2007 JETRO WHITE PAPERON“INTERNATIONAL TRADE AND
FOREIGN DIRECT INVESTMENT”

Increasing Utilization of Asian FTAs and Growth Strategies for Japanese Companies

Japan External Trade Organization（JETRO）

Preface
In 2006, the world economy recorded its third successive year of high economic
growth, at around 5%. China and India, in particular, maintained their high levels of
growth, and their rate of contribution to the world economy was approximately 40%.
The favorable world economic situation stimulated increased trade and investment. The
growth in trade was propelled by skyrocketing prices for primary products such as crude
oil and metal, while increased activity in the area of cross-border M&As against abackground of increased corporate profits and low interest rates was a factor stimulating
growth in investment.
In recent years, the expansion of the middle income bracket and increased
consumption in emerging economies such as the BRICs has seen the development of a
middle income market in these countries. In the U.S. and other countries, the trend
towards reduction in the prices of consumer goods such as digital home electronics is
accelerating. The U.S. is seeing the development of business models responding to thisreduction in prices, using overseas outsourcing for the production of semiconductors
and other goods in addition to home electronics. In the field of automotive
manufacturing as well, modularization is reducing costs in Europe and the U.S. ThisWhite Paper attempts to seek new business models for Japan in response to these trends
in the emerging economies, Europe and the U.S. Viable options include the strategic useof overseas outsourcing, the formation of alliances with businesses in the emerging
economies and the recruitment of local employees. It will also be important to beproactive in conducting PR programs overseas regarding the value of integrated typeproducts.
At the same time, the stimulation of trade by means of FTAs and EPAs in the
Asia-Pacific region will be essential for the smooth overseas expansion of businesses
targeting the middle income market. The rate of utilization of FTA schemes in the
Asia-Pacific region is increasing annually. Test calculations for Asia-Pacific FTAs,
including an ASEAN+6 FTA, indicate that the greatest benefits will result from FTAs
and EPAs that eliminate tariffs and reduce non-tariff measures (NTMs). The creation of
mechanisms to enable the reduction of overall service link costs (the cost of connecting
different bases, including tariffs, NTMs and transportation costs) will therefore be
essential to pushing ahead with FTAs and EPAs.
Part 1 of this White Paper provides a general overview. Chapter I considers the statusof the global economy, trade and direct investment and the direction of the new round of
WTO negotiations, while Chapter II discusses Asian FTAs that have started in full scaleand Japan’s strategies for growth. Chapter III examines the development of global

1business models by Japanese companies and associated issues, and supplements this
discussion with consideration of trends in the middle income bracket of the emerging
economies such as BRICs and marketing strategies targeting this stratum.
Trade and direct investment statistics for Japan and the world are continuously updated
on the JETRO Website (www.jetro.go.jp), and may be consulted in association with thistext. (Details can be found on the last page of this White Paper).

2

Contents

I

Status of the World Economy, Trade and Direct Investment

8

1. The World Economy: Status and Issues ···································································································· 8(1) The world economy records its highest growth since the 1980 in 2006
(2) The housing sector and crude oil prices are risk factors in the U.S. economy(3) 2006 high growth levels expected to continue in Europe(4) Developing economies: Continuing high growth and risk factors(5) Increasing activity in cross-border capital transactions and risk factors

2. World Trade ··············································································································································· 25(1) World trade increased by 15.4% in 2006, the fourth consecutive year of double-digit growth(2) China’s trade structure changing, Imports of intermediate goods slowing(3) World service trade increases by 10.6% in 2006

3. Global Direct Investment and Cross-border M&As··············································································· 39(1) Global inward direct investment exceeds 1 trillion dollars for the second consecutive year in
2006(2) 2006 level of cross-border M&As is second only to 2000; LBOs increase

4. Trade and Direct Investment in Japan ····································································································· 55(1) The Japanese economy: Towards a stable growth trajectory(2) Trade in Japan(3) Outward direct investment in Japan(4) New records set for inward direct investment inflows and outflows
Column I-1

Japanese companies using Asia as a base to increase overseas profitability

5. WTO ···························································································································································· 90(1) Trend of the new round: Difficulty in building consensus(2) Correction of unfair trade practices via WTO dispute resolution proceduresII

Searching for the Growth Strategy for Japan in the Growing Momentum in
Asian FTAs
106

1. The World and the Asian FTA ················································································································ 106
3

(1) Rise in FTAs Worldwide Accelerated by Lagging WTO New Rounds(2) Trends in the Asian FTA Getting More Attention from the World(3) Japan's EPA Strategy(4) NAFTA as a Precursor of the FTA Between Advanced and Developing Countries(5) EU Still Continuing to Implement Measures for Integration
Column II-1

Adoption of SOLVIT Makes Dispute Resolution Easy to Turn to

2. Economic Effects of FTAs ······················································································································· 123(1) FTA Model Analysis with a Focus on ASEAN(2) The Importance of Reducing Service Link Costs(3) ASEAN+6 Significantly Expands Imports and Exports in the Area
Commentary

Overview of Simulation, Assumptions and Preconditions, Etc.

3. Increasingly Tight Economic Ties in Asia and the Utilization of Asian FTAs with Issues
Involved ····················································································································································· 133(1) Increasingly Tight Economic Ties in Asia
Column II-2

Asian Economic Development of Tighter Ties as Seen in Terms ofInternational Input-Output Tables(2) Utilization of FTAs Advancing Step-by-Step in Asia
Column II-3

Japan-Mexico EPA Shows Effects in Japan's Automobile and Other
Exports to Mexico(3) FTAs in Asia Face Issues Affecting Utilization, Including Rules of Origin
Column II-4

EU Adoption of Cumulative Rules of Origin

4. Building Asia-Pacific Economic Partnerships ······················································································· 162

III Global Business Models and Concerns for Japanese Companies

166

1. Enhancing company capacity to build international business models ··············································· 166
Column III-1

 The Product Architecture Theory: integral type or modular type?

2. The global competitiveness of Japanese industry·················································································· 176(1) Digital home electronics
Column III-2

 Different price ranges in Japan and the U.S.

(2) Semiconductors
Column III-3

 Japan’s metal processing technology: supporting world innovation4

(3) Automobiles and parts(4) Finance

3. Issues with the service industries’ activities in emerging markets ······················································ 194
4. Current status and issues with Japanese companies’ overseas intellectual property
strategy ······················································································································································· 199
Column III-4

 Cooperation and request are the key to Public-private Intellectual
Property Protection Missions, Japanese companies’ trump card forprotecting intellectual property in China

Supplement: Japanese Companies’ Growth Strategy and Emerging Markets······································· 206
Column III-5

 The middle class: driver of automobile sales (Russia)
 Foreign brand autos in high demand GM sets aside special sales area for wealthy customers

IV

The Growing Use of Free Trade Agreements in Asia and Japanese Company
Growth Strategies (Conclusion)
225

Appendix

230

5

Explanatory Notes
1. Abbreviations of publications and publishing organizations(1) IFS: International Financial Statistics (IMF)(2) DOTS: Direction of Trade Statistics (IMF)(3) WEO (D): World Economic Outlook (Database) (IMF)

2. Figures
As follows, unless otherwise indicated.
(1)In text, figures and tables, “year” indicates the period January-December, and “fiscal year”
indicates the period April-March.
(2)In tables, figures for “foreign currency reserves” and “outstanding outward debt” are year-end
figures.
(3)Figures for “rate of growth” are year-on-year figures.
(4)In figures and tables, “-“ indicates lack of results, “0” indicates figures of less than a unit, and“n.a.” indicates that figures are unclear or unavailable.
(5)Because figures are rounded, there may be discrepancies in total.

3. Country and region classifications
As follows, unless otherwise indicated.
(1)ASEAN (Association of Southeast Asian Nations): Indonesia, Singapore, Thailand, Philippines,
Malaysia, Brunei, Vietnam, Laos, Myanmar, Cambodia(2)ASAN 4: Indonesia, Thailand, Philippines, Malaysia(3)Asian NIES: South Korea, Taiwan, Hong Kong, Singapore(4)Hong Kong and Taiwan are treated as independent economies(5)The accession of Romania and Bulgaria in early 2007 brought the number of EU countries to 27;
however, this White Paper mainly considers 2006 trends, and “EU” therefore as a rule refers to theEU25.
EU25: The EU15, plus 10 new member countries
EU15: Austria, Belgium, Denmark, Germany, Greece, Finland, France, Ireland, Italy, Luxembourg,
Portugal, Spain, Sweden, Netherlands, Britain
10 new EU member countries: 10 countries which acceded in May 2004 (Cyprus, Czechoslovakia,
Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia)(6) NAFTA (North American Free Trade Agreement): U.S., Canada, Mexico(7) BRICs: Brazil, Russia, India, China

4. Base point in time6As a rule, the base point in time is at the end of July 2007 for the General Overview, and the end ofJune 2007 for the studies by country and region.

5. Trade statistics
World trade figures in the General Overview are as a rule based on the World Trade Atlas, while
figures in the studies by country and region are in general based on locally published trade statistics.
Variations in the methods used by some countries and regions to convert figures to dollars, etc., may
result in discrepancies between figures in the General Overview and figures in the studies by country
and region.

7

I. Status of the World Economy, Trade and Direct Investment
1. The World Economy: Status and Issues(1) The world economy records its highest growth since the 1980 in 2006
In 2006, the world recorded a real GDP growth rate of 5.4% (IMF, purchasing power parity [PPP]basis1), the highest figure recorded in the period for which statistics are available, from the 1980
onwards. The world economy has maintained high growth at a rate of around 5% for threeconsecutive years since 2004. This rate significantly exceeds the long-term (1980-2006) average rateof 3.5%.
World trade and direct investment also recorded year-on-year increases in 2006, with trade
increasing by 15.4% on a nominal export basis and direct investment increasing by 25.8% on an
inward direct investment basis. This made 2006 the third successive year of high growth in the world
economy, trade and direct investment (Fig. I-1).
The developing countries provided the engine for these historic levels of growth. (Developing
countries and their economies will be discussed later.)The growth rate of the developing countries
was 7.9% in 2006, representing a pace of development more than twice that of the developed
countries, which recorded a figure of 3.1% (Table I-1). With a rate of contribution of 65-70% toeconomic growth between 2004 and 2006, the developing countries have provided an overwhelming
level of propulsion to the world economy.2 Among the developing countries, the contribution ofChina and India (each of which recorded growth of around 10%) was 29.4% and 10.3% respectively,
meaning that the collective contribution of these two Asian giants to the world economy wasapproximately 40%.

1.

Purchasing power parity (PPP) is calculated on the basis of how much goods and services actuallysell for in different countries (domestic-foreign price difference). This indicator is considered to be
more accurate than the nominal exchange rate, which varies significantly in response to a variety offactors. World GDP growth rates published in the IMF’s World Economic Outlook (WEO) arecalculated on a PPP basis.

2.

The high rate of contribution of the developing countries is due to the fact that the GDP of thesecountries, in which commodity prices are low, appears higher on a PPP basis than the actual rate. On
a PPP basis, the GDP of the developing countries represents 48.0% of the world total, while in termsof the actual GDP rate it represents 25.6% of the total, an almost two-fold difference.

The developed countries displayed a more balanced economic growth than the U.S.-led growth8

observed to date. The developed countries collectively represent the main area of final demand in theworld economy, and there is a risk that an excessive dependence on the U.S. could have a major
impact in the event of a slowdown in the U.S. economy. However, in 2006, the EU25 economy
recorded growth of 3.0%, overtaking the U.S. at 2.9%. The rate of contribution of the EU to theworld economy was 11.7%, surpassing that of the U.S. (10.8%) for the first time since the recessionthat followed the collapse of the IT boom in 2001.
The world economy has recently experienced a set of conditions favorable to high economic
growth: 1) Rapid economic growth, stimulated by exports and investment, in developing countries
integrated into the international division of labor (China is a representative example); 2) Favorable
financial conditions; and 3) Control of inflation. On the finance front, Japan, the U.S. and the EU
have actively adopted monetary loosening policies since 2001 to dispel concerns over deflation,
resulting in the supply of excess liquidity and the invigoration of financial markets. Following this,the U.S. increased interest rates 17 times from June 2004 to normalize rates. Despite this, as of 2006,
interest rates in Europe and the U.S. were sitting at 4-5%, and stock prices around the world hadreached their maximum ranges. In addition, the risk spread (the difference in yield with U.S.
Treasury bonds) of high-risk bonds and bonds issued by developing countries was maintained at alow level. In mid-2006, global financial markets underwent a process of short-term adjustment. This
shifted them to a growth footing, providing a boost to the world economy. Fears of inflation causedby skyrocketing crude oil prices were calmed by a reduction in prices in the latter half of 2006. The
world inflation rate of 3.8% for 2006 is no higher than the average figure since 2000, and the figureof 2.3% for the developed countries was within the acceptable range. At 5.3%, the inflation rate forthe developing countries was lower than the 6.0% average since 2000, and represents a relatively
low level in comparison to past figures (Fig. I-2).
Despite a slight reduction in the pace of growth compared to 2006, the world economy is expected
to maintain a high level in 2007. The IMF predicts a growth rate of 5.2% in the world economy in2007 (as of July 2007). Looking at risk factors, in addition to the potential overheating of the Indianand Chinese economies and spiraling stock prices, there are concerns over the effect of the U.S.
sub-prime loan problem and the failure of hedge funds on financial markets.

(2) The housing sector and crude oil prices are risk factors in the U.S. economy
The U.S. recorded a real GDP growth rate of 2.9% in 2006, the third consecutive year of growth ataround the 3% mark since 2004. However, a downturn in facility investments, combined with
reduced housing investment from the second half of 2006 through 2007, resulted in a slowdown of
the economy. The growth rate in the first quarter of 2007 slipped below 1%, recording 0.7% on aquarter-by-quarter basis.
Housing investment displayed two-figure negative growth from the 2nd through the 4th quarters9

of 2006. The contribution rate also shows housing investment figures to have reduced GDP growthby around one point per quarter on average. Adjustment of the housing sector is dragging on, andconcern remains over the effect of the sub-prime loan problem on financial markets. This sector has
therefore been indicated as a risk factor for GDP. However, considering the status of the U.S.
economy as a whole, as of the present, adjustment of housing prices has been limited, and no major
drop in prices has occurred; personal consumption is also growing steadily. These factors reduce theprobability of the scenario of a downturn in the U.S. economy due to reduced housing investment.
While the situation in the housing sector has obscured its significance, the downturn in U.S.
facility investments is continuing. Facility investments had recorded growth of around 6% on
average in recent years, but growth became negative in the 4th quarter of 2006. However, this result
is considered to have been strongly affected by cyclical factors arising from inventory adjustment,
and there are strong expectations of a progressive recovery.
Taking the factors discussed above into consideration, there are many reasons for optimism
regarding future trends in the U.S. economy. Economic forecasts by private sector organizations in
the main predict a return to potential growth rates (in general, around 3%) in 2008.
Trends in crude oil prices can be indicated as a risk factor in sectors other than the housing sector.
In summer 2006, crude oil prices exceeded $70 per barrel, and gasoline also cost approximately $3
per gallon. This had a considerable effect on sales of large pickup trucks, etc. (Fig. I-3; monthly
data). Following this, over January 2007, crude oil prices dropped to $54-55 per barrel, and gasoline
prices fell to around $2.20-2.30 per gallon. However, the climb in prices then picked up pace, withgasoline prices rising to a new record of over $3 per gallon in May. A review of trends over a periodof around two years shows that crude oil and gasoline prices have continued a steady rise while
increasing and decreasing within a specific range.
The weakening of the housing market would not by itself result in a reduction in consumption anda consequent downturn in the U.S. economy, but it is having a significant impact in combination
with the rise in crude oil prices. During the downturn of 1990-1991, an increase in crude oil prices(prices doubled from $18 per barrel in July 1990 to $36 per barrel in October 1990) coincided with areduction in housing investment (quarter-on-quarter negative growth of 15-20% for four consecutive
quarters), resulting in negative growth in individual spending. If geopolitical factors were to overlap
with a repeat of the destructive hurricanes that lashed the U.S. in 2005, generating a further rise in
crude oil prices, the potential for an economic downturn would increase.
With regard to inflationary fears, while the prices of natural resources such as crude oil continue
to increase, the pace of employment increases is gradually slowing and the Federal Reserve Board(FRB) is implementing prudent financial management policies. The risk of inflation is therefore
limited. Long-term interest rates began to increase in May and June 2007, and this is suppressing a
recovery in housing investment. However, long-term interest rates are unlikely to continue to10increase when inflationary fears have been eliminated.
Turning to the twin deficit, the fiscal deficit (in relation to GDP) reached its peak at 3.6% in 2004,
and dropped to 1.9% in 2006. Against a background of continuing outflow, in particular to fund theengagement in Iraq, increased tax revenues generated by the economic upturn contributed to the
reduction of the deficit. The current account deficit (in relation to GDP) has continued to worsen ona yearly basis, and 2006 was no exception. Despite this, if the figures are considered on a quarterly
basis, the deficit declined from 6.5% in the third quarter of 2006 to 5.6% in the fourth quarter. Thisis an effect of the slowing of the growth of the trade deficit, which had previously been driven by adecline in domestic demand, a weak dollar, and high crude oil prices, among other factors. However,the current account deficit remains high, and the danger of a “triple sell-off,” a mass dumping of U.S.
dollars, U.S. Treasury bonds and U.S. stocks has by no means been eliminated. The current accountdeficit is the reverse side of excess expenditure (or a too-low level of savings), the inherent structuralproblem of the U.S. macro-economy. Economic management to regulate domestic demand, personal
consumption in particular, will be required for a certain period in order to control the current accountdeficit to a sustainable level.
Economic management to regulate domestic demand, in particular personal consumption, will be
required for a certain period in order to control the current account deficit to a sustainable level.

(3) 2006 high growth levels expected to continue in Europe
The European economy commenced a process of recovery from the second half of 2003, but theeconomy slowed from the second half of 2004 through the first half of 2005. Following this, the EU
economy regained a recovery pace, and the EU25 recorded a real GDP growth rate of 3.0% in 2006
(2.7% in the Euro zone) (Table I-2). This rate of growth was more than 1% higher than the 2005 rate
(1.8%; 1.5% in the Euro zone), and exceeded initial projections. The rate of growth of the European
economy has been low for the past several years, not exceeding the 1-2% level, and the 2006 figures
represent the highest level of growth since the figure of 3.9% recorded in 2000.
This rapid recovery is being driven by domestic demand centering on investment in facilities;
gross fixed capital formation recorded a year-on-year increase of 5.5% in 2006. The economic
upturn is supported by rising private sector expenditure, which recorded an increase of 2.0% as
consumer confidence recovered on the back of improving employment figures. In addition, exports
displayed a high level of growth, recording an increase of 9.2% against the background of steady
growth in the world economy due to increasing demand in emerging markets. (The rate ofcontribution of net exports was 0.1%).
Considered by country, the German economy displayed the greatest recovery. The German
economy had stagnated since 2001, maintaining growth of only 0-1%, but it broke the 2% barrier for
the first time in two years in 2006, recording a figure of 2.8%. The Italian economy had similarly

11been in a state of stagnation, but displayed signs of a recovery in 2006, recording growth of 1.9%.
The French and Spanish economies have been supporting the economy of the Euro zone for the past
several years. In 2006, Spain maintained its drive with a growth rate of 3.9%, while growth inFrance was low-key at 2.0%. Growth rates were higher outside the Euro zone. The new Central andEastern European member countries in particular displayed high growth of approximately 4-8%,
with especially high growth exceeding 10% in some Baltic states.
German companies have regained international competitiveness by controlling wages and laborcosts, and have improved their business results. A rapid growth in exports, in particular to emerging
markets, and increasing investment in facilities are factors in the country’s achievement of a highrate of growth for the first time in six years. The fact that investment in construction shifted topositive growth in 2006 after recording year-on-year negative growth every year from 1995, with the
exception of 1999, was also an important factor. Personal consumption also increased on the back ofimprovement in the employment situation. A percentage of the expansion in consumption resulted
from temporary factors, such as demand in advance of a 2007 increase in value added tax from 16%
to 19%, and demand for AV equipment related to the holding of the soccer World Cup.
￭ The level of growth recorded in 2006 is predicted to continue in 2007
The EU predicts that growth in the EU25 will maintain a rate very close to the 2006 rate of 2.8%
(2.6% for the Euro zone) in 2007.
Increases in domestic and foreign demand are projected to continue, increasing the utilization rateof facilities and improving business results. Given the consequent rise in the ability and the desire ofcompanies to conduct investments, the current increase in facility investment is predicted to continue.
The outlook is for a continuing decline in the unemployment rate, improvement in the employment
situation, and growth in real wages, enabling the projection of a continued stable increase in personal
consumption.
In the first quarter of 2007, the EU25 maintained the strong growth characterizing 2006, recording
year-on-year growth of 3.1% (3.0% for the Euro zone). While figures for personal consumption
displayed a slight drop in Germany (down 0.2%), figures for investment in facilities showed aconsiderable increase to 8.6%, enabling the achievement of a growth rate of 3.3%. It is predicted thatthe increase in value added tax will not have a significant effect.
A downturn in outward demand in the event of a greater than expected slowdown in the pace ofgrowth in the U.S. economy is a risk factor, as is the effect of an increasingly strong Euro on exports.
An exchange rate of 1 euro to 1.33 U.S. dollars or 158.9 Japanese yen is a base condition of EU
economic forecasts, but the euro climbed past this rate from April.
A slowdown in housing investment, which had previously been supported by booms in Spain andthe UK, and the effect of increases in interest rates are risk factors in terms of domestic demand.

12

Interest rates increased eight times in the Euro zone between December 2005 and June 2007, andfive times in the UK between August 2006 to July 2007, resulting in an increase in the policy ratefrom 2.0% to 4.0% in the former, and from 4.5% to 5.75% in the latter. There are concerns that afurther increase in interest rates in 2007 could have an impact on consumption and corporate
investment.

(4) Developing economies: Continuing high growth and risk factors
In 2006, the developing economies recorded real GDP growth of 7.9%, their highest level ofgrowth since 1980. The real GDP growth rate of the developing economies was 7.7% in 2004 and7.5% in 2005, making 2006 the third consecutive year of growth at 7.5% or above (Fig. I-4). Due tothe scale of the economies of China and India (China represents 31.4% and India 13.1% of the total
GDP of the developing countries) and their extremely high growth rates of around 10%, the rate ofcontribution of these economies to economic growth in the developing economies overall was
correspondingly high, with a figure of 42.9% for China and 15.1% for India. Taken together, this isjust under 60%. As is clear, a significant proportion of the results for the developing economies isdependent on the performance of China and India, and the medium- to long-term prospects for
economic growth in the two countries and potential risk factors affecting this growth are therefore afocus of concern.
￭ Continuing high economic growth in China and concerns regarding investment overheating
The Chinese economy has maintained long-term high levels of growth. Since 2000, the lowest
level of growth recorded by the country was 8.3% in 2001, while a level of more than 10% has been
maintained since 2003. China’s total import and export volume increased by 350% between 2001
and 2006, reaching $1,760.7 billion in 2006, putting the country in third place behind the U.S. andGermany. Since China’s accession to the WTO, the country has attracted interest as a market in
addition to a production base, and the pace of direct investment is accelerating.
Because China’s high rate of growth in the past several years has been dependent on increases in
fixed capital investment and exports, some doubt exists with regard to its sustainability. The country
is in a situation in which an inflow of hot money may be generated by expectations of an increase in
the value of the yuan based on the trade surplus and investment inflows. The yuan has actually been
increasing in value at a relaxed pace since the country revised its exchange rate regime in July 2005.
Because the level of sterilization (the absorption of base money by the central bank via the sale ofgovernment bonds, etc.) is insufficient in relation to massive influxes of foreign funds, there is an
undeniable potential for excess liquidity to result in real estate speculation and overheating ofinvestment in booming industries.
China’s development has resulted in inward contradictions, such as the economic gap between

13

regions. The country has shifted its course from “Senpuron” (prioritized development of certain
regions and industries) to “Wakai shakai” (the achievement of a harmonious society), and has madeclear its intention to achieve balanced, high-quality growth in its 11th Five-Year Plan. The country
intends to move away from a growth-orientated approach excessively reliant on the infusion of
production factors and to correct the economic disparities between regions, add value to its
industries, develop its own technologies and deal with its environmental issues.
China’s consumption of crude oil, steel and other energy and mineral resources has rapidly
increased. While economic growth is driving this increased demand for resources, it is also a resultof excessive use of resources due to inefficient production methods. Increased demand from China
has also had an effect in buoying world commodity markets in recent years.
China’s government recognizes the country’s present mode of growth as being insufficiently
guided, and sees a need for change. A stable 7-8% growth rate is desirable for China, rather than a
two-figure rate that carries with it the possibility of a sudden slowdown. A rate of 7.5% is projectedin the country’s 11th Five-year Plan. In order to ensure stable growth, the country is aiming to shift
from investment-driven growth (Fig. I-5) to consumption-driven growth by means of bolstering thefarming economy, among other strategies. An increase in the minimum wage also forms part of the
background to the increase in labor costs in the country’s coastal areas. Progress in the protection of
employees is also expected, as indicated by the enforcement from 2008 of a labor contract law thatplaces restrictions on termination of employment. A movement towards greater selectivity withregard to foreign capital can also be observed; at the National Peoples’ Congress held in March 2007,
it was decided that preferential measures for corporate tax on foreign-funded companies would be
progressively phased out, while the tax return rate for value-added taxes on increases in exports ofsome IT and high-tech products were increased from September 2006 as a preferential measure.
Turning to responses to economic overheating, interest rates and the deposit reserve rate havebeen increased in stages since 2006. However, these restraining measures have failed to allay fears
of an overheated economy, with the real GDP growth rate climbing to 11.9% in the second quarter of
2007, higher than the figure of 11.1% recorded in 2006.
China’s government is making efforts to increase the quality of the country’s growth bycontinuing to apply macroeconomic control, attempting to increase consumer demand by increasing
agricultural wages, and working to improve the economy’s structural problems by reforming
national companies, the financial system and the social insurance system.
According to UN estimates, China’s population will continue to increase, reaching 1.45842 billion
by 2030. However, it is predicted that the productive population (from 15-60) will reach its peakfigure (0.92175 billion) rather sooner, in 2010. From the macroeconomic perspective, an increase in
the non-working population will cause a drain on savings. Considering the balance between savings
and investments, it can be assumed that this will be another factor generating a reduction in the scale14

of investment.
￭ The Indian economy: Average growth of 8.6% since 2003
The pace of growth of India’s economy is accelerating, up to 9.4% in FY2006 (April 2006-March
2007) from 7.5% in FY2004 and 9.0% in FY2005 (Fig. I-6). Between FY2003 and FY2006 theaverage rate of real GDP growth in India was 8.6%, considerably higher than the average figure of
5.9% recorded in the period between FY1991, when the country embarked on its program of
economic reform, and FY2002. Given the scale of India’s population (1.1 billion) and recent highrates of growth, the Indian economy is becoming an increasingly significant presence in the world
economy.
Looking at GDP growth by industry category, a noteworthy feature of results for 2006 is thatyear-on-year growth in the manufacturing sector (12.3%) outpaced growth in the service sector(11.0%). However, growth in the agricultural, forestry and fisheries sector, which represents
approximately 20% of GDP, was low at 2.7%. The rate of contribution of service and manufacturingindustries to the real GDP growth rate was 90%. To date, agricultural, forestry and fisheries
industries have represented a high proportion of India’s GDP, a weakness in a country in which
irrigation systems are not widely diffused, and in which the effect of weather conditions on
agricultural production can have a significant effect on the entire economy. Economic stability has
increased in the past several years, with the country experiencing economic growth driven by theservice and manufacturing sectors.
However, caution needs to be exercised with respect to the potential for India’s economy tooverheat. The wholesale price index shows a declining tendency in the growth of fuel prices, while
the rate of growth of the prices of products of other primary and manufacturing industries isincreasing. The consumer price index also recorded a 6.8% increase in FY2006, against 4.2% in
FY2005. Money supply (M3) shifted to a high level, increasing 20.8% as of March 2006, and thecentral bank has begun to apply a clear fiscal tightening policy, for example by raising the cash
reserve rate.

(5) Increasing activity in cross-border capital transactions and risk factors
Cross-border capital transactions continued to increase, totaling $6,482.3 billion and 14.5% ofworld GDP (2005, Fig. I-7). Following the collapse of the boom in mergers and acquisitions (M&A)
in 2000, cross-border capital transactions declined sharply through 2002, dropping to 7.1%, aroundhalf their 2000 level as a percentage of GDP. However, there was a rapid pickup from 2003-2005,
and during this period cross-border capital transactions more than doubled as a percentage of GDP.
From a medium-term perspective, the percentage of GDP represented by cross-border capitaltransactions has displayed an increasing trend since 1995, pointing to the progress of financial

15

globalization. Data for 2006 is not yet available, but an increase in the level of transactions ascompared with those in 2005 is predicted.
Considering results by category, investment in securities represented 50.5%, bank loans, etc.,
represented 34.0%, and direct investment represented 15.5% of cross-border capital transactions(2005). These recent results for capital transactions have been driven up by bank loans, etc., andinvestment in securities, which increased 4.4-fold and 3-fold respectively in 2005 against 2002
figures. Among investment in securities, a higher level of investment in bonds was observed, while
results for bank loans were increased by a higher level of loans by European banks and increased
provision of funding to developing countries.
￭ Increased presence of developing countries in cross-border capital transactions
An increase in the provision of funding by developing countries is an element of cross-border
capital transactions which is attracting attention. In 2006, Asia (excluding Japan) recorded a current
account surplus of $340 billion and the Middle East recorded a surplus of $210 billion. Centering onthese two regions, developing countries are recirculating funds into global financial markets via the
management of foreign currency reserves and other mechanisms (Fig. I-8). Research shows thatfunds from the management of foreign currency reserves by developing countries have reduced
long-term U.S. interest rates by 0.3-1.0% (WEO, April 2004; IMF), and are contributing to thestability of financial markets.
Up to the present, the management of foreign currency reserves has generally been focused on
low-risk (and low-return) investments such as U.S. Treasury bonds. However, there are more recent
examples of diversification of investments into stocks, real estate and the like via state funds(sovereign wealth funds [SWF]). The combined scale of SWF currently reaches $2,500 billion
worldwide. The Abu Dhabi Investment Authority of the United Arab Emirates (UAE) is operating afund of $875 billion, while Singapore’s Government of Singapore Investment Corporation (GIC) andTemasek Holdings are operating a fund of $430 billion (Table I-3). China, which holds the world’s
highest level of foreign currency reserves, has established an SWF managing $200 billion, and hasannounced the intention to invest $3 billion in the Blackstone Group, a major U.S. investment fund,as its opening investment.
As this indicates, public sector investments are no longer exclusively focused on U.S. Treasury
bonds; funds from SWFs and oil profits moving through London are being circulated into stock
investments and hedge funds. The flow of international capital transactions is heating up andbecoming more complex.
In addition, in certain regions “south-south financing” is an increasing presence, as illustrated byan increase in loans by Chinese banks to the resources sector in sub-Saharan Africa. The
Export-Import Bank of China has provided loans of $2.3 billion to Mozambique, $2.0 billion to16

Angola, and $1.6 billion to Nigeria (2005, 2006, Center for Global Development).
Capital inflows to developing countries are also continuing historical increases. Net capital
inflows to developing countries (capital inflows minus outflows to the rest of the world) reached$570 billion in 2006, or 5.1% of GDP (World Bank; Fig. I-9). The flow of capital to the developing
countries has increased significantly since 2003. This is the result chiefly of an increase in capital
flows to the private sector via bank loans and direct investment.
A global economic environment of low interest rates and abundant liquidity has encouraged
investors in the developed countries to seek investments offering a higher rate of return. At the sametime, improved fundamentals in the developing countries as a result of high economic growth andincreased foreign currency reserves has reduced the risk (risk premiums) associated with investmentin these countries. As institutional investors, including hedge funds and some private investors, adopt
global perspectives in order to diversify investments, the investment exposure of the developing
countries has increased. In future, attention must be focused on the effects of fiscal tightening in the
U.S. and Europe, the normalization of risk premiums via reevaluation of risk, and the risk of asudden retreat of capital from those developing countries in which an excessive amount of debt has
been denominated in foreign currencies by domestic stock markets and banks.
￭ Increased scale of hedge funds and associated risks
Amid the increased activity in the area of cross-border capital transactions, concern has also
mounted over hedge funds actively conducting investments across national borders. Hedge funds
attempt as much as possible to avoid the supervision and regulation of the authorities by conducting
their activities in offshore markets, and freely manage funds accumulated from a limited range ofinvestors (the super-rich, institutional investors, etc.) using a variety of methods in order to increase
returns regardless of market trends. Their standard procedure is to conduct investments in bonds,
stocks, commodities and other products, applying leverage via derivatives. As of January 2007, there
were 9,550 hedge funds worldwide, with accumulated funds totaling $1.5 trillion (Fig. I-10). This
represents a substantial increase against 2000, with accumulated funds increasing 4.7-fold, and thenumber of hedge funds 2.4-fold.
Up to the present, the super-rich represented the investor base for hedge funds. However, the ratio
of investments by the super-rich to total investments in hedge funds declined from 62% in 1997 to
44% in 2005. At the same time, the ratio of investments by institutional investors has climbed from
22% to 28%, and the ratio of investments by the Fund of Hedge Funds (FOHF, a fund that conducts
investments in multiple hedge funds) has increased from 16% to 28%. Taking into consideration thefact that the majority of institutional investors conduct investments in hedge funds via the FOHF, it
is clear that the investor base for hedge funds has shifted from the super-rich to institutional
investors.

17

The background to increased investment by institutional investors in hedge funds is a quest fordiversification of investments due to a reduction in returns from traditional investments, and anincrease in the level of acceptable investment risk in the present stable financial environment.
The increased scale of hedge funds and the increased involvement of institutional investors havegenerated calls for enhanced supervision and regulation and greater transparency. The regulation ofhedge funds was discussed at the G8 Summit in June 2007, but no agreement on direct regulation
was reached. It has also been pointed out that hedge funds focus on distortions in international priceformation (in bond markets, etc.), and seek to increase profits in the process of correcting these
distortions, and by this means make a certain contribution to the unification of global financial
markets. Balancing this, there are concerns over the danger of hedge funds making the transition
from their present comparatively low-risk operations to more high-risk investment styles as profits
decline with increased scale, and over the increased exposure of institutional investors to hedge
funds.

18

Fig. I-1

GDP, trade and FDI growth

（％）
6

（％）
80
60

5

40

4

20
3
0
2

-20

GDP
Trade (RHS)

1-40

Inward FDI (RHS)
0

-60
99

00

01

02

03

04

05

06

Notes: % changes from the previous year, GDP based on purchasing power parity and trade isnominal figures.
Source: WEO(IMF), and local statistics

Table I-1

GDP growth rate and contribution rate by country and region
(%)
2003
2004
2005
2006
Growth rate Contribution Growth rate Contribution Growth rate Contribution Growth rate Contribution

U.S.A.

2.5

13.2

3.6

14.1

3.1

13.0

2.9

10.8

EU25

1.3

7.4

2.4

10.1

1.8

7.9

3.0

11.7

Japan

1.4

2.5

2.7

3.5

1.9

2.6

2.2

2.6

East Asia

8.0

39.5

8.6

33.5

8.6

37.1

9.2

37.3

China

10.0

30.7

10.1

24.8

10.4

28.8

11.1

29.4

ROK

3.1

1.4

4.7

1.6

4.2

1.5

5.0

1.6

ASEAN10

5.9

6.2

6.5

5.3

6.0

5.3

5.9

4.9

7.3

10.1

7.8

8.4

9.2

10.9

9.2

10.3

India
Latin America

2.4

4.6

6.0

8.5

4.6

7.1

5.5

7.7

Brazil

1.1

0.8

5.7

2.9

2.9

1.6

3.7

1.8

Russia

7.3

4.4

7.2

3.4

6.4

3.3

6.7

3.2

World

4.0

100.0

5.3

100.0

4.9

100.0

5.4

100.0

Developing countries

6.7

73.0

7.7

65.0

7.5

70.0

7.9

68.6

BRICｓ

8.0

45.9

8.8

39.4

8.9

44.7

9.4

44.7

For reference

Notes: 1. The world growth rate was calculated by the IMF using purchasing power parity weighting.
2. Each country or region's contribution rate was calculated using 2006 prices and purchasing power parity weighting.
3. Figures may differ from those found elsewhere due to revisions, differing source data, and other factors.
4. East Asia includes the ASEAN10, China, the ROK, Hong Kong, and Taiwan.
5. Developing countries are as defined by WEO (IMF).
Sources: WEO (IMF), national statistics.

