electric machinery and electronics of which
production is concentrated in Southern China with close connection with Hong Kong.
For some products like components of office machinery, the ratio exceeds 60%.
By product, five items—integrated circuits, semiconductor devices, liquid crystal
components,

officemachinerycomponents

andaudio-visualequipment

components—account for 59% of Japan’s total exports in the category, while in imports,
computers and related products account for 29%. According to the trade specialization
coefficient,Japan’s

semiconductor

competitivenessdevices,andliquidisquite

crystalstrongdevices,

inintegrated

circuits,

while

China

maintainscompetitiveness in washing machines, air conditioners, computers and related
products (Table 4). Intra-industry trade is being carried out for office machinerycomponents and audio-visual equipment components. For those items traded in
intra-industry trade, components for industrial and non-general purpose components
are concentrated on the Japanese side, while household appliance and assemblycomponents are concentrated on the Chinese side, in a relationship of division of labor.
In trade of electric machinery and electronic products, there exists a relationship ofdivision of labor between the two countries, with Japan exporting capital-intensive andtechnology-intensive products, and China exporting labor-intensive products.
Japan’s import duties on electric and electronic appliances are zero, including
the HS84 categories. On the other hand, China lowered its import duties on IT-related
products from 2003 to zero in January 2005 under the Information Technology
Agreement, but duties on other items remain high—15-30% on televisions, 10-23.3%
on air conditioners, 9-30% on refrigerators, and 5-30% on washing machines as of 2004.
Digital copiers used to be classified as computer peripherals, with zero import duties,

11but from January 2004, they were raised to 14%, the same as those on optical-type
copiers.
Since tariff is zero both in Japan and China on most electronic goods and IT
products, direct impact of the lifting of the import duties is none or quite limited. Cost
arising from importing materials used for electric machinery and electronic appliances,such as chemical products and metals, will be lower to users from the elimination or
lowering of import duties by China, contributing to cost reduction. China’s tariff
reduction or abolition on household electric appliances and copying machines on which
the country retains high import duties will contribute to reduction of export costs forJapan, but the impact will be limited because Japanese companies are alreadymanufacturing in China. But if demand for high quality and high price products
produced in Japan grows owing to an elevation of income level in China, exports fromJapan can be expected to increase, but since these products are being assembled in
China, the effect will also be limited. Rather, a more prevalent view in industry holds
that the effect of exchange rate fluctuations will be larger than that of FTA.
If an FTA is signed by China with a third country (South Korea in particular)ahead of one with Japan, there is the possibility that Japanese companies would be put
on a disadvantage in the Japanese market. As Japanese companies face various
problems in business environment, such as copied products, opaqueness and changes
in investment legislation, a comprehensive FTA would resolve these problems andimprove business environment.
Table 4 Trends of Specialization Coefficient in Japanese Trade with China(14 major items in electric machinery and electronics equipment, based on statistics ofimporting country)
HS

Items

1999

2000

2001

2002

2003

Total of electric machinery and

0.17

0.13

0.07

0.07

0.11

electronics
8415

Air conditioner

0.26

0.08

－0.34

－0.58

－0.47

8418

Refrigerator

0.12

－0.32

－0.46

－0.21

－0.15

8450

Washing machine

－0.59

－0.69

－0.90

－0.92

－0.96

8471

Computer & related components

－0.13

－0.47

－0.62

－0.76

－0.77

8473

Office machinery components

0.03

－0.18

－0.08

－0.03

－0.00

8504

Transformer

－0.42

－0.49

－0.45

－0.45

－0.37

12

8525

Radio transmission equipment

0.81

0.80

0.45

0.46

0.46

8528

Television

－0.51

－0.82

－0.92

－0.95

－0.91

8529

Audio-visual equipment component

0.39

0.19

－0.17

－0.04

0.17

8532

Condenser

0.80

0.72

0.69

0.77

0.78

8541

Semiconductor device

0.76

0.74

0.74

0.80

0.78

8542

Integrated circuit

0.84

0.81

0.84

0.86

0.88

8544

Insulated cable

－0.48

－0.47

－0.51

－0.50

－0.53

9013

Liquid crystal device

－0.02

0.43

0.59

0.62

0.64

Note: Trade specialization coefficient is calculated: (Japan’s export to China -Japan’s
import from China) ÷（Japan’s export China + Japan’s import from China）.
The closer to 1 it is, the stronger Japan’s competitiveness; the close to - 1, the weaker,
the Japanese competitiveness; if it is around zero, intra-industry trade is taking place.
Sources: Japanese Finance Ministry statistics, China’s customs statistics.