19

Fig. I-2

World inflation trends(%)
8

Developing countries

7
6
5

World

4
3
2

Advanced countries

1
0

2000

2001

2002

2003

2004

2005

2006

Note: broken lines are annual averages between 2000 to 2006. Definitions ofdeveloping and advanced countries are based on IMF's WEO.
Source: WEO(IMF)

Fig. I-3

Crude oil and gasoline prices(cent per gallon)(dollar per barrel)

330

80

310

75

290

70

270

65

250
60
230
55

210

50

190

Gasoline170

Crude oil (RHS)

150

45
40

2005
2006
2007
Note: WTI spot price for crude oil and Retail regular price for gasoline,
monthly prices. Source: US EIA

20

Table I-2

EU Real GDP Growth by expenditure and by country(Unit: %)
2006
3.0
2.0
2.1
5.5
9.2
9.0
2.7
2.8
3.9
2.0
1.9
2.8
6.1
3.9
6.1

EU 25
Personal consumption expenditure
Government consumption expenditure
Gross fixed capital formation
Exports of goods and services
Imports of goods and services
EMU
Germany
Spain
FranceItaly
UK
Czech RepublicHungary
PolandSource: Eurostat

2007 (forecast) 2008 (forecast)

2.8
2.4
1.8
5.0
7.0
7.0
2.6
2.5
3.7
2.4
1.9
2.8
4.9
2.4
6.1

2.6
2.5
1.8
4.0
6.2
6.4
2.5
2.4
3.4
2.3
1.7
2.5
4.9
2.6
5.5

Fig. I-4 Contributoin to developing cuntries total GDP growth by country/region
9
8
7
6
5
4
3
2
1
0

（points, ％）

2000

2001

2002

2003

2004

2005

2006

China

India

Other Asia

Western Hemisphere

CIS

Middle East

OthersDeveloping countries growthNote: real and PPP basis. Definitions of developing and advanced
countries are based on IMF's WEO.
Source: WEO(IMF)21

Fig. I-5
China

% share of consumption, investment and net exports to total GDP in
(％)
60
50
40
30
20

Household Final Consumption Expenditure
Gross Fixed Capital Formation
Net Export of Goods and Service

10
0
-10

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Note: nominal figures,
Source: Chinese official statistics abstracts

Fig. I-6

Real GDP growth contribution by sector in India(points, %)
10.0

9.4

7.5

8.0
6.0

9.0

8.5
5.8

4.4

3.8

4.0
2.0
0.0
-2.0
-4.0
2000

2001

2002

Agriculture, forestry and fishery

2003

Industry

2004

Services

2005

2006

(FY)

Real GDP growthNote: FY99 price, Industry includes mining, manufacturing ,utility (electricity, gas and water supply) andconstruction. Services include commerce, hotel, transportation, telecommunication, financial, real estate,business services and community and social services.
Source: "Handbook of Statistics on Indian Economy"(RBI), Ministry of Statistics and Programme
Implementation

22

Fig. I-7

Cross boarder financial transaction（trillion dollars）

（％）

7
6

Portfolio

5

16.0

financialtransaction（% ofGDP, RHS)

Other (bank lending, etc.)

14.0
12.0

FDI

10.0

4

8.0
3

6.0

2

4.0

1

2.0

0

0.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Note: Sum of each countries' liabilities (inward flows) of financial account (FDI, Portfolio
investment, Other investment including financial derivatives) of balance of payments
accounts of the world.
Source: BOP(IMF)

Fig. I-8

Current account balances of Middle East and Asia

(billion dollars)

350
300

Middle East

250

Asia excluding Japan

200
150
100
50
0
-50
-100
95

96

97

98

99

00

01

Source: WEO(IMF)

23

02

03

04

05

06

Table I-3

Major Sovereign Wealth Funds (SWFs) of the world(Unit: billion dollars)
SWFs
AssetsAbu Dhabi Investment Authority
875
Government of Singapore Investment Corporation (GIC) and430
Singapore
Temasek (corporate M&As)
Saudi Arabia Several SWFs
300
country
UAE

NorwayGovernment pension fund

300

China
Official fund (scheduled to establish in September 2007)
Source: Morgan Stanley, etc.

Fig. I-9200

Net capital flows to developing countries（billion dollars）
700

Equity600

Private debt

500

Private capital

FDI

400

Official debt

300
200
100
0
-100
1998

1999

2000

2001

2002

2003

2004

2005

2006

Notes: All items are net inflows. Estimated for year 2006 by the World Bank.
Source: GDF(World Bank)

Fig. I-10

Assets and numbers of Hedge Funds(billion dollars)(numbers)

1,800

12,0001,600

Asssets

1,400

Numbers of Hedge Funds (RHS)

10,000

1,200

8,000

1,000

6,000

800
600

4,000

400

2,000

200
0

0
2000

2001

2002

2003

2004

Note: as of January Source:Hennessee Group

24

2005

2006

2007

2. World Trade(1) World trade increased by 15.4% in 2006, the fourth consecutive year of
double-digit growth
The volume of world trade (merchandise trade, export basis) maintained a high level in 2006,
recording a year-on-year increase of 15.4% to reach $11.8742 trillion (JETRO estimates; Table I-4).
This is the first time that world trade has recorded double-digit growth for four consecutive years in
26 years, since the second oil crisis (1976-1980).
In 2006, buoyant world economy and rapid rise in primary product prices contributed to thegrowth in world trade. On the back of rising prices of primary products such as crude oil and metals,
the export price growth rate (IMF) increased by 5.6% (remained unchanged from the 2005 figure of
5.2%), pushing up the nominal export value. Crude oil prices increased by 20.5%, maintaining ahigh rate of increase though it declined from the increase of 41.3% recorded in 2005. The prices ofprimary commodities (non-fuel) rose significantly, recording an increase of 28.4% due to the rapid
increases in the price of metals such as copper, zinc and nickel (Table I-5). While good harvest saw
food prices decrease by 0.3% in 2005, they increased by 9.9% in 2006. Prices of industrial products
increased 4.4%, equivalent to the level of increase in 2005.
The world real export growth rate increased by 9.8% in 2006,

topping the 2005 figure of 8.8%.

The world real GDP growth rate was strong at 5.4%, and the growth in Industrial Production Index
also increased significantly, rising to 3.7% against a 2005 figure of 1.8%.
￭The expansion in world trade was boosted by the EU, East Asia, and resource-exporting
countries
Almost all countries and regions experienced trade expansion in 2006, but the rate of increase
among the developing countries (20.5%, to $5.2055 trillion) outpaced that of the developed countries(11.7%, to $6.6687 trillion) (Table I-6). Looking at the figures by country and region, thecontribution to world trade growth (exports) by the EU25 (up by 12.5% to $4.5362 trillion) and East
Asia (up by 19.1% to 2.5812 trillion) is particularly remarkable. The contribution rate by the EU25
was 31.9%, while East Asia contributed 26.1%. Exports from raw material exporting countries alsorose conspicuously on the back of spiraling primary product prices. In addition to an increase of
25.7% in the Middle East, exports from Australia increased by 16.5%, Brazil by 16.2%, and Russia
by 22.5%.
The export growth from the EU25, which accounted for 38.2% of world trade, rose by 12.5%
year-on-year, overtaking the 2005 figure of 8.1%. This rise springs from a significant increase intrade within the EU, which recorded a 13.0% increase in 2006 against 7.1% in 2005, as a result of
economic recovery in the area. Inward exports accounted for 67.3% of total EU25 exports in 2006.
Exports outside the EU also grew 11.6%, up from 10.3% in 2005. The rate of outward export

25

increased significantly, rising to 31.4% with expanded exports of general machinery and transport
equipment to Russia and the CIS. A particularly high increase of 14.8% was recorded by Germany,and it contributed most to the world export growth among developed countries (9.0%). Exports fromthree Central and Eastern European countries (Poland, Hungary and Czech Republic) also recorded astrong increase of 21.8% on the back of increasing machinery exports.
Due to weak dollar, exports from the U.S. (accounting for 8.7% of the world total) increased by
14.4% to $1.0366 trillion, representing an advance on the 10.7% increase recorded in 2005. However,imports also rose by 10.8%, resulting in an increase of trade deficit to $817.3 billion, against $767.5
billion in 2005. The country’s trade deficit with China represents $232.6 billion.
Exports from Russia recorded an increase of 22.5% to reach $226.5 billion Fueled by rising crude
oil prices, Russia’s crude exports increased 23.0% to $93.6 billion. The value of Russia’s crude oil
exports was the second largest in the world, and represented 41.3% of Russia’s total export value.
Imports also increased by 40.1% to $128.2 billion, the first time in four years that the import growth
has outpaced that of export. Import figures were driven up by increased imports of automobiles (up64.6% to $12.7 billion) and IT products (up 56.0% to $14.1 billion).
Brazil recorded strong export growth, up by 16.2% to $137.5 billion. This growth was driven byincreases in exports of iron ore (up 22.6% to $8.9 billion), crude oil (up 65.5% to $6.9 billion), andBase metals and related products (up 16.0% to $15.3 billion).
Although the rise in crude oil prices has slowed growth in exports from the Middle East from thefigure of over 30% recorded in 2004 since 2005, the region still recorded a 25.7% increase in 2006,
surpassing the world export growth rate.
In East Asia, China’s export value increased by 27.2% to $969.1 billion, making 2006 the fifth
consecutive year of growth over 20%. Contributing to this figure were increases in exports of IT
products (up 27.9% to $316.3 billion), which represent 30% of China’s total export value, textile
products (up 28.3% to $138.1 billion), and steel products (up 52.2% to $51.9 billion). China’s
exports represented 8.2% of the total value of world exports in 2006, putting the country in third
place behind Germany (9.4%) and the U.S. (8.7%) as an exporting country.
The ASEAN countries (Thailand, Malaysia, Indonesia, the Philippines, Singapore and Vietnam)
also recorded strong growth in 2006, with export value increasing by 17.4% year-on-year to $751.0
billion. Vietnam displayed the most conspicuous growth among the ASEAN countries, a figure of
22.8%. Vietnam’s export has increased by over 20% per year since 2003, and in 2006 exports werestrong in textiles (up 24.8% to $6.1 billion) and crude oil (up 12.2% to $7.7 billion).
India’s trade volume increased significantly, with exports up 21.7% and imports up 24.9%
year-on-year. Exports of petroleum products were particularly strong, recording an increase of 73.0%,
and rising from 10.2% to 14.5% as a percentage of India’s total exports.
Australian exports increased by 16.5% to $123.4 This growth was mainly due to favorable

26

increase in iron ore (up 28.8% to $10.8 billion), liquefied natural gas (LNG) (up 37.4% to $3.9
billion), coal (up 5.6% to $17.5 billion) and base metals and related products (up 42.6% to $11.8
billion), buoyed by spiraling primary product prices.
￭ Mineral fuels and base metals are engines of world trade growth
Looking at trade trends by product (export base), the majority of products recorded double-digit
increases in 2006 (Table I-7). Particularly high growth was recorded by mineral fuels (up 25.7%)
and base metals and related products (up 26.4%). These two categories contributed 19.3% and12.7% respectively to the increase in world trade.
Due to the escalating prices, mineral fuel exports have risen in the 25-35% range for four
consecutive years; between 2002 and 2006 the average growth rate was 30.8. During this period, themineral fuel share of world trade rose from 8.1% in 2002 to 12.6% in 2006.
In 2006, petroleum exports grew by 30.0% to $852 billion, with growth somewhat slower than the
38.9% posted in. The Middle East accounted for almost 40% (39.1%) of world crude oil exports, but
the increasing presence of Russia and Africa was also noteworthy in 2006. Russia accounted for
11.0% of world crude oil exports in 2006, an increase of 3.7 points since 2000. Africa’s share ofworld crude oil exports rose to 19.6% (a 4.0-point increase since 2000) with increased exports from
Nigeria, Libya, Angola and Algeria.
LNG exports also increased significantly, up 32.9%. The past four years have seen an averageincrease of 27.5% in LNG exports driven by rising prices and increasing global demand. Indonesia,
the world’s largest exporter of natural gas, accounted for 19.5% of exports, followed by Qatar at
15.5% and Malaysia at 12.4%. In 2006, export growth from Asia’s two main exporting countries fell
below the rate of global growth rate, with Indonesia recording a 16.2% increase to $10 billion, andMalaysia recording 15.7% to $6.3 billion. On the other hand, Qatar’s exports increased 46.4% to$7.9 billion (estimated figures) with an expansion of exports to Japan and Korea. Australia, theworld’s sixth largest exporter of LNG, commenced exports to China in 2006, and recorded anincrease of 37.4% to $3.9 billion dollars. Indonesia’s share of world total LNG exports has been
declining year by year, and the figure of 19.5% recorded in 2006 represents a 13.8-point decline
against the 33.3% recorded by Indonesian exports in 2000. Further declines are expected in future
due to problems in liquefaction plants and the drying-up of gas fields.
Among base metals and related products, steel exports recorded an increase of 16.9% to $531.7
billion. China’s steel exports increased by 52.2% to $51.9 billion, and the country increased its sharein the world’s steel market to 9.8% in 2006, from 7.5% in 2005. Significant increases in copper
exports were recorded among Central and South American countries, with Chile’s exports increasing
by 68.1% and Peru’s by 71.8%. In aluminum, there was a considerable expansion in exports from
Russia (up 31.9%) and Canada (up 41.9%).

27

As prices of mineral fuels continue to spiral upwards, exports of ethanol (ethylene/alcohol, a fuelthat has attracted interest as an oil substitute) continued their spectacular rise, increasing by 64.9%(against 57.0% in 2005) to $3.5 billion. This increase is linked to the fact that rising crude oil prices
and the need to respond to global warming have increased demand for bio-fuels, consequently
driving up prices. Increased exports to the U.S. (up 10.7-fold to $700 million) among others haveseen Brazil, the world’s largest exporter, double its exports to $1.4 billion (up 93.6%). Brazil boasts
an overwhelmingly high presence in ethanol export, increasing its share of total world exports from
35.0% in 2005 to 41.1% in 2006. China has also increased its share of world mineral fuel exports
from 2.9% to 12.3%, recording an approximately 7-fold increase against the previous year to reachan export figure of $0.4 billion on the back of increased exports to Korea (registering a 5.5-foldincrease) and Singapore (registering an 11.7-fold increase). Among ethanol import figures, imports
to the U.S. rose sharply, increasing 4.7-fold year-on-year to $1.5 billion.
The export value of corn, a raw material in the production of ethanol, had seen negative growth in2005 (down 3.6% year-on-year), but increased 16.4% in 2006 to $13 billion.
Machinery and equipment exports grew by 12.9% to $4.9266 trillion, accounting for 40% of
exports worldwide. In 2006, exports from China accounted for 9.9% of total machinery andequipment exports, while Japan accounted for 9.9% of total exports, making China number 3 in theworld, behind Germany (12.5%) and the U.S. (11.3%). (Fig. I-11). Electrical equipment exports
represented 46.7% of China’s figure of $487.1 billion in machinery and equipment exports, followed
by general machinery (38.3%), transport machinery (7.9%) and precision machinery (7.1%).
However, exports by foreign-affiliated companies accounted for 58.2% of China’s total export
volume in 2006, and the greater percentage of machinery and equipment exports were also assumed
to be made by these companies.
With demand for automobiles growing in both the U.S. and Europe, automobile exports grew by
10.2% to $644.2 billion. As major automakers shifting production overseas, passenger vehicle
exports from developing countries including China, Thailand, Mexico and South Africa haveincreased significantly (Fig. I-12). In 2006, the developing countries accounted for 18.2% of allpassenger vehicle exports, a 4.8-point increase over the figure of 13.4% recorded in 2003. Mexico
especially displayed tremendous growth in up 28.9% to $17.4 billion. Eastern European countries
also recorded significant increases, with the Czech Republic up 35.3%, Slovakia up 66.5%, and
Hungary up 65.3%. In Asia, Thailand and China recorded large increases in automotive exports, up
35.8% and 80.7% respectively. According to the Japan Automobile Manufacturers Association(JAMA), in 2006, Japanese manufacturers produced 11.48 million units domestically, and 10.97
million units overseas, an overseas production ratio of 48.9%. The ratio of domestic to overseas
production is expected to be reversed in 2007.
The developing countries accounted for 27.6% of world motorcycle exports in 2006, with China’s

28

figure of 17.5% placing it second only to Japan (34.9%).
World textile exports grew by 8.7% to reach $551.8 billion. China, the world’s largest exporter oftextiles, continued the extraordinary expansion of its exports, recording a 28.3% increase to $138.1
billion despite the U.S. and the EU import restrictions to Chinese textiles since 2005.3 Since theabolition of the quotas established under the WTO’s Multifibre Arrangement (MFA), most countries
have seen their share of world textile exports decline, while China’s share increased by 6.6 points(18.4% to 25.0%) from 2004 to 2006.

3. In November 2005, the U.S. and China signed a Memorandum of Understanding on trade in textile andapparel. According to this Memorandum, 21 categories of products exported from China to the U.S.
would become subject to import restrictions until 2008. In June 2005, an agreement was reached between
China and the EU under which China would voluntarily limit exports of 10 categories of textile products
to the EU until the end of 2007.

￭ Global IT trade grows 13.9% to $1.898 trillion
Exports of IT products (finished IT products such as computers and video equipment and IT parts
such as semiconductors) recorded strong growth in 2006, up by 13.9% to $1.898 trillion. With thecollapse of the IT bubble, trade in IT products stagnated in 2001 (down 11.8%) and 2002 (up 1.5%),
but has demonstrated more than two-figure growth every year since 2003.
The most notable phenomenon of the year was the stunning growth in IT exports from developing
countries, whose share rose from 42.0% in 2000 to 55.9% in2006. China became the world’s largest
exporter of finished IT products in 2003, of IT parts in 2005, and of IT products as a whole in 2004.
As for 2006, China accounted for 16.7% of IT exports worldwide, a more than approximately
four-fold increase since 2000, when the nation recorded a share of 4.1%. In 2006, Japan took a 9.4%
share of world exports of IT parts, putting it at the number 3 position as an exporter, while its shareof exports of finished IT products declined, placing the nation in number 6 position as an exporter
behind China, the U.S., the UK, Germany and the Netherlands (Table I-8).
Almost all categories excepting audio devices either remained at the same level or increased
against the previous year.
Flat panel displays demonstrated the greatest growth among IT products, increasing by 21.2% to$98.2 billion. China’s exports increased by 38.4% to $24.0 billion, representing a 24.4% share of theworld market (a 3-point increase over the 2005 figure of 21.4%). Korea eclipsed Japan to take 2nd
place as an exporter in this market, increasing its exports by 27.5% to $13.3 billion against Japan’s
increase of 17.3% to $12.3 billion.

29

Dramatic growth was also recorded in video equipment exports, with an increase of 17.5% fueledby global demand for liquid crystal televisions and plasma televisions. Telecommunications
equipment exports also grew well, up 19.2% to $278.9 billion. In this area, the category that includes
mobile phones (HS852520) recorded an increase of 14.6%. U.S. Strategy Analytics indicates that the
number of mobile handsets shipped globally increased by 24.7% as new contracts have been signed
in emerging economies such as China and India, reaching a new record of 1 billion units in 2006. In
India, enormous population and a low diffusion rate led to a net increase of 67.27 million contracts
in FY2006, bringing the nation’s total number of users to 166.05 million (data from Telecom
Regulatory Authority of India [TRAI]).
Exports of semiconductors and electronic component recorded a 14.2% increase to $422.2 billion,
representing an 8.6-point year-on-year increase, and exports of electronic tubes and integrated
circuits were both up approximately 8 points against the previous year. According to the U.S.
Semiconductor Industry Association (SIA), favorable economic conditions in the main markets andstrong sales of domestic electronic products such as high-definition television (HDTV) sets
contributed to the expansion of the market for semiconductors.

(2) China’s trade structure changing, Imports of intermediate goods slowing
China’s trade surplus has expanded markedly since 2005. The nation’s 2006 balance of trade rose
sharply up $75.6 billion from the previous year to reach $177.5 billion (Table I-9). Until this point,
export and import growth rates had been similar. Since 2005, however exports have grown 7-10
points faster than imports. The expansions of foreign-affiliated parts manufacturers’ production and
China’s growing technological capability have resulted in rapid growth in local production ofintermediate goods. The previous pattern of importing intermediate goods for assembly in China,
followed by export of final goods, is changing.
In 2006, intermediate goods represented 56.0% of China’s imports, and final goods represented
57.2% of its exports. Intermediate goods were mainly imported from Korea, Taiwan, Japan and
ASEAN (imports from these countries and regions accounted for 60% of China’s total imports ofintermediate goods). The majority of final goods were exported to Europe, the U.S. and Japan. As
part of an East Asian production network, intermediate goods are imported from within the region,
assembled and processed in China, and the final goods are exported to developed countries.
Growth in China’s imports of intermediate goods and exports of final goods had previously been
almost in balance. However, the growth in the nation’s imports of intermediate goods peaked at
46.8% in 2002, and dropped to 17.5% in 2006. Meanwhile, the final goods’ growth rate was muchhigher, at 25.0% in 2006.

Imports of intermediate goods, which accounted for 61.4% of China’s

total imports in 2002, accounted for only 56.0% in 2006. The share of final goods in the nation’s
total exports also declined, but the fall was small compared to that of imports of intermediate goods

30

(Fig. I-13). Despite the slow down of imports of intermediate goods imports, the nation’s exports offinal goods such as home electronics and transportation equipment are continuing to grow strongly,
and have recorded an increase of around 30% since 2003.
This change in China’s trade structure shows the increase in domestic production of intermediate
goods as well as the increasing infiltration of foreign-affiliated parts manufacturers and improvementin Chinese companies’ technology, resulting in a greater reliance on domestic production rather thanimport, for the sourcing of intermediate goods.
Japanese companies are working to expand local procurement in China.

In JETRO’s

November-December 2006 survey of Japanese manufacturers in Asia, we found the percentage ofJapanese companies doing business in China that are increasing local procurement was up 4.0 points
to 50.9%. Japanese automotive manufacturers are also seeking to expanding their local procurementin China in the next three to four years.
￭ The world trade begins to decline in 2007
Trade (export) statistics for the 16 major countries and regions for which quarterly data isavailable up to the first quarter of 2007 show that trade growth slowed to 10.5% in the first quarterof 2007 (Table I-10).
By product, there was a decline in mineral fuels, including crude oil (down 5.9%), in addition to aconspicuous slowing of growth in the area of machinery and equipment. The IT-related productexports displayed a declining tendency from the third quarter of 2006, and slowed to record growthof only 2.5% in the first quarter of 2007.

(3) World service trade increases by 10.6% in 2006
World trade in services (cross-border private sector service exports, excluding government
services) remained the same in 2006 as the previous year, recording an increase of 10.6% to reach$2.7108 trillion (Table I-11).
By category, trade in transportation increased by 9.2% to $625.9 billion, travel by 7.3% to $737.1
billion, and “other services”s (financial services, insurance, telecommunications, royalties andlicense fees, etc.) increased by 13.1% to $1.3477 trillion. “Other services”, a category which hasrecorded double-digit growth for five consecutive years, was the only category of services recording
the growth that has exceeded that of the previous year.
According to the World Tourism Organization (WTO), the number of travelers (arrivals basis)
globally increased by 4.5% to 842 million in 2006. Despite rising crude oil prices and safetyconcerns, the strong growth in the travel sector recorded in 2005 continued in 2006.
In 2006, trade in services maintained strong growth at levels similar to the previous year in the
majority of countries and regions (Table I-12). Looking at the main 20 service-exporting countries,

31

Japan surpassed France to take fourth place behind the U.S., the UK and Germany.
Service exports from the U.S., the leading nation in service trade, increased by 9.4% to $387.4
billion in 2006. U.S. service imports increased 9.1% to $306.7 billion. Growth in the “otherservices”, which accounted for approximately 50% of U.S. service exports, was particularly strong
against a background of increased trade in financial services. An increase of 11.5% was recorded inthis category.
Services trade grew by 8.8% to reach $1.2472 trillion in the EU25. Growth in transport services
declined to 7.4% against a figure of 11.2% in 2005, but growth accelerated in both travel services(from 4.6% to 6.3%) and “other services” (from 9.5% to 10.6%). The growth in travel services is
considered to be an effect of large-scale sporting events.
In Asia, service trade grew by 15.2% to reach $613.9 billion. China’s exports grew 17.0% to $86.5
billion, giving the nation a 3.2% share of world services exports. Trade in the services sector
increased by 11.9% to $57.3 billion in Singapore. Growth in travel services was particularly marked
in Singapore, with the rate of growth in this area accelerating from 9.8% in 2005 to 19.5% in 2006.
Singapore removed the ban of casinos in 2005, and the government has set a target of doubling thenumber of foreign tourists and tripling tourism revenues by 2015.
The rate of growth of services trade in India was the highest recorded by any of the majorcountries, with year-on-year growth of 33.8% in exports and 40.5% in imports. Software services
represented almost 40% of India’s service exports, and this category grew strongly, increasing 33.5%
to $28.8 billion.

Table I-4

World trade indices
2005

2006

US$ billion

Unit

6,447

7,498

9,111

10,381

11,874

Nominal growth rate

%

4.9

16.3

21.5

13.9

15.4

Real growth rate

%

4.1

6.1

12.6

8.8

9.8

Export price growth rate

%

0.8

10.2

9.0

5.2

5.6

US$ billion

1,608

1,842

2,211

2,452

2,711
10.6

World merchandise trade (based on exports)

World trade in services

2002

2003

2004

Growth rate

%

7.3

14.6

20.0

10.9

World real GDP growth rate

%

3.1

4.0

5.3

4.9

5.4

Growth in industrial production index (22 industrialized economies)

%

-0.5

1.3

2.9

1.8

3.7

Crude Price (average)
oil
Demand

US$/barrel

25.0

28.9

37.8

53.4

64.3

Million barrels/day

77.7

79.2

81.9

83.1

83.7

Change in nominal effective exchange rate of U.S. dollar%-1.6
Notes: 1. 2006 trade value and growth rates are JETRO estimates.
2. Real GDP growth rates based on purchasing power parity.
3. A negative change in the nominal effective exchange rate of the U.S. dollar indicates depreciation.
Sources: IMF, IFS , and WEO ; WTO; BP; and national trade statistics.

-12.3

-8.2

-1.5

-0.9

32

Table I-5

Trends in trade price indices by commodity
(%)
2002

2003

2004

2005

2006

Industrial products

2.3

14.1

9.3

3.4

4.4

Crude Oil

2.5

15.8

30.7

41.3

20.5

Primary commodities

28.4

1.7

6.9

18.5

10.3

Food

3.4

5.1

14.3

-0.3

9.9

Beverage

16.6

4.9

3.0

21.0

6.3

Agricultural raw materials

1.8

3.7

5.5

1.6

10.1

Metals

-2.7

12.2

36.1

26.4

56.5

Source: IMF, WEO.

Table I-6

World trade by country and region (2006)(US$ million, %)NAFTAU.S.A.
CanadaMexicoEU25
EU15Germany
FranceUK
Italy
Netherlands
Belgium
Spain
Sweden
New EU members
3 central and eastern European countries
Japan
East Asia
China
ROK
TaiwanHong Kong
ASEAN
Thailand
Malaysia
Indonesia
Philippines
Singapore
Vietnam
India
Switzerland
Australia
BrazilArgentina
RussiaTurkeySouth Africa
World
Industrial countries
Developing countries
BRICs

Exports

Imports

Value
Growth rate Share Contribution
1,675,209
13.1
14.1
12.3
1,036,635
14.4
8.7
8.2
388,1137.6
3.3
1.7
250,461
17.0
2.1
2.3
4,536,175
12.5
38.2
31.9
4,156,494
11.7
35.0
27.4
1,113,036
14.8
9.4
9.0
489,8535.8
4.1
1.7
447,619
13.6
3.8
3.4
411,234
10.3
3.5
2.4
462,848
14.1
3.9
3.6
369,328
10.5
3.1
2.2
205,4826.7
1.7
0.8
147,506
13.3
1.2
1.1
379,681
22.9
3.2
4.5
280,249
21.8
2.4
3.2
647,290
8.2
5.5
3.1
2,581,248
19.1
21.7
26.1
969,073
27.2
8.2
13.1
325,465
14.4
2.7
2.6
213,004
12.7
1.8
1.5
322,664
10.4
2.7
1.9
751,043
17.4
6.3
7.0
130,621
18.9
1.1
1.3
160,845
14.1
1.4
1.3
100,799
17.7
0.8
1.0
47,03714.7
0.4
0.4
271,916
18.4
2.3
2.7
39,82622.8
0.3
0.5
121,259
21.7
1.0
1.4
147,884
13.1
1.2
1.1
123,372
16.5
1.0
1.1
137,470
16.2
1.2
1.2
46,52815.3
0.4
0.4
226,524
22.5
1.9
2.6
85,50216.4
0.7
0.8
57,89711.6
0.5
0.4
11,874,183
15.4
100.0
100.0
6,668,707
11.7
56.2
44.0
5,205,476
20.5
43.8
56.0
1,454,326
24.8
12.2
18.3

Value
Growth rate Share Contribution
2,459,938
11.3
20.1
16.1
1,853,938
10.8
15.1
11.6
349,795
11.2
2.9
2.3
256,205
15.7
2.1
2.2
4,624,074
13.7
37.8
35.8
4,187,369
12.7
34.2
30.4
909,523
17.3
7.4
8.6
534,845
6.2
4.4
2.0
566,031
12.7
4.6
4.1
437,759
13.8
3.6
3.4
416,892
14.8
3.4
3.5
353,843
11.1
2.9
2.3
316,6219.8
2.6
1.8
126,771
13.9
1.0
1.0
430,255
23.7
3.5
5.3
296,683
21.5
2.4
3.4
579,294
11.7
4.7
3.9
2,295,051
16.2
18.8
20.6
791,614
19.9
6.5
8.5
309,383
18.4
2.5
3.1
202,038
11.2
1.7
1.3
335,753
11.7
2.7
2.3
656,264
14.8
5.4
5.4
128,6528.9
1.1
0.7
131,223
14.5
1.1
1.1
61,0655.8
0.5
0.2
51,53317.0
0.4
0.5
238,900
19.4
2.0
2.5
44,89121.4
0.4
0.5
172,876
24.9
1.4
2.2
141,468
11.9
1.2
1.0
132,753
11.9
1.1
0.9
91,39624.3
0.7
1.1
34,15919.1
0.3
0.4
128,151
40.1
1.0
2.4
138,295
18.4
1.1
1.4
68,15723.9
0.6
0.8
12,239,837
14.6
100.0
100.0
7,362,212
12.0
60.1
50.8
4,877,625
18.6
39.9
49.2
1,184,036
22.9
9.7
14.2

Notes: 1. Value of world trade and for the EU25, new EU members, industrial countries, and developing countries based on JETRO estimates.
2. The 3 central and eastern European countries are Poland, Hungary, and the Czech Republic.
3. ASEAN consists of 6 countries: Thailand, Malaysia, Indonesia, the Philippines, Singapore, and Vietnam.
4. Definitions of industrial countries and developing countries are based on the IFS (IMF) .
Sources: National trade statistics.

33

Table I-7

World trade (exports) in 2006
Value
Growth rate
11,874,183
15.4
4,926,611
12.9
1,583,395
12.0
24,8419.9
1,633,948
15.4
1,307,632
10.9
644,23110.2
541,039
9.6
18,31011.1
281,5319.3
401,66313.2
1,502,311
12.5
1,005,270
12.1
289,96415.2
497,041
13.3
686,362
9.6
62,202
7.7
2,262
-10.8
46,675
11.8
12,96016.4
309,768
12.2
3,495
64.9
78,688
10.4
16,056
2.9
43,125
15.6
342,855
10.2
33,76018.7
1,559,176
25.0
1,494,286
25.7
50,346
7.5
51,20932.9
1,276,577
28.4
852,01630.0
551,806
8.7
66,456
3.0
306,229
11.9
147,777
16.3
158,452
8.1
965,735
26.4
531,72116.9
326,775
15.0
204,947
20.0
49,96981.4
15,22955.2
51,640
35.9
3,260
30.6

Total value
Machinery and equipment
General machinery
Air conditioners
Electrical equipment
Transport equipment
Automobiles
Passenger vehicles
Motorcycles
Automotive parts
Precision instruments
ChemicalsIndustrial chemicals
Pharmaceuticals and medical supplies
Plastics and rubber
Foodstuffs
Seafood
Tuna
GrainsCorn
Processed food products
Ethanol (Ethyl alcohol)
Oils, fats, and other animal and vegetable products
Soybeans
Animal and plant fats
Miscellaneous manufactured goods
Iron ore
Mineral fuels, etc.
Mineral fuels
Coal
LNG
Petroleum and petroleum products
Crude oil
Textiles and textile products
Synthetic fibers and textiles
Clothing
Knit products
Cloth
Base metals and base metal products
Steel
Primary steel products
Steel products
CopperNickelAluminumLead
IT products
Computers and peripherals
Computers and peripherals
Parts for computers and peripherals
Office equipment
Telecommunications equipment
Semiconductors and electronic components
Electron tubes and semiconductors
Integrated circuits
Other electronic components
Flat panel displays
Video equipment
Audio equipment
Measuring and testing equipment
IT parts
Finished IT products
Total IT equipment
Sources: National trade statistics.

522,716
307,871
214,846
22,169278,854422,160
73,493
348,667
354,596
98,206135,013
13,455
149,751
991,602906,394
1,897,996

34

9.6
9.0
10.4
18.8
19.2
14.2
12.8
14.5
15.9
21.2
17.5
-8.7
13.5
14.0
13.9
13.9

(US$ million, %)ShareContribution
100.0
100.0
35.6
41.5
10.7
13.3
0.1
0.2
13.8
13.8
8.1
11.0
3.8
5.4
3.0
4.6
0.1
0.2
1.5
2.4
3.0
3.4
10.5
12.7
6.8
8.5
2.4
2.4
3.7
4.2
3.8
5.8
0.3
0.5
0.0
0.0
0.3
0.4
0.1
0.1
2.1
2.6
0.1
0.0
0.5
0.7
0.0
0.1
0.4
0.4
2.0
2.9
0.3
0.3
19.7
13.1
19.3
12.6
0.2
0.4
0.8
0.4
17.8
10.8
12.4
7.2
2.8
4.6
0.1
0.6
2.1
2.6
1.3
1.2
0.7
1.3
12.7
8.1
4.8
4.5
2.7
2.8
2.2
1.7
1.4
0.4
0.3
0.1
0.9
0.4
0.0
0.0
4.4
2.6
1.8
0.2
2.3
3.6
0.6
2.9
3.0
0.8
1.1
0.1
1.3
8.4
7.6
16.0

2.9
1.6
1.3
0.2
2.8
3.3
0.5
2.8
3.1
1.1
1.3
-0.1
1.1
7.7
7.0
14.6

Fig. I-11

Shares of world machinery and equipment exports

(%)
18.0
16.0
14.0
12.0
10.0

15.8

15.2

12.3

13.7
12.4
11.8

10.7

12.5

11.2
10.3

10.4

10.6

10.7

12.9

12.1
12.9

8.0
6.0

7.2

6.1

4.0

11.2
9.6
8.7

4.7

3.7

3.1

2.0

12.5
11.3
9.9
9.1

0.0
2000

2001

2002

Japan

2003

China

2004

2005

U.S.A.

2006
Germany

Sources: National trade statistics.

Fig. I-12
20.0

Developing countries' share of world passenger vehicle exports

（％）
18.2

18.0

16.3

16.0

14.8

14.0
12.0

13.7

13.8

2000

2001

13.4

12.8

11.1

10.0
8.0
6.0
4.0
2.0
0.0
1999

ROK
BrazilSouth Africa

2002

2003

Eastern Europe
Turkey
China

2004

2005

MexicoThailand
Others

Notes: 1. Definition of developing countries based on the IFS(IMF).
2. Eastern Europe are the Czech Republic, Poland, Slovakia, Hungary, and Slovenia.
Source: National trade statistics.

35

2006

Table I-8

Top ten countries/regions in IT-related exports(%)
IT Products (total)

IT parts
IT finished products
Countries/regions Share Countries/regions Share Countries/regions Share
1
China
16.7
China
12.6
China
21.1
2
U.S.A.
9.7
U.S.A.
10.2
U.S.A.
9.2
3
Japan
7.3
Japan
9.4
UK
8.0
4
Germany
6.2
Taiwan
6.6
Germany
7.1
5
UK
5.1
ROK
5.9
Netherlands
5.4
6
ROK
5.0
Germany
5.3
Japan
4.9
7
Netherlands
4.4
Malaysia
4.5
Mexico4.6
8
Taiwan4.2
Singapore
4.0
ROK
4.1
9
Malaysia
3.9
Netherlands
3.5
Malaysia
3.2
10
Mexico3.0
UK
2.4
France2.7
Sources: National trade statistics.
Rank

Table I-9

China's trade balance2000
Trade balance
24,115
Change-5,098
Exports
249,212Growth rate
27.8
Imports
225,097
Growth rate
35.8
Source: China's trade statistics.

Fig. I-13

2001
22,541-1,574
266,155
6.8
243,6138.2

2002
30,362
7,821
325,565
22.3
295,203
21.2

2003
25,534-4,828438,371
34.6
412,83639.8(US$ million, % )
2005
2006
101,881 177,459
69,93575,579761,999 969,073
28.4
27.2
660,119 791,614
17.6
19.9

2004
31,946
6,411
593,36935.4
561,42336.0

China's exports of final goods and imports of intermediate(U S $ m illio n )6 ,0 0 0(% )5 ,5 4 7

6 1 .462
61

5 ,0 0 0

5 9 .8

4 ,4 3 7

5 9 .6

4 ,0 0 0

5 8 .55 9 .0
3 ,0 0 0
2 ,0 0 060

3 ,7 7 559
5 8 .2

2 ,4 6 9
1 ,8 1 2

4 ,4 3 5

2 ,6 1 458

5 7 .25 7 .45 6 .0

1 ,9 2 1

3 ,2 2 0

5 7 .2

3 ,4 6 857
56
55

1 ,0 0 0
54
53

0
2002

2003

2004

Im p o rts o f in te rm e d ia te g o o d s
In te rm e d ia te g o o d s' sh a re o f to ta l im p o rts

2005

2006

E x p o rts o f fin a l g o o d s
F in a l g o o d s' sh a re o f to ta l e x p o rts

N o te : B a se d o n th e U N B E C c la ssific a tio n . In te rm e d ia te g o o d s d o n o t in c lu d e p ro c e sse d fu e ls.
S o u rc e : C h in a 's tra d e sta tistic s.

36

Table I-10
products

Quarterly trade by major countries and regions in exports of major(US$million, growth rate: %)Total value

Major 16countries/regions' share of world
total in 2006
59.4

2006
Ⅰ

Ⅱ

2007
Ⅲ

Ⅳ

Ⅰ

1,664,404
1,786,621
1,809,540
1,927,602
1,839,761(14.3)(14.5)(14.0)(14.0)(10.5)
Machinery and equipment
76.3
879,910
939,991930,288
1,008,102
965,182(15.4)(14.3)(12.8)(12.8)(9.7)
General machinery
73.1
266,757
284,170
292,128
314,388
305,080(8.3)(9.8)(13.6)(15.5)(14.4)
Electrical equipmetn
80.1
304,428330,055
327,866
346,290318,758(24.0)(22.9)(13.3)(9.8)(4.7)
Transport equipment
74.7
234,953
248,169
230,676
261,884
263,620(12.9)(9.7)(11.0)(13.8)(12.2)
Precision instruments
78.8
73,771
77,596
79,61885,541
77,724(17.2)(13.1)(12.6)(12.1)(5.4)
Chemicals
61.8
216,607
231,645
237,610
243,604
255,249(7.8)(10.8)(16.9)(17.9)(17.8)
Foodstuffs
45.8
70,84674,99380,14988,60983,748(7.9)(6.8)(13.2)(16.2)(18.2)
Textiles and textile products
58.1
69,53979,37589,45682,33374,768(8.3)(11.3)(12.6)(15.5)
(7.5)
Steel
55.4
62,89570,99976,814
83,70486,711(0.9)(8.3)(30.4)(39.4)(37.9)
Iron ore (Imports)
82.5
8,874
8,835
10,293
9,961
11,438(31.3)(6.5)(24.0)(15.0)(28.9)
Mineral fuels (Imports)
69.6
262,555
282,123
300,385
252,227
248,183(38.0)(33.4)(24.0)(-1.7)(-5.5)
Crude oil (Imports)
70.9
154,374
172,116
189,298
152,776
145,336(40.8)(34.0)(28.4)(1.9)(-5.9）
IT parts
84.8
192,186
203,388219,265
225,639
199,392(17.0)(16.4)(15.9)(11.8)(3.7)
IT finished products
78.4
168,197
182,293
169,350
190,865
169,933(25.7)(26.1)
(8.6)
(7.7)
(1.0)
Total IT equipment
81.7
360,383
385,681
388,615
416,504
369,325(20.9)(20.7)(12.6)(9.9)(2.5)
Notes: 1.16 major countries and regions are U.S.A, Canada, Mexico, Germany, France, UK, Japan, China, ROK, Taiwan,
Hong Kong, Singapore, Thailand, Malaysia, Switzerland, and Brazil.
2. Iron ore, mineral fuels, and crude oil are import figures. Others are export figures.
3. Growth rates are Y o Y comparisons.
Sources: National trade statistics.

Table. I-11 Trade in services(exports)(%, US$million)
2000 2001 2002 2003 2004 2005 2006
Value Contribution
6.2

0.3

7.3

14.6 20.0 10.9

10.6 2,710,800

100.0Transportation

7.1

-0.9

4.6

13.4 24.9 12.2

9.2

625,900

20.4

Travel

3.9

-2.2

4.6

10.0 18.2

7.3

737,100

19.5

Other services

7.4

2.8

10.6 18.1 18.9 12.2

13.1 1,347,700

60.1

Value of global service exports

Source: WTO.

37

7.8

Table I-12 Trade in services by coutry and region(2006)
Exports
Growth
Value
rate
World
2,710,800 10.6
NAFTA
459,633
8.8
U.S.A.
387,383
9.4
Canada55,9597.2
Mexico16,292
1.2
Central and South America
77,000 14.2
Brazil
17,971 20.6
Europe1,382,300
8.6
EU25
1,247,200
8.8
Germany
164,235 10.6
UK
223,103
9.3
France112,353 -2.3
Italy
100,476 13.1
Spain
100,263
8.1
Netherlands
81,6904.5
CIS50,900 21.2
Russia29,820 22.0
Africa64,400 11.8
South Africa
11,793
8.2
Middle East
62,6009.4
Asia
613,900 15.2
Japan
121,395 12.5
China
86,500 17.0
ROK50,744 15.5
Hong Kong
71,323 14.7
India
72,800 33.8
ASEAN10
123,200 12.4
Singapore
57,300 11.9
Note: Value of China based on WTO estimates.
Source: WTO.

38

Share
100.0
17.0
14.3
2.1
0.6
2.8
0.7
51.0
46.0
6.1
8.2
4.1
3.7
3.7
3.0
1.9
1.1
2.4
0.4
2.3
22.6
4.5
3.2
1.9
2.6
2.7
4.5
2.1

(US$million, %)Imports
Growth
Value
Share
rate
2,619,600 10.3
100.0
400,8639.4
15.3
306,728
9.1
11.7
71,622 11.6
2.7
22,5137.6
0.9
80,100 13.5
3.1
26,740 19.9
1.0
1,222,7007.8
46.7
1,132,300
7.9
43.2
214,499
6.7
8.2
169,367
6.5
6.5
108,0153.0
4.1
100,916 13.5
3.9
76,578 17.5
2.9
77,8127.5
3.0
74,400 19.0
2.8
44,891 16.7
1.7
79,800 11.9
3.0
13,936 17.5
0.5
96,1009.5
3.7
665,500 14.3
25.4
142,775
7.7
5.5
99,700 19.9
3.8
69,423 20.2
2.7
34,731
7.2
1.3
69,532 40.5
2.7
157,400 12.7
6.0
60,767 12.4
2.3

3. Global Direct Investment and Cross-border M&As
(1) Global inward direct investment exceeds 1 trillion dollars for the second
consecutive year in 2006
In 2006 global inward direct investment grew by 25.8% year-on-year to reach $1.4215 trillion(JETRO estimate; international balance of payments base; net; flow), the second consecutive year of
figures in excess of $ 1 trillion (2005: $1.1297 trillion (Table I-13; Reference Section/Statistics: See
Table 6). Following the historical peak of $1.5876 trillion recorded for world inward direct
investment in 2000 during the M&A boom, figures declined significantly through 2003. Three
consecutive years of increases commenced in 2004, and figures reached 89.5% of their 2000 level in2006. World outward direct investment increased 43.3% to $1.4358 trillion in 2006.4
Figures for global direct investment in 2006 rivaled the historical peak due to increased activity incross-border M&As (up 14.8% year-on-year to $974.5 billion) against a background of low interest
rates, increased company desire for acquisitions prompted by profit increase under high growth
worldwide, and an increase in the number of leveraged buy-outs (LBOs) (discussed below) by
investment companies and others, in addition to strong investment in developing countries (Fig.
I-14).

4. Theoretically, figures for global inward direct investment and outward direct investment should match,but in many cases figures and trends differ in actual statistics. The reason for this is the fact that thedefinition and method of evaluation of direct investment (treatment of lower limit figures in accounts,
reinvested profits, sub-subsidiaries, transfer of profits, transactions with offshore companies, etc.) and theperiod for which direct investment is recorded in the accounts differ from country to country.

￭ Significant increases in inward and outward direct investment in the U.S.
Considered by country and region, growth in both inward and outward direct investment wasparticularly high in the U.S. The EU25 accounted for approximately half of world direct investment,
but growth was low in both inward and outward investment.
Inward direct investment in the U.S. recorded a spectacular increase, up 65.7% year-on-year to$180.6 billion, the highest investment flow since the 2000 M&A boom. The rate of contribution of
the U.S. to the global increase in inward direct investment in 2006 was 24.5%.
Looking at the figures for U.S. inward direct investment by category, ”net equity capital” recorded
an increase of 73.2% to $98.0 billion, contributing 57.9% to the growth in inward direct investmentin the country. This increase stems from an increase in M&As targeting U.S. companies, chiefly by
European companies, for example the purchase of Lucent Technologies for $14.7 billion by France’s

39

Alcatel. “Reinvestment earnings” also increased by 48.0% to $70.6 billion, contributing 32.0% to thegrowth in inward direct investment in the U.S. This was due to a 14.8% increase in the profits of U.S.
subsidiaries of foreign companies in favorable economic conditions, and an increase in the ratio ofretention of those profits (reinvestment of profits in the U.S. subsidiary rather than transfer to theforeign parent company) from 46.7% in 2005 to 60.2% in 2006.
In a reversal of the reduction that occurred in 2005, U.S. outward direct investments recorded
rapid growth to $235.4 billion in 2006. The rate of contribution of the U.S. to the overall growth inworld outward direct investment in 2006 was 56.0%.
In 2005, the effect of the American Jobs Creation Act5 caused increased repatriation of profits
from U.S. subsidiaries overseas to parent companies in the U.S., resulting in a reduction of $20.4
billion in reinvested earnings, and a consequent overall reduction in the level of outward direct
investment. With the disappearance of this special factor in 2006, reinvested earnings climbed
rapidly to $220.1 billion. Reinvested earnings accounted for almost the entirety of the increase in
U.S. inward investment in 2006, with a contribution ratio of 99.0%.

5. The aim of the American Jobs Creation Act was to encourage U.S. companies to increase investment
and create more jobs in the U.S. To this end, companies were offered tax breaks under specific conditions
if they repatriated profits from overseas subsidiaries to the U.S. as dividends.

Inward direct investment in the EU25 recorded only a minor increase, growing 2.1% year-on-year
to $668.7 billion (rate of contribution: 4.8%). However, the $80.3 billion structural reorganization of
the oil giant Royal Dutch Shell Group (RDS) in 2005 contributed significantly to this result. If thisfactor is excluded, inward direct investment in the EU25 grew 16.4% in 2006.
Inward direct investment in the EU25 from the region itself, which accounted for 72.2% of its
inward direct investment, decreased 9.2% against the previous year, due to the effect of the RDS
reorganization and other factors. Investment from outside the region, however, grew rapidly at a rateof 55.1%. Investment from the U.S. increased approximately 2.5-fold. The resurgence in the level ofreinvested profits discussed above was one factor in this increase. While the UK accepted the highest
level of investment among the EU25 in 2005, investment in the nation was down 28.8%
year-on-year to $139.5 billion in 2006, due among other factors to the RDS reorganization. By
contrast, investment rose steeply in Belgium and Italy, up 110.4% and 96.3%, respectively.
Like inward direct investment to the region, outward direct investment from the EU25 grew only
slightly in 2006, recording a 2.0% increase year-on-year to $794.9 billion. If the integration of RDS
mentioned above is excluded, the increase becomes 13.7%. Investment within the region accounted

40

for 67.3% of outward direct investment from the EU, and was down 1.7% year-on-year due to theeffect of the RDS reorganization and other factors. Investment outside the region increased by 9.6%.
Among the EU25, the level of investments by the Netherlands, the major investing nation in 2006,
were down 11.0% year-on-year to $169.9 billion due among other factors to the RDS reorganization.
Investment by Spain increased 2.1-fold to $89.7 billion on the back of large-scale M&As in the areaof electronic communications. Spain’s rate of contribution to the increase in world outward direct
investment was 11.0%, the highest contribution made by an EU25 country. Spain has been requestedby the European Commission to abolish its foreign investment support scheme6 and has been
reducing support measures from 2007 and plans to phase them out by 2010.
Inward direct investment to the ten new EU member countries increased 2.1% year-on-year to$38.8 billion. The greatest amount of investment was directed towards Poland. Investment in thenation increased by 45.0% to $13.9 billion, and accounted for approximately one-third of total
investment in the new EU member countries.

6. This system enabled Spanish companies that have opened a foreign branch or purchased shares in aforeign company for the purpose of exporting goods or services to withhold an amount of tax
corresponding to 25% of the amount invested.

￭ Investment in China records negative growth after two consecutive years of positive growth
Inward direct investment to East Asia increased 15.9% year-on-year to $174.4 billion,
representing 12.3% of the world total. China received the highest amount of investment in the region,but investment in the nation was down by 1.3% to $78.1 billion, the first time negative growth has
been recorded since 2003, when investment fell 4.5% (down 4.5%) (Table I-14). On an investment
execution basis (gross basis, excluding banks, securities, and insurance), investment in China
increased by 4.5% to $63.0 billion, but direct investment from major countries and regions declined,
including Japan (down 29.6% to $4.6 billion) and the U.S. (down 6.4% to $2.9 billion). Consideredby industry sector, investment decreased in manufacturing industries and increased in
non-manufacturing industries.
The peaking of investment in manufacturing industries and change in the investment environment
can be observed behind the slowing of investment in China. Labor cost increased an average of
12.3% per year in China between 2000 and 2005 (China Statistical Yearbook). In addition, as part ofa trend towards change in government policy regarding foreign funds, the tax refund rate for direct
taxes on increased imports has been reduced, and a tax on company earnings was adopted by the
National People’s Congress in March 2007. As of January 2008, preferential company tax measures41

relating to foreign funds will be scrapped, and a uniform tax rate (in principle, 25%), will come into
effect for all domestic and foreign companies. In addition, improvement in the foreign funding
environment is one focus of the nation’s 11th Five-year Plan (2006 to 2010), and China is attempting
to attract foreign capital to higher value-added products and service industries.
Both Hong Kong and Singapore also pushed up figures for inward direct investment in East Asia,with the former recording a 27.6% year-on-year increase to $42.9 billion to take second position in
the region after China, and the latter recording a 61.3% increase to $24.2 billion to take third
position.
The rate of increase of investment in Thailand slowed in 2006, with the nation recording an
increase of 8.9% year-on-year to finish at $9.8 billion, against an increase of 52.8% in 2005. On an
approval basis this represents a decline of 18.2% to $7.0 billion. To some extent this reduction in
investment is an effect of the large-scale automotive-related investment conducted in 2005 by
Japanese companies, but can also be seen to have been affected by political instability and unclear
economic policy directions (strengthening of restrictions on short-term capital flows, foreign funding,etc.) since the military coup and the establishment of military rule in September 2006.
India recorded a 2.5-fold year-on-year growth in investment to $16.9 billion. Inward M&As also
increased, up 44.8% to $0.79 billion. India’s high economic growth is continuing, with an averageannual growth of 8.6% in real GDP between 2003 and 2006, and the nation is experiencing an influxof direct investment that seeks to open up new markets.
Investment in Vietnam increased 2.1-fold year-on-year to $8.8 billion on a new approval basis,
representing a historical high for the country. Given its abundant and low-cost labor force, politicalstability and the prospect of relaxation of restrictions on foreign funding with its accession to the
WTO in January 2007, Vietnam has become the focus of attention as both an emerging market and apotential production base alongside China, enabling risk to be spread.
The UN’s Economic Commission for Latin America and the Caribbean (ECLAC) reports thatinward direct investment to Central and South America increased by 1.5% against 2005 to $72.4
billion. Mexico received the highest amount of investment, recording an increase of 20.8% to $19.0
billion, while investment in Brazil increased 24.7% to $18.8 billion. According to ECLAC, thesources of inward direct investment in Latin America and the Caribbean have displayed a trend
towards diversification recently, with investment from Spain, the major investor in the region, on the
decline. Investment in resources-related industries represented the major type of investment in theregion.
Inward direct investment in Israel increased 3.0-fold year-on-year to $14.2 billion, continuing
2005’s high growth (up 2.3-fold to $4.8 billion). Inward M&As also recorded a significant increasein Israel growing 3.4-fold to $8.2 billion. The majority of investment was conducted in themachinery and equipment, and software fields.

42

Israel is strong in the areas of advanced technology and military technology. In order to gain
access to the country’s technological prowess and labor force, Berkshire Hathaway, the investmentcompany operated by U.S. investor Warren Buffett, purchased the Israeli metalworking company
Iscar for $4.0 billion, while U.S. flash memory manufacturer SanDisk purchased Israel’s M-Systems
Flash Disk Pioneers for $1.5 billion. Israel’s outward direct investment also increased 4.1-fold to$13.6 billion, a figure which included the purchase of the U.S. generic pharmaceutical giant Ivax by
an Israeli counterpart, Teva Pharmaceutical Industries, for $8.4 billion.
Outward direct investment from the developing countries increased in 2006, centering on the
BRICs. Investment from Brazil increased 11.2-fold to $28.2 billion, investment from Russia
increased 40.9% to $18 billion, investment from India increased 3.9-fold to $9.7 billion, andinvestment from China increased 57.7% to $17.8 billion.

(2) 2006 level of cross-border M&As is second only to 2000; LBOs increase
According to data from Thomson Financial, the value of world cross-border M&As increased by
14.8% year-on-year in 2006 to $974.5 billion, while the number of M&As (completed mergers andacquisitions) increased by 11.5% to 7,953. The value of cross-border M&As in 2006 was second
only to the historical peak of $1.2667 trillion (9,664 M&As) recorded in 2000. On an announced
basis, cross-border M&As were up 46.0% to $1.5061 trillion (12,097 M&As), representing a new
historical record.
￭ Increase in cross-border M&As targeting U.S. and Canadian companies
M&As targeting U.S. companies increased by 39.8% year-on-year to $182.7 billion. Thesetransactions accounted for 18.7% of the total value of world M&As, representing a contribution rateof 41.3%. Large-scale M&As included the purchase of U.S. communications giant Lucent
Technologies by French counterpart Alcatel for $14.7 billion, and the $8.7 billion purchase of the
U.S. gold mining giant Glamis Gold by Canadian counterpart Goldcorp (Table I-15). Acquisitions by
U.S. companies increased by 33.4% to $207.3 billion, representing 21.3% of the world total. 2006
saw the $11.3 billion buyout of Dutch media giant VNU by a consortium including the U.S. Carlyle
Group and Blackstone Group among its members, and the $10.6 billion buyout of Denmark’s largest
telecommunications company, TDC, by Valcon Acquisition, a group of private equity funds
including Apax Partners of the UK and the U.S. Blackstone Group.
M&As targeting Canadian companies increased 2.5-fold against the previous year to $74 billion(contribution rate: 35.6%), contributing to the growth in world total M&As. Resources-related
M&As were conspicuous among these, with major acquisitions including the buyout of nickel giant
Inco by the major Brazilian resources company Companhia Vale do Rio Doce ($18.4 billion), thebuyout of nickel giant Falconbridge by Swiss nonferrous metals giant Xstrata ($18.2 billion), and the43buyout of steel maker Dofasco by Luxembourg steel giant Arcelor ($5.3 billion), one of the world’s
major steel manufacturers.
Despite the fact that M&As targeting EU25 companies declined by 4.8% against 2005 to $481.4
billion, they accounted for approximately 50% of the world total value.7 As it did in 2005, the UK
recorded the highest figures in the EU with an increase of 2.2% to $208.3 billion. Major acquisitions
include the $31.8 billion buyout of British mobile phone group O2 by Telefonica, Spain’s largest
telecommunications company, the $30.2 billion buyout of British airport management giant BAA by
the major Spanish construction group Ferrovial Group, and the $15.5 billion buyout of British
industrial gas giant BOC by German counterpart Linde.
High total transaction amounts were recorded in Germany (down 13.2% year-on-year to $56.3
billion) and France (up 31.9% to $46.1 billion). Among new EU member countries, rapid growth
was recorded by Lithuania (up 34.1-fold to $2.5 billion) and Slovakia (up 7.4-fold to $1.3 billion).
Major acquisitions included the purchase of Lithuania’s largest oil refinery, Mazeiku Nafta, by
Polish oil giant PKN Orlen ($2.4 billion) and the purchase of Slovakian electricity producer
Slovenske Elektrarne by Italian energy giant Enel ($1.1 billion). M&As by EU25 companies
declined by 10.5%, but their value still reached $430.4 billion, accounting for 44.2% of the world
total. Among the EU25, M&As increased 3.2-fold to $98.4 billion in Spain, and decreased 29.8% to$87.9 billion in the UK.

7. The Dutch steel giant Mittal Steel purchased the major Luxembourg steel producer Arcelor for $39.5
billion, but this was not recorded by Thomson Financial as a cross-border M&A because Mittaltransferred its national registration to Luxembourg.

￭ Significant increase in M&As in finance/insurance, telecommunications and mining fields
By industry category of acquired companies, 2006 saw a 43.8% year-on-year increase to $156.4
billion in the finance/insurance field (this represents the highest transaction value in the year), a
49.5% increase to $109.0 billion in the telecommunications field, and a 4.4-fold increase to $60.4
billion in the mining field. M&As in the area of real estate leasing, mortgage bankers and brokers
also increased 19.5% to $66.0 billion.
In the finance/insurance category, acquisitions included the purchase of Italy’s Banca Nazionale delLavoro by French finance giant BNP Paribas (in May and July 2006, for a total of $11.1 billion) andthe purchase of Switzerland’s largest insurance company Winterthur by French insurance giant Axa($10.0 billion). On an announced basis, this represented an increase of 29.7% year-on-year to $219.9
billion, and M&A activity centering on Europe seems set to pick up further in future with strong44

profits posted by European banks and continuing progress in the integration of financial markets
within the EU.
M&As in the area of telecommunications included the previously mentioned purchase of Britain’s
O2 by Spain’s Telefonica ($31.8 billion), of Lucent Technologies in the U.S. by France’s Alcatel($14.7 billion), and of Danish telecommunications giant TDC by a British and U.S. investmentgroup ($10.6 billion). Among other factors, the improved financial status of major companies, thesaturation of the fixed and mobile telephone markets in the countries of the manufacturing
companies, the desire to market third-generation services, and plans to expand composite services
through M&As were behind this activity in the area of telecommunications.
2006 saw a rapid increase in M&As in the mining field against a background of spiraling resource
prices. Companies in the emerging economies also made their mark as purchasers in this area.
Contributing to results in this area were the previously mentioned buyout of Canadian nickel giant
Inco by major Brazilian resources company Companhia Vale do Rio Doce ($18.4 billion), thepurchase of Canadian nickel giant Falconbridge by Swiss nonferrous metals producer Xstrata ($18.2
billion), and the purchase of the U.S. gold mining giant Glamis Gold by Canadian counterpart
Goldcorp (US8.7 billion).
Growth of M&As in the real estate leasing, mortgage bankers and brokers area was particularly
remarkable since 2004. Buyouts of German companies represented the highest percentage of thetotal (34.9%), with the majority of purchasers from the U.S. or major European countries such as the
UK and France. A group of U.S. investment funds including Goldman Sachs purchased the rights tothe department store properties of German retail and distribution giant KarstadtQuelle in March
2006 for $5.4 billion following a continuing downturn in performance for the German company.
￭ Increasing acquisition by companies in the developing economies
M&As by companies in the developing economies recorded a staggering increase of 71.9%
year-on-year to $159.5 billion in 2006. In terms of value and number, M&As by companies indeveloping economies represented less than 10% of the world total at the beginning of the 1990s.
However, figures have continued to increase, and in 2006 M&As by companies in these economies
represented 16.4% of the total value and 17.6% of the total number of M&As in 2006. M&As
between developing countries represented the greater part (58.5% on an M&A number basis) ofthese M&As.
Among the BRICs, the growth rate of M&As was significantly above the world average level in
Brazil (up 8.9-fold year-on-year to $19.7 billion), China (up 66.5% to $14.3 billion), and India (up3.3-fold to $7.1 billion). Among other factors, this increase in M&As is spurred by companies taking
action to ensure the necessary resources to respond to rapid economic growth, and companies using
the increased economic power resulting from increased profits to engage in M&As as a means of45

obtaining technologies and brands from advanced countries (Table I-16).
An examination by category of outward M&As from the BRIC countries shows Brazilian
companies to have concentrated on M&As in resources8 and manufacturing industries, with a lower
rate of activity in the area of services. The rate of outward M&As in resources-related industries has
increased in recent years in China, and the rate of outward M&As in manufacturing and service
industries is increasing in India.
The majority of outward M&As by Brazilian companies targeted companies in the U.S., Canada, andneighboring Argentina. Major acquisitions included the previously mentioned purchase of Inco byCompanhia Vale do Rio Doce (in 2006 and 2007, for a total of $20.7 billion), and the purchase ofJohn Labatt Canada by Brazilian beer giant AmBev ($7.8 billion).
Chinese companies focused on M&As of companies in East Asia (Hong Kong, etc.), but also
engaged in M&As of companies in advanced countries such as the U.S. and EU countries. Most
M&As were conducted by state-run companies, and included the acquisition of PetroKazakhstan, aBritish company holding rights to oil reserves in Kazakhstan, by the China National Petroleum
Corporation (CNPC) for $4.0 billion, and the purchase of Udmurtneft, a subsidiary of a joint venture
between British BP and a Russian oil company, by Chinese oil giant Sinopec for $3.5 billion in 2006.
In non-resources-related areas, Chinese PC giant Lenovo Group acquired IBM’s PC business for$1.8 billion, and the China Construction Bank purchased the Hong Kong-based retail subsidiary of
the Bank of America (BOA), BOA (Asia), for $1.2 billion in 2005.
Indian companies have focused on M&As targeting companies in the U.S., the EU and Asia, butsince 2003 have also expanded M&A activities in Australia and New Zealand. The fields covered arediverse, encompassing resources, pharmaceuticals and business services, among others. In 2007,
India’s Tata Steel acquired the Anglo-Dutch steel manufacturer Corus ($15.9 billion), and the Indianaluminum giant Hindalco Industries purchased its U.S. rival Novelis ($5.8 billion). M&As in
Australia were mainly mining resources-related.
M&As by Russian companies have mainly targeted companies in the U.S. and the UK, but M&As
in the Republic of South Africa have also been observed since 2004. M&As have centered on
resource-related fields, but have also been increasing in the areas of metals, copper products,
telecommunications and finance. In 2007, Russian steel giant Evraz Group acquired Oregon SteelMills of the U.S. for $2.1 billion, and Russian non-ferrous metals giant Norilsk Nickel purchased thenickel business of Finland’s OM Group for $0.8 billion (Table I-17).

8. “Resources” refers to oil/natural gas (oil refining) and the mining industry.

46

￭ Rapid rise in LBOs contributes to increase in M&As
Leveraged buyouts and other types of cash purchase have become the major form of cross-border
M&As in recent years. The opposite was the case in the M&A boom of 2000, when acquisition bymeans of share exchange (including cash sharing) accounted for the majority of transactions.
Cash-only transactions accounted for 54.9% of the total in 2006, double the 2000 figure of 27.0%,
while share exchanges were down to 7.1%, one-sixth the 2000 figure of 42.0% (Fig. I-16).
Companies are favoring cash purchases rather than share exchanges because of the ready availabilityof funds resulting from the fact that 2006 company profits in Japan, the U.S. and the Euro zone
(GDP ratio: 12%) were 25% above the long-term average (1988-2006; IMF). In addition, as will be
discussed below, the easy availability of funding is another factor in the increase in cash purchases.
In 2006, cross-border LBOs recorded a tremendous increase of 71.2% to $180.4 billion,
contributing 59.9% to the increase in cross-border M&As.
An LBO is a scheme in which the purchasing company procures funds using the assets of thecompany to be purchased as collateral, and the purchased company repays the loan following
completion of the purchase. This mechanism enables the purchasing company to conducttransactions on a scale far in advance of their available funds.
Until 2002, LBOs represented only around 5% of M&As on a value basis even at their highest.
However, in 2003, LBOs increased to account for approximately 10% of M&As, and in 2006 they
represented 18.5%. The easy availability of funds spurred by low interest rates, high liquidity and theactive willingness of banks and other financial institutions to provide funding for LBOs is one factor
driving this rapid increase in LBOs. An examination of the changes in U.S. interest rates and thenumber of cross-border LBOs indicates a pattern in which a low interest rate environment like
today’s can act as the trigger for a rapid increase in LBOs (Fig. I-17).
The main actors in cross-border LBOs are investment companies (purchasing funds, etc.).
Institutional investors are increasing their investments with investment companies in a quest forhigher operating profits, and investment funds are actively engaging in cross-border LBOs in
addition to domestic LBOs. In 2006, investment from the U.S. to Europe represented just under half
(47.1%) of cross-border LBOs, while investment within Europe represented 32.5%, meaning that
almost 80% of cross-border LBOs were conducted by the U.S. and Europe.
The current situation differs from the LBO boom in the U.S. in the late 1980s in that there is ahigher ratio of cross-border LBOs today, financing is being obtained from banks and other financial
institutions rather than by issuing high-yield bonds, and the leverage ratio (the debt to equity ratio) isaround five times lower today than in the boom. For these reasons, the risk of a collapse of the LBO
boom is limited in comparison to the previous case.
However, the financial environment that is supporting the current LBO boom is changing, with atrend towards tightening (increasing interest rates, curtailing of excess liquidity, etc.), and in future

47

there is a possibility that financing may become difficult to obtain. In addition, as illustrated by theannouncement in May 2007 by Timothy F. Geithner, President of the Federal Reserve Bank of New
York, that LBO financing by financial institutions would be the subject of intense scrutiny, there isconcern that the increasing demand for LBO financing may cause financial institutions to act
imprudently in this area.
Cash buyouts such as LBOs represented the main stream of M&As in 2006, but during the M&A
boom of 2000, M&As by means of share exchanges represented 42.0% of the total. In this type of
M&A, shares function as “currency,” and become the units in which the transaction is measured.
Therefore, if the shares increase in value, the “currency” (i.e., share value) also increases, and thevalue of the transaction increases proportionately. Before and after 2000, the purchase price inindividual M&As increased as a result of increases in share value (Fig. I-18). In addition, there were
330 M&As in 2000, the peak year, a figure significantly higher than the average of 192 for the past
decade (1997-2006). This is considered to be because numerous companies were spurred by thecontinuous announcement of large-scale M&As to conduct M&As via share exchanges (i.e., an
M&A boom).
In the first quarter of 2007, share prices were at the same level as that recorded during the ITboom, and unit prices for share exchange M&As had not returned to their 2000 level. In addition, thefigure of 183 M&As involving share exchange recorded during 2006 showed the average for the past
decade. At present, companies are controlling the value of share exchange M&As despite the factthat share prices are increasing.
￭ Trends in the first half of 2007
Cross-border M&As continued to increase between January and June 2007, recording a
year-on-year increase of 36.6% to a transaction value of $630.2 billion in 4,235 M&As. On anannouncement basis, this represents an increase of 70.2% to $1.3090 trillion. Increases are expected
to continue throughout 2007.
Looking at the countries and regions in which acquired companies are located, the EU25 recorded
an increase of 24.9% against the previous year to $316.6 billion, accounting for 50% of the world
total. Acquisitions in the UK increased in particular, up 5.4% to $130.9 billion, or 20% of the world
total. Major acquisitions included the purchase of UK electricity company Scottish Power by the
Spanish energy giant Iberdrola ($26.6 billion), and the purchase of the UK’s largest drug store chain,
Boots Alliance, by a group of U.S. private equity funds including Kohlberg Kravis Roberts ($21.5
billion). M&As also increased 55.6% in the U.S. to $125.2 billion, or 20% of the world total. The
purchase of U.S. biotechnology giant MedImmune by British pharmaceuticals giant AstraZeneca for$14.7 billion was a major acquisition in the U.S. in 2006.
By industry type, the highest transaction values were recorded in the areas of petroleum and48

natural gas (a 3.7-fold increase to $46.8 billion), finance and insurance (up 53.0% to $102.0 billion),and electric, gas and water distribution (a 6.2-fold increase to $57.9 billion). In addition to theacquisitions mentioned above, major M&As included the purchase of the European stock exchange
federation Euronext by the New York Stock Exchange (NYSE) Group ($10.2 billion) and thepurchase of Canadian petroleum company Shell Canada by the British petroleum giant Royal Dutchshell ($7.6 billion).

49

Fig. I-14

Global FDI and cross-border M&A trends(U S$ billion)
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
1995

1996

1997

1998

1999

2000

2001

G lobal inward FD I

2002

2003

2004

2005

2006

Global cross-border M &A

Sources: IM F, National and regional balance of payments statistics, Eurostat, Thomson Financial.

Table. I-13 FDI of major economies (net flows based on balance of payments)(US$ million, %)Inward FDI
U.S.A.
CanadaEU25
EU15Luxembourg
FranceGermany
Italy
Netherlands
Spain
UK
Ten new EU members
PolandSlovakia
Switzerland
Australia
Japan
East Asia
China
ROK
TaiwanHong Kong
ASEAN
Thailand
Malaysia
Singapore
India
BrazilMexicoRussiaIsrael2005

2006

108,996
28,922654,761
616,767
116,373
81,06335,866
19,922
97,66325,020195,990
37,994
9,602
2,107-1,266-35,056
3,223
150,467
79,127
6,309
1,625
33,62529,782
8,957
3,967
15,004
6,676
15,066
15,763
12,7664,754
1,129,748

180,580
69,041
668,688629,882
96,96081,07642,868
39,11477,42320,016
139,543
38,806
13,922
4,165
25,08924,531-6,789174,407
78,095
3,645
7,424
42,89442,3509,751
6,047
24,207
16,881
18,782
19,03728,732
14,1501,421,452

Growth rate

65.7
138.7
2.1
2.1
-16.7
0.0
19.5
96.3
-20.7
-20.0
-28.8
2.1
45.0
97.7
n.a.
n.a.
n.a.
15.9
-1.3
-42.2
356.9
27.6
42.2
8.9
52.4
61.3
152.9
24.7
20.8
125.1
197.7
25.8

Outward FDI
Share

12.7
4.9
47.0
44.3
6.8
5.7
3.0
2.8
5.4
1.4
9.8
2.7
1.0
0.3
1.8
1.7
n.a.
12.3
5.5
0.3
0.5
3.0
3.0
0.7
0.4
1.7
1.2
1.3
1.3
2.0
1.0
100.0

Contribution

24.5
13.8
4.8
4.5
-6.7
0.0
2.4
6.6
-6.9
-1.7
-19.4
0.3
1.5
0.7
9.0
20.4
-3.4
8.2
-0.4
-0.9
2.0
3.2
4.3
0.3
0.7
3.2
3.5
1.3
1.1
5.5
3.2
100.0

2005

2006

-7,66233,542779,470
771,821124,029
120,971
55,51441,754
190,952
41,82990,913
7,649
3,024
157
54,308-34,376
45,461
57,574
11,306
4,298
6,028
27,196
8,747
552
2,971
5,034
2,495
2,517
6,474
12,7633,323
1,001,596

235,358
45,243794,904
782,922
81,507
115,036
79,422
41,994
169,892
89,67979,457
11,982
4,266
368
81,506
20,97350,16591,378
17,8307,129
7,399
43,46015,561
790
6,041
8,626
9,676
28,202
5,758
17,97913,633
1,435,762

World
Notes: 1. JETRO estimates for the world.
2. ASEAN consists of Thailand, Malaysia, Indonesia, the Philippines, and Singapore.
3. For the Netherlands, from the 2007 JETRO White Paper on, the data include special-purpose entities (SPE).
Sources: IMF, National and regional balance of payments statistics, Eurostat and other sources.

50

Growth rate

n.a.
34.9
2.0
1.4
-34.3
-4.9
43.1
0.6
-11.0
114.4
-12.6
56.6
41.1
134.7
50.1
n.a.
10.3
58.7
57.7
65.9
22.7
59.8
77.9
43.2
103.3
71.3
287.8
1020.6
-11.1
40.9
310.2
43.3

Share

16.4
3.2
55.4
54.5
5.7
8.0
5.5
2.9
11.8
6.2
5.5
0.8
0.3
0.0
5.7
1.5
3.5
6.4
1.2
0.5
0.5
3.0
1.1
0.1
0.4
0.6
0.7
2.0
0.4
1.3
0.9
100.0

Contribution

56.0
2.7
3.6
2.6
-9.8
-1.4
5.5
0.1
-4.9
11.0
-2.6
1.0
0.3
0.0
6.3
12.7
1.1
7.8
1.5
0.7
0.3
3.7
1.6
0.1
0.7
0.8
1.7
5.9
-0.2
1.2
2.4
100.0

Table. I-14 Foreign direct investment (FDI) in China, Thailand, India, andVietnam: totals and growth rates(US$ million, %)China

ThailandIndia

VietnamYear
FDI

Growth rate

FDI

Growth rate

FDI

Growth rate

FDI

Growth rate

2002

49,308

11.5

3,335

-34.1

5,627

2.8

1,558

-38.4

2003

47,077

-4.5

5,235

57.0

4,585

-18.5

1,914

22.9

2004

54,936

16.7

5,862

12.0

5,474

19.4

2,222

16.1

2005

79,127

44.0

8,957

52.8

6,676

22.0

4,268

92.1

2006

78,095

-1.3

9,751

8.9

16,881

152.9

8,827

106.8

Note: For Vietnam, the basis is new approvals.
Sources: National trade statistics and balance of payments data.

Table. I-15 Cross-border M&A: 10 largest (2006 and first half of 2007)
2006
Acquirer company

Date

Nationality

Target Company
Industry

Nationality

Industry

Amount(US$ million)
31,798January-06

Telefonica SA

Spain

Telecommunications

O2 PLCUK

Telecommunications

June-06

Airport Development

Spain

Finance (investment)

BAA PLCUK

Air transport

30,190

COMPANHIA VALE DO RIO DOCE

BrazilMiningInco Ltd

CanadaPetroleum & natural gas

18,372

November-06
August-06

Xstrata PLC

September-06 Linde AG
December-06 Kemble Water Ltd
November-06 Alcatel SA
July-06

Valcon Acquisition BVJanuary-06

Nordic Telephone Co ApS

November-06 Osprey Acquisitions Ltd

Switzerland

MiningFalconbridge Ltd

CanadaPetroleum & natural gas

18,236

Germany

General machinery

BOC Group PLC

UK

Chemical product related

15,545

Thames Water PLC

UK

Electric, gas, water utilities

14,889Lucent Technologies Inc

U.S.A.

Communication equipment

14,674VNU NV

Netherlands

Publishing and printing

11,287Luxembourg

Finance (investment)

FranceCommunication equipment

U.S.A.

Finance (investment)

U.S.A.

Telecommunications

TDC A/S

Denmark

Telecommunications

10,618Australia

Finance (investment)

AWG PLCUK

Electric, gas, water utilities

10,409Acquirer company
Nationality

Industry

Target Company
Nationality

Industry

Amount(US$ million)

first half of 2007
Date
April-07

Iberdrola SA

Spain

Electric, gas, water utilities

Scottish Power PLC

UK

Electric, gas, water utilities

26,635June-07

AB Acquisitions Ltd

U.S.A.

Finance (investment)

Alliance Boots PLC

UK

Retail

21,450April-07

JTI(UK)Management Ltd

Japan

Finance (investment)

Gallaher Group PLC

UK

Cigarettes

18,800April-07

Tata Steel UK Ltd

India

Finance (investment)

Corus Group PLC

UK

Metals and metal products

15,856June-07

AstraZeneca PLC

UK

Pharmaceuticals

MedImmune Inc

U.S.A.

Pharmaceuticals

14,681

May-07

Vodafone Group PLC

UK

Telecommunications

Hutchison Essar Ltd

India

Telecommunications

12,748

April-07

Allianz AG

Germany

Finance (investment)

AGF

FranceFinance (life insurance)

11,107

April-07

NYSE Group Inc

U.S.A.