2. Transportation machinery
As a target of analysis, the automobile, the most important item among transportation
machinery and facing many business barriers, has been selected.
Along with the electric machinery and electronics equipment, the automobile isone of Japan’s major export commodities. The weight transportation machinery carries
in Japan-China trade is far smaller than that of electric machinery and electronics. It
accounts for 5.8% of China’s import from Japan, and a mere 1.3% in Japan’s importfrom China. The low percentage is ascribable to China’s protection of its auto industry
by means of high import duties, a still relatively short history of Japanese auto
industry’s investment in China, and China’s auto industry still remaining in apre-export phase. Japanese automakers’ advances into China, however, make it certainthat auto parts export to China will grow in the future.
Japan’s export of transportation machinery (HS87) to China amounted to $4
billion (in 2003), and import from China came to $1.02 billion, leaving a heavy surplus
in Japan’s favor. Exports comprise of automobiles and parts, while imports comprise of
bicycles and accessories. So far as automobiles are concerned, bilateral trade isone-sided from Japan to China, leaving a surplus of $3 billion for Japan. As formotorcycles, China runs a surplus, with Japan’s imports increasing, if still lower than13

bicycles. In other words, Japan’s competitiveness is strong with regard to automobiles,
while China is strong in bicycles and motorcycles, indicating the relationship ofdivision labor between the two countries in the sector of transportation machinery.
(Table 5) The re-export ratio through Hong Kong is relatively low at 7%. Japanese
investment in the transportation machinery sector in China surged 4.4 times in 2003
over the previous year, testifying the expanding China business by the automobile andauto parts industries.
China today is the world’s fourth largest producer and third largest market of
automobiles. Since the country’s auto ownership is still a low 18.3 units per populationof 1,000, or only one thirtieth of the Japan level, both production and sales ofautomobiles are bound to grow in the future, eventually turning the country into amajor producer and market of automobiles, second only to the United States. Despite
such a scale of the industry, China’s auto industry is crowded with as many as 115
manufacturers, preventing it from achieving profits from a large size of the market.
Another disadvantage is the underdevelopment of the parts industry, keeping
production cost high and technology level low, resulting in weak international
competitiveness. A majority of car makers are in partnership with foreign concerns,
drawing on foreign makers’ models. The relationships between Chinese and foreign
makers are complex.
China’s import duties on cars which averaged 50-60% at the time of its accession
to the WTO are set to be lowered in stages to 25% in July, 2006. Duties on buses andtrucks were cut to 25% from January, 2005. The import quota system is scheduled to belifted entirely in January, 2005, following a 15% expansion each year from the base of
2000. It is also set that other restrictions, such as limit on models, limit on the amountof investment to be approved, or restrictions regarding domestic contents, are either
abolished or eased. Despite the series of these market opening and liberalization
measures accompanying the WTO membership, problems still remain: the tariff rates
are still high, and import procedures to be followed after the abolition of the importquota system remain unannounced, for example. Other problems drawing complaint
with regard to investment and auto-related services include: restrictions on the equity
ratio, restrictions on the number of joint ventures, restrictions on production models,
restrictions on the location of after-sale service stations, protection of intellectual
property rights, and other matters in business environment.
Table 5 Trade Specialization Coefficient with China in Transportation Machinery

14

HS

Items

1999

2000

2001

2002

2003

Transportation machinery

0.36

0.40

0.40

0.54

0.60

8701

Tractor

1.00

1.00

1.00

0.99

0.99

8702

Public

1.00

1.00

1.00

1.00

1.00

87

transport

passenger

vehicle(capacity for 10 or more persons)8703

Passenger cars

1.00

1.00

1.00

1.00

1.00

8704

Trucks

1.00

0.98

1.00

1.00

1.00

8705

Special purpose vehicles

1.00

1.00

1.00

1.00

1.00

8706

Chassis with a motor

1.00

1.00

1.00

1.00

1.00

8707

Body

1.00

－0.08

0.90

0.51

－0.28

8708

Parts and accessories(limited to

0.52

0.59

0.64

0.58

0.70

0.95

0.75

0.89

0.38

0.18

those for vehicles 8701-8705)
8709

Self-driven working trucks

8711

Motorcycles

－0.05

0.06

－0.64

－0.98

－0.97

8712

Bicycles

－0.99

－0.99

－1.00

－1.00

－1.00

8713

Vehicles for disabled persons or

－1.00

－0.99

－1.00

－1.00

－0.99

－0.21

－0.17

－0.24

－0.13

－0.13

－0.98

－0.97

－0.98

－0.96

－0.95

－0.95

－0.94

－0.82

－0.92

－0.93

hospitals
8714

Parts and accessories (limited tothose for vehicles 8711-8713)