Finance (investment)

Euronext NV

Netherlands

Finance (investment)

10,203January-07

Merck KGaA

Germany

Pharmaceuticals

Serono International SA

Switzerland

Pharmaceuticals

8,561

April-07

Citigroup Japan Investments

U.S.A.

FinanceJapan

Finance (investment)

7,921

Nikko Cordial Corp

Notes: 1. The date is the completion date of the transaction.
2. The nationality of the aquirer is that of its ultimate parent company.
3. The definition of M&A follows Thomson Financial's (including the founding of a joint venture by integrating existing assets).
4. The ranking is based on the value of a single transaction.
Source: Thomson Financial.

51

Fig. I-15

M&A by corporations in developing nations

(%)
20
18

No.
Value

16
14

developing countries
to advanced countries

12
10
8
6
4

Between developing countries201990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Note: Definitions of industrial and developing countries are based on IFS (IMF), with the Caribbean financial centers (Bermuda, the Caymans) included in theindustrial countries. The bar graph shows the breakdown by number of M&As (acquisition of corporations in advanced countries by corporations in developing
countries, acquisitions of one corporation in a developing country by another.
Source: Thomson Financial.

Table. I-16 Cross-border M&A in BRICs(US$ million, %)2002
BRICs total
BrazilRussia
India
China
World

2003

2004

2005

2006

Value

3,675

8,903

14,167

19,758Growth rate

-37.8

142.2

59.1

39.5

45,384
129.7

Value

353

2,047

8,600

2,212

19,725Growth rate

-83.6

479.7

320.2

-74.3

791.9

Value

561

1,035

2,414

6,781

4,245

Growth rate

48.1

84.5

133.3

180.9

-37.4

Value

182

1,137

857

2,157

7,084

Growth rate

-90.3

525.9

-24.7

151.8

228.3

Value

2,580

4,684

2,297

8,606

14,331

Growth rate

71.9

81.6

-51.0

274.7

66.5

Value

418,766

338,302453,462

848,603

974,459

Growth rate

-37.0

-19.2

34.0

87.1

14.8

Source: Thomson Financial.

52

Table. I-17 Major cross-border M&A by BRICs (2003 to June 2007)
Purchaser

Completed

BrazilRussiaCompany purchased
Industry

January-07

COMPANHIA VALE DO RIO DOCE

August-04

Ambev

May-03January-07

China

Industry

Amount(US$ million)

MiningInco Ltd.

CanadaMining

20,688Beverages

John Labatt Ltd.

CanadaBeverages

7,758

Petroleo Brasileiro SA

Petroleum & natural gas

Perez Companc SA

Argentine

Petroleum & natural gas

1,028

Evraz Group SA

Metals and metal products Oregon Steel Mills Inc.

U.S.A.

Metals and metal products

2,107
2,088

December-05 Lukoil Overseas Holding Ltd.
November-05 Alfa Group

India

Nationality

Petroleum & natural gas

Nelson Resources Ltd.

UK

MiningFinance (banking)

Turkcell Iletisim Hizmetleri

TurkeyTelecommunications

1,602

Finance (investment)

Corus Group PLC

UK

Metals and metal products

15,856

April-07

Tata Steel UK Ltd.

May-07

AV Aluminum Inc.

Finance (investment)

Novelis Inc.

U.S.A.

Metals and metal products

5,767

June-07

Essar Global Ltd.

Finance (investment)

Algoma Steel Inc.

CanadaMetals and metal products

1,467

October-05

CNPC International Ltd.

Petroleum & natural gas

PetroKazakhstan Inc.

UK

Petroleum & natural gas

3,957

August-06

Sinopec Corp Qingdao Br, China

Petroleum & natural gas

OAO Udmurtneft

RussiaPetroleum & natural gas

3,500

April-06

CNOOC Ltd.

Petroleum & natural gas

NNPC-OML 130

Nigeria

Petroleum & natural gas

2,692

Note: Rio Doce of Brazil's acquisition of Canada's Inco was carried out in two stages, in November, 2006 (US$18.4 billion) and January, 2007 (US$2.3 billion); the figure stated is the totalpurchase price.
Source: Thomson Financial.

Fig. I-16
80

Means of acquisiton in cross-border M&A(% )sto ck sw ap s

70

N o n -L B O cashtran sactio n s
LB O

60

C ash o n ly

50
40
30
20
10
0
1 9 9 5 1 9 96 1 99 7 19 9 8 1 9 9 9 2 00 0 2 0 0 1 2 0 02 2 00 3 20 0 4 2 0 0 5 2 00 6
N o te: T ransactio n V alue b ase.
S o urce: T ho m so n F inancial.

53

Fig. I-17

Cross boarder LBOs and interest rate

1,000,000(%）(million dollars）

4

Cross boarder LBOs (values, log scale)long term interest rate (RHS, reverse scale)5

100,000
6
10,000
7
1,000
8

9

100
1990

1992

1994

1996

1998

2000

2002

2004

2006

Note: 20-year US government bond for interest rate. Source: Thomson Financial

Fig. I-18

Values of stock swap M&As per transaction and stock price(billion dollars)(year 95=100)
300

2.5
2.0

Transaction values

280

Stock price indices (RHS)

260
240

1.5

220
200

1.0

180
160

0.5

140
120

0.0

100
1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

(CY)

Notes: quarterly data. Transaction values are three quarters moving average and undisclosed
transactions excluded. Stock price indices are average of US, UK and Germany.
Source: Thomson Financial, etc.

54

4. Trade and Direct Investment in Japan(1) The Japanese economy: Towards a stable growth trajectory
In 2006, the Japanese economy overall settled into a stable growth trajectory driven by company
facility investments. At 2.2%, real GDP in 2006 exceeded the figure of 1.9% recorded in 2005.
Considered by quarter, the first quarter of 2007 represented the ninth consecutive quarter of positive
growth.
The “three excesses” (excess facilities, excess staff and excess debt) that acted as a drag on theJapanese economy from the latter half of the 1990s to the first half of the 2000s are largely things ofthe past. The ratio of non-performing loans held by major banks reached 8.4% at its peak (March
quarter, 2002), but was down to 1.5% in the March quarter of 2007. In addition, the employment
environment is improving against a background of solid company performance, with unemployment
down from 5.5% in August 2002 to 3.8% in April 2007. Company investment in facilities also grewat the high rate of 7.5% year-on-year in 2006, the fourth consecutive year of year-on-year positive
growth since 2003. However, these improvements in the corporate sector and the employment
environment have not necessarily translated into higher earnings, and the growth rate of personal
consumption in 2006 had little momentum at 0.8% year-on-year. Foreign demand has recently
picked up on the back of a healthy world economy, contributing 0.8 points to the growth in real GDP
in 2006 and acting as a factor supporting a stable economy.
The economic recovery commencing from January 2002 reached its 58th month in November
2006, and there is a strong possibility that this may become Japan’s longest period of sustained
postwar growth.
With Japan’s population having begun to decline from 2005, exports and the cultivation ofoverseas markets by means of active outward direct investment will be important factors in ensuring
sustainable economic growth when increased domestic demand can no longer be relied upon. In
addition, the use of advanced technologies and expertise to increase productivity, and theencouragement of investment in Japan by overseas companies to promote the revitalization ofJapan’s regional areas, will play increasingly important roles than has previously been the case.

(2) Trade in Japan￭ Five consecutive years of export increases for the first time since 1995
Turning to Japan’s trade figures (customs clearance basis), in 2006, exports increased 8.2%
year-on-year to $647.3 billion, and imports increased 11.7% to $579.3 billion (Table I-18). 2006 was
the fifth consecutive year of export increases and the fourth consecutive year of import increases.
Exports broke through the $600 billion mark for the first time against a background of export
increases driven by a weak yen and a healthy world economy. 2006 represented the first time thatfive years of consecutive export growth had been recorded since 1995. As a result, Japan’s total trade55

value (total value of imports and exports) increased 9.8% to $1,226.6 billion. The increase in importvalue, pushed up by growth in the Japanese economy due mainly to demand in the private sector andrapidly increasing crude oil prices among other factors, produced a $11.6 billion reduction in thebalance of trade to $68.0 billion. This has resulted in a reduced trade surplus for the second
consecutive year. On a quantity basis, exports increased by 7.7% and imports by 3.7%, both rates
higher than 2005.

The growth trend in 2006 continued into 2007, with exports in the first quarter ofthe year up 10.1% against the first quarter of 2006 to $166.4 billion, and imports up 4.3% to $144.7
billion. However, on a quantity basis, the rate of growth has slowed since the fourth quarter of 2006.
While the trade surplus declined for the second consecutive year in 2006, the current accountsurplus increased on an international balance of payments basis for the first time in two years. The
current account surplus increased by $4.6 billion (2.8%) year-on-year to $170.5 billion in 2006,
increasing also as a percentage of GDP to 3.9% from 3.6% in 2005. This was a result of an increasein the surplus of the balance of income , in addition to a reduction in the service trade deficit (TableI-19). The surplus of the balance of income increased for the fourth consecutive year, recording ahistorical high of $118.2 billion. Due to the fact that the trade surplus was down by $12.7 billion to$81.3 billion in the same period, the balance of income surplus exceeded the balance of trade surplus
for the second consecutive year. The increase in the balance of income was generated by increased
interest and dividends from overseas and increased reinvestment of profits resulting from greater
activity in the areas of overseas portfolio investment and direct investment. Portfolio investment
income, representing 76.3% of the balance of income, increased $11.7 billion to $90.1 billion, while
direct investment income increased $5.2 billion to $26.1 billion. According to international balanceof payments statistics by region, North America recorded the highest level of portfolio investment
income at $43.2 billion (up $5.3 billion), of which the U.S. recorded the greatest share ($41.8 billion,
up $5.1 billion). By contrast, Asia ($11.4 billion, up $1.6 billion) recorded the highest level of direct
investment income, followed by North America ($7.9 billion, up $2.1 billion).
Japan’s service balance deficit fell $5.8 billion against 2005 to $18.3 billion. This was a result of asignificant decline in the travel balance deficit, from $25.2 billion to $18.4 billion. In 2006, thenumber of overseas visitors to Japan increased by 9.0% against 2005 to 7.3 million people, dueamong other factors to the relaxation of restrictions on the issuance of visas to visitors from Asia,
while the number of Japanese citizens leaving the country for overseas travel increased only 0.8% to17.35 million people, in part because of the significant increase in air fares with the rise in crude oil
prices. These factors contributed to the reduction in the travel balance deficit.
In other service trade categories, the transport services deficit increased by $0.5 billion
year-on-year to $5.2 billion, while a $5.3 billion surplus was recorded in the other services balance.
A noteworthy feature of the other services balance was the dramatic increase in the surplus forroyalties and license fees. 2006 was the fourth consecutive year that a surplus has been recorded in56this category, with a year-on-year increase of $1.6 billion to $4.6 billion. This can be seen to be a
result of increased royalty payments to corporate head offices in Japan stemming from increased
manufacturing and sales in overseas bases by Japan’s manufacturing industries. By country andregion, the balance of royalties and license fees increased by $0.7 billion in Asia to record a $4.2
billion surplus, increased by $0.1 billion in North America to record a $1.2 billion deficit, andincreased by $0.5 billion in Western Europe to record a $0.6 billion surplus. The increase in Asia,
where Japan’s manufacturing industry is establishing production bases, is particularly noticeable.
Among other categories, the financial services balance increased by $0.8 billion to record a surplus
of $3.2 billion due to a rise in the value of service fees with an increase in purchases of Japaneseshares by non-residents, the construction services balance improved with an increase in plant orders
from the Middle East, but the surplus was reduced by a decline in the amount recorded in theinsurance services category and an increase in the deficit in the data services category.
￭ The U.S. and China drive Japanese exports
Looking at Japan’s exports (customs clearance basis) in 2006 by destination country and region(Table I-20), two noteworthy features can be indicated:1)

Two-figure growth was recorded in Japan’s exports to China, in terms of both value andquantity;

2)

There was steady growth in exports to the U.S.

Japanese exports to China grew 15.6% year-on-year to $92.9 billion, representing a two-figure
increase over the rate of 8.8% recorded in 2005. Exports of electrical equipment including electricalcomponents increased 21.3% to $25.2 billion and exerted a considerable influence in pushing up
total exports. Exports of general machinery including motors also increased, up 10.9% to $18.9
billion. Among other factors, increased plant orders from the Middle East stemming from increasingenergy demands are considered to form the background to these increases.
Japan’s exports to the U.S. increased by 8.0% year-on-year to $145.7 billion in 2006. Exports oftransportation equipment (up 18.2% to $58.9 billion), including automobiles (up 25.3% to $45.4
billion), contributed significantly to the increase in total exports. Exports to the U.S. contributed
21.9% to the increase in Japan’s total exports, 18.7% of which was represented by automobile
exports, making automobile exports the major factor in increased Japanese exports to the U.S. The
strength of demand is indicated by the magnitude of the increase in exports of passenger vehicles tothe U.S., which were up 35.8% to 2.2 million units in 2006, against 1.6 million units (up 6.7%) in2005 (Table I-21). In the first quarter of 2007, exports to the U.S. were up 2.5% to $35.3 billion
against the same period in 2006. On a quantity basis, this was a decline of 0.7%, representing thefirst decline in two years. Exports to the U.S. are being pushed down by declines in exports ofconstruction and mining machinery (down 30.5% to $0.6 billion), which have been affected by57

sluggishness in the U.S. housing market.
Considering trends in imports by country and region of origin in 2006, the following two
noteworthy characteristics emerge:
1)

Spiraling crude oil prices drove up imports from Middle Eastern countries;

2)

The rate of growth of imports from China decreased.

In terms of the rate of contribution to the rate of growth of import value, the most important
countries were China (15.5%), Saudi Arabia (14.0%) and the United Arab Emirates (UAE) (10.3%).
Imports from China increased by 8.6% year-on-year to $118.5 billion, a decline to a one-figure
increase compared to the increase of 15.8% recorded in 2005. There was also a slight decline in therate of increase on a quantity basis, from 11.2% in 2005 to 7.8% in 2006. Behind this is a slowdown
in imports of mechanical components (up 8.7% to $48.3 billion). Due to price declines, among otherfactors, imports of audio-visual equipment recorded negative growth, declining 5.8% to $7.1 billion.
In addition, an 18.2% decline in coal imports to $1.5 billion also pushed down Japan’s imports from
China. This can be seen as a result of a reduced export ability due to China’s prioritization ofdomestic consumption. The major category driving imports from China was manufactured goods,
such as metal goods (including steel construction machinery, nails, screws and bolts), which
increased 12.3% to $14.8 billion.
￭ Automobiles make major contribution to propelling exports
A review of exports by product in 2006 (Table I-22) shows that automobile exports (up 16.9%
year-on-year to $105.8 billion) contributed significantly to pushing up the total value of Japanese
exports. Other than automobiles, a considerable increase was recorded in exports of manufactured
goods (up 10.7% to $74.6 billion), such as nonferrous metals (up 47.8% to $10.8 billion). In addition
to growth in automobile exports, those to North America, the weak yen was the major factor
responsible for pushing up exports.
Automobile exports were strong throughout the year, with the export ratio of vehicles
manufactured domestically by major manufacturers exceeding 50% for the first time in 19 years,
since 1987. According to the Japan Automobile Manufacturers Association (JAMA), the number ofunits exported in 2006 increased by 18.1% to 5.97 million, and the export ratio was 52%. Despite thefact that the number of units manufactured overseas increased 3.5% to 10.97 million, production isstill not keeping pace with global demand. The sharp increase in exports of non-ferrous metals to
China (up 70.1% to $2.6 billion) is conspicuous, and increases in the price of copper and aluminum
have driven up Japan’s export value.
Turning to 2006 imports by product (Table I-23), imports of mineral fuels (up 21.4% to $160.5
billion) such petroleum (up 24.1% year-on-year to $99.2 billion in value; down 0.8% to 246.73
kiloliters in quantity) were the major factor in the overall import increase. The import price of crude58

oil exceeded $60 per barrel, increasing 25.1% to $63.90. In the third quarter of 2006, the price perbarrel exceeded $70 for the first time, reaching $70.70. The import value of petroleum increased
sharply due to the fact that the upward trend in crude oil price increases continued throughout theyear. However, the value of crude oil imports declined for the first time in 11 quarters in the fourth
quarter of 2006, declining 0.3% year-on-year to $23.1 billion. In the same period the rate of increaseof crude oil prices has stabilized, with crude at $60.8 per barrel. Import increases were also recordedin the areas of electrical equipment (up 10.3% to $74.4 billion), including semiconductor
components (up 15.7% to $24.7 billion) and manufactured goods (up 14.1% to $56.4 billion),including nonferrous metals (up 39.6% to $18.6 billion). Imports from Taiwan and South Africa
pushed up the value of imports of semiconductor components and nonferrous metals respectively.
￭ Surplus in IT trade balance increases for the first time in two years
In 2006, Japan’s IT exports increased 3.3% against 2005 figures to $138.2 billion, and imports
increased 4.5% to $85.8 billion (Table I-24). An increase in exports of IT components for the firsttime in two years saw the surplus in the IT trade balance increase by $0.7 billion year-on-year to$52.5 billion. In addition to the strength of the world economy, increased overseas investment andincreased export of core components by Japanese manufacturers are the key factors in this increasein exports of IT components.
By destination country and region, IT exports were given a considerable boost by increases inexports to China (up 19.3% year-on-year to $23.1 billion) and Mexico (up 38.6% to $3.2 billion).
Exports of IT final products (up 19.9% to $4.8billion) and IT components (up 19.2% to $18.3
billion) to China both increased significantly over 2005, with two-figure growth recorded in each.
Increased exports of semiconductor components (up 25.9% to $8.2 billion) such as integrated
circuits (up 34.3% to $6.1 billion) were a particular factor in the overall export increases, and wasdue to increased exports of components as Japanese manufacturers expand production bases in
China. Mexico is a base for the assembly of televisions for the North American market, andincreased exports of core components as Japanese electrical goods manufacturers increased theircapacity for the production of liquid crystal televisions in 2006 was a factor in the overall increase ofexports to Mexico.
IT exports declined to South Korea (down 7.8% year-on-year to $9.5 billion) and the U.S. (down
1.4% to $26.3 billion). Exports of IT components to South Korea declined, with exports ofsemiconductor components down 13.2% to $3.8 billion, and exports of other electronic parts down
8.7% to $2.2 billion. With regard to exports to the U.S., because IT final products for the U.S.
market are assembled in Mexico before export, as indicated above, there has been a decline in directexports to the U.S. In fact, exports of IT final products from Mexico increased 26.3% to $35.8
billion, of which 85.5% were exports to the U.S..

59

In terms of specific product categories, exports were driven up by increases in exports of IT
components, including semiconductor components (up 4.5% year-on-year to $41.7 billion) andelectronic parts (up 11.6% to $36.0 billion). 2006 was the fourth consecutive year of growth inexports of IT components since the low recorded in 2002, with exports climbing 6.6% to $93.6
billion. Imports of IT final products grew 0.7% to $37.2 billion, representing a decline from the
4.6% growth recorded in 2005, while growth in imports of IT components accelerated to someextent, up 7.6% (to $48.6 billion) as compared to 4.0% growth in 2005. The trend was the same inimports from East Asia, which accounted for approximately 75% of Japan’s IT imports. Imports of
IT final products were down 0.6% against 2005( to $26.2 billion), the first time in five years thatgrowth has gone below the level recorded in the previous year, while imports of IT components grew
6.4%( to $38.6 billion), advancing on the growth of 5.4% recorded in 2005. Imports of IT final
products and components formerly displayed largely identical trends, and this divergence of trends is
a noteworthy characteristic of results for 2006.
Japan’s IT import figures were driven by imports from China (up 4.5% year-on-year to $30.5
billion) and Taiwan (up 14.3% to $10.2 billion). The import value of IT components (up 6.7% to$13.8 billion) and IT final products (up 2.8% to $16.8 billion) from China both increased￭ Further development of division of production between Japan and East Asia in electricalequipment
The Grubel-Lloyd Index (GLI) is an index that shows the degree of intra-industry trade in terms ofimports and exports of goods belonging to the same industry category from individual countries. The
GLI is normally defined as 1-Σ | (exports – imports) | / Σ (exports + imports), and takes a value
between 0 and 1. As the proportion of intra-industry trade increases, the figure moves closer to 1. If
there is a divergence between exports and imports in the country in question, the GLI will be skewed,
and the figure following correction is defined as the intra-industry trade index9.
Considering the intra-industry trade index between Japan and East Asia (here defined as ninemajor countries and regions) 10 by industry (HS six-digit basis) (Table I-19), we find that the index
for electrical equipment is particularly close to 1, indicating increasing intra-industry trade in thiscategory. Looking at the destination country and regions indices for electrical equipment, East Asia’s
intra-industry trade index in electrical equipment is high, and displays an increasing tendency.
Japan’s intra-industry trade in electrical equipment with East Asia can be indicated as being more
active than the country’s intra-industry trade in this category with the U.S. or the EU25 (Fig. I-20).

9. Exports are calculated as EXij X Σ (EXij + IMij)/Σ (EXij + EXij) and imports as IMij X Σ(EXij +IMij)/Σ(IMij + IMij), where EXij is exports of commodity i from country j, and IMij is imports of60

commodity i to country j. Based on Isogai, T., Morishita, H., Ruffer, R. (2002), " Analysis of Intra- andInter-regional Trade in East Asia: Comparative Advantage Structures and Dynamic Interdependency inTrade Flows," International Department, Bank of Japan.
10. China, South Korea, Taiwan, Hong Kong, Singapore, the Philippines, Malaysia, Indonesia, Thailand.

Intra-industry trade can be classified into vertical intra-industry trade and horizontal intra-industry
trade. Vertical intra-industry trade is a pattern in which partner countries import goods of differing
quality from the same industry category. For example, Japan might export capital-intensive,high-quality goods, while importing labor-intensive, low-quality goods from another country. Thiscase represents trade with a high unit price differential between exports and imports. In horizontal
intra-industry trade, countries import and export goods belonging to the same industry category but
distinguished by design, brand, or other features. This is intra-industry trade with a low unit pricedifferential between exports and imports. The intensifying intra-industry trade between Japan andEast Asia in the electrical equipment category is vertical intra-industry trade, in which there is adivergence between the unit price of export and imports.
The trade pattern between Japan and East Asia in the electrical equipment category was analyzed
based on “Trade Patterns in the Machinery Sector” published by the Bank of Japan in 2005, in which
trade characterized by imports and exports with a price ratio of less than 1/1.25 (0.80) or more than
1.25 was defined as vertical intra-industry trade, and trade characterized by imports and exports witha price ratio of between 1/1.25 (0.80) and 1.25 were defined as horizontal intra-industry trade.
Calculations were performed using HS six-digit classifications for IT-related equipment to divide
commodities into components and final products and determine the form of trade in each case. The
divergence between import and export unit prices for the top ten components in terms of trade value
in the IT components category and the IT final products category was 25% or greater in both cases.
This indicates that vertical intra-industry trade is the trade pattern for both IT components and IT
final products (Table I-25). However, while the trade pattern is the same, for many products in the ITcomponents category, Japanese export unit prices were higher, and for many products in the IT final
products category, Japanese import unit prices were higher.
According to the Quarterly Survey of Japanese Business Activities, published by the Ministry of
Economy, Trade and Industry, Japan’s electrical equipment companies are accelerating their push
into East Asia, in particular China. The number of companies that have established bases in China
increased from 403 in FY2001 to 737 in FY2005 (Fig. I-21), and investment in facilities increased
from ¥98.2 billion to ¥221.4 billion. Investment in facilities in this industrial sector has also
increased in Japan, with investments increasing from ¥2,405.8 billion to ¥3,926.6 billion between
FY2001 and FY2005, according to the Financial Statements Statistics of Corporations by Industry

61

published by the Ministry of Finance. This indicates that the overseas expansion of Japanesecompanies is not a simple shift of production bases. It can be seen as indicating, as discussed above,that the structure in the electrical equipment sector is not one in which Japanese companies simply
supply domestically-produced parts for assembly into final products in East Asia, but that a system isdeveloping in which there is a regional division of labor in the production of parts according to thedegree of value added.

(3) Outward direct investment in Japan￭ Figures for outward direct investment set new maximum for first time in 16 years
Japanese outward direct investment (international balance of payments basis; net; flow) in 2006
continued on the growth path that commenced in 2004, increasing 10.3% year-on-year to $50.2
billion (Fig. I-22). This figure surpasses the previous maximum ($48.0 billion in 1990) for the firsttime in 16 years. Factors that can be indicated in the background are 1) active expansion intodeveloping economies, particularly in Asia, 2) development investment in oil, natural gas, etc.,
conducted to ensure rights to energy resources, and 3) increased M&As of overseas companies.
While domestic investment is concentrating in the areas of production of high value-added goods
and the development of new products, investment overseas is expanding in the area of measures formass production.11

11.

See JETRO’s “FY 2006 Survey of Japanese Firms’ International Operations” , page 51.

A number of differences emerge from a comparison of the peak period for Japanese outward direct
investment from the second half of the 1980s to the beginning of the 1990s and the present period. In
the former period, investment concentrated in North America, and largely in the U.S., while today
Asia is the major investment destination, and in particular China with its high potential for growth.
During the previous peak period, companies involved in the automotive and related industries
enhanced their production systems in the U.S. in order to avoid trade friction. In addition, astrengthening yen increased perceptions of affordability with respect to companies and real estate,
and investment picked up pace in non-manufacturing sectors such as finance and insurance and realestate. Today, in order to increase global competitiveness, investment is focusing on core operations,and is being employed to establish new production bases and expand factories, in particular in the
manufacturing sector, such as the transport equipment industry, and the tobacco and glass industries,in which major M&As have recently been conducted.

62

￭ Japanese investment in China declines for the first time in seven years
Looking at results by country and region, investments in western Europe were responsible fordriving up the total value of Japan’s outward direct investment. Within western Europe, figures forinvestment were buoyed by investment in the UK and the Netherlands. Japanese direct investment in
the UK increased by 150.4% against 2005 to $7.3 billion, while investment in the Netherlands
increased 156.3% to $8.5 billion. A certain amount of the direct investment in the UK represented alarge-scale M&A in the ceramics sector (the purchase of Pilkington by Nippon Sheet Glass) as partof a global business expansion strategy. In the case of the Netherlands, the total amount ofinvestment was boosted by increased investments in holding companies by trading companies tofund oil and natural gas development.
Investment in Asia represented 34.2% of Japan’s direct investment, increasing 6.0% year-on-year
to $17.2 billion. Investment in Asia is driving the current expansion in investment, but there was ahiatus in 2006, with the rate of growth of investment in the region slowing from the 53.7% recorded
in 2005. The growth of investment in China in particular fell by 6.2% to $6.2 billion, following six
consecutive years of growth from 2000 (Fig. I-23). In the background is a reconsideration ofstrategies for investment in China, in the wake of a backlash in relation to the rapid investment
growth since 2003, increases in the cost of investment, and a greater awareness of the risks
associated with investment in China. As can be seen in Casio’s concentration of its multiple Chinese
production bases in the hands of a newly created production subsidiary in order to increase
production efficiency and reduce costs, companies are not merely refraining from investments in
new facilities, but a trend towards consolidating production facilities in China can also be observed.
Direct investment in ASEAN 10 increased 38.4% year-on-year to $6.9 billion, boosted by alarge-scale M&A in Malaysia (the purchase of OYL Industries by Daikin). However, investment inThailand, Indonesia and the Philippines fell below 2005 levels. In the case of Thailand, this is a
result of major investments having been conducted in the country by automotive manufacturers in
2005, in addition to an effect of political instability and a higher Baht. In the case of Indonesia, it ispossible that, in addition to the slow pace of infrastructure provision, the stagnation of internal
demand affected investment.
Investments in North America, accounting for 20.3% of Japan’s outward direct investment, were
down 22.6% against 2005 to $10.2 billion. Investments in the U.S., which accounted for the majorityof North American investments, declined 23.3% to $9.3 billion. This is an effect of large-scale
pull-outs in the area of communications in the first quarter of 2006. Given the increasing focus on
specific business areas and consolidation of business by Japanese companies in the U.S., thesignificance of the U.S. holding company of NTT Communications, NTT USA, Inc., had declined,
and the company opted to disband it. In addition, Matsushita Electric Industrial made the decision tosell its stake in Universal Studios Holdings in view of the increasing distribution of image content

63online.
With regard to direct investment in the U.S., 2006 also saw a large-scale M&A in the field of
power generation (the purchase of Westinghouse by Toshiba and others), and increased reinvestmentof profits on the back of rising profits in the transportation equipment field.
Investment in Central and South America recorded a decline of 60.2% year-on-year to $2.5 billion
due to a major withdrawal in the field of transportation equipment in Mexico. An automotive
manufacturer transferred the shares in its Mexican production subsidiary held by its head office to a
newly established subsidiary in Europe. While this was not a capital withdrawal in the true sense, it
resulted in the recording of the maximum decline in investment growth and rate of contribution
among the major regions in Central and South America.
￭ Increasing investment in emerging markets
While investment in China decreased, in Asia investment in India and Vietnam, which haveattracted attention as emerging markets, increased significantly, by 92.7% to $0.5 billion and 204.4%
to $0.5 billion, respectively. Investment in the fields of transportation equipment and electricalmachinery represented the highest percentage of investments in India and Vietnam, respectively.
Advances by Japanese companies into emerging economies increased in 2006, with investments in
Brazil, Russia and Eastern European nations, in addition to India and Vietnam (Fig. I-24).
In particular, Japan’s major automotive manufacturers are increasingly advancing into India.
Suzuki increased its presence in the country, holding an inauguration ceremony in February 2007 in
Manesar, Haryana, for three new production plants for an automobile manufacture and sales
subsidiary, an engine manufacturing subsidiary, and a motorcycle manufacturing and sales subsidiary.
The company also plans to conduct further large-scale investments in the country by 2010. In thesame period, Nissan, France’s Renault and India’s Mahindra and Mahindra announced that theywould construct a factory in Chennai in Tamil Nadu to manufacture passenger cars and SUVs. The
investment conducted by the three companies over the next seven years will amount to more than
¥109.6 billion. In July 2007 Honda commenced construction of an integrated production plant,
which it intends to commence operating by the end of 2009, with an investment of approximately¥27.6 billion. The plant will manufacture passenger vehicles, including small cars.
This push by major automotive manufacturers is not limited to India, but can also be observed in
Russia (Table I-26). Following Toyota, Nissan decided in June 2006 to establish a new car assemblyplant in Saint Petersburg. In June 2007, Suzuki also announced its intention to establish a base in
Russia.
￭ Manufacturing industry boosts figures for outward direct investment
By industry category, outward direct investment in the manufacturing industry increased by 32.0%

64year-on-year to $34.5 billion in 2006, reaching a level of more than twice that of thenon-manufacturing sector. A large-scale M&A conducted in Malaysia increased investment in thearea of electrical machinery by 60.8% to $7.0 billion, boosting figures for the manufacturing sector.
Investment in the areas of glass and stone also increased significantly, up 967.6% to $2.8 billion.
Investments were also actively conducted in the oil industry in order to ensure rights to resources.
Investments in this sector were up 450.0% to $2.9 billion. An investment conducted via a holding
company in the Netherlands saw investment in the Netherlands representing the major percentage ofinvestment in this sector.
By contrast, investment in the non-manufacturing sector fell by 19.0% year-on-year to $15.7
billion. In addition to a net outflow of $3.4 billion in the communications sector, which saw alarge-scale withdrawal of capital from the U.S., this result was affected by a reduction in investmentin the finance and insurance sector, down 39.7% to $5.6 billion, following large-scale investment inthis sector in Central and South America in 2005. Investment in other non-manufacturing sectors
increased by 360.3% to $5.5 billion, as a result of a large-scale M&A in the field of U.S. power
generation (the purchase of Westinghouse by Toshiba and others). An 18.6% increase in investmentin the wholesale and retail sectors to $5.5 billion, mainly in the UK, also contributed to the result.
￭ Cross-border M&As increased in scale in 2006
The value of cross-border M&As involving Japanese companies increased by 63.6% year-on-year
to $19.9 billion in 2006, while the number of M&As declined by 24 to 212. The figure recorded in
the first half of 2007, $30.9 billion, has already exceeded the figure for 2006.
The value of cross-border M&As in 2006 reached its highest level since 2000, when M&As were
stimulated by the IT boom. The increase in the scale of cross-border M&As can be indicated as acharacteristic of 2006, and this trend has continued into 2007 (Fig. I-25). In addition, a tendency forcompanies to concentrate on their core businesses has become clear. This differs from the tendency
towards business diversification displayed in the early 1990s, as exemplified by Sony’s purchase of
the film company Columbia Pictures Entertainment and Matsushita's purchase of the major U.S. filmand entertainment company MCA.
During 2006, there were four extremely large-scale M&As that exceeded $1.0 billion involving
Japanese companies. The largest of these was the $5.4 billion purchase of U.S.-based Westinghouseby Toshiba, the U.S. engineering company Shaw Group and others. Toshiba decided on large-scale
investment based on projections of increased demand for nuclear power to ensure stable electricity
supply and as a measure to combat global warming (Table I-27). The $4.0 billion purchase of UK
Pilkington by Nippon Sheet Glass was the next-largest M&A. This purchase was stimulated by thenecessity of maximizing the synergy between the companies in the area of technologicaldevelopment.

65

The first half of 2007 saw the buyout of major British tobacco producer Gallagher by Japan
Tobacco for $18.8 billion, a purchase that set a new historical record for M&As involving Japanesecompanies. The expansion represented by this purchase will enable Japan Tobacco to benefit fromthe economies of scale achieved, in addition to enhancing its technological assets and distribution
infrastructure.
￭ Sales strategies of Japanese companies differ region by region
It will be difficult for Japanese companies to rely on an increase in domestic demand in the future,and they are therefore pursuing strategies that see them hurrying to break into overseas markets andincrease their profits on a global scale. According to the “Quarterly Survey of Overseas
Subsidiaries”, published by the Ministry of Economy, Trade and Industry, the sales ratio ofcommodities manufactured overseas (all domestic companies basis) has demonstrated a constantincrease since the middle of the 1990s, from 8.3% in FY1995 to 16.7% in FY2005. The percentages
in the area of information and communications equipment, including electronic component anddevice manufacture, and the area of transportation equipment, are over 30%. In addition, the fact thatthe percentages are at their highest in Asia, exceeding North America, indicates that Japanesecompanies are positioning their corporate activities in Asia as the center of their overseas businessstrategies.
The sales achieved by Japanese companies overseas can be broadly divided into three types: salein the country of manufacture, export to a third country other than Japan, and export to Japan(reverse import). Considered by region, there is a strong tendency for Japanese companies in North
America to expand their sales volume by means of sales in North America (Table I-28). In Europe,
there is a high proportion of export to third countries in addition to domestic sales. It is characteristicof Japanese companies in Asia, however, to seek profit by means of all three avenues: domestic sales,
exports and reverse imports. In 2006, the percentage of domestic sales in Asia rose to approximately
50% from the level of around 40% that it had maintained for a five-year period up to 2006. The
growth was particularly pronounced in China, increasing from around 35% to more than 50%.
Japanese companies do not merely regard China as a production base, but are also serious about thedevelopment of enormous consumer markets in the country.
Considered by industry, domestic sales in the country that formed the destination for investment is
the major type of sale in the transportation equipment sector, and in the related steel sector. In theelectrical machinery and precision machinery sectors, exports to third countries represents the major
sale type in all regions other than North America, with reverse imports also forming an importantsource of profit in Asia.
￭ Increase in reinvestment of profits continues

66

Japanese companies are expanding their overseas sales channels, and are adopting a strategy thatstresses reinvestment of profits overseas rather than their repatriation to Japan.
The balance of direct investment profits (interest generated by directly invested capital held
overseas, dividends, etc.) increased by $5.2 billion in 2006 to reach a $26.1 billion surplus, withincreases in Asia in particular. This figure represents the largest surplus recorded in the period since1996 for which statistics are available. Dividends and branch profits allocated from overseas
subsidiaries and related companies to parent companies increased $2.5 billion to $11.3 billion, while
reinvested profits increased $2.6 billion to $14.1 billion, both figures maintaining high rates ofincrease (Fig. I-26).
The profit ratio of overseas investments has also recovered from its drop at the time of the Asianmonetary crisis, and has recently maintained a higher level than recorded in the past. However,despite the fact that the profit ratio has overtaken that of Germany, it is still at a lower level than thatof the U.S. (Fig. I-27). The divergence between profit ratios is particularly high in Asia. Reasons thatcan be indicated for this are the facts that U.S. companies are expanding their activities
internationally in the services sector, in particular the finance industry, in addition to the
manufacturing sector, and they display a higher level of localization than Japanese companies,
leading to greater customer acceptance.12

12. For a discussion of the causes of differences in the profit ratio of investments by Japanese and U.S.
companies in China and ASEAN 4 (Thailand, the Philippines, Indonesia, Malaysia), see page 149 of the“White Paper on International Economy and Trade” (2006) published by the Ministry of Economy, Tradeand Industry.

(4) New records set for inward direct investment inflows and outflows￭ Net capital outflow recorded for the first time since 1996
In 2006, a $6.8 billion capital outflow (international balance of payments basis; net) was recordedin Japanese inward direct investment. This represents the first negative figure recorded since 1996,
but new records were set for the value of both capital inflow and outflow. Capital inflow increased
51.7% year-on-year to $45.6 billion, the highest figure since 1996. Equity capital increased 49.0% to$25.8 billion, while reinvested earnings (unallocated profits at the destination of the investment)
increased 32.4% to $2.2 billion, with both figures representing new records (Fig. I-28). Investmentby overseas companies in Japan also recorded a steady increase, with other capital (borrowing andlending of funds and sale and purchase of securities other than shares by foreign companies)
increasing by 58.7% to $17.7 billion.

67

Capital outflows from Japan also achieved a new maximum, at $52.5 billion. Equity capitalincreased 157.4% to $34.6 billion, while other capital increased 32.7% to $17.8 billion. This result
was significantly affected by the sale by UK Vodafone of their Japanese subsidiary to BB Mobile, aSoftbank Group company, in April for $17.53129 billion. (This withdrawal of capital represented
33.4% of the capital outflow from Japan on an international balance of payments basis. In its
absence, a capital outflow of $34.9 billion would have been recorded, resulting in a net capital
inflow of $10.7 billion.) Continuing capital withdrawals in response to poor business performanceby the investing company, as exemplified by U.S. GM’s sale of its stake in Suzuki ($1.956 billion),
also contributed to the increase in capital outflows. In addition, the trend towards recovery ofinvestments by foreign funds, etc., which became conspicuous in 2005, also continued in 2006.
Looking at net capital inflow and outflow by region, net outflows were recorded in the major
regions such as North America, Western Europe and Asia. In North America, the sale by GM of its
stake in Suzuki in March 2006 and a trend towards recovery of capital by some financial institutions
led to a $2.7 billion outflow, while in Western Europe, the Vodafone sale mentioned above resulted
in a capital outflow of close to $4.0 billion against a $1.1 billion inflow the previous year. In Asia, atrend towards the incorporation of Japanese branches of foreign securities companies and the partial
recovery of the capital held by the branches through bases in Asia led to a$0.9 billion capitaloutflow in 2006, against a capital inflow of $1.6 billion in 2005 (Fig. I-29).
By industry sector, the manufacturing sector, which recorded a $2.2 billion outflow in 2005,
recorded an inflow of $0.3 billion in 2006. In the non-manufacturing sector, in addition to a $9.7
billion outflow in the communications sector resulting from the Vodafone sale, an outflow ofapproximately $2.2 billion to Hong Kong was recorded in the finance and insurance sector. However,this was offset by inflows of around $1.0 billion from each of the UK, the Netherlands andSingapore, resulting in an overall capital inflow of approximately $2.3 billion (Reference
Section/Statistics: See Table 13).
In 2007, with a series of large-scale M&As targeting Japanese companies (to be discussed below),a capital inflow of$27.1 billion was recorded between January and May. While capitaloutflows totaled $12.9 billion, the net inflow of$14.2 billion represents a new high.

The stock of inward direct investment in Japan as of the end of 2006 was ¥12.8 trillion, meaningthat the scheme launched by the government in 2003 to double direct investment the levels at the endof 2001 has largely been achieved (Fig. I-30). As a result, the percentage of GDP represented byinvestment in Japan rose from 1.3% as of the end of 2001 to 2.5% in 2006, and the government hasestablished a new target, seeking to increase the figure to 5% by 2010.
￭ A paucity of large-scale domestic M&As in 2006
According to data published by Thomson Financial (completion basis), the announced value of68domestic M&As in 2006 was $3.42060 billion, a slight increase over the figure of$3.25610

billion recorded in 2005, but at 87, the number of M&As failed to break the 100 mark for the firsttime since 1999. In addition, large-scale M&As were limited to several deals by the U.S.’sinvestment banks in January, etc., and no M&A exceeded $1.0 billion, continuing the 2005 trend(Fig. I-31, Table I-29).
The numerous corporate revival-related M&As that occurred in 2003 and 2004 came from 2005 tomainly involve small and medium-sized acquisitions, and therefore do not have the presence thatthey previously did. In addition to the fact that there is largely no longer any requirement for therevival of large companies with the recovery of the Japanese economy, this is a result of anincreasing involvement of domestic funds and financial institutions in corporate revival, an area thatwas previously dominated by foreign funds, diminishing the relative presence of the latter. There
have been increasing cases recently, on the other hand, of foreign funds, etc., involving themselvesin companies with minimal investments, and on that basis making stockholder proposals regarding
dividend increases, abolition of lockup policies, selection of board members and the like (TableI-30).
By country and region, domestic M&As initiated in North America continued to maintain a highlevel at 46 M&As totaling $1.971 billion, while the presence of East Asian companies also displayeda gradual increase. In 2006, 14 M&As were initiated in Japan by East Asian companies. The
announced value of these M&As was $0.866 billion on an announced basis, a figure that represents a
new high. Among these, cases of involvement in companies based on investments to raise capital byinvestment funds in financial centers such as Hong Kong and Singapore were conspicuous, but other
M&As indicated that East Asian companies are gradually extending their power with respect to
M&As in Japan. These included the purchase of the solar power system manufacturer MSK by the
Chinese solar battery manufacturer Suntech Power, the purchase of the Kaga Central Golf Club by agroup of Korean investors, and the takeover of the computer program services company Commseedby the Korean online game company Cykan.

Column I-1
Japanese companies using Asia as a base to increase overseas profitability
According to trends in overseas profits calculated by JETRO on the basis of the consolidated
statements of listed companies for FY2006, the overseas sales ratio of Japanese companies(excluding exports from Japan, etc.) was 33.8% for the period, the next highest ratio to the 33.9%
recorded in 2005 (see Table). In addition, data for the 773 companies indicates that the value of sales
in overseas bases increased 13.0% year-on-year while operating profits increased 14.9%, marking
five consecutive years of increased revenues and increased profits. Due to the fact that domestic

69

business is generally growing strongly, in FY2006 the growth in revenue and profits recorded indomestic divisions (14.3% and 33.4% respectively) were higher than those in overseas divisions, butfrom a longer-term perspective, overseas divisions have been supporting overall company profits
since FY2001.
Variations can be observed in the degree of overseas expansion by different industry sectors. In
terms of changes over time in the overseas sales ratio, the ratio increased from 31.8% in FY1997 to
37.6% in FY2006 in the manufacturing sector, while it declined from 24.9% to 19.6% in the
non-manufacturing sector. Other differences can be noted between industry sectors, for example thefact that the total overseas asset ratio in the manufacturing sector increased from 26.6% to 32.2%
between FY1997 and FY2006, while declining from 25.8% to 19.9% in the non-manufacturingsector.
In addition, looking at the return on assets (ROA) and asset ratio by region, both ratios are highfor both the manufacturing and non-manufacturing sectors in the Asia-Pacific region, while trends
differ for each sector in the U.S. and Europe. In the U.S. in particular, both ROA and the asset ratio
are generally high for the manufacturing sector, whereas for the non-manufacturing sector, while
ROA is high, the asset ratio is relatively low, indicating a slow start in terms of overseas expansion
in comparison with the manufacturing industry (Fig. 1). Examining the two factors which consist
ROA, -the sales to operating profit ratio (the ratios of operating profit to sales) and the ratio of returnon total assets (the ratio of total assets to sales)-, a comparison of domestic and overseas divisions
indicates that for overseas divisions, ROA is bolstered by the ratio of return on assets rather than the
profit ratio, and this trend is particularly marked in Asia. This appears to be because the increase in
ROA is supported by economic growth in the country in which the company is located rather thanthe competitiveness of the product or service itself. Over the past several years, overseas profit ratios
have tended towards improvement, but the question as to how to achieve a sustained improvement inboth the manufacturing and non-manufacturing sectors can be indicated as an issue for the future(Fig. 2).

70

TableOverseas sales and profits trends among listed companies

Sales share by region
Fiscal
year
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006

(%)

No. of World
companies
(582)
(593)
(643)
(668)
(715)
(728)
(738)
(774)
(804)
(832)

Domestic

Overseas

71.4
71.1
72.5
71.9
69.7
68.0
67.9
67.3
66.1
66.2

28.6
28.9
27.5
28.1
30.3
32.0
32.1
32.7
33.9
33.8

100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0

Americas Europe
11.3
13.4
12.4
12.6
13.7
13.7
12.9
12.2
12.5
12.6

5.4
6.0
5.4
5.2
5.5
6.0
6.1
6.4
6.3
6.9

AsiaPacific
5.8
4.9
5.5
6.4
6.7
7.8
8.2
8.8
10.1
10.3

Operating profits share by region
Fiscal
year
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006

No. of World
companies
(582)
(593)
(643)
(668)
(715)
(728)
(738)
(774)
(804)
(832)

100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0

Other
6.1
4.6
4.2
3.9
4.4
4.6
4.9
5.3
5.0
4.1
(%)

Domestic

Overseas

76.6
73.4
75.0
79.9
76.0
72.9
73.3
71.8
70.8
73.5

23.4
26.6
25.0
20.1
24.0
27.1
26.7
28.2
29.2
26.5

Americas Europe
9.8
13.8
14.1
10.4
12.4
13.0
11.1
10.9
10.8
9.1

3.4
4.8
2.1
0.7
0.6
2.8
4.3
4.7
4.7
4.1

AsiaPacific
4.8
4.4
5.0
6.0
6.7
7.2
7.5
8.6
10.0
8.3

Other
5.3
3.6
3.7
3.0
4.2
4.1
3.7
4.0
3.7
5.1

Notes: 1. The data cover listed companies whose fiscal years end between December and March (excluding banks and insurance companies) and whos
2. For FY2006, the data include corporations that had released their consolidated financial results by May 31, 2007.
3. The totals are totals of each region prior to exclusion of internal transactions within the consolidation. Total sales thus include inter-segment sales.
4. The YoY growth rate is based on the same companies as sampled in the previous year.
5. The data include some listed subsidiaries and thus are duplicated in some cases.
6. “Other,” in regions, includes data covering multiple regions, such as “Europe and America” or “overseas.”
Sources: Toyo Keizai Inc. CD-ROM of corporate financial records (to FY2005); corporations’ consolidated financial statements (FY2006).

71

Fig 2

Sales Margin and Turnover Ratio by Region

Turnover Ratio (multiple)

ROA＝１％

３％

５％

7％

2.8

▲△ All Industries●○ Manufacturing◆◇ Non-manufacturingNon-manufacturing (Asia)

2.6
2.4

Average of FY02 to 06
2.2
Non-manufacturing (Americas)

2.0

Non-manufacturing (Total
Overseas)

Average of FY97 to 01

All Industries (Asia)

1.8

Non-Manufacturing （Domestic）
Manufacturing （Europe）

1.6

Manufacturing (Asia)

All Industries （Total Overseas）
All Industries （Europe）

1.4

Manufacturing （Total Overseas）

All Industries (Americas)

All Industries (Domestic)
Manufacturing （Americas）

1.2
Non-manufacturing (Europe)

Manufacturing (Domestic）

1.0
0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0
Sales Margin (%)

Note: ROA=Operating profit/Total Asset (end of fiscal year)
Sources: Toyo Keizai Inc. CD-ROM of corporate financial records (to FY2005); corporations’ consolidated financial statements(FY2006).

72

Trends of Foreign Assets Ratio and ROA by Region（FY97 to 2001 and FY2002 to 2006）
ROA (%)
14

Total Overseas

PharmaceuticalPharmaceutical

Average of FY02 to 06

All Industries

12

11

10

Warehousing &Transportation
Services

Iron & SteelElectric
Machinery Appliances
Retail Chemicals

6

Manufacturing

WholesaleTransportation
Equipment

Nonferrous
MetalsServices

All Industries
Non-manufacturing

1

Wholesale

Construction
0.0

Non-manufacturing

2.0

4.0
6.0
Real Estate

Construction

0
0.0

5.0

10.0

Nonferrous
MetalsRetail42Machinery Iron & Steel
ChemicalsElectric
Appliances

6

Warehousing &Transportation
Services

15.0

20.0

25.0

30.0
35.0
Information &Communication

Real Estate

-2

40.0

45.0

-4

50.0

-4

8.0

10.0

12.0

Information &Communication

Services-9
Foreign Assets Ratio (%)

Foreign Assets Ratio (%)

12

Precision
Instruments

Manufacturing
Transportation
Equipment

Precision
Instruments

Average of FY97 to 01

8

Asia and Oceania

ROA (%)
16

10

RetailWarehousing &Transportation
Services

8
6

ROA (%)

Americas

ROA (%)

Services

Precision
Instruments

Pharmaceutical
8

Electric Appliances
Chemicals

Real Estate

Construction

All Industries

Services

All Industries
Machinery

42

Europe10

Electric
Appliances

6
Manufacturing

Chemicals
Machinery

Nonferrous Metals

Non-manufacturing

4

Wholesale

Manufacturing

Nonferrous Metal
0
0.0

5.0

-2

10.0

Precision
Instruments

Warehousing &Transportation
Services

15.0

2

Non-manufacturing

Transportation
Equipment

RetailWholesale-4
Iron & Steel

0

-6

0.0

-8

Foreign Assets Ratio (%)

2.0

4.0

6.0

8.0

10.0

12.0

-2
Foreign Assets Ratio (%)

Note:
1)
Figures for FY2006 exclude companies that did not disclose their assets on their financial
statements. The other figures are same as indicated in the Tables.
2)
ROA is calculated as operating profits during the fiscal year divided by total assets as of the end of
the fiscal year.
3)“Manufacturing sector” here represents 16 of the 33 classifications employed by the Tokyo Stock
Exchange, as follows: Foodstuffs, textile products, pulp and paper, chemicals, medical products,
petroleum and coal products, rubber products, glass and earth products, iron and steel, non-ferrous
metals, metal products, machinery, electrical equipment, transport equipment, precision equipment,
and other products. “Non-manufacturing sector” refers to all industries other than industries in the
manufacturing sector (excluding banks and insurance companies).
4)
For the U.S. and Europe, some industries could not be included in the graphs. The figures for suchindustries are shown in the following table (unit: %).

73

Americas
Transportation
Equipment
FY97-01
FY02-06

EuropeAssets Ratio

ＲＯＡ

Construction

Assets Ratio

ＲＯＡ

26.9
31.1

5.5
5.9

1.5
0.9

-2.4
-19.9

Pharmaceutical

Assets Ratio

ＲＯＡ

Assets Ratio

ＲＯＡ

FY97-01
FY02-06
Information &Communication
FY97-01
FY02-06

9.8
12.4

3.6
14.6

FY97-01
FY02-06
Information &Communication
FY97-01
FY02-06

4.0
2.4

5.7
22.5

Assets Ratio

ＲＯＡ

Real Estate

Assets Ratio

ＲＯＡ

40.7
17.8

1.6
-3.1

FY97-01
FY02-06

0.2
0.1

-18.7
-

Looking at the business type of purchased companies, continuing the trend of 2005, numerous
resort facilities such as golf courses were acquired for revival in 2006, with a strong drive to invest
evident in regions in which comparatively low-cost facilities remain available. M&A of realestate-related companies also registered a significant presence, with eight M&As totaling $0.465
billion. However, given indications of overheating in some real estate transactions, mainly inmetropolitan areas, and the rising trend of long-term interest rates since the end ofzero interest rate
policy of the Bank of Japan, there is less activity in the area of real estate than was previously thecase. With regard to the purchasing companies in Japanese M&As, investment funds and related
entities maintained a high share, representing approximately half of total M&As in terms of number(32) and announced value ($0.9617 billion).
In 2007, a number of major M&As have already taken place, including the acquisition of the
Nikko Cordial Group by Citigroup, the purchase of hotels managed by ANA by the Morgan StanleyGroup, and the buyout of Nissan Diesel by the Volvo Group. M&As from January to June, at anannounced value of $17.00735 billion, have already surpassed results for 2006, and have recorded
the most rapid increase ever on a semi annually basis. While there is a strong element of credit
enhancement in the purchase of the Nikko Cordial Group by Citigroup, it can, together with thepurchase of Nissan Diesel, be viewed as part of a global business reorganization. Overseas also,
having experienced a reorganization from the latter half of the 1990s to the first half of the 2000s, isonce again undergoing a new reorganization, including the separation of Chrysler from
DaimlerChrysler and the purchase of the Reuters Group by the Thomson Financial Group. In the
future, this reorganization may gather pace and involve Japanese companies.
￭ Effect of lifting the ban on triangular mergers

74

As this global business reorganization proceeds, lifting the ban on triangular mergers in May 2007is attracting attention as a systemic change that will very likely promote M&As of Japanesecompanies by overseas companies. A new Company Law fusing the former [Part II] of theCommercial Code, the Limited Company Law, and others, came into effect from May 2006. One
year later, a provision providing for increased flexibility in merger considerations came into effect,
making triangular mergers and cash-out mergers possible. Formerly, the shareholders of the acquiredcompany could only be compensated by means of shares in the acquiring company. The newprovisions make it possible, subject to the approval of the board of directors and a special resolutionof the general shareholders’ meeting of the acquired company, to employ shares issued by the parent
company of the acquiring company, among other means. This will enable foreign companies toacquire Japanese companies without the requirement for large amounts of cash, as in a takeover bid.
According to the Enforcement Regulations of the Revised Company Law promulgated in April
2007, in the event of a merger, companies are obliged to disclose information regarding theappropriateness of the merger consideration and the method of conversion of the consideration,
among other pieces of information.
With regard to tax treatment, under the former corporate restructuring tax system, if specificcriteria of eligibility were met, book price transfer of assets and liabilities (deferment of tax) wasallowed. The April 2007 amendment of the Corporation Tax and Special Taxation Measures Laws
maintains business relatedness between the parties to the merger as a condition for tax deferral, but
recognizes conditions of eligibility as being fulfilled if the parties have fixed facilities or employees.
This means that dummy companies lacking business substance do not fulfill the condition for tax
deferment. The amendment of the laws also increases the range of options available to companies
that already possess a Japanese representative when they take a Japanese company under theirumbrella without modifying their corporate structure.
The aggregate market value of shares of companies in emerging economies, in particular the
BRICs, has recently increased, and the aggregate market value of shares per company in Mexico,
Brazil, and South Africa has exceeded that of Japan (Fig. I-32). Because tax issues currently make it
difficult to conduct exchange offers using shares of the purchasing company as consideration, thelow aggregate market value of Japanese companies means that there is only a potential risk of hostile
takeovers, but the occurrence of friendly takeovers via triangular mergers by companies in emerging
countries in addition to companies in the U.S. and Europe, which have traditionally been the main
actors in M&As of Japanese companies, can be projected.
￭ Establishment of a regulatory environment suited to a period of global reorganization
The establishment of a legal system relating to corporate restructuring, including the measure that
lifts the ban on triangular mergers, has increased the possibility that Japanese companies will be

75

exposed to international pressure to restructure. Some companies are merging with other domestic
companies to become competitive on a global scale, while many cases of the implementation of
takeover prevention measures have also been observed.
Against this background, the Guidelines to Application of the Antimonopoly Act Concerning
Review of Business Combination were revised in March 2007. Under the pre-revision guidelines,
the degree of oligopoly in the domestic market was the major focus when attempting to control
market concentration through business combination. Following the revision, the degree of oligopolyin overseas markets is also considered in areas of business in which severe international competition
exists, and the standards regarding oligopoly have been relaxed. This will in some cases enable
M&As that were previously prevented because a high degree of oligopoly in the domestic market,
and, in combination with the revision of the legal system relating to corporate restructuring, will
increase the range of options available to companies in terms of restructuring.
However, there is serious concern that corporate restructuring involving foreign companies might
result in the illegal overseas channeling of technologies possessed by Japanese companies that could
be put to military use, which would have a significant impact on security. Based on the Foreign
Exchange Act, Japan’s regulations concerning inward investment include a requirement for priornotification in the case of certain types of companies, but because they were established in 1991,
aspects of the current regulations are insufficiently adapted to a situation in which economic
activities and corporate restructuring are globalized. With regard to this issue, the interim report of
the Study Group on the International Investment Environment in a Globalized Economy of the
Ministry of Economy, Trade and Industry, published in April 2007, outlined an orientation for
inward investment regulations, among other proposals suggesting that, in addition to themaintenance of the existing regulations, regulations should be extended to cover general purpose
items with significant potential for diversion to military use, and that regulations should also be
applied to the parent companies of companies operating in businesses that are subject to theregulations. A Revision of Government and Ministerial Ordinances concerning Inward Direct
Investment Regulations based on the Foreign Exchange and Foreign Trade Acts that incorporates
these proposals was formulated in June 2007, and is scheduled to be enacted in September 2007.
These regulations must not impede inward investment by constraining the advance of foreigncompanies into Japan to an unnecessary degree, and the introduction of rules that are highly
objective and transparent in terms of content, procedure and operation, and which are balanced withthe purpose of the regulations, is therefore required.

76

Table I-18 Trends in Japanese Trade(US$ million, %)
2005

2006

2006

2007
Q1
166,410
10.1
144,651
4.3
21,759
9,308
122.0
2.4
117.7
-0.1
57.5
-3.4
15.6
58.2
119.4
-2.1

Q1
Q2
Q3
Q4
Exports 598,215
647,290 151,191
158,145 166,258
171,696
YoY change (%)
5.9
8.2
4.8
7.3
10.4
10.1
Imports 518,638
579,294 138,741
142,591 148,608
149,354
YoY change (%)
14.1
11.7
14.2
11.5
11.5
9.9
Trade balance
79,577
67,997
12,45015,554
17,651
22,342
YoY change-30,792-11,581-10,370-3,932327
2,395
Export volume index
114.4
123.2
119.2
122.5
125.6
125.4
YoY change (%)
0.8
7.7
11.2
8.8
8.3
3.3
Import volume index
117.9
122.3
117.8
121.9
122.7
126.8
YoY change (%)
2.9
3.7
2.6
4.5
3.0
4.9
Crude oil imports price (US$/barrel)
51.1
63.9
59.5
64.9
70.7
60.8
YoY change (%)
40.5
25.1
46.1
30.6
26.0
6.2
Ratio of oil imports
15.4
17.1
17.4
17.4
18.3
15.5
Radio of manufactured imports
58.6
56.8
56.2
56.3
56.3
58.3
Exchange rate (yen/$ avg.)
110.2
116.3
116.9
114.4
116.2
117.8
YoY change (%)
-1.8
-5.3
-10.6
-5.9
-4.3
-0.4
Notes: 1. The base year for volume indices is 2000.
2. Exchange rates are the interbank central rate averages for the period.
3. Quarterly growth rates are YoY comparisons.
Sources: Ministry of Finance, Trade Statistics; Cabinet Office, The System of National Accounts; and Bank of Japan ,Economic Statistics Monthly

Table I-19 Trends in Japanese current account balance

Current account balance
Balance of goods and services
Trade balance
Exports
Imports
Swervices balance
Income balance
Current transfers
Current account balance/GDP(%)

2005
165,887
69,95894,018567,889
473,872-24,060
103,510-7,580
3.6(US$ million, %)2006 value change
170,507
4,620
63,040-6,91881,296-12,722615,778
47,889534,483
60,611-18,257
5,803
118,151
14,641-10,684-3,104
3.9-

Note: Data publshed in Yen is calculated into dollars by interbank central rate
averages for the period.
Sources: Ministry of Finance, Trade Statistics; Cabinet Office, The System of
National Accounts; and Bank of Japan , Economic Statistics Monthly

77Table I-20 Japan's import /export trends with major trading partners(US$ million, %)Value
YoY change
Value
ImportsWorld
YoY change
Export volume YoY change
Import volume YoY change
Value
Exports
YoY change
Value
U.S.A.
Imports
YoY change
Export volume YoY change
Import volume YoY change
Value
Exports
YoY change
Value
EU25
Imports
YoY change
Export volume YoY change
Import volume YoY change
Value
Exports
YoY change
East Asia
Value
Imports
YoY change
Value
Exports
YoY change
Value
China
Imports
YoY change
Export volume YoY change
Import volume YoY change
Value
Exports
YoY change
Value
Imports
ASEAN 10
YoY change
Export volume YoY change
Import volume YoY change
Value
Exports
YoY changeSouth Korea
Value
Imports
YoY change
Value
Exports
YoY change
Taiwan
Value
Imports
YoY change
Value
Exports
YoY change
Hong Kong
Value
Imports
YoY change
Value
Exports
YoY change
Middle East
Value
Imports
YoY change
Value
Exports
YoY change
Central and SouthAmerica
Value
Imports
YoY change
Note: Data for EU25 in 2007 Q1is calculated in EU27.
Source: Ministry of Finance, Trade Statistics.
Exports

2005

2006

598,2155.9
518,638
14.1
0.8
2.9
134,889
6.4
64,497
3.3
2.1
1.6
88,036-1.0
59,0662.2-5.2
0.2
283,3365.6
226,48512.1
80,3408.8
109,105
15.8
2.4
11.2
76,074
4.4
73,0768.4
1.4-1.6
46,880
6.1
24,536
11.4
43,9104.7
18,187
9.1
36,132
2.1
1,580
-2.6
16,575
14.6
87,667
39.8
25,11216.0
16,10717.2

647,2908.2
579,294
11.7
7.7
3.7
145,651
8.0
68,071
5.5
8.8
0.4
93,8696.6
59,8301.3
3.9
0.9
300,1425.9
247,716
9.4
92,852
15.6
118,516
8.6
14.4
7.8
76,3490.4
79,9909.5-0.2
3.5
50,321
7.3
27,345
11.4
44,152
0.6
20,345
11.9
36,469
0.9
1,521
-3.7
19,19415.8
109,190
24.6
30,57421.8
20,411
26.7

78

2006
Q1
151,191
4.8
138,741
14.2
11.2
2.6
34,4275.0
16,404
7.1
9.3
0.3
22,6960.3
14,884-1.7
4.1
1.9
68,777
2.5
58,814
7.6
20,31813.0
27,671
6.0
19.0
7.9
17,668-4.0
19,1086.3
2.9-2.7
12,033
6.5
6,722
16.6
10,610
-3.4
4,927
11.6
8,148
-3.2
386
-3.6
4,585
19.7
26,546
44.9
7,399
24.9
5,071
33.1

Q2
158,145
7.3
142,591
11.5
8.8
4.5
35,516
6.7
17,016
2.1
8.4-3.7
23,207
7.3
14,577
-2.0
5.8
-0.9
73,891
4.9
60,3897.6
22,53617.4
28,731
6.3
18.4
6.4
18,588-4.9
19,6058.8-1.5
5.5
12,522
10.4
6,730
9.7
11,229
-2.8
4,963
9.3
9,015
2.5
361
-6.1
4,268
10.8
26,774
34.6
6,598
14.1
5,003
27.5

Q3
166,258
10.4
148,608
11.5
8.3
3.0
37,25612.4
17,3445.3
9.7
0.9
23,107
9.1
14,8382.1
4.9
0.9
77,710
7.1
62,4839.2
24,00914.3
29,8768.5
11.7
6.7
20,106
3.7
20,462
9.5
0.2
5.0
12,634
5.8
6,659
11.8
11,162
3.7
5,091
8.8
9,798
3.4
395
4.6
4,990
15.5
29,989
26.1
8,387
28.0
5,210
20.3

Q4
171,696
10.1
149,354
9.9
3.3
4.9
38,452
7.8
17,307
7.9
8.1
4.2
24,86010.1
15,5316.9
1.1
1.9
79,764
8.9
66,03012.9
25,98817.3
32,239
13.4
10.1
10.3
19,987
6.7
20,815
13.2
-2.3
5.8
13,132
6.8
7,233
8.3
11,149
5.0
5,364
17.7
9,509
0.8
379
-9.2
5,350
17.0
25,880
0.8
8,189
19.6
5,126
26.8

2007
Q1
166,410
10.1
144,651
4.3
2.4
-0.1
35,2852.5
17,0794.1-0.7
9.4
25,47011.9
15,6734.9-3.0
1.8
76,041
10.6
62,110
5.6
24,24719.3
29,8067.7
13.8
2.9
19,44010.0
20,3236.4
5.7
1.2
13,154
9.3
6,493
-3.4
10,172
-4.1
5,107
3.7
9,027
10.8
381
-1.3
5,985
30.5
25,349
-4.5
8,423
13.8
5,192
2.4

Table I-21 Trends in passenger car exports and sales in U.S.A.

Exported to U.S.A.
(YoY change)
Japanese passenger cars sold in U.S.A.
(YoY change)
Passenger cars sold in U.S.A.
(YoY change)
Japanese passenger cars produced in U.S.A.
(YoY change)

2004
1,523,220-2.7810,004-0.9
7,505,932-1.4
3,143,603
11.4(vehicles, %）
2005
2006
1,624,685
2,206,347
6.7
35.8
922,934
1,154,456
13.9
25.1
7,667,066
7,780,758
2.1
1.5
3,383,277
3,281,073
7.6-3.0

Source: Japan Automobile Manufacturers Association

Table I-22 Japanese exports by product (2006)

Total value
Foodstuffs
Raw materials
Mineral fuels
Chemiccals
Basic manufactures
Iron and steeｌ
Nonferrous metals
Manufactures of metals
General machinery
Electrical equipment
Transportation equipment
Automobiles
Others

World
Value
YoY
647,290
8.2
3,078
6.4
7,742
14.6
5,550
30.8
58,445
9.7
74,63910.7
29,987
8.2
10,752
47.8
9,023
6.3
127,344
4.6
138,262
4.4
156,898
13.3
105,78716.9
75,333
6.3

U.S.A.
Value
YoY
145,651
8.0
516
1.1
497
50.9
1,161
75.8
6,905
-0.4
8,628
9.7
2,031
24.9
724
14.4
1,999
8.8
31,3182.9
23,144-1.7
58,86218.2
45,36325.3
14,620
-1.3

EU25
Value
YoY
93,869
6.6
117
5.8
581
20.1
471
18.4
6,912
5.7
5,756
7.6
842
26.1
588
34.5
1,161
0.1
23,241
5.9
20,8000.4
23,707
8.5
15,741
5.6
12,284
15.4

China
Value
YoY
92,852
15.6
423
19.8
3,220
18.8
1,380
13.4
12,20616.6
15,061
13.7
5,951
5.3
2,599
70.1
1,549
18.8
18,947
10.9
25,215
21.3
5,373
33.0
1,557
20.6
11,027
5.6

ASEAN10Value
YoY
76,349
0.4
321
2.0
749
8.7
402
1.9
6,791
6.1
13,685
4.0
6,541
-5.2
2,304
49.4
1,812
1.0
15,634-5.8
21,734
2.4
7,337
-13.5
3,078
-15.3
9,695
10.1

(US$ million, %)Middle East
Value
YoY
19,194
15.8
44
12.3
77
60.4
11
37.4
371
12.4
3,549
26.1
1,779
36.3
273
40.2
145
16.7
3,202
32.0
1,742
4.2
9,401
11.5
8,765
11.9
796
-0.6

China
Value
YoY
118,516
8.6
8,041
1.8
1,749
3.6
2,845
-13.8
5,352
25.0
14,81712.3
20,0207.1
23,038
10.5
1,949
23.7
40,7058.2

ASEAN10
Value
YoY
79,990
9.5
5,699
1.8
8,506
44.0
21,463
10.2
4,097
5.8
7,650
16.7
7,568
0.9
15,136
0.4
975
20.3
8,897
7.6

(US$ million, %)Middle East
Value
YoY
109,190
24.6
108
-6.9
152
51.8
107,028
24.9
775
22.7
609
8.2
99
-23.8
166
-13.6
1
-17.0
252
0.1

Source: Ministry of Finance, Trade Statistics

Table I-23 Japanese imports by product (2006)

Total value
Foodstuffs
Raw materials
Mineral fuels
Chemiccals
Basic manufactures
General machinery
Electrical equipment
Transportation equipment
Others

World
Value
YoY
579,29411.7
49,122-3.1
40,72427.5
160,496
21.4
42,2397.1
56,382
14.1
53,6773.9
74,353
10.3
19,442
3.5
82,858
7.5

U.S.A.
Value
YoY
68,071
5.5
12,890
-3.6
4,009
12.1
957
-21.4
8,756
8.3
4,167
14.4
11,118
8.6
12,115
15.1
5,831
3.1
8,227
0.7

EU25
Value
YoY
59,830
1.3
5,311
-4.4
2,115
3.1
150
6.4
14,299
0.3
5,612
5.4
7,369
0.9
6,318
10.4
8,174
-0.4
10,482-0.3

Source: Ministry of Finance, Trade Statistics

79

Table I-24 Trends in Japanese IT exports and imports①Computers & peripherals (total)
Computers & peripherals
Computer components②Office equipment③Communication equipment④Semiconductor components
Electron tube, semiconductor, etc
Integrated circuit⑤Other electronic parts
Flat panel display⑥Video products⑦Audio products⑧Measuring equipment
Components
Final products
Total(US$ million, %)Exports
Imports
2006
2006
2005
2005
Value
Value
YoY
Value
Value
YoY
22,953
22,94627,117
25,771
-5.0
0.0
7,273
7,051
18,77918,057-3.9-3.0
15,68015,894
8,338
7,714
-7.5
1.4
1,205
790
460
390
-15.2
-34.4
4,428
4,027
3,487
4,129
18.4
-9.1
39,886
41,695
21,257
24,693
16.2
4.5
10,787
10,993
2,672
2,907
8.8
1.9
29,09930,702
18,58521,78517.2
5.5
32,29736,046
15,575
16,177
3.9
11.6
10,52012,340
5,497
5,354
-2.6
17.3
16,497
15,508
4,661
3,901
-16.3
-6.0
336
199
1,150
982
-14.6
-40.7
16,276
17,024
8,371
9,707
16.0
4.6
87,864
93,63545,17048,583
7.6
6.6
46,01444,60036,90837,1670.7-3.1
133,878 138,235
82,07885,750
4.5
3.3

Note: Product definition follows note 2 at the reference.

Fig, I-19

Degree of intra-industry trade between Japan and East Asia
in each industry

0.7
0.6
0.5
0.4
0.3
0.2
0.1
1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Electrical equipment

Precision equipment

General machinery

Chemical products

Transportation equipment

Food

Metal and similar products
Sources: World Trade Atlas、Bank of Japan; Trade Patterns in Japan's Machinery Sector, Analysis of Intra and Interregional Trade in East Asia: Comparative Advantage Structures and Dynamic Interdependency in Trade Flows.

80Fig, I-20 Degree of intra-industry trade between Japan and geographic area inelectrical machinery industry
0.7

0.6
East Asia
U.S.A.

0.5

EU25

0.4

0.3
1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Sources: World Trade Atlas、Bank of Japan; Trade Patterns in Japan's Machinery Sector, Analysis of Intra and Interregional Trade in East Asia: Comparative Advantage Structures and Dynamic Interdependency in Trade Flows.

Table I-25 Price fraction of top 10 products (HS codes in 6 digits) in IT trade
between Japan and East Asia
Components
HS Code1 854221
2 847330
3 852990
4 854229
5 853400
6 854140
7 853690
8 854290
9 850440
10 853224

Share in IT
components trade
31.6
11.7
10.8
6.8
4.1
4.1
3.5 2.7
2.0
1.7

name of the product
Electronic integrated circuits（digital）
Parts and accessories for automatic data etc.
Parts for radio, TV, etc
Electronic integrated circuits（other）
Printed circuits
semiconductor devices
Electrical apparatus
Electronic integrated circuits（parts）
Static converters
Ceramic dielectricPrice ratio（export unit price/import unit price)
2002
2003
2004
2005
2006
0.5
0.7
0.6
0.5
0.5
0.9
1.0
1.0
1.0
1.1
1.6
1.9
1.7
6.5
4.9
0.9
0.9
1.0
0.9
0.5
1.7
1.6
2.0
2.6
2.8
6.3
5.2
3.1
3.4
3.9
1.2
1.7
1.6
1.6
2.1
2.4
2.6
2.5
3.2
2.7
1.4
1.6
1.6
1.5
1.3

Final products
Share in IT final
Price ratio（export unit price/import unit price)products trade
2002
2003
2004
2005
2006
1 847130 Portable digital automatic data processing machines
10.6
0.7
0.8
0.7
1.0
0.7
2 847160 Automatic data processing machines (input or output units)
10.1
2.6
2.1
1.9
1.4
1.0
3 852540 Video cameras(includes digital cameras)
8.4
1.9
1.4
1.4
1.3
1.8
4 847170 Automatic data processing machines (storage units)
8.1
1.5
1.2
1.0
0.4
0.9
5 847150 Automatic data processing machines (digital processing units)
6.3
0.2
0.4
0.6
0.3
0.1
6 854389 Measuring and testing equipment
6.0
0.4
0.5
0.7
0.7
0.6
7 852520 Transmission apparatus
4.0
2.8
1.9
1.1
1.5
0.2
8 847180 Other units of Automatic data processing machines
3.4
4.1
2.2
5.5
3.2
4.2
9 903180 Measuring or checking instruments
3.3
43.0
78.4
64.6
52.8
39.6
10 852812 Color TV
2.9
0.7
0.6
0.6
0.6
0.7
Note: Colored are 0.80≦export unit price/import unit price≦1.25 rounded off to two decimal places.
Sources: Global Trade Atlas, World Trade Atlas
HS Codename of the product81Fig, I-21

Number of overseas affiliates in eletrical machinery industry

number of overseas
affiliates
800
700

China

ASEAN

600

North America

EU

500
400
300
200
100
0
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

fiscal year
Notes: 1.Electrical machinery industry includes 'Electrical machinery', 'Information and communicationequipment', and'Precision instruments'.
2.There is gap between fiscal year 2000 and 2001 as classification in industry was revised.
Source: Ministry of Economy, Trade, and Industry, Basic (Trend) Survey of Overseas Business Activities

Fig. 1-22

Trends in Japan's FDI (based on balance of payments)(US$ million)
60,000

FDI has grown to the highest level ever
50,00040,00030,00020,00010,000

0
84

86

88

90

92

94

96

98

2000

2002

2004

2006

Note: These data lack strict continuity due to differences in yen-dollar exchange rate calculation methods, changing definitions of direct
investment, and other factors. For 1985-1994, dollar-denominated values were used. For 1995, yen-denominated published values wereconverted to dollars for each six-month period using the average Bank of Japan interbank rate for the period. For 1996 on, yendenominated values were converted to dollars for each quarter using the average Bank of Japan interbank rate for the period.
Sources: Ministry of Finance, Balance of Payments Statistics ; Bank of Japan, Foreign Exchange Rates ; and others.