8715

Buggies and parts

8716

Trailers,

semi-trailers,

othervehicles and parts

The automobile trade is dominated by Japan’s almost one-sided exports to China,both in assembled vehicles and parts. Since automakers are sticking to a principle ofproducing in the market where the products are sold, they are moving to step up local
production in China, prompting parts manufacturers to accompany them for local
production. Even if an FTA is concluded, it is unlikely that Japanese automakers willswitch local production to shipment from Japan. Yet there remains the possibility thatfor items which cannot count on mass production, exports from Japan will increase.
Exports from Japan to China will feel no impact from an FTA because of the zero tariff
rate. Imports from China to Japan should depend on strategies of automakers and15parts manufacturers. A comprehensive FTA could work to improve China’s businessenvironment. As for China’s FTA with ASEAN, it is considered to have only a limited
impact because each maker has production bases both in China and ASEAN. For
products without benefits of mass production, a division of labor may develop.
3. Machine tools
Machine tools—machines to make machines—include a wide range of devices fromlathes, drilling machines, milling machines, grinding machines, gear machines tomachining centers. In this analysis are covered metal working (cutting, HS8457-8461),
metal molding (forging, press; HS8562-8563), molding box for metal forging, and die(HS8580).
Machinery（HS84）, including machine tools, is the second most important itemof trade after electric machinery and electronics equipment. Metal processing
machinery (included in HS84) amounted to $1,535.7 million, or 18% of Japan’s totalmachinery exports to China. But Japan’s import was only $79 million, or 0.7%. As asource of China’s imports of machine tools, Japan is competing with Taiwan for the top
position. Japan is the top supplier to China of machining centers (HS8457), drillingmachines/boring machines/milling machines (HS8460), and planningmachines/shaping machines (HS8461).
Japan-China trade of machine tools (those included in HS84) was in Japan’s
surplus of $1,456 million, with Japan holding overwhelming competitiveness in mostproducts with a specialization coefficient larger than 0.9 (Table 6). In the backgroundof Japanese strength is rising demand for Japanese numerically controlled machine
tools and Chinese products being absorbed by domestic demand. China’s exports are
relatively plenty, with the trade specialization coefficient running at relatively small at
0.68, in metal mold/plastic molding machines (HS8480). In this area, Japan’s exports
peaked out in 2002 and have since been on a decline, while exports from China are on arise, owing to the transfer of manufacturing bases to China for low-end products. The
production of these products in China takes the form of module-type production, in
which key components put into a unit are exported to China and assembled there for
re-import into Japan.
The mainstay of Chinese demand for machine tools is metal processing
machines (cutting machines). Domestic supply cannot keep up with domestic demand,leaving the country heavily dependent on imports from Taiwan, Japan and Germany.

16

Since China is lagging behind in numerical control of machine tools, only about 10% of
those built domestically are the NC-type. The forte of Chinese-made machine tools istheir competitive prices and quick repairing service, an advantage Chinese companies
established when foreign companies were still handicapped under the policy to restrict
their marketing bases. In contrast, it is still difficult for Chinese manufactures to
produce high-precision products, and their dependence on imports is high for key
components. Export of low- and mid-priced products to Southeast Asia has been risingin recent years, but they still depend on technologies from advanced industrial
countries for the controlling apparatus. The Chinese government is attempting toenhance the quality and technology for machine tools, through mergers andacquisitions as one way to obtain technology. The acquisition of the Japanese machine
tool maker Ikegai by Shanghai Electric Group is one example.
Japanese machine tool makers are starting to consider China as a place to basetheir production, marketing and development activity, and, therefore, move to bolster
functions in such fields in that country.
Table 6 Specialization Coefficient for Machine Tools in Trade with China
HS
8456

Items
Machines

that

processbyremoving

1999

2000

2001

2002

2003

0.30

0.36

0.69

0.82

0.85

1.00

1.00

0.94

1.00

1.00

materials with the use of laser and otherphotonbeams,

ultrasoundwave,

electrodischarge, electrochemical method,electronic beam, ion beam or plasma arc.
8457

Machining centers for metal processing,unit construction machine (limited tosingle station types), and multi-stationtransfer machine

8458

Lathes (limited to those for metal cutting)

0.95

0.99

0.99

0.99

1.00

8459

Boring

0.93

0.97

0.96

0.98

0.99

0.94

0.96

0.96

0.96

0.96

machinesformachines,

millingscrew-cutting

machines

metal,

drilling

machines,andtapping

machine, threading and tapping machines
8460

Grinding machines, honing machines,
lapping machines, grinding machines and17other finishing processing machines
8461

Planing machines, shaping machines,
standing

cutting

machinesmachines

broaching

0.84

0.93

0.91

0.88

0.89

0.99

0.99

0.99

0.97

0.98

,sotting

machines,gear

cutters, gear grinding machines, gear
finishing machines、cutting off machines,
lathes 、 cutting machines and otherprocessing machines
8462

Forging

machines,

hammers,

die-stamping machines, folding machines,
straightening machines, flat machines,
shearing machines, punching machines,
knotting machines
8463

Other machine tools

0.97

0.96

0.93

0.98

0.97

8480

Molding boxes for metal forging, molding

0.89

0.88

0.85

0.81

0.68

bases, patterns and metal for forging, diesformetallic

carbide,glass,

mineralmaterials, rubber or plastic molding(exclusive those for metallic ingot)

In Japan-China trade of machine tools, Japan’s competitive power isoverwhelming. In metal molds, imports from China are increasing sharply, because
Japanese manufacturers have shifted their bases of production of low-end products to
China where module production is conducted for re-import into Japan. The Chinese
market is shared by domestic products that cater to demand for low-end products andforeign products (or products made by foreign companies in China) for high-end
demand. Japanese products, however, are facing competition with Taiwanese andGerman products. Japanese machine tool makers are moving to collaborate with theirChinese counterparts to establish marketing channels to Chinese users.
The tariff rate on machine tools is zero in Japan, and 9-12% in China. Under thecircumstances, an FTA will benefit exports from Japan. Chinese import duties are set
lower on NC machine tools than on non-NC machine tools, reflecting China’s
willingness to introduce NC technology in which it is lagging. In the future, pricing will
become an important factor even for mid- and high-price models, with the prospects
18

that advantages could be gained as to prices if Japan move ahead with an FTA
preempting other countries.
4. Construction machinery
Construction machinery is diverse in the product range—from bulldozers, oil hydraulicshovels, road rollers, pile drivers, tunnel diggers, and cranes to dump trucks. Here,cranes (HS8426), bulldozers, shovels, road rollers (HS8429), excavators, pile drivers(HS8430), all construction machinery included in HS84, are selected for analysis.
Bulldozers, shovels and road rollers (HS8429) account for 70% of the world’s
total trade of construction machinery, Japan is the world’s largest exporter (accountingfor 20.6% in 2003), while China ranks 11th. In imports, the U.S. is the largest importer,
followed by China (accounting for 8. 5%). Japan is ranked 33rd. In machinery trade
between Japan and China, construction machinery accounts for 7.5% of China’s total
imports, and a negligible 0.03% in Japan’s total imports. In Japan’s construction
machinery exports, China as the third largest market accounted for 12.0%, while in
China’s imports of construction machinery, Japan accounted for 58.2%, as the largest
source of imports.
Japan’s exports (China’s imports in trade statistics) amounted to $1,128 million(in 2003), with imports a mere $3.32 million, manifesting Japan’s overwhelming
competitiveness (Table 7). Japan’s exports shot up 5.3 times in 2003 over the preceding
year. The largest export item was hydraulic shovels, which accounted for 85% of theentire construction machinery exports. In Japanese trade statistics, exports to Hong
Kong amounted to $620 million (in 2003), showing a gap of $470 million with China’s
imports from Japan. When Japan’s exports to China and to Hong Kong are put
together, the value and as well volume roughly equal to China’s imports from Japan,
indicating that exports to Hong Kong are re-exported to China. The machinery
re-exported from Hong Kong are considered, in view of the unit import price and on thebasis of canvassing of companies, to be used machines. Exports to China of
construction machinery surged in 2003, but slowed down in 2004, especially sharply
after May of that year thanks to the macro-economic control the authorities put into
practice.
In China’s construction machinery market, there is a clear division: wheel
loaders that numbered 68,000 units in 2003 were dominated by Chinese domestic
companies, centering on state-owned firms, while hydraulic shovels that totaled 30,000

19units were sold mostly by foreign companies from Japan and South Korea. Ninety
percent of hydraulic shovels are made by foreign companies, such as Komatsu, Hitachi
Construction Machinery, and Kobelco Construction Machinery from Japan, Daewoo
Heavy Industries and Hyundai Heavy Industries from South Korea, Caterpillar, Volvo,
Liebherr and Atlas from Europe and the U.S. Korean companies have a combined
market share of 40% on the strength of price competitiveness, 20% or so less expensive
than Japanese companies’ products which account for 30-35%. Although the market
has been shrinking since May of 2004, the decline is considered temporarily. China’s
construction machinery market is of a size one third of Japan’s, and it is expected tocontinue to grow. Three major Japanese firms moved into China in 1994, and havebeen building up production and marketing footholds and opening new ones after 2000.
China’s tariff on hydraulic shovels, Japan’s mainstay export items, was lowered
to 8% in January of 2004 from 14% at the time of its WTO entry. During the same
period, tariffs on other products were similarly cut to 5-8% from 10% or so. The importquota system and the import bidding system were abolished either in January of 2002
or January of 2004. As for used construction machinery, a quality inspection system
was put into effect from 2003, resulting in import restriction as of the autumn of 2004.
Japan’s import duties on construction machinery are zero, whereas China’s
stand at 5-8%, leaving the possibility of expansion of exports and addition of new items
from Japan (trade creation effect). For major construction machinery manufacturers ofJapan, local production in China and export from Japan are at 5 to 1 or 10 to 1 ratios.
This means that improvement in business environment in China, with regard to
non-tariff barriers and investment climate, by means of a comprehensive FTA, could
benefit Japanese construction machinery makers in a significant way.
Japanese construction machinery makers are turning their eyes to FTAs
between China and the ASEAN. Unlike the case of automobiles, their bases of
production in ASEAN countries have only a short history, and those in China are said
to be better established. Therefore, if China and the ASEAN are linked by FTAs, theycan expect to export from China to the ASEAN. Such a prospect has led some makers
to strengthen production bases in China.
Table 7 Trade Specialization Coefficient of Construction Machinery with China
HS