82

Fig. 1-23

Investment in China(US$ million)

(％)

8,000

200.0

7,000
6,000

150.0

5,000
4,000

100.0

3,000
2,000

50.0

1,000
0

0.0

-1,000-2,000Investment in China-3,000Rate of growth (right axis)-50.0-4,000-100.0
94

96

98

2000

2002

2004

2006

Sources: Ministry of Finance, Balance of Payments Statistics ; Bank of Japan, Foreign Exchange Rates

Fig. 1-24

Japanese Foreign Direct Investment by Geographic Area
(International Investment Position)

(％)
50

35

20

15

10

5

0
96

97

ASEAN5

98

99

China

2000

2001

Developing Countries

2002

2003

2004

North America

2005

Western Europe

Notes: 1. ASEAN5 are Indonesia, Thailand, Philippines, Malaysia and Singapore.
2. Developing countries are an area except North America, Western Europe, ASEAN5, South Korea, Taiwan,
Hong Kong and China from World.
Source: Ministry of Finance and Bank of Japan, Direct Investment Position by Region and Industry

83

2006

Table I-26 Direct investment in Russia and India by major Japanese automakers
Specifics
Investingcompany

Amount ofinvestment(Approximate)

OutlineSuzuki¥200 billion

Investment conducted to augment an already operating automotive manufacturing plant (Manesar Plant) and to increase the production
capacity of an automotive engine plant. ¥200 billion is expected to be invested by 2010.

NissanMotorsMore than ¥109.6 billion(total of threecompanies)

Nissan, Renault (France) and Mahindra and Mahindra (India) will construct factories in Chennai to manufacture passenger cars andpower trains. The facilities are scheduled to commence operation in the second half of 2009. The investment conducted by the threecompanies in a seven-year period from 2007 is expected to be more than $109.6 billion.

ToyotaMotors¥40-50 billion

Toyota will establish a small car assembly plant. The company aims to construct the plant adjacent to its primary plant in Bangalore by
2010. Initial production is scheduled for 100,000 vehicles.

Honda¥27.6 billion

Honda will establish an integrated manufacturing plant performing all processes from engine assembly to pressing and chassis assembly,
commencing operation at the end of 2009 at an annual output of 60,000 vehicles. The plant is scheduled to produce passenger vehicles
including small cars.

NissanMotors

¥22.66 billion

Investment conducted to establish a car assembly plant in St.Petersburg and enhance business operations. The new plant is scheduled tocommence operation in 2009. The plant will produce a maximum of 50,000 vehicles per year, and is expected to employ around 750
workers.

ToyotaMotors¥15 billion

Anticipating a future expansion of the Russian market, Toyota has decided to establish its first Russian plant, in St. Petersburg's
Shushary district. Toyota's investment will be approximately ¥15 billion, and the plant is expected to commence operation in December
2007.

Suzuki¥14 billion

Suzuki will establish a car assembly plant in Russia to respond to the expected future expansion of the Russian automobile market.
Operation is scheduled to commence in the second half of 2009, and the plant is expected to employ around 500 workers.

Isuzu

-

India

RussiaIsuzu has agreed to commence manufacturing and marketing its Elf light truck with the Russian automaker SSA in Russia. The
companies plan to manufacture and market 500 vehicles in FY2006, but have agreed to aim for annual production of 10,000 vehicles per
year within three years. Future sales potential is projected as 30,000 vehicles.

Source: Japan Corporate Watcher (PHP Kenkyusho), company press releases

Fig. 1-25

Outward cross-border M&A activity(Deals)(US$ million)
300

450
400

250

Number of deals

350

Value per deal (right axis)
200

300
250

150
200
100

150
100

50
50
0

0
90

91

92

93

94

95

96

97

98

Source: Thomson Financial

84

99 2000 2001 2002 2003 2004 2005 2006 2007
(1-6)

Table 1-27.

Japan's major outward M&A (2006 and first half of 2007)

Year

April 2007
October 2006

Purchaser
Japan Tobacco
Toshiba, Shaw Group,
Ishikawajima Harima Heavy
Nippon Sheet Glass
Marubeni, Tokyo Electric Power

June 2006
June 2007
October,
DaikinNovember 2006
March 2006
Marubeni Offshore Production
February 2007

Equityownership after(US$ million) purchase (%)
AmountCompany purchased

Nomura Holdings

Industry
Cigarettes

Gulliver International-

Nationality
UK

Industry
Cigarettes

U.S.A.

Electric power

Westinghouse

18,800

100.0

5,402

100.0

4,001
3,420

100.0
100.0

Glass manufacturing Pilkington
UK
Glass manufacturing
Mirant Asia Pacific
Philippines
Electric power
Air conditioning
Air conditioning
O.Y.L. Industries
Malaysia
equipment
equipment
Oil and gas drilling Pioneer Natural Rexources U.S.A. U.S.A.
Oil and gas drilling
Securities andFinance
Instinet
U.S.A.
commodities service

2,116

99.3

1,300

100.0

1,200

100.0

Notes: 1. The Thompson Financial definition of an M&A was followed (including the founding of a joint venture by integrating existing assets).
2. In the JT, Toshiba, and Marubeni cases, the acquisition was carried out through a coroproation set up for that purpose.
Source: Thompson Financial

Table1-28
CY2006)

Sales Ratio of Japanese Company in Advancing Area (by Demand;
North America
LocallySales tomade Sales third power

EuropeSales toJapan

LocallySales tomade Sales third power

Sales toJapan

LocallySales tomade Sales third power

Sales toJapan

LocallySales tomade Sales third power

Manufacturing industry in total
91.0
7.4
1.6
60.0
38.7
1.3
55.3
28.3
16.5
Food and tabacco
82.3
6.7
11.0
74.3
23.7
2.0
73.2
11.0
15.8
Textiles
85.6
11.1
3.3
45.3
47.6
7.1
71.2
26.9
2.0
Wood, pulp, and paper products
61.3
18.9
19.7
42.8
57.2
0.0
n.a.
n.a.
n.a.
Chemicals
82.8
14.9
2.2
45.5
52.4
2.0
56.4
40.2
3.4
97.3
2.0
0.7
n.a.
n.a.
n.a.
62.2
16.5
21.3
Ceramics, stone and clay
Iron and steel
93.5
5.7
0.9
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Non-ferrous metals
88.0
8.2
3.9
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Metals
91.4
7.1
1.5
45.3
14.2
40.5
n.a.
n.a.
n.a.
89.0
10.5
0.5
61.9
36.9
1.3
43.6
42.3
14.1
Industrial machinery
84.7
12.5
2.9
58.9
39.4
1.7
44.6
28.5
26.8
Electrical machineryTransportation equipment
94.1
5.2
0.7
62.8
36.9
0.2
85.6
10.8
3.7
Precision instruments
88.9
6.3
4.9
67.4
29.5
3.1
11.4
37.7
50.9
Notes: 1. Each retes = each items /Sales.
2. NIES3 are Taiwan, South Korea and Singapore.
3. Items without original data are indicated as "n.a.".
Source: Ministry of Economy, Trade and Industry, Trends in Overseas Subsidiaries (Quarterly Survey of Overseas Subsidiaries)

Fig. 1-26(Unit：%)
China (including Hong Kong)

ASEAN4

Asia NIES3

47.6
57.0
46.7
22.7
56.5
37.5
81.2
52.7
44.2
29.0
16.4
77.7
4.0

30.8
28.2
38.2
34.6
36.0
24.2
13.6
14.0
13.1
21.3
46.8
18.8
14.4

Sales toJapan

LocallySales tomade Sales third power

21.6
14.8
15.1
42.7
7.3
38.3
5.2
33.3
42.8
49.7
36.8
3.5
81.7

50.5
87.4
56.3
81.3
67.6
59.9
94.2
57.1
52.1
32.3
29.4
91.3
40.9

22.2
3.0
7.8
4.1
12.5
16.0
1.8
26.7
3.2
24.1
36.5
4.1
7.1

Sales to
Japan

27.4
9.6
36.0
14.6
19.9
24.1
4.0
16.2
44.8
44.0
34.0
4.6
52.1

Trends in Direct Investment Income (Balance)(US$ million)
16,00014,000

Dividens and Distributed Branch Profits

12,000

Reinvested Earnings

10,000
8,000
6,000
4,000
2,000
0
-2,000-4,000
96

97

98

99

2000

2001

2002

2003

2004

2005

2006

Note: Because of the revision of the method for calculating reinvested earnings, 2004-2006 are based on revised
data.
Source: Ministry of Finance, Balance of Payments Statistics

85

Fig. 1-27

International Comparison of the Rate of Return on External Assets

％
16.0
14.0
12.0
10.0
Japan
U.S.A.

8.0

Germany

6.0
4.0
2.0
0.0
92

93

94

95

96

97

98

99

2000

2001

2002

2003

2004

2005

Note: Derived from return on external assets for current year/average of outstanding direct investment for current year andend of previous year.
Sources: IMF, Balance of Payments Statistics ; UNCTAD, World Investment Report

Fig, I-28

Inward direct investment in Japan(US$ billion)

60.0
45.7
32.5

38.0
40.0
17.8
20.0

30.1

27.2
6.5

7.2

8.9

-6.3

-4.0

-5.7

16.4

18.3

-10.2

-12.1

27.1

0.0
-20.0

-5.5
-19.0

-28.9

-40.0
-60.0

-12.9
-24.7 -26.9

Equity capital (inward)

Equity capital (outward)

Reinvested revenues (inward)

Other capital (inward)

Other capital (outward)

Total (net)

-52.5

-80.0
96

97

98

99

2000 2001 2002 2003 2004 2005 2006 2007
(1-5)

Note: Yen-denominated values were converted to dollars for each three month period using the average Bank of Japan interbank rate
for the period.
Source: Bank of Japan, Ministry of Finance.

86Fig, I-29

Inward direct investment in Japan, by region(US$ billion)
20

15

10

5

0

Asia

North America

Western Europe

Other

Latin America

-5

-10
96

97

98

99

2000

2001

2002

2003

2004

2005

2006

2007
(1-5)

Note: Yen-denominated values were converted to dollars for each three month period using the average Bank of Japan interbank
rate for the period.
Source: Bank of Japan, Ministry of Finance.

Fig I-30

Japan's Inward FDI Stock(trillion yen)

(%)
3.0

14
Inward FDI Stock12% of GDP (right axis)

2.5

10
2.0
8
1.5
6
1.0
4
2

0.5

0

0.0
96

97

98

99

2000 2001 2002 2003 2004 2005 2006

Source: Bank of Japan, Ministry of Finance87Fig I-31

Cross-border M&A activity in Japan（US$million ）20,000180

18,000160

16,000140

14,000120

12,000100
10,000
80
8,000
60

6,000

40

4,000

20

2,000
0

0
95

96

97

98

99 2000 2001 2002 2003 2004 2005 2006 2007

Officially published amount

Number of M&A cases (right axis)

Source: Thomson Financial

Table I-29 Major Inward M&A Deals (from Jan. 2006 to June 2007)
Date
Apr-07

TargetNikko Cordial
Corp

SectorAcquioror

AcquirorNationSectorValue of
Deal ($
million)% OwnedAfter Transaction

Security brokerage

Citigroup Japan Investments

U.S.A.

Banks

7,921

61.1

U.S.A.

Financial

2,361

100.0

2,294

94.6

Jun-07

ANA Co LtdHotels Business

Hotels and motels

Shiroyama Properties(SP), a special purpose
acquisition vehicle formed byan investment fund operated by
Morgan StanleyMar-07

Nissan Diesel
Motor Co Ltd

Truck and bus bodies

NA Co Ltd(NA), a
wholly owned unit of Volvo AB

SwedenAutomobile

Department stores

GIC

Singapore

Investment advice

862

100.0

Industrial gases

Air Liquide GroupFranceIndustrial gases

778

100.0

Cerberus Asia Capital Mgmt LLC

U.S.A.

Financial

751

49.3

Intl Auto Components Group JP

U.S.A.

Financial

305

100.0

Goldman Sachs International

U.S.A.

Security brokers,
dealers, andflotation companies

255

12.7

SSF lll Asia Holding Partner

Cayman Islands Financial

124

14.9

Hawks Town
Corp
Japan Air Gases
Mar-07Ltd
Mar-07

Jan-06 Kokudo Corp
Sep-06

Apr-06

Mitsuboshi Belt
Kaseihin Co
Fintech Global
Inc

Amusement andrecreation services
Motor vehicle parts
and accessories
Security brokers,
dealers, and flotationcompanies

Feb-07 Fujita Kanko Inc Hotels and motels
Aug-06 MSK Corp

Semiconductors andrelated devices

Suntech Power Holdings Co Ltd

China

Semiconductors andrelated devices

107

66.7

Yokogawa
Feb-06 Analytical
Systems

Computers andperipheral equipment
and software

Agilent Technologies Inc

U.S.A.

Instruments tomeasure electricity

105

100.0

Source: Thomson Financial

88

Table I-30 Cases of Stockholder proposals by Foreign Companies
AcquirorTargetProposal

Abolishment of
Aderans, Sapporo Holdings, Bull-Dog
takeover defense
Sauce
measures

Steel Partners Japan
Strategic Fund

Brother Industries, Fukuda Denshi,
TTK, Inaba Denki Sangyo, Denki
Kogyo Company, Ezaki Glico

Dividend increase

Dalton Investments LLC

Fujitec, Nippon Fine Chemical

Management andemployee buy out

The Children's Investment
Master Fund

Chubu Electric Power, Electric Power
Dividend increase
Development

Safe Harbor Master FundLP

SNT Corporation

Dividend increase andelection of directors

Brandes Investment
Partners & Co.

Ono Pharmaceutical

Dividend increase

Source: Press releases

Fig I - 32

Market Value per Company on Major Stock Exchanges（US$ million)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

NYSE Group
Swiss ExchangeEuronext
Borsa Italiana
Mexican Exchange
Deutsche Börse
Johanesbourg Exchange
Sao Paulo SE
Tokyo SE
Shanghai SE
London SE
Hong Kong Exchanges
Singapore Exchange

April-07
December-01

Taiwan SE Corp.
National Stock Exchange India
Korea Exchange
Source: World Federation of Exchanges

89

10,0005. WTO(1) Trend of the new round: Difficulty in building consensus
The strong will of the WTO member countries to achieve further liberalization of world trade led
to the inauguration of the new round of WTO negotiations with the 4th Ministerial Conference in
Doha in November 2001. Commencing seven years after the conclusion of the Uruguay Round, the
new round represents the ninth multilateral trade negotiations since the formation of GATT.
As of July 2007, the new round is approaching its sixth year. Until the end of 2007, each of theparties to the negotiations will expend considerable effort on the attempt to reach an overall
consensus. However, the negotiations are experiencing difficulties, unable to overcome standoffs indifferent areas: between the developed and developing countries over the elimination of tariffs on
products of the mining and manufacturing products in the non-agricultural market access (NAMA)
negotiations; between other countries and the U.S. over the elimination of subsidies to agricultural
producers in agricultural negotiations; and between the EU and agricultural exporting countries overthe elimination of tariffs on agricultural products.
Above all else, the confrontation between the developed and developing countries in the NAMA
and agricultural negotiations has underlined the importance of considering development as the key toconsensus in the new Round. As long as new trade rules do not guarantee sufficient merits to thedeveloping countries, which now comprise almost 80% of the WTO membership, achieving a
consensus will be difficult. This awareness has resulted in the new Round being dubbed the Doha
Development Agenda. However, as indicated by the collapse of the 5th Ministerial Conference in
Cancun in September 2003, it is anything but a simple matter for the developed and developing
countries to make mutual concessions.
Against this background, the developed and developing countries adopted a cooperative stance atthe 6th Ministerial Conference held in Hong Kong in December 2005. The importance ofdevelopment was a given of the conference, with the developed countries offering to make theexports of the least developed countries (LDC) tariff- and quota-free, while in NAMA negotiations
the developing countries accepted the Swiss Formula urged by the developed countries. In
agricultural negotiations, members agreed to eliminate export subsidies by 2013. Finally, it wasdetermined that a general agreement would be reached by the end of 2006.
Following the Hong Kong conference, the members of the G6 (the U.S., the EU, Japan, Australia,
Brazil and India) proceeded with vigorous negotiations aiming at the achievement of agreement
regarding agricultural market access (elimination of tariffs) and domestic support (provision ofsubsidies to producers) and, in NAMA negotiations, the coefficients employed in the Swiss Formula,by the end of April 2006. However, the standoffs mentioned above were repeated, and thenegotiations stalled without a conclusion being reached.
The G6 member countries failed to overcome their differences in an informal ministerial meeting90

held July 23-24, 2007, and the meeting was closed by WTO Director-General Pascal Lamy without aresolution. Director Lamy later announced the suspension of the new round at the meeting of theGeneral Council, indefinitely discontinuing talks that had continued for almost five years, sinceNovember 2001.
Since then, Director Lamy has visited major parties to the negotiations, including Japan, to soundout their positions and determine the potential for compromise. In November 2006, four months after
the suspension of the new round, he proposed the commencement of working-level discussions. In
January 2007, an informal WTO ministerial meeting held at the meeting of the World Economic
Forum in Davos agreed to continue negotiations either bilaterally or between small groups ofcountries. With these moves, the ground has been prepared for a full-fledged recommencement of
the new round.
Since then, the U.S., the EU, Brazil and India have formed the G4 and have proceeded withnegotiations aimed at establishing modalities (including coefficients) for agricultural and NAMA
negotiations by the end of July 2007, but these talks have once again failed to break the existing
deadlocks. An informal G4 ministerial meeting held in Potsdam, Germany, on June 21 collapsed
without being able to bridge the gap between the U.S. and the EU on the one hand, and Brazil andIndia on the other, over the issue of coefficients in the Swiss Formula. On July 17, Crawford
Falconer, Chairperson of the agriculture negotiations, and Don Stephenson, of the NAMA
negotiations, each distributed Chairperson’s texts, and it was decided to continue with negotiations
referring to these texts at the working level (Table I-31). It appears that more time will be required
for the developed and developing countries to reach a consensus (Fig. I-33).
￭ Status of negotiations and sticking points in major areas
For developing countries that seek to expand their agricultural exports, improved market access inthis area is the most important issue. Agriculture negotiations focus on three issues: “market access(elimination of tariffs),” “domestic support (provision of subsidies to agricultural producers),” and“export competition (provision of export subsidies).” The elimination of export subsidies by 2013
was decided at the Hong Kong conference, and the focus of current negotiations has therefore turned
to market access and domestic support. The U.S., Brazil and India seek the EU to eliminate tariffs
and agree to the treatment of agricultural products as sensitive products, while the EU, Brazil andIndia wish the U.S. to eliminate agricultural subsidies. In addition, India seeks the expansion of
special safeguards applicable only to developing countries and the range of application for special
products, but the U.S. is resisting this move in the interests of preventing excessive protectionism.
Falconer’s Chairperson’s text seeks compromise chiefly around proposals made by the EU and theG20 (the group of agricultural-exporter developing countries, of which Brazil and India participate
in the G4 as representatives). At present, negotiations are proceeding with the Chairperson’s text91

being employed as a reference by the countries involved.
For Japan, which has a competitive advantage in the manufacturing sector, the lowering of tariffs
on mining and manufacturing products is an important issue. Tariff levels remain high in thedeveloping countries in particular, and the reduction of tariffs in these countries would be asignificant boon for Japanese manufacturers, which have production bases in China and the ASEAN
countries and seek access to promising emerging markets such as the rapidly growing BRICs (Fig.
I-34).
The focus of the NAMA negotiations is the coefficients employed in the Swiss Formula. The
Swiss Formula is a formula used to determine tariff reductions. The higher the coefficient employedin the formula, the higher the final tariff rate (bound rate) will be. Developed countries, including the
U.S. and the EU, propose a coefficient of 10 for developed countries and 15 for developing countries,
but the developing countries themselves seek a higher coefficient. For example, the NAMA 11Group,13 which includes Brazil and India, insists that a 25-point difference between the developed
and developing countries (developed countries: 10; developing countries: 35) is required. However,a coefficient of 35 would reduce the final bound rate for Brazil from the current 30% to 16%, higher
than the applied rate of 12.6% for most favored countries (MFNs), and the new tariff rate would
therefore not be lower than the applied rate. For many developing countries there would be a wide
divergence between bound rates and applied rates as in the case of Brazil, and there is concern thatthe use of a coefficient that is too high would prevent substantial tariff reductions from being
achieved. The Chairperson’s text prepared by Don Stephenson, the Chairperson of the NAMA
negotiations, suggests figures of 8-9 for the developed countries and 19-23 for the developing
countries. Discussions will continue with these figures as a reference.

13. A group of middle-income countries that stresses the need for alleviation of conditions in developing
countries in NAMA negotiations based on principles of flexibility and reciprocity. The group is made up
of 10 countries: Argentina, Venezuela, Brazil, Egypt, India, Indonesia, Namibia, the Philippines, South
Africa and Tunisia.

With regard to the liberalization of the services sector, the developed countries, given their highlevel of competitiveness in this area, are basically on the offensive, with the developing countries
playing a defensive hand. The situation is reversed with respect to Mode 4 (movement of persons),
with some developing countries that wish to provide workers to the labor markets of the developing
countries, pressing for liberalization in this area. Service sector negotiations formerly involved
bilateral requests and offers. However, inefficiency was an issue using this method, and a system of92

plurilateral request was adopted at the Hong Kong conference at the urging of the developed
countries. Among other areas, Japan is seeking liberalization in the areas of computer-related,
electronic communications, financial, marine transport, construction and distribution services,primarily from China and ASEAN.
In other areas, the new round has seen negotiations regarding rules to concretize and improve theanti-dumping (AD) agreement and increase discipline, and negotiations aimed at making tradesmoother by increasing the transparency of customs procedures and clarifying rules.

(2) Correction of unfair trade practices via WTO dispute resolution procedures
The WTO has received extensive attention as a result of the new round of trade negotiations, but
the WTO also has an important role to play as an organization that resolves trade conflict. If thefunctions of the WTO are divided into legislative, administrative and judicial functions, it can besaid that the nature of the legislative function is exemplified by the new round, the WTO Secretariat
is responsible for the administrative function, and the organization’s dispute settlement procedures
exemplify the judicial function. Using the dispute settlement procedures, the member countries areable to correct unfair trade practices and improve the rules regulating international trade.
The Uruguay Round resulted in the formulation of an understanding regarding rules andprocedures for dispute settlement (the Dispute Settlement Understanding: DSU). A Dispute
Settlement Body (DSB), which employs a system of “negative consensus,”14 was established on thebasis of the DSU. In addition, an Appellate Body (AB) was established, “cross-retaliation”15 wasintroduced, unilateral measures16 were prohibited, and time limits were placed on procedures. These
measures have dramatically increased the effectiveness of dispute settlement, and the number ofdispute raised has increased from 101 in the GATT period (approximately 40 years) to 366 in the
12-year period between the establishment of the WTO in 1995 and July 2007.

14. Under this system, a panel recommendation is adopted if it is not rejected by all member countries.
15. Cross-retaliation enables retaliatory measures to be adopted in another sector if they are ineffective inthe sector in which a dispute is occurring.
16. Disregarding dispute settlement procedures and adopting retaliatory measures such as the lowering oftariffs on the basis of a unilateral decision.

￭ The major focus of disputes in the past was trade remedy measures, while today thedomestic institutions of developing countries (subsidies in China, etc.) are also a focus.
Between 1995 and the end of 2005, 421 countries brought 342 disputes before the WTO. A

93

breakdown of the number of countries by the type of disputes in which they were involved shows thegreatest number (75) involved in disputes regarding AD measures, followed by 74 countries
involved in disputes regarding import and export restrictions (import licenses, etc.), 34 countries
involved in disputes regarding safeguard measures, and 33 countries involved in disputes regarding
subsidies and export subsidies (Fig. I-35).
The areas in which developed countries displayed the greatest tendency to raise disputes withother developed countries were trade remedy measures overall, government procurement, theAgreement on Trade-related Aspects of Intellectual Property Rights (TRIPS), internal taxes, theAgreement on the Application of Sanitary and Phytosanitary Measures (SPS), the Agreement on
Technical Barriers to Trade (TBT), subsidies, export subsidies, and services (Fig. I-36). It is apparent
that developed countries seek to correct the internal institutions of other developed countries as they
relate to services, government procurement, internal taxes, etc.
Developing countries tend most strongly to commence disputes with developed countries in theareas of AD, tariffs and charges, import restriction measures and the like. Areas in which developing
countries bring cases against developing countries include AD, safeguards, and tariffs and charges.
Developing countries can be seen to make efforts to clear away import and export restrictions rather
than focusing on internal regulations.
The share among the trade remedy measures that have been the subject of disputes held by thedeveloped countries is 60% in the case of AD, 59% in the case of safeguards, and 70% in the case ofcountervailing duties. Overall, trade remedy measures is an area in which there is a strong tendency
for cases to be brought against developed countries. 130 countries have raised disputes regarding
trade remedy measures, or approximately one-third of all countries that have raised disputes. Of
these, 62 countries, or almost half, have raised disputes with the U.S. in this area. As this indicates,
numerous countries are seeking by means of the DSB to correct the trade remedy measures adopted
by the U.S. Japan has considerable experience in the area of disputes regarding U.S. trade remedy
measures, having been through disputes regarding steel safeguards, the Byrd Amendment, and“zeroing,” among others. The U.S. has recently been the losing party in these disputes, and isbowing to international pressure and modifying the relevant systems and measures that it has inplace.
The disputes raised by developed countries against developing countries relate to the Agreement
on Trade-related Investment Measures (TRIMS), subsidies/export subsidies, internal taxes andagriculture treaties, among others. The causes of these disputes can be found in the fact thatnumerous developing countries, in a quest to foster domestic industry, introduce preferential
measures for foreign investment, with regard to some of which there may be concerns regarding
violation of WTO rules. The liberalization of investment-related regulations was the most importantof the Singapore Issues in the new round for the developed countries. However, it faced strong94resistance from the developing countries at the 2003 Cancun Ministerial Conference, and following
this was excluded from the negotiations. The developed countries are attempting, via dispute
resolution procedures, to remove impediments to investment in the developing countries.
Many cases in which developed countries have raised disputes regarding the internal systems ofdeveloping countries have arisen recently. Of the 342 disputes that arose between 1995 and the endof 2005, approximately three-quarters (255) involved import and export measures, and the remainder(87) involved national laws and regulations. However, of the 11 disputes regarding which
deliberation has been requested since November 2006, seven are disputes involving internal systems,
and of these, five have been raised by developed countries against developing countries (Table I-32).
Of these, the most numerous are disputes regarding China’s domestic regulations. Disputes regarding
Chinese regulations have recently increased. In addition to the disputes listed in Table I-32, in April
2004, the U.S. raised a dispute regarding a value-added tax on semiconductors, and in March 2006,
the U.S., the EU, and Canada raised joint objections to measures related to imports of automobile
parts. More than five years have passed since China acceded to the WTO in November 2001, and thecountry has largely completed the liberalization schedule to which it committed on that occasion.
Given this, the increase in disputes can be seen as an indication that other countries are actively
seeking correction of regulations and measures put in place by the country that do not conform to
WTO rules.
￭ Toward prevention of misuse of trade remedy measures by the U.S.: The decision toeliminate zeroing as a result of Japan’s victory
The U.S. makes extensive use of trade remedy measures (AD, countervailing duties, safeguards).
Between 1995 and 2006, there were 239 instances of AD, putting the country at number two in theworld behind India, and 47 instances of countervailing duties, placing the country at number one in
the world. Between 1995 and April 2007, there were a total of six instances of safeguards, putting
the U.S. at number four in the world.
AD and countervailing duties are measures implemented to prevent imported goods from having anegative effect on industries in the importing country (AD target goods that are dumped by exporting
companies, and countervailing duties target goods that are competitive due to the provision ofsubsidies by the government of the exporting country). Safeguards, by contrast, temporarily restrict
imports in the event that a rapid increase in imports has a significant negative effect on domestic
industries. These measures were subjected to discipline under the terms of the agreements thatemerged from the Uruguay Round, and member countries amended their domestic systems inaccordance with the respective agreements.
However, certain problems remain with regard to the trade remedy measures put into effect by the
U.S., and other countries have therefore actively sought their correction by means of bringing cases

95before the DSB. Since the establishment of the WTO, 50 cases have been brought involving U.S.
trade remedy measures, of which 31 have concerned AD measures.
As one case of AD involving the U.S., a method of calculating the dumping margin employed by
the U.S. termed “zeroing” resulted in a series of disputes. In November 2004, Japan brought thisissue to the DSB. The AB announced an outright victory for Japan in January 2007. Due to thisvictory, the U.S. is now under pressure to amend the relevant systems. For countries that had been
subject to extremely unfair AD tariffs, Japan’s victory is highly significant. A discussion of thenature of zeroing, the means by which Japan achieved its victory, and the significance of that victory
follows below.

1) Zeroing and cases brought before the WTO
At the stage of initial investigation for the application of AD measures, it is necessary to calculate
the dumping margin, i.e., to aggregate the sum of the difference between the export price of goods
from a specific country and the selling price of goods in that country when the latter is higher than
the former. Zeroing refers to a calculation method in which the difference between the export priceof goods from a partner country and the domestic selling price of those goods when the former ishigher than the latter is excluded from the margin. If there actually were any of these negative
margin goods, then the aggregate dumping margin would be lower than it would be if there werenone of these goods. However, by converting negative margins to zero, the U.S. obtains a margin
that is higher than it would have been if the negative figures had been included (Table I-33).
Numerous countries have requested the U.S. to eliminate zeroing, and an increasing number of cases
have been judged as being in violation of WTO rules. In the final decision of the U.S.-Canada
softwood lumber dispute, for examples published in August 2004, the use of zeroing in the AD initialinvestigation was ruled to be a violation of the AD agreement. In the case “U.S. – Zeroing (EC)”brought by the European Commission, the AB ruled in 2006 that the use of zeroing in the periodic
administrative review of the AD tariffs following the implementation of AD measures was inviolation of the AD agreement.

2) The reversal won by Japan and its significanceIn February 2004, Japan requested a panel to deliberate on U.S. AD measures relating to 16 steel
products including steel sheets and bearings for automotive use. The Japanese complaint concerned
the use of zeroing, not only at the initial investigation stage, but also in the administrative reviews
and the sunset review.17 The difference between cases brought by Canada, the EC and others and theJapanese case was that the latter targeted not merely the AD measures as applied to the 16 goods, but
the use of zeroing as such. A judgment regarding the violation represented by the individual AD
measures would have resulted in the U.S. simply correcting the specific measures. By seeking a96

judgment on the violation represented by the use of zeroing as such, the case sought to prevent any
future use of the method. This case attracted considerable attention from other WTO member
countries, with 10 countries including the EU, China and Korea sitting on the panel as observers.
The Japanese case was conducted largely simultaneously with the “U.S. – Zeroing (EC)” casebrought by the European Commission, and the European victory produced high expectations inJapan that the country’s case would result in the elimination of zeroing. These expectations were,
however, dashed by the panel’s decision. The panel concluded that the use of zeroing in W-W
comparison18 at the stage of initial investigation was a violation of the rules, but that its use in theadministrative reviews (W-T comparison) was not. This decision banned zeroing in W-W
comparison, but supported the status quo in every other respect. The decision disappointed Japan’s
expectations, and was experienced largely as a defeat for the country.
Japan was not satisfied with the panel’s decision, and launched an appeal to the AB in October
2006. The AB reversed the panel’s decision, and decreed the use of zeroing by the U.S. to be a
violation of the rules in every respect. In an unqualified victory for Japan, zeroing came to represent
a violation at the initial investigation stage, in administrative reviews, and in the sunset review.

17. A sunset review is a review of an AD tariff five years following the implementation of the measure.
The tariff can be extended if it will be eliminated after five years but dumping will continue or recur. The
U.S. has in almost all cases employed extensions.

With regard to the use of zeroing in T-T comparisons in initial examinations, based on the decision
handed down by the AB in the U.S.-Canada softwood dispute, the AB ruled the use of zeroing a
violation of Article 2.4 of the Anti-dumping Agreement concerning fair comparison, reversing thedecision of the panel that had stressed the contradiction involved in prohibiting zeroing in all
methods of comparison. With regard to the administrative reviews, quoting the decision in “U.S. –Zeroing (EC),” the AB determined that the use of zeroing in the W-T comparison by the U.S.
Department of Commerce had resulted in the application of AD tariffs higher than the actualdumping margin, and that the use of zeroing in administrative reviews represents a violation of theAnti-dumping Agreement. Finally, the AB examined two cases in which AD measures had been
extended as a result of the sunset review, and ruled that they were in violation of the agreement
because they were based on dumping margins resulting from the use of zeroing, which had alreadybeen judged as a violation of the agreement.

3) The meaning of Japan’s victory and the U.S. response97What is the meaning of Japan’s victory? The major setback for the U.S. in the decision wasprobably the prohibition on the use of zeroing in administrative reviews. The administrative reviews
represented an important issue because an AD tariff increased by such a review could be applied tothe company in question retrospectively. Ultimately, if zeroing was employed to increase AD tariffs
during administrative reviews, the loss incurred from zeroing being unable to be used at the initial
examination stage could be made up in this way. The prohibition of the use of zeroing in
administrative reviews resulted in a lowering of the overall level of AD tariffs.
Strong pressure is being exerted worldwide for the correction of unfair U.S. trade measures.
Zeroing is not the only measure that has produced dissatisfaction among other countries. In 2003,
numerous countries raised a joint appeal to the DSB against the Byrd Amendment19, and were
ultimately able to have it abolished.

18. Article 2.4.2 of the Anti-dumping Agreement recognizes three methods of comparison for use indetermining

themarginbetweenweighted-average-to-weighted-averagetheexport

(W-W)

price

and

domestic

selling

price:

comparison;2)transaction-to-transaction

1)

(T-T)

comparison; and 3) weighted-average-to-transaction (W-T) comparison. The U.S. Department ofCommerce employed W-W comparisons in its initial investigations for the application of AD measures,and employed W-T comparison in administrative reviews. The panel ruled that the use of W-W
comparison should be prohibited, but that the use of W-T comparison did not represent a violation of theAnti-dumping Agreement. Having lost the case brought against it by Canada regarding softwood imports,
the U.S. recalculated dumping margins for these imports using T-T comparison in place of the W-W
comparison that had been ruled to be in violation of the agreement, and imposed tariffs on this basis.
Japan’s case asserted that T-T comparison was also a violation of the Anti-dumping Agreement.

However, it is likely that some time will elapse before the elimination of zeroing. In the case of
the Byrd Amendment, the U.S. Congress raised strong objections to the judgment of the WTO, andthe U.S. was slow to take action to repeal the Amendment. This occurred two years later, following
the institution of retaliatory measures by other countries. Some members of Congress have alreadyshown strong objections to the complete elimination of zeroing. In June 2007, the United States
Trade Representative presented a proposal that would enable the use of zeroing in rule negotiationsin the new round. The U.S. is under pressure from the international community to revise its domestic
laws, and its future responses will be the focus of considerable attention.
￭ U.S.-China trade friction as observed in WTO disputes

98Low-priced Chinese products have recently come to represent a threat to U.S. industry. The U.S.
trade deficit with China has expanded significantly, from $83.8 billion in 2000 to $232.6 billion in2006.
The deficit is causing the U.S. Congress to harden its attitude towards China. The pressure being
put on China to revalue the yuan, the virulent reaction to the attempted purchase of Unocal by the
China National Offshore Oil Corporation (CNOOC), and the pressure being exerted to convince
China to resolve issues of infringements of intellectual property rights (pirated products, etc.),
among other factors, makes the “China problem” in the U.S. remind us of the “Japan bashing” of thepast.
The Bush administration is treating the hardening attitude of Congress with caution. From a broad
perspective, the stance that the administration is adopting is to deal with unfair trade practices in
China in ways that conform to WTO rules. In March 2004, the U.S. requested a consultation with
China via the DSB regarding a Chinese measure to refund value added tax on integrated circuits todomestic producers. China eliminated this measure as a result of the consultation. In March 2006,
the US, with the EU and Canada, brought to the DSB the case regarding China’s Rules for
Determining Whether Imported Automotive Parts and Components Constitute Complete Vehicles.
China announced that it would extend the application of the measure until July 2008, but thecomplaining parties seek complete elimination of the measure and have requested the establishmentof a panel.

19. A U.S. law under which the revenue obtained by the U.S. from AD and countervailing duties would be
distributed to domestic producers applying for remedy (formulated in October 2000).

In 2007, the U.S. became even more active in bringing cases to the WTO regarding Chinesesystems and measures. The first of these involved nine subsidies provided in order to attract foreign
investment, the second violations of intellectual property rights, and the third regulations concerning
the domestic distribution of imported media such as magazines and DVDs.

1) U.S. case against nine preferential measures and China’s response
In February 2007, the U.S. complained to the WTO regarding a system put in place by China thatprovides nine subsidies to domestic exporting companies. (Five nations are acting as observers,
including Japan and the EU. Mexico has also made a separate complaint to the WTO regarding thesame system). The U.S. complaint is based on its belief that the Chinese system corresponds to a
subsidy contingent upon export performance, or a subsidy contingent upon the preferential use of99

domestic products, as prohibited by Article 3.1 of the Agreement on Subsidies and Countervailing
Measures. (The U.S. also indicates violations of Article 3 of GATT and Article 2 of the TRIMS
Agreement). China has to date introduced numerous preferential measures designed to attract foreigncompanies, and the majority of the nine subsidies that are the subject of the dispute fall into thiscategory (Table I-34). If any of the subsidies is a subsidy contingent upon export performance orupon preferential use of domestic products, such subsidies will be the violations of Article 3 of theAgreement on Subsidies and Countervailing Measures and China will be obliged to abolish them.
Intermittently visible behind the U.S. case is the consideration given by the Bush administration to
the strong attitude of the U.S. Congress on China. Susan C. Schwab, the USTR, emphasized that
China’s subsidy programs have encouraged U.S. manufacturers to switch from parts and materials
produced in the U.S. to those imported from China causing damages to SMEs and their employees in
the U.S. Senator Max Baucus, Chairman of the Senate Finance Committee, Senator Chuck Grassley,
and Senator Carl Levin have successively backed the U.S. case.
In March 2007, China announced that it had eliminated one of the subsidy programs that wasunder challenge, in this case a program that enabled certain export companies access to discountloans from commercial banks. In the same month, China further announced that it would abolish a
program under which tax was waived for companies for a two-year period from the year in which
they first recorded a profit, and subsequently halved for the next three-year period.20

The tax

breaks following the application of this program will be abolished in 2008. Although it did not form
part of the content of the objections raised against the nation, China has also announced a uniform
25% tax on corporate earnings.