Items

8426

Construction

1999
1.00

2000
0.97

20

2001
0.94

2002
0.98

2003
0.99

8429

machinery8430

5. Steel products
Steel (HS72) and steel products (HS73) are analyzed. Steel accounts for 6% of China’s
total imports, and for a same percentage of China’s imports from Japan. On the other
hand, steel accounts for 1 % of both Japan’s total imports and those from China. The
percentage of steel products in Japan’s and China’s total imports, and that in the twocountries’ imports from each other, is 1%. For Japan, China is the second largest
market of steel and steel products; as a source of Japan’s imports, China is the second
largest for steel and the largest for steel products. China’s share in both exports andimports of steel and steel products is on the rise. Steel exports from Japan are
particularly important for the both countries.
In bilateral steel trade, Japan is in heavy surplus, but it is fairly balanced insteel products. Japan’s competitiveness is strong in steel, while intra-industry trade isbeing carried out for steel products (Table 8). Top five items in Japan’s exports ofsteel—galvanized steel sheet, cold-rolled steel sheet, hot-rolled steel sheet andothers—account for 85% of the total. In imports from China, on the other hand,ferroalloy and pig iron account for 86%. Japan’s exports mostly consist of steel sheets
which China cannot mass-produce, while most of imports are products with a low levelof processing not too different from being raw materials. Among steel products, exports
from Japan consist of seamless pipes, screws, and special products, while imports
contain household sundries and structures which are classified as “other steel
products.”
The re-export ratio through Hong Kong has declined to 16% for steel and 5% forsteel products, attesting to the diminishing importance of the re-export.
In China, steel makers of varying sizes are scattered in provinces across thenation. Shanghai Baosteel Group Corp. and Anshan Iron & Steel Group Corp. are theonly two steel companies with an annual output over 10 million tons. The twocompanies have a share of only 14% of the market between them, in contrast with theJapanese market where the top four makers account for 75%. High value- added
production has only recently started, with the streamlining of the production system
and improvement of quality of steel products yet to be advanced. Japanese investment
21

in the steel industry in China that started with tinplate and galvanization is
expanding recently in joint ventures by major companies to produce high-quality steel
sheets to meet demand from automakers that have started assemblage in China.
Japanese-affiliated steel companies focus their business on the down-stream stage,
such as cold-rolled sheets and tinplate. Despite their deployment of world-standard
facilities, major Chinese steel makers still lag largely behind their Japanesecompetitors in their overall capacity that involves operating technology and response
to environmental regulations.
While Japan levies no import duties on steel and steel products, with minor
exceptions, China is in the process of reducing its tariffs averaging 8.82% on 114 itemsof steel and steel products under 8-digit classification at the time of the WTO accession
by 3.1 points through 2005. The tariff on cold-rolled coils with less than 0.3 millimeter
thickness for tin plate was raised from 4% to 6% in 2002, and then cut to 5% in 2003,
which still is at the same level with rates on high-valued added products. The
Japanese steel industry is seeking a further reduction.
Other trade barriers cited include the steel import quota, the temporary
regulations concerning imported products management, safeguard measures, andanti-dumping rules.
In contrast to the zero tariff rate on steel products in Japan, China levies importduties on products including those under two-digit classification. So an FTA will work
to be advantageous for Japan. The Japanese steel industry, however, is giving a highmark to China’s tariff reduction keeping promise under the WTO accession conditions.
Also, thanks to brisk export, Japanese steel makers are not deeply worried about thecurrent tariff rate as a barrier.
The Japanese steel industry supports an early conclusion of economic
partnership agreements with Asian countries, because China, as a country which ismost important as Japan’s steel market, with a relatively high tariff and huge
productive power, has signed an FTA with the ASEAN. At the same time, steel
companies are concerned that the steel industry, which is a key industry for eachcountry, might be treated as a sensitive sector in negotiations for FTAs with East Asian
countries.
Table 8 Trade Specialization Coefficient of Steel-related Items
HS

Items

1999

2000

22

2001

2002

2003

72

Steel

0.73

0.67

0.78

0.80

0.75

73

Steel products

0.01

－0.14

－0.10

0.05

－0.03

6. Chemicals and chemical products
Chemicals and chemical products are classified into HS28-HS39; in this survey,
plastics (HS39) and organic chemicals (HS29) are taken up.
Plastics and organic chemicals combined account for 9.5% of Japan’s exports to
China and 4.1% of imports from China (in 2003). China is Japan’s largest, andexpanding, export market of plastics and organic chemicals. In imports, China is thelargest source of plastics for Japan and its share is expanding; in organic chemicals
imports, the country is the fourth largest source, but its share remains unchanged. The
combined share of plastics and organic chemicals in China’s total exports is not high, at
3.9%, but their share of total imports accounts for 9%. For China, Japan is the thirdlargest export market and second largest source of import of plastics; Japan is thethird largest market for organic chemicals, and second largest source of imports.
Trade of chemicals between Japan and China is in heavy surplus for Japan bothin plastics and organic chemicals. Except import of organic chemicals, Japan’s export
and import of the two categories of products are expanding sharply. Exports fromJapan center on plastics for a wide variety of purposes—[those for IT equipment andautomobiles, while imports from China are mostly plastic products for packaging andhousehold use. There exists a relationship of division of labor, with Japan exporting
high valued added products, and China exporting low-value added products (Table 9).
The ratio of re-export through Hong Kong has been declining, to 5% or so, fororganic chemicals, but it still is high for plastics, at 25% (in 2003). The actual value ofplastic exports to China is larger than the export value on the Japanese trade
statistics.
In contrast with European and U.S. firms, which are engaged in upstream
production, like styrene, Japanese companies are mainly in downstream production,such as resins. Products that are increasing recently are high-value added products,
called functional plastics, for supply to Japanese electric machinery and electronic
appliance makers and automobile makers. Since specifics of functional resins are
decided through consultations of chemical companies and user companies, Europeanand American firms tend to use products of European and American chemical
23