20. A system under which productive foreign companies that scheduled operation for more than 10 years
during company registration procedures are exempt from tax for two years following their firstprofit-making year, and are then taxed at a half rate for the following three years.

Foreign companies that have entered China still face an uncertain situation. According to “Heisei
18 nendo nihon kigyo no chugoku ni okeru gaishi yuuguu seisaku riyo jokyo” (the Report on the
Status of Use of Preferential Measures by Japanese Companies in China) (2006), published by
JETRO in April 2007, based on the results of a questionnaire survey of 104 Japanese companies
doing business in China, 14 companies were making use of the tax breaks that followed thetwo-year/three-year system discussed above, and for 10 of these companies the tax relief offered by
the system represented more than 10% of their profits. Six companies were making use of the system
offering discount loans from commercial banks. Forty-one companies were making use of the100two-year/three-year system (which was not a subject of the complaints discussed above), and for 22of these companies, the tax remedy provided represented more than 10% of their profit.
As indicated above, China has commenced a fundamental review of its preferential programs forforeign investors under the influence of the cases brought to the WTO by the U.S. China has worked
to ensure that its domestic laws and systems conform to WTO rules since its accession to theorganization in 2001. To date, China has been cooperative in amending measures in response tocomplaints to the WTO. If the U.S. Congress sees that requests to China for revision of trademeasures via WTO dispute resolution procedures produces results, it is likely that in the future its
attitude towards China will also change.

101TableI-31 Chairperson for Agriculture, Mr. Falconer and for NAMA, Mr.
Stephanson's revised texts, and proposals submitted by major countries （As of
July 2007）
Chairman's Paper
Tariff cuts in the highest Middle between EU andtier*1
US's proposals
Tariff Cap
Not mentioned

Japan (G10)45%# of Sensitive ProductCuts on US's Domestic
SupportCoefficients in Swiss
Formula4-6% of dutiable tariff
lines*2$13 billion 〜 $16.4
billionDeveloped: 8-9,Developing: 19-23

EUdeveloping countries

U.S.
higher than 85%

60%

75%

Opposing

100%(except sensitive products)

100%

75%

15% of Agr.
tariff lines

8% of Agr. tariff lines

1% of Agr. tariff lines(dutiable)

1% of Agr. tariff lines

Less than $15 billion
developed: 10

developed: 10$22.7 billion
developed: 10

developed: 10

developing: 15
developing: 15
developing: 30*3
developing: 15(note) *1 The highest tier is the highest of the four tiers, into which the bound rate is divided. Japan proposes to set the highest at higher than 70% bound tariff rate,
EU higher than 90%, G20 higher than 75%, and U.S. higher than 60%. Mr. Falconer sets the highet tier at higher than 75% for developed, 130% for developing
countries.
*2 However, if the member countries have higher than 30% of tariff lines in the highest tier, or application of this methodology would impose a disproportionate
constraint in absolute number of tariff lines because that Member has its import duty commitments at 6-digits level, they have an option to have the number ofsensitive products increased up to 6-8%.
*3 This is the proposal submitted by the NAMA 11 group (including Brazil and India of G4). The proposals vary among developing countries. For instance, 8countries including Chile, Colombia, Costa Rica, Thailand are proposing to accept 20 if deveoped countries accept less than 10.
(source) MAFF, Chairperson, Mr. Falconer and Mr. Stephanson's revised texts, BNA WTO Reporter
Date of Chairspersons' announcement: July 17, 2007

Fig. I-33 New round since Hong Kong Ministerial Conference (Dec. 2005 - Dec.
2007)
6th Ministerial
Conference (Hong Kong)
December 2005
Adoption of Hong Kong
Ministerial Declaration

Target for
conclusion ofnegotiations:
End ofDecember
2006(Extended)

Deadline for modalities
agreement: End of July
2006
(Suspended)

2005

Target foragreement on
modalities: End of
July 2007(Extended)

WTO Director-General
Pascal Lamy calls for
preparatory work fromnegotiating groups.
November 2006

Scheduledrecommencemen
t of negotiations:
September 2007

Chairperson's texts issued
by Falconer andStephenson (July 2007)

2007

2006

New roundnegotiations
suspended.
End of July

Target for
conclusion ofnegotiations:
End ofDecember 2007

Bilateral or small
group negotiations
conducted.

Informal ministerial
meeting at Davos
Conference
January 2007

Expiration of term of US
Trade Promotion
Authority (TPA)
End of June 2007
Collapse of informal G4ministerial meeting
June 2007

Source: Compiled from METI documents, data from BNA WTO Reporter, etc.

102

Fig. I-34 Tariff rates on mining and manufacturing products of selected
countries/areas (year 2006)40
34.9 35.6

bound rateapplied rate

35

30.8

tariff rate (%)

30
25 25.5

23.4

25
20

16.4

15.714.9
15

12.6
10.4

10

00

6.8

6

5.8

3.9
3.3 3.9
2.8 3.3
2.7

5

8.2

7.9

6.3
0

or
e
V
ie
tn
a
M m
al
ay
Ph sia
ill
ip
in
e
Ch
i
Th na
ai
la
nd
Br
az
il
In
In dia
do
ne
sia

Si
ng
ap

.

EU

.S
U

pa
n
Ja

H

on
g

K
on

g

0

country
Note: The rates of India are in 2005.
Source: "World Tariff Profiles"（WTO)

Fig. I-35 Number of Countries participating in dispute settlement by area
(1995-the end of 2005)
80

75

74

70

50
34

33

30

24

24

22

21

21

17

20

16

14

10

12

9

8

7

5

3

2
RTA

40

Rule of Origin# of Countries

60

TRIM

Fiber
Agreement
Tariff andOther Charges
Services(GATS)
Unilateral
Measures
Government
Procurement

SPS

TariffValuation andAgriculture
Agreement

TBT

Countervailing
DutiesTaxes onExport/Import,

TRIPS

Subsidies,
ExportSafeguards

ImportLicences,

Anti-dumping

0

Area

Source: WTO, "2007 Report on Compliance by Major Tradeing Partners with Trade Agreements-WTO,
FTA/EPA and BIT-"(METI)

103

Fig. I-36 Proportions of disputes brought by developed and developing countries
by area (1999-the end of 2005)

RT
A

n
or
igi
of
Ru
le

Ag
re
em
en
t

ea
su
re
s

be
r

Un
il a
te
ra
lM

Re

Fi

ns

TB
T

SP
S

n
at
io

st
ric
t io

as
sif
ic
tiv
e

s,
Qu
an
tit
a
tio
n

Area

nc
es
,I
m

po
r

t/
Ex
po
r

tR
es
tri
c

Ta
xe
s

on

Ta
rif
f

Va
lua

Ta
rif
f

s

tio
n

an
d

an
d

Cl

Ot
he
r

Ch
ar
ge
s

eg
ua
rd
s

s

Sa
f

Du
t ie

ng

en
t

du
mp
i

er
va
ili n
g

Co
un
t

An
ti -

es

gr
ee
m

ub
sid
i

ltu
ra
lA

TR
IM

ies
,E
xp
or
tS

Ag
ric
u

po
rt/
E
Im

Su
bs
id

es
(G
AT
xp
or
S)
t,
Int
er
na
lT
ax
es

TR
IP
S

Se
rv
ic

Go
ve
rn
m

en
t

Pr
oc
ur
em
en
t

100%
90%
80%
70%
60%
%
50%
40%
30%
20%
10%
0%

Im

po
rt
L

ice

developing→developing
developing→developed
developed→developing
developed→developed

Disputes regarding domestic systems and measures

Disputes regarding the border measures

Source: WTO, "2007 Report on Compliance by Major Tradeing Partners with Trade Agreements-WTO, FTA/EPA and BIT-"(METI)

TableＩ-32 Recent WTO Disputes (November 2006-April 2007)
DS#
352
354
355
356
357
358
359

Date of Request
Complainant
for Consultation

Dispute Cases
India — Measures Affecting the Importation and Sale of Wines and Spirits from theEuropean Communities
Canada — Tax Exemptions and Reductions for Wine and Beer
Brazil — Anti-dumping Measures on Imports of Certain Resins from Argentina
Chile — Definitive Safeguard Measures on Certain Milk Products
United States — Subsidies and Other Domestic Support for Corn and Other
Agricultural Products
China — Certain Measures Granting Refunds, Reductions or Exemptions from Taxes
and Other Payments
China — Certain Measures Granting Refunds, Reductions or Exemptions from Taxes
and Other Payments

Measures in
Question

2006/11/20

EUInternal Taxes○

2006/11/29
2006/12/26
2006/12/28

EU
Argentina
Argentina○

2007/1/8

CanadaSubsidiesAD
Safeguards
Subsidies,
Agriculture

2007/2/2

U.S.

Subsidies, TRIM○

2007/2/26

MexicoSubsidies, TRIM○

360

India — Additional and Extra-Additional Duties on Imports from the United States

2007/3/6

U.S.

Tariff361

European Communities — Regime for the Importation of Bananas

2007/3/21

Colombia

362

China — Measures Affecting the Protection and Enforcement of Intellectual Property R 2007/4/10

TariffAccession
Protocol, TRIPS

363

China — Measures Affecting Trading Rights and Distribution Services for Certain
Publications and Audiovisual Entertainment Products

2007/4/10

U.S.
U.S.

(source) "2007 Report on Compliance by Major Tradeing Partners with Trade Agreements-WTO, FTA/EPA and BIT-"(METI)

104

Domestic
Institutions

Accession
Protocol, GATS○○○

Table I-33 Zeroing mechanism(Unit: $)Export goods

a

b

c

Export price

80

40

70

60

Domestic price

The export price and domestic selling price of goods (a, b, and c) exported by country A to the U.S. are compiled on a tabl
When zeroing is not employed, the aggregate dumping margin is calculated as (80 - 60) + (40 - 60) + (70 - 60) = 10.
The export price exceeds the domestic selling price, and therefore no dumping is recognized.
However, when zeroing is employed, the goods with a negative margin are excluded from the aggregate, as follows:(0) + (40 - 60) + (0) = -20. This leads to a judgment that dumping is occurring.
(Source) Formulated by JETRO.

Table I-34 Overview of nine Chinese subsidy programs against which cases havebeen brought to the WTO DSB by the U.S.
Potential prohibited
subsidy category

Subsidies

Eligible companies

Complete refund of value-added tax paid for Foreign-fundedpurchase of domestic production facilities
companies
Subsidy contingent upon
preferential use of
Corporate tax exemptions for companies
domestic goods(Agreement on Subsidies purchasing domestic production facilities
and Countervailing
Measures, Article 3.1 (b))
Note 1
Corporate tax exemptions related toinvestments in domestic production facilities
using advanced technologies, etc.

Further tax reductions following "twoyear/three-year" system

Subsidy contingent upon
export preformance(Agreement on Subsidies
and Countervailing
Measures, Article 3.1 (a))
Note 2Foreign-funded
companies

Additional information
Only applicable to companies in areas of business in which
foreign investment is encouraged.
Exemption of 40% of investment in domestic production
facilities from corporate tax in a fiscal year in whichinvestment has increased against the previous fiscal year forcompanies in areas of business in which foreign investment isencouraged.

Exemption of 40% of investment in domestic production
Domestically-funded facilities using advanced technologies in a fiscal year in which
companies
investment has increased against the previous fiscal year fordomestically-funded companies.
Foreign-funded
Corporate tax is halved for companies for which exports
companies that have represent 70% or more of total production value in a specificcompleted the term of fiscal year. Tax is levied at a rate of 10% for foreign-funded
preferential
companies in special economic zones, etc. (Applicable toinvestment measures companies to which a 15% tax abatement already applies).

Corporate tax reductions for companies in
Foreign-fundedareas of business in which foreign investmentcompanies
is encouraged

No obligation to export. However, the export ratio of
authorized projects should be 100%. Corporate tax is reduced
from 30% to 15% for foreign-funded companies that haveconducted investment in areas of business in which foreign
investment is encouraged.

Tax refunds related to reinvestment in export
Foreign-funded
companies or companies with advanced
companies
technologies

Export ratio of 70% or higher. No obligation to export forcompanies with advanced technologies. When profits from aqualifying company are directly invested in a qualifying
company or another foreign-funded company, and the period of
operation of this company will be five years or more, 100% of
the tax already paid on the profit that was invested can be
refunded.

Tax exemptions on various employee
subsidies

Foreign-funded
companies

Export ratio of 70% or higher. No obligation to export forcompanies using advanced technologies.

Provision of discount loans by commercial
banks for superior exporters

Domestically-funded
Companies with exports totaling $0.2 billion or more per year
companies andand an export debt coverage ratio of 85% or higher are
foreign-fundedclassified as superior exporters.
companies

Exemption from customs duties and valueadded tax on imported equipment

Foreign-funded
companies

No obligation to export. However, the export ratio of
authorized projects should be 100%. Conditions apply for
exemptions, including involvement in an area of business inwhich foreign investment is encouraged and the provision oftechnology licenses.

Note 1: In addition, these measures may be in violation of Article 3.4 of the GATT, Article 2.1 of TRIMS, and Articles 7.2, 7.3 and 10.3 of China's WTO accession document.
Note 2: In addition, these measures may be in violation of Article 10.3 of China's WTO accession document and Article 1.1(a)(iv) of the Agreement on Subsidies and Counterva(Source) Formulated from WTO documents and documents relating to trade measures in China

105

II. Searching for the Growth Strategy for Japan in the Growing
Momentum in Asian FTAs
1. The World and the Asian FTA(1) Rise in FTAs Worldwide Accelerated by Lagging WTO New Rounds
As of July, 2007, 143 free trade agreements (FTAs) are in effect worldwide. Until 1989 there were
only 19, but starting in the 1990s the number has increased dramatically. In the decade from 1990 to
1999, 48 agreements were formed, and 76 new agreements have been created since the year 2000.
(Fig. II-1).
Factors behind this sudden acceleration in new FTAs may include the fact that as the WTO talks
in the previous Uruguay Round and the current Doha Round have been slow to bear fruit, morecountries started to pursue FTAs so as to supplement the lagging WTO. The number of WTO
members has increased and negotiations are going beyond tariffs to include many areas such asservices and trade remedy measures (Table II-1). In other words, WTO demands a large number ofcountries to reach consensus on many subjects. Consequently, they, in some occasions, find it morereasonable to pursue FTAs, which can be concluded with a more limited number of counterparts thanthe Rounds, in relatively short time period. The shift toward FTAs by the major trading countries
such as the U.S., which has driven other competing countries to turn to FTAs, is, we believe, anotherreason for this acceleration. In other words, each new FTA spurs the creation of yet more FTAs.
■Regional Integration Occurring at Various Levels, Such as FTAs, Custom Unions, andCommon Markets
FTA is an agreement between the governments of two or more countries/regions whose purpose isto eliminate tariff and other trade barriers. The custom union, on the other hand, is an agreement thateliminates tariffs within member countries while instituting common tariffs as well as trade policies
against the imports from countries or regions outside the area. Adopting common tariffs and trade
policies while having already the characteristics of FTAs, custom unions can achieve a greater
degree of economic integration than an FTA.
Custom unions are much fewer in number than FTAs worldwide. According to the WTO reports,
only eight of them exist today, among which are the Mercado Común del Sur (Mercosur) made up of
Brazil, Argentina and other South American countries, and the Gulf Cooperation Council (GCC)
comprised of six Persian Gulf countries including the United Arab Emirates. Countries have notbeen very enthusiastic to form custom unions for a variety of reasons, such as: (1) Having common
tariffs and trade policies make it necessary for individual countries to discard their own trade
policies and denies them the freedom to negotiate FTAs independently with outside countries. (2)Stabilizing the region is what countries are looking for in custom unions. Therefore, this strong106

motivation toward regionalism lowers their incentives to form custom unions cross-regionally.
(There are no such custom unions at present.) The EU belongs to the common market, which affords
an even greater degree of economic integration than a custom union with such additional features as
free movement of people and capital.
■Cross-Regional FTAs and FTAs Between Advanced and Developing Countries Also
Increasing
It used to be that FTAs would most often be formed among countries that have geographicalproximity (Table II-2). It is rather natural that neighboring countries/regions that already have strong
economic or political ties form an FTA to further deepen their relationship.
The EU, originated from the Treaty of Rome in 1957, is the center of economic integration in
Europe, embracing more and more peripheral countries since its inception, to become a hugecommon market. In 2004, ten Eastern European countries like Poland and Hungary joined the EU,
and subsequently, Romania and Bulgaria acceded in 2007, which resulted in a total of 27 member
countries. There have also been some movements to form FTAs between the EU and Middle Easternand African countries. As of July 2007, the number of FTAs in Europe, Russian and the CIS, theMiddle East, and Africa exceeds 81, accounting for 56.6% of the world total. In the Western
Hemisphere, NAFTA in North America, the Central American Common Market (CACM), theCaribbean Community (CARICOM), the Andean Community of Nations (CAN) and Mercosur inSouth America are among the free trade areas as well as custom unions that have been formed. The
number of FTA in this region has currently risen to 19, accounting for 13.3% of the total.
Representative FTAs in the Asia-Pacific region include the ASEAN Free Trade Area (AFTA), andFTA networks are being formed around the hub of ASEAN, such as the ASEAN-China FTA(ACFTA) and the ASEAN-Japan Comprehensive Economic Partnership (AJCEP). There are 22
FTAs in the Asia-Pacific region, accounting for 15.4% of the total.
Recent years have also seen an increase in regional FTAs that cut across regional boundaries. The
U.S.-Australia FTA and the Japan-Mexico EPA belong to this category. 21 FTAs, 14.7% of total, areplaced in the cross-regional FTA category. As globalization advances, FTAs are extending beyond
regional barriers, which create a global network of agreements.
The EU-South Africa FTA, NAFTA, FTA between Japan and ASEAN countries, whereby advanced
countries/regions are seeking liberalization of trade and investment in developing countries that areexperiencing a remarkable economic growth. FTAs with advanced countries give developing
countries a greater access to the enormous markets.
In the past, economic disparities between advanced and developing countries were the reasons that
advanced countries are more inclined to have FTAs with other advanced countries (such as the EU),and developing countries with other developing countries (such as Mercosur). However, FTAs

107

between advanced and developing countries are on the rise. This type of FTAs represented only
about 30% of all FTAs prior to the year 2004, but the figure has increased to more than 50% since2005.
On a regional basis, notable examples include the EU with the Middle East, Eastern Europe andAfrica, the U.S. with Central and South America, and Japan with other Asian nations, including
those in ASEAN countries, aimed at securing fast-growing markets in the each region. More recently,
there are starting to be cross-regional FTAs between advanced and developing countries, such as the
U.S.-Republic of Korea FTA and the Japan-Mexico EPA.
■FTAs Increase Depth of Coverage Beyond Tariffs to Include Investment, Services, etc.
Many of the past FTAs aimed at liberalizing trade in goods through the elimination of tariff.
Recent FTAs go beyond the elimination of tariff and non-tariff barriers to cover a wide range offields including services, investments, intellectual property, competition policy and disputesettlement. According to WTO report, until 1999 there were only 11 FTAs that included services.
Since 2000, that number has increased by 32 for a current total of 43.

Particularly noteworthy is

the fact that 63.2% of FTAs concluded since 2005 include services (Fig. II-2). The world-class FTAs
such as NAFTA and the EU are comprehensive, and Japan’s EPAs also cover not only tariffs andinvestment, but also other areas including bilateral cooperation.
As growing numbers of companies extend their oversea operations in this globalization of
economy, countries demand their counterpart countries more to tackle with problems such as thestrict regulations on foreign investment in manufacturing as well as service industries, and those
involving the infringement of intellectual property rights caused by the flood of counterfeit products
entering markets. There has been a growing emphasis on the FTA as a forum for the resolution ofproblems like these, as well. Thus the concept of the FTA has come to extend beyond its previous
scope of trade in goods, and the FTA has become capable of influencing even domestic policy incounterpart countries.

(2) Trends in the Asian FTA Getting More Attention from the World
There are 22 FTAs in force in the Asia-Pacific region. The countries making up ASEAN+6(ASEAN plus Japan, China, the Republic of Korea, India, Australia and New Zealand) participate inas many as 14 FTAs (including Early Harvest (EH) schemes) (Table II-3). Japan’s EPAs with
Singapore and Malaysia went into effect in November 2002 and in July 2006, respectively. In May
2007, Japan also reached an agreement in major issues with ASEAN that includes the percentages oftariff items subject to liberalization, those of sensitive items, and other such matters. Specific items
are to be determined from this point forward. Apart from negotiations with ASEAN as a whole,
Japan has also signed EPAs with Thailand, the Philippines, and Brunei that are expected to become108effective in the near future.
China and the Republic of Korea have also been actively pursuing FTAs. The ASEAN-China FTA
went into effect in July 2003, and China is currently negotiating with Australia, New Zealand, andSingapore. The Republic of Korea, following its "multiple simultaneous" FTA strategy, has focused
its efforts on concluding FTAs with countries and regions that will make Korea the trade hub for
Northeast Asia.
Agreements with other countries in the Asia-Pacific region include an FTA with Singapore, signed
in March 2006, and with the U.S., signed in July 2007, as well as the FTA with ASEAN that went
into effect in June 2007. At present, its negotiations are underway with India.
The center of the FTA network that covers the Asia-Pacific region is ASEAN. In addition topromoting the liberalization of trade and investment within itself, ASEAN has actively sought toconclude FTAs with other countries in the Asia-Pacific region outside its area with the aim of
becoming the hub for this region. Japan, the Republic of Korea, China, Australia, New Zealand, andIndia have all either concluded or are currently negotiating FTAs with ASEAN. In this way, a
network of FTAs is being formed in the Asia-Pacific region, as though these countries were
following the Japan's Comprehensive Economic Partnership in East Asia (CEPEA) framework
proposal (Fig. II-3).
FTA frameworks covering the Asia-Pacific region include the CEPEA framework by ASEAN+6
countries (Japan, China, Republic of Korea, Australia, New Zealand, India), the East Asia FTA(EAFTA) framework by ASEAN+3 countries (Japan, China, Republic of Korea), and the
APEC-wide Asia-Pacific Free Trade Area (FTAAP) framework.
The CEPEA framework was formulated as part of the global economic strategy announced by
Japan's Ministry of Economy, Trade and Industry in April 2006. The CEPEA is a comprehensive
FTA framework that includes a wide range of fields, such as goods, investment, services, andintellectual property rights. At the ASEAN+3 economic ministers meeting in August 2006, Japanproposed that a study group of experts be convened, and the East Asia Summit in January 2007
agreed to form a private-sector study group. The first meeting of the group was thereupon held inTokyo in June of the same year, and plans were made to deliver an interim report at the East Asia
Summit to be held in Singapore in November of that year.
The EAFTA framework originated in the East Asia Vision Group report presented to the
ASEAN+3 Summit in November 2001. A private-sector study group of experts was then formed, as
proposed by China, and carried out a feasibility study. The results of that study were reported to the
ASEAN+3 Summit in January 2007. At the summit, the Republic of Korea proposed the formationof a Phase II study group for field-by-field analysis, and it was decided that this group would present
a final report to the ASEAN+3 economic ministers meeting in the summer of 2009.
The FTAAP framework, which was proposed around 2004, was originally met with some109

reservations by the U.S. That country, however, suddenly proclaimed its support in 2006, perhaps
because it was concerned that it could be excluded from the FTA network that was gradually taking
shape in the Asia region. With U.S. support, the APEC Summit of November 2006 in Hanoi decided
to conduct research on methods of promoting regional integration, including the FTAAP designatedas a long-term target, and to have a working-level report given at the APEC Summit in 2007.

(3) Japan's EPA Strategy
Japan has been supporting the GATT/WTO multilateral trade system for a considerable time. The
U.S., which had been supporting multilateral trade systems alongside Japan, formed NAFTA in 1994.
Then, the third WTO ministerial conference in Seattle ended in failure in 1999. With the difficulties
of multilateral trade negotiations thus cast in relief, Japan began actively working on EPAs as asupplement to the WTO. The first EPA with Singapore came into being in November 2002, and was
followed by the conclusion of EPAs with Mexico and Malaysia (Table II-4).
Japan has sought by means of EPAs to secure overseas markets for Japanese companies and to
reduce their costs of doing business overseas. It has therefore given top priority to concluding EPAs
primarily with the East Asia region, which has recorded significant growth and which is amanufacturing center for Japanese companies, and particularly with the ASEAN countries. Not only
do the ASEAN countries generally have high tariffs on mining and manufacturing products, but theyalso still have numerous barriers to investment and services. Japan consequently seeks to improvethe environment for trade and investment by concluding EPAs with these countries. Japan so far has
EPAs in effect with Singapore, Mexico, and Malaysia, has signed agreements with the Philippines,
Chile, Thailand, and Brunei, and has reached an agreement in the major issues with Indonesia.
Negotiations with ASEAN as a whole also reached agreement in the major issues in May 2007,
aimed toward the adoption of cumulative rules of origin that will the stimulate intra-regional trade of
ASEAN by Japanese companies that have located there.
Japan is also promoting EPAs to resolve the disadvantages of not having FTAs in place. Mexico
and Chile, for example, have concluded numerous FTAs, and could be termed advanced FTA
countries. Both countries have, more particularly, concluded FTAs with the U.S. and the EU so thatJapanese companies that are competing against European and American products have been forced
to engage in disadvantageous competition. Moreover, Japanese companies are unable to qualify for
the Mexican government procurement market, which European and American companies are
qualified to participate in, so that the Japanese companies have been unable to contract for oil,electric power, and other such large-scale projects. Following its strategy for improving
disadvantageous competitive conditions like these, Japan has concluded an EPA with Mexico andsigned an EPA with Chile. Japanese companies are planning to utilize the opportunities opened up by
EPAs with these countries to recover lost ground.
Promotion of structural reform in Japan and counterpart countries is another important purpose of110the EPA. Although some consideration is required in the fields of agriculture, forestry, and fisheries,
the conclusion of EPAs is intended to promote domestic structural reform while making the
economy more efficient and vigorous.
Japan has further accelerated EPA negotiations in 2007. It signed EPAs with Chile in March,
Thailand in April, and Brunei in June. Negotiations have begun with India, Australia, Vietnam, andSwitzerland.
Negotiations with India were initiated in January 2007 with the goal of signing an agreement
within two years. Japan aims to acquire the vast consumer market centered on the rapidly growing
high-income segment in the cities of India, with its population of 1.1 billion.
Negotiations with Australia began in April. This is Japan's second-ranked export destination forautomobiles and automobile parts, and the EPA is expected to expand automobile-related exports.
Australia is also a crucial source for procurement of iron ore and other resources, and it is importantthat assurance of stable supplies be written into the EPA. Meanwhile, Australia is the fourth largest
source of Japan's agricultural, forestry, and fishery product imports.
The EPA with Vietnam, for which negotiations began in January 2007, is subject to even greater
expectations because Vietnam in particular is considered a "China plus one"(1) candidate location.(2)---------------------------------------------------------------------------------------------------------1. The strategy of distributing investment over China and one other country in order to reduce the risk ofconcentrating investment in China.
2. Vietnam acceded WTO in January 2007.

----------------------------------------------------------------------------------------------------------

The conclusion of EPAs with these countries as well as with ASEAN will constitute amajor step toward realization of the economic partnership that Japan seeks for the
Asia-Pacific region.
(4) NAFTA as a Precursor of the FTA Between Advanced and Developing
Countries
NAFTA, which is made up of the U.S., Canada, and Mexico, symbolizes the combination of largeadvanced countries (the U.S.) with developing countries (Mexico), the initiative of multinational
companies in the U.S., and the achievement of comprehensive, high-level liberalization. The factthat NAFTA incorporated Mexico into the U.S. production network can be considered one of theeconomic effects achieved by this agreement. Moreover, there are some aspects in common between
NAFTA and the economic partnership that Japan is pursuing in the Asia-Pacific region. There is the
combination of an advanced country, Japan, with developing countries China, India, and the ASEAN
countries, and there is the fact that Japanese companies are in the process of forming a production
network through investment in China and ASEAN. These are the elements that overlap with NAFTA

111

characteristics. Japan also aims at having comprehensive, high-level liberalization in the Asia-Pacificregion. This is what NAFTA has achieved. Below, we introduce some examples from NAFTA that
could serve as a useful reference in thinking about an economic partnership in the Asia-Pacificregion.
■Significant Liberalization Achieved in Goods, Services, and Investment
NAFTA trade in goods has become almost entirely tariff-free, with some exceptions, such as dairy
products. Rather than the WTO’s positive list system, NAFTA has adopted the negative list systemfor dealing with services, which resulted in significant liberalizations in service-related regulations.
In investment, national treatment principle was given for pre-investment, and the negative list
system was adopted for those categories in which foreign investment is restrained.
Mexico's foreign investment policy, influenced by the liberalization of services and investment
due to NAFTA, underwent major change. Mexico amended its law on foreign investment in
December 1993, immediately before NAFTA went into effect, and eliminated the across-the-board
upper limit of 49% that had applied to the ratio of foreign capital participation in many fields. Even
finance and insurance, which had been handled as exceptions under the revised foreign investment
law, were opened to 100% participation in the NAFTA framework.
In Mexico, NAFTA led to the elimination of tariffs on finished vehicles simultaneously with
deregulation of the automobile industry. Tariffs on NAFTA-originated vehicles in Mexico werereduced from 20% to 10% immediately after the agreement went into effect. With the graduatedreduction in rates that was then implemented, tariffs on small trucks were eliminated completely in
1998, followed by tariffs on passenger vehicles in 2002. In conjunction with the graduated loweringof tariffs, certain performance requirements for the automobile industry, such as the requirement thatthe percentage of domestically produced parts be maintained at or above a certain level, and therequirement to maintain a certain balance between imports and exports, were relaxed in stages until
they were eliminated in 2004.
After NAFTA went into effect, Mexico gained in importance as a base to produce automobiles forexport to the U.S. The number of automobiles produced in Mexico nearly doubled from 1.01 million
units (of which 580,000 were for export) in 1994 (the year NAFTA went into effect) to 1.98 million
units (of which 1.56 million were for export) in 2006. The greater part of this increase was fromexpansion for export to the U.S. Mexico thus received the benefit of increased employment while
U.S. auto manufacturers were able to reduce costs through production in Mexico.
With NAFTA, Mexico accepted liberalization in the financial sector, which most developing
countries do not actively embrace. This liberalization contributed to the stabilization of Mexico's
economy.
Even with the foreign investment law as amended in 1993, Mexico limited foreign capital

112

participation in commercial banks to 49%. With NAFTA, however, U.S. and Canadian financialorganizations were allowed to enter the Mexican market with 100% owned subsidiaries. Financial
liberalization under NAFTA was one factor in the 1999 amendment of foreign investment law, which
eliminated all limitations on capital participation in commercial banks for enterprises both inside andoutside the NAFTA area.
Mexico was hit by a peso crisis (the tequila shock) in December 1994, immediately after thecountry joined NAFTA. There was a series of collapses of local banks. As a result of liberalization of
the financial sector, U.S. and Canadian banks bought up local banks in Mexico. The Mexican
government established an organization to deal with non-performing loans and took steps tonormalize the banking system. The purchase of local banks by foreign banks taking advantage offinancial sector liberalization under NAFTA can be considered to have helped contribute to thestabilization of the financial system.
■Mexico, Not a Member of the WTO Government Procurement Agreement, Opens up
Through NAFTA
NAFTA incorporated government procurement provisions. The language and substance of theseprovisions make them largely the same as what is in the WTO Government Procurement Agreement,
which establishes that the NAFTA signatory countries are not as a rule allowed to treat the products,
services, and enterprises of any other NAFTA signatory country so that they are at a disadvantage
relative to domestic products, enterprises, and so on.
Given the existence of the WTO Government Procurement Agreement, one may wonder why
NAFTA would have to include the very same content. The WTO Government Procurement
Agreement is unlike service agreements or other such agreements in that membership in it isvoluntary. Only 13 countries and regions are signatories, and developing countries are not members.
Although the U.S. and Canada are WTO Government Procurement Agreement signatories, Mexico isnot. NAFTA is the first instance of Mexico opening government procurement to other countries byan international agreement. NAFTA broke the ice for Mexico to determine government procurement
according to the FTAs (or EPA) with the EU and Japan, and this has effectively put Mexico in asituation that is practically the same as being a WTO Government Procurement Agreement
signatory.
There are some sectors of infrastructure development in the developing countries that require
technology and capital from advanced countries. Wide-ranging FTAs with a plurality of advanced
and developing countries as participants should probably consider including government
procurement provisions in the interest of assuring transparency.
■Adopting a Self-Certification System for Certification of Origin

113

NAFTA prescribes rules of origin by individual product items. Theoretically, therefore, productsthat are imported from outside the area will not be exported to other signatory countries as NAFTA
products with preferential tariffs unless they have undergone value-added processing within the area.
However, there have been actual cases in which low-cost Chinese or other such products were
imported into the U.S. and then illegally imported into Mexico falsely identified as NAFTA products.
These cases have become a problem. These illegal imports have resulted from the disparity between
the U.S. and Mexico in their tariffs on goods imported from outside the area. The apparel industry
has suffered serious damage, and according to a study report announced by the Ministry of the
Economy of Mexico in 2002, approximately 60% of the domestic apparel market ($16.3 billion in2000) was made up of these kinds of illegally imported products.
The fact that illegal importation of this kind persists in NAFTA is considered to be a systemic
problem. NAFTA has adopted a system of self-certification, so that certificates of origin do not haveto be issued by public agencies or third-party organizations. The exporter's own signature issufficient. Self-certification systems are thought to be more susceptible than prior certification
systems to false declarations and other such illegal actions.(3)---------------------------------------------------------------------------------------------------------3. Even under self-certification systems, it is usual to set up arrangements
whereby the importing country's authorities check certificates of origin after the fact.

---------------------------------------------------------------------------------------------------------It should be noted, however, that systems of self-certification have advantages compared tosystems of certification by third-party organizations, such as allowing for speedy export procedures.
The cost of certification of origin also has the effect of offsetting the advantages of tariff reduction,and there is demand for reduction of that cost. It is probably necessary to study the adoption of
selective systems for certification of origin, so that, for example, enterprises engaged in local
production can use a system of self-certification for importation of parts they require for production.

(5) EU Still Continuing to Implement Measures for Integration
Movements toward economic partnership in the Asia and Pacific region are centered onliberalization with respect to goods and investment. Attempts to impose the level of integration
found in the EU, which is the highest in the world, would be premature in this region. On the other
hand, ASEAN is aiming to institute an ASEAN Community by the year 2015. Moreover, Japan has
recently been seeing discussion of an East Asian Community. There is a likelihood that movements
aimed at achieving a high degree of integration, as found in the EU, in the Asia-Pacific region willtake concrete form in the long term. Here, therefore, we shall provide a summary review of
initiatives for the free movement of persons and monetary union, which are still underway in the EUeven now.