companies, while Japanese firms tend to turn to Japanese chemical makers. While
Chinese chemical companies have an advantage in costs and delivery time, Japanesecompanies have competitive edge in quality and services and there is little feeling of
threat from Chinese companies.
Japanese tariff rates on chemical goods have been lowered in stages inaccordance to CHTA—Chemicals Harmonization Tariff Agreement—since 1995.
According to the APEC, the average tariff rate for chemicals and photo materials was
2.5% in 2003. Since general preference rates are applied, most products are imported
duty free, with the effective tariff rates running at a negligible 0.03% on plastics and
0.18% on organic chemicals.
Meanwhile, China pledged at the time of its accession to the WTO to gradually
lower import duties on chemical goods to the CHTA level by 2008. The reduction isphased—to 11.6% in 2004, and to 6.5% in 2008, from 15.4% at the time of the WTO
entry. The tariff rates on major resin products are scheduled to go down to the level ofindustrialized countries. However, specific duties, which translate into a high ad
valorem rate, are levied on photo sensitizers. China’s effective tariff rate on chemical
imports from Japan was 9.02% on plastics and 4.63% on organic chemicals in 2004.
Table 9 Trade Specialization Coefficient of Chemical Products with China
1999

2000

2001

2002

2003

29 Organic chemicals

0.58

0.63

0.60

0.65

0.67

39 Plastics

0.29

0.28

0.22

0.25

0.26

0.99

0.99

0.99

0.99

0.99

0.86

0.88

0.86

0.90

0.94

3923 Plastic products for transportation and

－

－

－

－

－

package and plastic stoppers, lids and

0.50

0.51

0.57

0.62

0.60

3924 Plastic tableware, kitchen utensils and

－

－

－

－

－

other household goods and cosmetics

0.87

0.91

0.96

0.99

0.99

HS

Items

3904 Polyvinyl chloride and other halide olefin
polymers (limited to primary goods)
3907 Polyester and other polyester, epoxi resin
andpolycarbonates,

alkyd

resin,

polyester and other polyesters (limited toprimary goods)

caps and similar products24

Anti-dumping measures have been invoked one after another against chemicals
imports in China. Such a move is considered to reflect a policy to protect domesticmakers which are engaged in production with antiquated facilities and to facilitate
investment in China by foreign makers. Government-private sector consultations arebeing held between Japan and China to address problems of the two countries’
chemical industries, including anti-dumping issues.
In contrast with Japanese effective tariff rates which are nearly 0%, China is toretain relatively high rates, including 6.5% on major resins in 2008, meaning an
advantage on the Japanese side in case an FTA is concluded. The advantage will be
maximum if production takes place in Japan for export to China. For Japanesecompanies engaged in production in China, cost of procurement of materials fromJapan will decline. Lower costs of material procurement from Japan could work toincrease imports of raw materials from Japan and process them in China for re-export
to Japan in labor-intensive industries.
7. Textiles
Textile products range widely from silk and silk clothes in category HS50 to materials
for spinning and weaving falling into category HS63. In this survey, man-made fibers(HS54, 55) and clothing and accessories (HS61, 62, 63) are main targets of analysis.
Textiles account for 5.6% of Japan’s exports to China and 23.7% of imports from
China, and 18% of China’s exports to Japan and 4.6% of imports from Japan. They areimportant items in China’s exports and Japan’s imports. For Japanese textile trade,
China ranks top both in exports and imports, accounting for 41% of Japanese textile
exports and as much as 71% of Japanese textile imports. Japan is China’s largest
export market of textiles, and second largest source of imports, closely behind Taiwan.
The two countries are important trading partners of each other in textiles.
Japan’s textile exports to China amounted to $$3,195 million in 2003 andimports from China reached $18 billion, leaving Japan in heavy deficit. Japan’s exports
to China mainly consist of textile materials such as filament of man-made fibers,
cotton, knitwear and crocheted knit, while imports are dominated by garments andtheir accessories. The percentage of clothing and accessories (HS61, HS62) in China’s
exports to Japan is 20.4%. In trade with China, Japanese products are strongly
competitive in materials, while China’s maintain competitiveness in garments. A

25

relationship of division of labor exists between the two countries (Table 10). However,
the amount of Japan’s exports to China is dwarfed by China’s exports to Japan, thelatter being several times as large as the former. The ratio of textile trade throughHong Kong is high in filaments of manmade textiles, but no big difference is noted in
the trade specialization coefficient due to a small value of imports. In textiles, trade
making use of the system stipulated for under Article 8 of the Temporary Tariff
Measures Law is important. Under the system, raw materials are exported forprocessing abroad and re-imported into Japan within a year, which are exempted fromtariff equivalent to that on raw materials. It is widely used for re-import from China.
China produces 25% of the world’s total output of chemical fibers, and 30% of theworld population are said to be wearing Chinese-made apparels. The textile industry
in China is called a “10% industry,” meaning that it accounts for about 10% of thecountry’s entire industrial production, number of enterprises and employment.
Exports that now account for 20% of the total production of textiles are expected toincrease further in the future thanks to the abolition of the MFA quotas in January,
2005. China’s apparel market is three-tiered—the top tier (high-end market) with
Italian products, the second tier (middle market) with Japanese, Hong Kong andTaiwanese products, and the third tier (low-end market) with Chinese products.
Japanese textile manufacturers started their moves to China in the latter part of the
1970s and reached a peak in 1995, declining thereafter. They moved up somewhat
after 2002.
In Japan, as a result of the revision of the Tariff Temporary Measures Law in2001, many items of garments became targets of the preferential tariffs aimed atpoorer developing countries. Since China does not belong to such a group of countries,
preferential tariffs are not applied to a bulk of its garments. As for textiles such asfilaments, specific preferential tariff rates (reduced from the WTO rates) are set foreach item. For imports making use of the Article 8 system, the tariff rate on the portion
equivalent to raw materials is set to be zero. China’s tariff rates range from3% to 19%,
which is fairly high. According to promises made at the time of the WTO entry, tariff
rates on textiles are set to be reduced to 5% for raw materials, to 10% for fabrics, and to
12-15% for apparels.
Japan applies WTO agreement rates of about 10% to garments. China levies
5-19% tariff rates, considerably high even after the reduction in the wake of the WTO
entry. For this reason, the both countries will benefit from an FTA, but the benefit will
be larger on exports from a country of lower tariff rates. For example, tariffs of 9.6% or26

13.5% are levied on men’s overcoat and car coat (furred) in Japan, and 19.4% in China.
For Japanese textile industry which is promoting exports, the FTA will be a tail wind.
Many industry people said that an FTA was unlikely to work to increase exports from
China to Japan, and rather make Japan’s exports to China easier.
Table 10 Trade Specialization Coefficient of Major Textile Products with China
HS

Items

1999

2000

2001

2002

2003

54 Filament fibers of manmade fiber

0.95

0.96

0.94

0.86

0.84

55 Staple fibers of manmade

0.69

0.73

0.75

0.77

0.73

52 Raw cotton

0.19

0.31

0.36

0.39

0.44

60 Knitted goods and crocheted goods

0.91

0.91

0.90

0.90

0.92

0.68

0.69

0.66

0.66

0.69

50 Raw silk

－0.74

－0.43

－0.38

－0.36

－0.33

62 Apparels and their accessories (excluding

－0.99

－0.99

－0.99

－0.99

－0.99

61 Apparels and their accessories

－0.99

－0.99

－0.99

－0.99

－0.99

63 Textiles for spinning and weaving and other

－0.99

－0.98

－0.98

－0.97

－0.98

－0.95

－0.98

－0.98

－0.96

－0.94

59 Impregnated,coated,coveredorlaminated textile fabrics; textile articles of akind suitable for industrial use

knitted and crocheted goods)

products; sets, used apparel ,used spun andweaved goods and scraps
57 Carpets and floor spreads of spinning andweaving textiles

8. Foods
Foods in narrow terms are those in Category V in the HS classification (foods andbeverages). The objects of the statistical analysis here range from Category I to IV(HS01 to 24) in the HS— Category I that includes meat and fish meat, Category II that
includes vegetables and flours and Category III that includes oils and fats—, but theanalysis focuses on foods in Category IV.
Foods account for 9.7% of China’s exports to Japan, which is China’s largest
export market of foods, accounting for 29% of China’s total food exports (in 2003).

27

Meanwhile, foods in China’s imports from Japan account for only 0.3%. Food exports
from Japan in 2003 amounted to $240 million, and Japan’s food imports from China
amounted to $5,970 million, leaving a lopsided balance with a deficit of $5,730 million
for Japan. In terms of the trade specialization coefficients, China’s competitive poweris overwhelming for most products, except for flours, oils and fats and other preparedfoods in which Chinese competitiveness is somewhat weaker than in other products(Table 11).
The largest category of major imports from China is prepared foods, such asmeat and fish and shellfish (HS16), which amounted to $1.7 billion (in 2003), or 2.2% ofJapan’s total imports from China. As a category of Chinese imports, they ranked 10th,
followed by prepared foods of vegetables and fruits (HS20) that amounted to $800
million (1.2%), ranked 19th. In Japan’s exports to China, fish and shell fish (0.16%)
ranked 37th and other prepared foods (0.1%) ranked 46th.
China’s food industry is growing rapidly, with its output having topped RMB 1
trillion in 2002. It accounts for 9.1% of China’s industrial production (in 2003). Its highgrowth in recent years owes itself to rising investment by foreign companies, including
those from Hong Kong and Taiwan. Foreign companies’ share of food production
reached 25.3% in 2003. Foreign companies have advantages over Chinese companies insuch areas as the size of operation, production technology, product development power
and market development. They are engaged in global competition on the Chinese foodmarket. Along with the expansion of middle- and high-income group in Chinese
population, demand for high-level processed foods, such as dairy goods, confectionery
and frozen foods, is rising. At the national level, the share of processed foods in the
total food consumption is running at 30%, far below the 80-90% level in industrializedcountries, leaving a sizable room for further market development.
Investments in China by Japanese food companies have been rising sharply
since 2002. While they concentrated in fresh vegetables, frozen vegetables, frozen
processed products of fishery and diary foods and cooked dishes, and beer in the
mid-1990s, recent investments are increasing in such areas as confectionery, beverages,
seasonings, premixes like frying flours, and restaurants. Japanese food companies are
forming

partnership with Chinese, Taiwanese and Japanese firms. Good examples

are the collaboration of Sanyo Foods andKikkoman and TONGYIKANGSHICHUAN

and that between

both tie-ups with Taiwanese firms that have produced

synergic effects.
In Japan-China food trade, imports from China overwhelm exports to China.

28

Under the division of labor that has emerged between the two countries, Japanesecompanies that have transferred their operation to China produce low-value added
products in China for re-import into Japan, while keeping production of highvalue-added products in Japan.
Foods are not covered by the preferential tariff system in Japan, but many foodproducts, including prepared foods of meat and fish, which are the mainstay of foods
imports from China, are covered by the special preferential tariffs. The special
preferential tariff items do not include imports from China. For some products, there is
no preferential tariff system. Tariff rates are generally higher in Japan, but Japanese
rates are high on some agricultural and fishery products. The rate on beef, for example,
is 38.5% in Japan, compared to 12% in China. Tariffs are also higher in Japan on citrus
fruits. Also, import of many products from China is banned under the quarantine
regulations, and the quarantine procedures against residual farm chemicals constitutean import barrier against Chinese products, the Chinese side says. Because of tariff
rates higher in Japan on some products and the effect of the quarantine system, thelikely impact of an FTA varies from product to product. But the agreement is certain towork in Japan’s favor on high quality foods, but the impact will be limited as a whole,
given the small quantity of Japanese exports of food to China.
Table 11 Trade Specialization Coefficient of Major Foods with China (HS2 two-digit)
HS

1999

2000

2001

2002

2003

2

Meat and meat scraps for eating

－0.99

－0.99

－0.99

－1.00

－1.00

3

Fish, crustaceans, mollusks, and

－0.69

－0.79

－0.83

－0.85

－0.83

－1.00

－1.00

－1.00

－1.00

－1.00

－0.99

－1.00

－1.00

－1.00

－1.00

－0.95

－0.94

－0.93

－0.91

－0.95

preparations of other aquatic
invertebrates
7

Edible vegetables and certain
roots and tubers

16

Preparations of meat, of fish or ofcrustaceans,molluscs

otheraquatic invertebrates
19

Cereals,flours,preparedproducts of milk of starch and29baked goods
20

Vegetables,

fruits,

nuts

and

－0.99

－1.00

－1.00

－1.00

－1.00

0.09

0.09

－0.04

－0.16

－0.30

prepared foods of parts of otherplants21

Other prepared products

Ⅴ．Impact of FTA
Japan’s import duties on industrial goods are already very low, with effective rates
running close to zero on the strength of preferences, except for apparels and others.
China, on the other hand, is engaged in phased reduction of import duties inaccordance with its promise with the WTO, but they are still relatively high. Thus,
Japan-China will benefit Japan’s export, creating and enlarging fresh trade. Yet, theexpected benefits will vary from industry to industry, and will be limited as a whole.
One reason for such prospects is that many commodities are already being imported
into China without paying import duties in the form of consigned processing trade.
It may also be pointed out that for items in which relationship of division of laboris already established, major changes are unlikely to take place in trade thanks to FTA.
For example, in sectors in which Japanese companies have already moved their basesof production to China, such as apparels and sundry goods for daily life, and, therefore,
there are few exports from Japan, or for labor-intensive goods, there is little likelihoodthat export from Japan to China will increase even if China’s import duties are
eliminated under a free trade agreement.
It is certain, of course, that if Japan is the sole country having an FTA with China,that would put Japanese exports at a relative advantage vis-a-vis those fromcompeting countries of Europe, the U.S. or South Korea; it would also be an
encouraging development for industries and products attempting to promote exports.
Also, for Japanese companies in China importing components and materials fromJapan, a cost reduction effect can be expected. On the contrary, if China concludes an
FTA with Japan’s competitor countries before it does with Japan, Japanese products
would certainly be put at a competitive disadvantage.
As for benefits other than import duties, improvement in business environment
30

can be expected under a comprehensive and broad FTA called an Economic
Partnership Agreement (EPA). An EPA covers trade in goods, trade in services,
investment rules, IPR protection, trade facilitation such as technical barrier to trade,sanitary and phytosanitary measures, Competition policy dispute settlement andbilateral cooperation. If an FTA works to achieve improvements in investment-related
legislation and customs administration which are still lacking in transparency, or
problems related to copied products which Japanese companies in China are facing,those companies would benefit greatly.

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