114

■Seeking the Free Movement of Persons: EU Measures and Issues
The EU has adopted numerous statutes in the past intended to realize the free movement of
persons. In fact, however, the adoption of statutes alone did not suffice to facilitate the movement ofpeople. There were many impediments, such as differences among the signatory countries in theirsocieties, cultures, languages, pension and tax systems, and other aspects of domestic laws,
capabilities, and occupational qualifications. These interfered with the freedom of EU citizen to livein other countries. The percentage of EU citizens at present who live in a signatory country otherthan their country of origin, or who work in a signatory country other than their country of origin,amounts to no more than about 1.5% of the total working population. Even though the procedures
required for people to move have been simplified, this figure has hardly changed at all over the past
30 years.
The EU has therefore begun to make environmental improvements to promote people's movement.
One of these is the mutual recognition of occupational qualifications. When mutual recognition is inplace, then a physician in one country, for example, will be able to provide medical services inanother country. A Directive of the European Parliament and of the Council on the Recognition ofProfessional Qualifications is to become effective in October 2007. This will make it possible for EU
citizens who live in other signatory countries to provide services using their qualifications in theircountry of origin temporarily without applying for permission. Under certain conditions, their
qualifications may also be recognized for the purpose of starting a business in another country.
Although a variety of attempts toward the free movement of persons have been made in the EU,
barriers still remain. The disparity in income levels between signatory countries and other sucheconomic elements are one factor preventing people's free movement. There is concern that a sudden
movement of workers from a new member of the EU to an earlier signatory country, for example,
could cause housing shortages, school shortages, and other such societal problems. Earlier signatory
countries are therefore permitted to restrict the free movement of workers from new member
countries. Workers from Romania and Bulgaria, for example, which joined the EU in January 2007,
will have their free movement limited for a period of seven years at most. Only two countries,
Sweden and Finland, have taken the step of opening up completely to date.
The United Kingdom, which had acted positively to accept workers, announced that it would limit
the acceptance of workers from Romania and Bulgaria. The reason is that more workers thanoriginally expected were received by the country since 10 countries became new members in 2004,
leading to problems in paying expenses resulting from the consequent lack of housing, lack ofschools to take in the workers' children, training in the English language, and so on.
■Monetary Union Brings Stability to Economic Indicators but Some Fiscal Discipline Issues

115

Remain
There have been a number of factors in efforts toward the establishment of the European
Economic and Monetary Union (EMU). These include economic factors such as expansion of tradeand investment by a reduction of foreign currency risk and foreign currency transaction costs,
stabilization of cost of living fluctuations and narrowing of inflation level differences in the EU
region by means of shared financial policies, and reinforcement of fiscal discipline. There has also
been a political aspect in the background, such as the desire to establish a common currency on a parwith the dollar as a symbol of regional integration.
The economies of a region must be to some extent homogeneous as a precondition for unificationof their currencies. Monetary union signifies each country's abandonment of its regulatory function
with respect to drops in overseas demand and other such shocks involving its own national currency
and financial policy. The existence of large economic disparities within a region, therefore, becomesa problem in that it limits the effects of shared currency alignment and financial policy. Countries
that participate in monetary union are consequently required to satisfy the criteria for economic andmonetary convergence established by the Maastricht Treaty. These criteria relate to prices, long-term
interest rates, stabilization of exchange rates, and sound fiscal discipline. As it turned out, the 11
countries that satisfied the convergence criteria inaugurated the EMU. The European Central Bank
(ECB) was established in June 1998, use of the euro as a common currency for non-cash transactions
began in 1999, and cash transactions using the euro (withdrawal from circulation of national
currencies) began in 2002. Greece joined the EMU in 2001 and Slovenia joined in 2007.
It is difficult to accurately measure the extent to which regional trade and investment has
increased because of the EMU. There is no doubt, however, that there were positive effects in theformation of single markets such as goods or investment. Price increases have also held quite steady,barely exceeding 2%, even within the context of sharply rising crude oil prices. Inflation disparity
was also reduced from about 4 points in 1997 to about 2 points in 2006.
In June 1997, a Stability and Growth Pact (SGP) that included provisions for monitoring fiscal
deficits and imposing sanctions was concluded for the purpose of maintaining fiscal discipline evenafter the inauguration of the EMU. The SGP made signatory countries responsible for keeping theirgovernment deficit to less than 3% of their GDP and maintaining the level of government debt at lessthan 60% of GDP. Countries that persisted in violation would be subject to corrective measures, andultimately to monetary penalties.
Since 2001, however, the economy has deteriorated, policy priority has been given to businessrecovery measures, and national governments are less motivated to seek fiscal soundness. Deficits of
3% or more have been recorded not only in smaller countries such as Portugal and Greece, but also
in countries such as Germany and France, which are leaders in European integration.
Given this context, fiscal discipline by means of SGP has relaxed. In November 2003, the decision116

was made to temporarily suspend fiscal deficit improvement procedures regarding Germany andFrance. In March 2005, the SGP was amended to exclude European unification costs, such as thecost of East and West German unification, as well as research and development expenses. There issome tendency to approve of making operations flexible by such means as relaxing fiscal stimulation
requirements temporarily during economic slumps. At the same time, however, many take the viewthat this has lessened the effectiveness of the SGP, which seeks adherence to strict fiscal discipline.
The ECB has expressed apprehension about the SGP amendment.
As a result of the recent upturn in the business climate, deficits of over 3% have been seen only in
Italy and Portugal as of 2006. The debate over the SGP has also grown relatively quiet. The
maintenance of fiscal discipline is still a critical problem affecting confidence in the euro, however,and it is not to be overlooked from the viewpoint of new member countries in the expanding EMU.
----------------------------------------------------------------------------------------------------------

Column II-1
Adoption of SOLVIT Makes Dispute Resolution Easy to Turn toMany cases occur in which the incorrect application and mistaken interpretation of laws by
signatory country authorities in the EU cause problems for citizens and enterprises from othercountries. A means for resolving these problems that arise from the incorrect application of statutes
relating to markets within the EU, and resolving them promptly and at low cost, was created in 2002.
It is called the SOLVIT on-line network. SOLVIT centers have been established in the various
countries, and they are offering their services at no charge.
The SOLVIT centers as a rule provide measures for resolving problems within 10 weeks after
application. They can also request assistance from the European Commission when necessary. When
official suits are brought before the European Commission, those cases that are determined to besolvable without going through the European Court of Justice are also sometimes turned over to
SOLVIT centers to be handled.
Difficult problems that are unlikely to be resolved within 10 weeks basically do not come within
the SOLVIT purview. However, many people turn to SOLVIT, which can try to resolve problems
quickly and at no charge, rather than pursuing complicated, time-consuming court cases. TheSOLVIT centers have been presented with 1,500 or more cases since 2002.
SOLVIT will attempt to resolve a wide range of problems, including those that concern social
security, tax systems, services, and so on. It can also be effective in dealing with factors that impede
the free movement of persons, such as troublesome and arbitrary administrative procedures involved
in applications to start a business, refusal to recognize occupational qualifications, and so on.
There was one case, for example, of a self-employed person (a builder) from the Czech Republic
who had attempted to start doing business in Germany. The German authorities insisted that a work
permit was needed to provide services in the construction sector, and refused to issue a work permit.

117

SOLVIT in Germany determined that self-employed people are not required to obtain work permits,and succeeded in obtaining permission for this self-employed person to conduct business. The time
taken to resolution was four weeks.
In another case, an anesthetist from the UK requested that Spanish authorities recognize his
professional qualification so that he could work in Spain. The authorities required the anesthetist to
produce an unnecessary amount of documentation. SOLVIT in the UK and Spain then intervened
and the anesthetist was eventually able to work in Spain. The problem took eight weeks to resolve.
Of the 467 cases handled by SOLVIT centers in 2006, 15% had to do with recognition ofoccupational qualifications while 9% had to do with the free movement of persons and civil rights inthe EU, and 21% of all the cases involved movement of persons. As this indicates, SOLVIT
functions to facilitate activity by EU citizens and businesses in signatory countries other than theircountry of origin.

Reference: European Commission, "SOLVIT 2006 Report: Development and Performance of the
SOLVIT network in 2006," European Union Website, 2007.
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118

Fig. II-1

Worldwide FTA Trends

1955-1959
1965-1969
The total number is 143(as of July 1, 2007)

1975-1979
1985-1989
1995-1999
20050

10

20

30

40

50

(number)60

Notes:
1. Of the 194 regional trade agreements listed on the WTO website (listing signifies that GATT or the WTO has been notified of theagreement and it is currently in effect), we have excluded 54 as duplicates due to new participants in existing FTAs, notification ofboth GATT and GATS, and etc.
2. The period is based on the date of the agreement. If that is unclear, the date of notification to GATT or the WTO is used.
3. The graph includes non-reported FTAs, namely ROK-ASEAN FTA, Thailand-India FTA as well as Singapore-India FTA.
Source: WTO website (www.wto.org/english/tratop_e/region_e/region_e.htm) as of March 1, 2007.

Table II-1. Overview of the past WTO multilateral negotiations
Year

Number ofyears

Negotiation

1947
Round 1
1949
Round 2
1951
Round 3
1956
Round 41960-1961
Dillon Round
1964-1967
Kennedy Round
1973-1979
Tokyo Round
1986-1994
Uruguay Round
2001-Present Doha Development Agenda
Source: Data from WTO Website

1
1
1
1
2
4
7
9
7＋

Number ofparticipant
countries
23
13
38
26
26
62
102
123
150
Increase in number ofparticipant countries

Longer negotiation
periods

Table II-2 FTAs by Region
Year
55-59
60-64
65-59
70-74
75-79
80-84
85-89
90-94
95-99
2000-04
2005Total

Europe, Russia andWestern
the NIS, Middle
Hemisphere
East, Africa

1
1
1
2
1
13
24
32
6
81

Asia-Pacific

CrossRegional

1
1
2

1
1
1
2
4
8
1
19

2
2
2
3
1
8
6
22

1
9
6
21

119

Total

1
2
1
4
4
4
3
18
30
57
19
143

Fig. II-2

Trend of FTAs that include services: number and proportion(%)（number）
25

0.7
Number
Proportion

20

0.6

20

0.5
15
12

0.3

10

5

0.4

4

0.2

4
3

0.1

0

0
-1989

1990-1994

1995-1999

2000-2004

2005-

Note: Based on the data reported by member countries to GATS
Source: WTO

Table II-3 FTAs in force in the Asia-Pacific region
FTA
Australia-New ZealandLaos-Thailand
Asean Free Trade Area (AFTA)
Singapore-New Zealand
Japan-Singapore
Singapore-Australia
Asean-China
Thailand-India
Thailand-Australia
Thailand-New ZealandSingapore-India
Singapore-ROK
Japan-Malaysia
ASEAN-ROK

Date, Status
January 1983
June 1991
January 1992 (start of tariff reduction: January 1993)
January 2001
November 2002
July 2003
July 2003
September 2004 (start of EH)
January 2005
July 2005
August 2005
March 2006
July 2006
June 2007

Note: EH stands for Early Harvest
Source: Data from countries involved in FTAs above120

Fig. II-3 "ASEAN+1" FTAs continue to expand to form the free trade area in the
East Asia
ASEAN-China
Jan. 2004, EH
July 2005, Mfg

Korea-India
Under Negotiation

ASEAN-Korea

ASEAN-Japan
Under Negotiation

June 2007

Japan-India
Under Negotiation

China

Korea

Japan
Japan-Korea
Under Negotiation

India

Japan-Australia
Under negotiation

AFTA（ASEAN FTA）
ASEAN-India
Under Negotiation

Singa
pore

Indon
esia

Thaila
nd

Brune
i

Laos

Camb
odia

Malay
sia

Philip
pines

Myan
mer

Vietn
am

China-Australia
Under Negotiation

Australia
ASEAN・CER
Under Negotiation

ASEAN+6
In Force

Under Negotiation

Study

Source: JETRO

121

New
ZealandTable II-4 Japan's EPAs: in effect, signed, being negotiatedCountry/Region

Consideration⇒

Negotiation⇒

Agreement in Principle, Signed, In EffectSingapore

Joint study group,
March-Sept. 2000

Negotiations from
Jan. 2001

Signed Jan. 2002

In effect
November 2002

MexicoJapan-Mexico joint
study group, Sept.
2001-July 2002

Negotiations from
Nov. 2002

Signed Sept. 2004

In effect April
2005

Negotiations from
Jan. 2004

Signed Dec. 2005

In effect July
2006

Negotiations fromFeb. 2004

Signed Sept. 2006

Negotiations fromFeb. 2006

Signed March 2007

JTEPA Task Force,
July-Nov. 2003

Negotiations fromFeb. 2004

Signed April 2007

Intergovernmental
preparatory meetings,
Feb.-April 2006

Negotiations from
June 2006

Signed June 2007

Negotiations from
July 2005

Agreement inprinciple Nov. 2006

Negotiations from
April 2005

Framework
agreement May 2007

Malaysia

Philippines
Chile

ThailandIntergovernmental
Joint study group,working group, May-July
Sept.-Nov. 2003
2003
Intergovernmental
Joint coordinating
working group, Oct.
team, Sept.-Nov. 2003
2002-July 2003
Joint study group, Jan.Sept. 2005
Intergovernmental
working group, Sept.
2002-May 2003

BruneiIndonesia
ASEAN
ROK
Gulf Cooperation Council

Preparatory meeting, Joint study group, Jan.Sept.-Dec. 2003
April, 2005
Intergovernmental
Intergovernmental
committee, March-Oct. preparatory meeting,
2003
Jan.-Dec. 2004
Joint study group July
2002-Oct. 2003
Intergovernmental
preparatory meeting,May 2006

Negotiations from
Dec. 2003
Negotiations from
Sept. 2006

VietnamIntergovernmental
joint discussion group,
Feb.-April 2006

Negotiations begin
Jan. 2007

India

Joint study group, July
2005-June 2006

Negotiations begin
Jan. 2007

Joint study group, Nov.
2005-Dec. 2006

Negotiations begin
April 2007

Australia

Intergovernmental
preparatory meeting,
Sept. 2002-July 2003

Joint governmental
Negotiations begin
study group, Oct.
May 2007
2005-Nov. 2006
Sources: Ministry of Foreign Affairs, Ministry of Economy, Trade and Industry of Japan
Switzerland1222. Economic Effects of FTAs
(1) FTA Model Analysis with a Focus on ASEAN
The creation of free trade areas centered on ASEAN has been progressing steadily in Asia. This
chapter will present an estimate of the economic effects of various free trade agreements (FTAs) in
Asia by means of model analysis. By clarifying the effect of upward pressure on GDP and changes
to the structure of trade, the chapter will present the possibilities brought by FTAs, together withmeasures intended to maximize the economic effects of FTAs.
Needless to say, estimations of the economic effects of an FTA by means of a model will produce
results according to the assumptions involved. If the conditions and assumptions are made as clear as
possible, however, and the effects of the FTA are presented concretely and specifically, then the
results may be significant insofar as they are able to provide certain suggestions for discussion of
FTAs and the issues involved in their implementation.
The estimate here was made using the sixth edition (with 2001 base data) of GTAP, which is themost standard general equilibrium model. The subject was FTAs centered on ASEAN, including theASEAN Free Trade Area (AFTA), ASEAN+1, ASEAN+3, ASEAN+6, and so on. This includes
FTAs that have been signed, on which agreements have been reached, and that are being planned.
The analysis was applied to a total of 11 industries with a focus on eight industrial classifications
involving manufacturing of electric machinery, transportation equipment, and so on. (For further
information, including details of the assumptions employed, please see the Commentary at the end of
this chapter.)
The economic effects of an FTA were estimated first of all by converting base data from before
the FTA was concluded or completely implemented, in the case of ASEAN, to the common effective
preferential tariff (CEPT) rate as of 2003.(4) The working assumption is that tariffs within the region
will then be eliminated and non-tariff measures (NTMs) will be reduced. The liberalization effects
are estimated on this basis. (For ASEAN+6, only the effects of tariff elimination were estimated, forpurposes of comparison.)---------------------------------------------------------------------------------------------------------4. The adoption of CEPT tariff rates in 2003, in the present model analysis, results in an intra-ASEAN
tariff rate of 2.1%. Consequently, the liberalization effect of intra-ASEAN trade is the effect of not
imposing this 2.1% tariff. The original ASEAN signatory countries are slated to remove tariffs on more orless all product categories by 2010.

---------------------------------------------------------------------------------------------------------■The ASEAN+6 FTA Pushes GDP Up 1.3% for all Signatory Countries
The economic effects of an FTA bring change to the entire economy in the form of consumption
and production structure changes that occur when trade within and outside the area rises and falls

123because of the elimination of tariffs and the reduction of NTMs. These are static effects.
The economic effects of the main FTAs centered on ASEAN (envisioning tariff elimination and
NTM reduction) include, in the case of ASEAN+6, pushing GDP up in all signatory countries by
1.3%. In the case of ASEAN+3, this margin was 1.0% (Table II-5). For Japan, the margin of GDP
increase from ASEAN+6 was 1.0%, from ASEAN+3 it was 0.7%, and from Japan-ASEAN it was
0.3%. The margin of GDP increase for ASEAN from ASEAN+6 was 2.3%, followed by ASEAN+3
at 2.0%, while the margins from ASEAN+1 were 1.0% (ASEAN-India FTA) to 1.4%
(Japan-ASEAN), and 0.9% (AFTA), respectively.
On the other hand, examination of the effects on countries that have not joined FTAs shows that
there was either a diminishing effect or no effect in all cases. It was confirmed that FTAs could, insome cases, have a negative effect on outside (non-signatory) countries. In the case of Japan, theASEAN-China and ASEAN-Australia FTAs, to which Japan is not a party, had a diminishing effectof 0.01%.
In all cases, the effects were greatest with ASEAN+6, which has the most comprehensive
membership. This is because the effects of an FTA are propagated directly through trade, so thatliberalization of trade between a larger number of countries will have a greater effect. In other words,
the elimination or reduction of tariffs and NTMs tends to lower the prices of import and increase
their volume, but the effect on imports as a whole will be greater when the tariffs and NTMs
imposed on imports from a counterpart country are at a higher level (so the effects of reduction are
correspondingly greater) or when imports from a counterpart country make up a larger percentage of
total imports. With ASEAN+6, ASEAN reduced tariffs and NTMs on imports from signatory
countries within the area by 8.4% of the total. The effects on imports as a whole were greater
because imports from within the area made up over half the total, and the volume of imports fromthe rest of the world increased 12.9%. Meanwhile, with ASEAN+3, ASEAN reduced tariffs andNTMs on imports from within the area by the equivalent of 8.0%, while the percentage of imports
from within the area was 47.8% of the total. Both these figures are lower than for ASEAN+6, andthe effects on imports as a whole were consequently smaller than in ASEAN+6. The volume ofimports from the rest of the world increased 12.0%, which was also lower than the figure for
ASEAN+6.
As in the case of imports from within the area, exports to the area have also increased inaccordance with the extent of tariff elimination and NTM reduction by the trading partner country
for intra-area trade. In the case of ASEAN+6, for example, ASEAN exports to the area increased
39.7%, while exports to the rest of the world also increased 6.2%. (Effects on trade will be explainedlater.)
An increase in imports has an unmistakable depressing effect on GDP. The inflow of inexpensive
imported goods, however, can cause personal consumption, capital investment, and other internal124

demand to expand, which has the effect of pushing GDP up. For example, the rate of increase in
ASEAN imports as a result of ASEAN+6 was greater than the increase in exports. Therefore,
external demand (net exports) had the effect of depressing GDP by 4 points. Meanwhile, internal
demand grew, with personal consumption increasing 5.2% and capital investment increasing 14.0%,
so that internal demand had a positive upward effect of 6.2 points, offsetting the decreasing effect ofexternal demand. The increase in GDP as a whole amounted to 2.3%.
■The Effects of NTM Reduction Are a Greater Factor in the Economic Effects of FTAs
The above estimates took into account the effects from the elimination of tariffs and the reductionof NTMs by FTAs. When only tariffs are eliminated, however, the economic effects are limited.
Considering the margin of GDP increase in ASEAN+6, for instance, we see that the effect of tariffelimination does not exceed 0.2% for ASEAN+6 as a whole (Fig. II-4). This is because the tariffs
imposed by the main countries on imports from within the area are already low, at 4.2% for ASEAN,
5.0% for Japan, 6.4% for Australia, and so on.
When NTMs are taken into consideration, however, the margin of GDP increase in ASEAN+6 as awhole rises to 1.3%, and in the main countries and areas it expands by 1.0–2.3%.(5) The tariff rate on
imports from within the area imposed by Australia is 6.4% while the tariff equivalent rate of NTMs
that are reduced is 9.3%, and the impact of the NTMs is approximately 1.5 times greater. In the caseof ASEAN, NTMs at 4.3% are higher than the tariff rate of 4.2%. When NTM reduction is included,
therefore, the effect in ASEAN+6 as a whole is to push the GDP up by 1.1 points more than when
only tariffs are eliminated.
Estimates show that NTMs tend to be higher in advanced countries such as Australia where thetariff rates are already at low levels. The data used in this chapter for the tariff equivalent rate of
NTMs indicate, for example, that Australia imposes technical restraint measures (standards, quality
inspections, and so on) on agricultural products, some general machinery, and some other items.
---------------------------------------------------------------------------------------------------------5. The present analysis assumed that FTAs would reduce NTMs by half. The effects from 25% reduction
and 75% reduction of NTMs within the ASEAN+6 framework were also considered, for reference. A 25%
reduction of NTMs results in a margin of GDP increase of 0.7% in the area as a whole, while the effect ofa 75% reduction was 2.0%. The extent to which an FTA reduces NTMs has a relatively large influence on
the resulting effect of upward pressure on the GDP.

----------------------------------------------------------------------------------------------------------(2) The Importance of Reducing Service Link Costs
Estimation of the economic effects of FTAs with a focus on ASEAN showed that the greatest
economic effects were in ASEAN+6, which has the largest number of members. Examination of theeconomic effects of FTAs also made the following points clear:125<1> The economic effects from elimination of tariffs alone are limited.
<2> The effects from reduction of NTMs are often greater than those from elimination of tariffs.
When negotiating FTAs and economic partnership agreements (EPAs), therefore, the extent towhich NTMs can be reduced is an essential consideration for maximizing the economic benefits tobe received.
Many researchers have recognized that governments, especially in developing countries, do notmake clear the nature of the measures they actually put in place as NTMs. The collection andpublication of more highly accurate information regarding NTMs by national governments andinternational organizations is, therefore, a crucial first step toward the reduction of NTMs.
The reduction of NTMs has great significance for recent business expansion by Japaneseenterprises. Enterprises have been undergoing fragmentation as their bases become geographicallydispersed. This is progressing in two dimensions, one being dispersal of an enterprise's in-houseproduction processes to different sites and the other being international outsourcing.(6) In this context,
the international division of labor furthered by FTAs lowers service link costs. These are the costs oflinking together different production bases, such as tariffs, NTMs, transportation costs, and so on.
The lowering of these costs makes it likely that production networks within the area will become
more active, so that lowering NTMs and other such service link costs other than tariffs offers agreater margin for possible cost reduction.
---------------------------------------------------------------------------------------------------------6. Fukunari KIMURA and Mitsuyo ANDO, "International Production and Distribution Networks and
New International Trade Strategies," Financial Review (April 2006), published by the Policy ResearchInstitute, Ministry of Finance.

---------------------------------------------------------------------------------------------------------The estimates made in this chapter have also shown that the reduction of NTMs, which make up a
portion of service link costs, has a greater effect than the elimination of tariffs. Thus it is importantfor FTAs to include schemes not just for the reduction of NTMs, but also, beyond that, for reducing
service link costs as a whole, to include physical distribution infrastructure, financial services, and soon. This is crucial in figuring the economic effects of an FTA. The reduction of service link costs
provides a boost to enterprises that seek to optimize production or achieve economies of scale bymaking use of comparative advantages within the region, by clustering, and so on. Depending on the
FTA, the productivity of an enterprise could be enhanced or its competitiveness reinforced.

(3) ASEAN+6 Significantly Expands Imports and Exports in the Area
Changes in trade volume resulting from ASEAN+6 among signatory countries as a whole will be
examined in detail, industry by industry. The growth in intra-area export volume for all industries is
65.9%. This major increase was brought about by the elimination of tariffs and reduction of NTMs

126

in the area (trade creation effect, Table II-6).
On the other hand, exports outside the area shrank by 14.0% overall (trade conversion effect). In
terms of global exports to countries inside and outside the area, all the ASEAN+6 signatory
countries and regions show a positive effect. The overall figure is an increase of 13.8%.
The total of imports for all industries from within the region likewise amounts to an increase of
67.1%, and from outside the region a decrease of 12.6%, so that global imports from all countries
show a 21.0% increase. As with exports, the trade creation and trade conversion effects areperceptible. Examination of total growth in global exports and imports for all industries shows thatthe growth in imports exceeds the growth in exports by about 7 points. This is because a larger
percentage of imports are from within the region, and the growth in the large intra-area imports has agreater contributory effect toward the total growth.
Examination of the rate of growth in intra-area exports for the major industries shows thattransportation machinery, the manufacturing industry subject to the highest tariff rate (18.6%) for
intra-area imports, increased intra-area exports by a factor of two or more. Japan and the Republic ofKorea, which account for approximately 60% and 10% of intra-area exports, respectively, increased
by a factor of 2.5. Under imports, China increased by a factor of 5.6.
In general machinery, Japan accounts for 47.5% of intra-area exports. Reduction by a tariff
equivalent of 10.7% in tariffs and NTMs resulted in an increase of 73.6% in Japanese intra-area
exports. Transportation machinery and general machinery are sectors where Japanese exports arevery competitive, and these two industries account for just under one-half of the percentage increaseof Japanese intra-area exports.
Electric machinery, which is the manufacturing industry sector with the largest export volume,
showed a relatively low increase of 25.8%. This is because there are not very many NTMs involved
and because the intra-area tariff rate for the electric machinery industry is already low at 2.9% due tothe WTO's Information Technology Agreement (ITA).(7) In electric machinery, Chinese intra-area
exports increased 66.2% while exports outside the area increased 27.2%. In this case, both increased.
Intra-area imports also increased 71.2%. This is thought to be in part because of the processing tradepattern whereby China imports parts from within the area to assemble into finished goods that it thenexports to countries inside and outside the area.
---------------------------------------------------------------------------------------------------------7. ITA signatory countries basically eliminate their tariffs on IT-related products. The ASEAN+6
signatory countries subjected to analysis in this chapter have all joined the ITA.

----------------------------------------------------------------------------------------------------------

Commentary
Overview of Simulation, Assumptions and Preconditions, Etc.
・About GTAP

127

A computable general equilibrium (CGE) model was selected to serve as a framework for analysisof the economic effects of FTAs. The purpose is to analyze the effects of an FTA before it isconcluded or before the substance of the FTA agreement is fully executed (ex ante analysis), or to
analyze its influence on the economy as a whole.
The analysis in this chapter utilized a CGE model known as GTAP. The Global Trade Analysis
Project (GTAP) was developed primarily by Professor Hertel of Purdue University in the U.S. and isbeing operated as a worldwide trade model. The latest version covers 87 countries and regions and
57 industries across the globe. GTAP has become established as the worldwide standard CGE modelfor estimating the economic effects of an FTA. This has happened for various reasons, including (1)that it allows easy access to databases, models, and related information, and enables analysis to bedone with relative ease; and (2) that the entire project is operated in an open environment in which
specialists in every country and field provide their data and other resources. The present analysis
used the most recent version (6th edition ) of the GTAP database with 2001 base data.
Care is required, however, since accurate measurement of FTA economic effects using theanalytical model has proven to be difficult. The CGE model is capable of measuring an FTA's effects
on the economy as a whole, for example, but this analysis requires vast amounts of data, and it ismore or less impossible to gather data with uniformly high levels of quality on all countries andindustries. Another point is that the model is based on general economic theories that are simplified,for example, in their assumptions of perfect competition. Also, there are limits to the accuracy of thevarious types of coefficients and factors that exercise a major influence on the results of analysis.
For reasons like these, analysis by this model does not necessarily yield a faithful reflection of
economic reality. Although the results obtained by model analysis may be suitable for determining
an outlook on the economic effects of an FTA, therefore, the resulting figures cannot be expected tobe accurate.
・Country, Region, Industry, Tariff Rate, and Non-Tariff Measures in the Analytical Model
The countries and regions of the model were Thailand, Malaysia, Indonesia, the Philippines,
Singapore, Vietnam, Japan, China, the Republic of Korea, Hong Kong, Taiwan, Australia, New
Zealand, India, the U.S., the EU-15 countries, the new EU signatory countries (12 countries), and 18
additional countries and regions of the world from the GTAP database of 87 countries.
The FTAs subjected to analysis were the ASEAN Free Trade Area (AFTA), ASEAN+1 (bilateral
FTAs between ASEAN and Japan, China, the Republic of Korea, Australia, and India), ASEAN+3(inter-regional FTAs between ASEAN and Japan, China, and the Republic of Korea), and ASEAN+6(inter-regional FTAs between ASEAN and Japan, China, the Republic of Korea, Australia, New
Zealand, and India). ASEAN as referred to in this chapter comprises the six countries of Thailand,
Malaysia, Singapore, the Philippines, Indonesia, and Vietnam.

128

The 11 industries considered in the model were agriculture, forestry, and fisheries (including foodproducts), mining, textiles, paper manufacturing, chemicals, metals, general machinery, electricmachinery, transportation machinery, other manufacturing industries, and services out of the 57
industries in the GTAP database. There are limitations on the trade data on services, making it
difficult to calculate the economic effects on this industry from an FTA. Consequently, this was notbroken down into more detailed industrial classifications, but rather aggregated as services.
The original GTAP database only recorded the most-favored-nation (MFN) tariff rate for the Thai
tariff rates. The Common Effective Preferential Tariff (CEPT) rates were not utilized. It was
desirable, therefore, to bring the Thai tariff rates closer to the norm, and to better reflect the fact thatthe original ASEAN member countries have reduced tariff rates to the 0–5% range on almost allitems since 2003 (full implementation of CEPT). For that purpose, the 2002 CEPT package
published on the ASEAN Secretariat Web site was taken as a basis for the 2003 CEPT concessionary
rates.
The non-tariff measures (NTMs) adopted for the model were the tariff equivalents that Ando(2005) converted by country and industrial category. Ando (2005) compared the import price of acertain goods with the domestic manufacturer's price, broke down the difference to identify the
portion with the tariff excluded, and estimated the influence on price of the NTM by conducting
regression analysis of the portion with the tariff excluded and the NTM incidence. This is known as
the price gap approach. The results of estimation by Ando (2005) are used to obtain total values forfour measures: technical regulation (labeling, standards, implementation of quality inspections,troublesome customs procedures, etc.), quantitative limits (arbitrary issuance of import licenses,
import quotas, import prohibitions, etc.), monopolistic behavior (allowing imports only bymonopolistic import companies, etc.), and price regulation (control of import prices, etc.). For
convenience, however, average values were used for certain countries that were not analyzed byAndo (2005), namely Thailand, Indonesia, and Malaysia for the Philippines and Vietnam, andThailand, Indonesia, Malaysia, and China for India.
Worldwide tariff rates are converging on lower levels, and the existence of NTMs is exerting nosmall influence on trade in this context, as is apparent also from interviews with enterprises.
Researchers have not agreed, however, on the extent to which trade is distorted because of (1) thelack of accurate data on the status of NTM implementation, (2) various statistical errors that occur
when converting NTMs to tariff equivalents, and other such factors in positive analysis. Although
the research results in Ando (2005) have received positive evaluations from specialists in NTM
research in terms of what it is possible to calculate at the present stage, these results should beunderstood as a partial representation of the distorting effects on trade from actual NTMs.
・Assumptions Regarding the Liberalization Caused by FTAs

129

This chapter has presented an estimate of the liberalization effects of FTAs made with thefollowing policy variables changed externally.
With regard to tariffs, it was assumed that tariffs on imports from countries covered by an FTA
would be eliminated, and that subsidies on exports to countries covered by the FTA would be
eliminated. With regard to NTMs, it was assumed that the FTA would reduce them by half. Since
NTMs correspond to transportation costs in the broad sense, they constitute an external shock toimport-related productivity where imports from countries covered by the FTA are concerned. Thiseffect is generally similar to that of tariff reduction.
・Current Status of Non-Tariff Measures (NTMs)
As a result of the model analysis, it was found that reducing NTMs has a major effect on trade.
The current status of NTMs in the major ASEAN+6 countries was verified using the data now
available.
In ASEAN, each country has a total of 100–400 NTMs (table). Looking by type of measure, we
see that there are more than 100 quantitative limits in Thailand, Malaysia, and Indonesia, and as
many as 60–80 in the other countries, making these measures very numerous. Discretionary issuanceof import licenses, import quotas, import prohibitions, and other such measures can be found.
Technical regulations are next most numerous, and these include quality inspections, labeling,
standards, regulation of advertising, and so on. Monopolistic measures and price regulation are fewer
in number.
According to the Report on Foreign Trade Barriers (2006 version) by the U.S. Trade
Representative (USTR), China has been applying an import licensing system on iron ore (without
notification to the WTO) as well as activities in inspection and quarantine of agricultural productsthat restrain trade. On the other hand, China had removed import quotas from all items, including air
conditioners, cameras, televisions, clocks, motorcycles, and other such items by January 2005, basedon its WTO membership commitment. The USTR report also identified issues in India, including theimport licensing systems for poultry, certain chemical products, and so on, and a monopolistic
importer system in petrochemical products, some pharmaceuticals, grains, and so on. It also pointed
out that certification must be obtained from the Bureau of Indian Standards (BIS) for the importationof 109 items, including food products and household electrical appliances.

Reference: Ando Mitsuyo (2005), "Estimating Tariff Equivalents of Non-tariff Measures in APEC
Member Economies" in Philippa Dee and Michael Ferrantino, eds., Quantitative Methods forAssessing the Effects of Non-tariff Measures and Trade Facilitation, Singapore: World Scientific PubCo., Inc.

130

Table II-Reference The number of NTM in ASEAN countries(number of cases)
Number of NTM by country
Thailand Malaysia Indonesia Singapore Philippines Vietnam

Main examples

Quantity control
measures

113

123

189

64

67

82

Import licensing on a discretionary basis (foods, electric
equipment, etc.); import quotas (iron and steel, automobiles, foods,etc.), prohibitions on imports (used cars, etc.)

Technical measures

22

6

134

29

90

158

Quality inspections, labeling and specifications standards,
advertising restrictions on foods, pharmaceuticals, cosmetics,
electric products, machinary, and etc

Monopolistic measures

0

1

13

0

2

8

Monopolistic import company system for rice, petroleum, etc.

Price control measures

0

0

0

1

0

34

Price controls on imports (in Vietnam, on beverages, glass, etc.),
anti-dumping measures (in Singapore, on iron and steel products)

Other
Total

6
141

4
134

71
407

8
102

0
159

1
283

Automatic licensing measures

Note: We summerized the data disclosed by ASEAN Secretariat, which had taken the information of the number of NTA from APEC, UNCTAD, etc. who compiled the data
mainly reported from each government. The years of compiling the data vary with country, ranging from 2001 to 2003. We count the number of NTM regardless of the level of
HS digit in question. For instance, a measure affecting HS tariff lines (products) at two digit level is counted as one while another measure affecting products at HS eight digit
level is also counted as one. Thus, that a country is shown as having a large number of NTMs in this table does not necessarily mean that it does have many NTMs or that the
impact of the NTMs applied is large.
Source: ASEAN Secretariat.

----------------------------------------------------------------------------------------------------------

131

Table II-5 Effects of various FTAs on GDP (tariff totally eliminated and NTM
reduced by 50%)(%)
Intra ASEAN(AFTA)
All
membercountries
ASEAN
Japan
China
ROK
India
Australia

ASEAN- ASEAN- ASEAN- ASEAN- ASEAN・ ASEAN
China
ROK
Japan
Australia
India
+3

0.9
0.9
-0.01
-0.01
-0.01
-

0.7
1.3
-0.01
0.4
-0.04
-0.03
-0.02

0.7
1.0
-0.02
0.3
-0.02
-0.01

0.5
1.4
0.3
-0.02
-0.02
-0.1
-0.04

0.8
1.0
-0.01
-0.01
-0.01
-0.02
0.5

0.9
1.0
-0.01
0.9
-0.01

1.0
2.0
0.7
1.5
1.6
-0.1
-0.1

ASEAN
+6

1.3
2.3
1.0
1.7
1.7
1.2
1.4

Notes: Rounded down below two decimal points; regard 0.00% as no influence and indicate as "-."
Shaded boxes indicate FTA member countries/regions.
Sources: Estimated from GTAP

Fig. II-4
32

Effects of ASEAN+6 FTA on GDP of each country/region

(%)

Japan
India
Australia, New Zealand
ROK
China
ASEAN

Reference

10
Tariff elimination

Tariff elimination plus 50%
reduction of NTMs

Tariff elimination plus 25%
reduction of NTMs

Source: Estimated from GTAP

Table II-6 Effects of ASEAN+6 FTA on trade by industry （ tariff totallyeliminated and NTMs reduced by 50%）
(unit: %)ExportImport% change% change% share% shareintra trade extra trade to the world (pre FTA) intra trade extra trade from the world (pre FTA)
All industries (Asean +6 allmember countries)
65.9
-14.0
13.8
100.0
67.1
-12.6
21.0
100.0
Textile
83.7
-6.6
24.8
7.9
83.4
-39.0
45.4
4.8
Chemicals
78.9
-10.2
29.9
10.5
79.2
-23.3
23.5
12.8
General machinery
56.5
-16.2
9.5
15.1
56.4
-12.7
18.7
14.0
Electric machinery
25.8
-7.0
6.5
23.4
25.8
-14.4
10.7
18.1
Transportation equipment
115.1
-15.8
3.5
8.9
114.8
-20.0
24.7
4.8
Notes: "All industries" category includes services. "% share" indicates % of total export/import in value to "to/from theworld" before the FTA comes into effect.
Source: Estimated from GTAP132

3. Increasingly Tight Economic Ties in Asia and the Utilization of
Asian FTAs with Issues Involved(1) Increasingly Tight Economic Ties in Asia
As noted above (Chapter 2, Section 1), there are currently 14 free trade agreements (FTAs),
including Early Harvest (EH), in effect in the countries making up ASEAN+6 (Japan, ASEAN,
China, the Republic of Korea, India, Australia, and New Zealand).
As FTAs continue to be formed within the Asia-Pacific region, the amount of trade among FTA
signatory countries as a proportion of intra-area trade among the ASEAN+6 countries ($1.1768
trillion, export basis) was $521.7 billion, which accounts for 44.3% of total intra-area trade (Table
II-7). Japan, India, Australia, and other countries are pursuing FTA negotiations centered on ASEAN,
so that the amount of trade among FTA signatories as a percentage of intra- regional trade is
expected to grow.
Intra- regional trade within the Asia-Pacific region itself is also increasing. Examination of thepercentages of intra-regional trade within the major regions of the world (2006) shows that the EU25
has the highest percentage among the major regions at 66.1%. The North American Free Trade
Agreement (NAFTA), formed in 1994, reaches 44.2%, but intra-regional trade among the ASEAN+6
countries also reaches 43.3%, which is an increase of 2.7 points since 2000 (40.6%) (Table II-8). The
figure for ASEAN is 27.2% in the ASEAN Free Trade Area (AFTA), which was formed in 1993 andhas already lowered agreement tariff rates to the 0–5% range on most items. This is a rise of 3.2
points since 1995. The rates of intra-regional trade between ASEAN and Japan, India, and China
also show a rising trend. Asia-Pacific intra-area trade is driven by East Asian intra-area trade, which
includes Japan and ASEAN exports to China and Chinese exports to ASEAN.
Examination of trade in East Asia (export basis) in terms of the major trade categories of IT
products and transportation machinery (automobiles, automobile parts, etc.) shows a distinctively
large expansion of exports to China by Japan and the ASEAN5 (Thailand, Malaysia, Indonesia, thePhilippines, and Singapore.(8) (Table II-9) The expansion of Japanese and ASEAN exports to China
parallels the growth of IT product manufacturing in China, and one factor in this export expansion is
the increase in exports of intermediate goods and other such products from Japan and ASEAN. As
the production network for IT products and other such products advances, ASEAN5 intra- regional
trade accounts for 23.4% of the total value of ASEAN5 IT product exports. Although exports fromJapan and ASEAN 5 to China in the category of transportation machinery show a tendency to
expand, these still remain a small percentage of the total. On the other hand, ASEAN5 intra- regional
trade has risen from 21.5% in 2000 to 25.7%, suggesting how the division of labor in thetransportation machinery sector has progressed in the ASEAN area, as well.

133

---------------------------------------------------------------------------------------------------------8. ASEAN5 was chosen rather than ASEAN10 because of statistical constraints.

----------------------------------------------------------------------------------------------------------

Column II-2
Asian Economic Development of Tighter Ties as Seen in Terms of International
Input-Output Tables
The advancing regional specialization （←division of labor） taking place in Asia has given risenot only to growing vigor of intra-area trade, but also to an increasing mutual dependency amongindustries. Here we shall examine the influence of production inducement by country and region on
the basis of forward and backward international linkage effects as calculated from Asianinternational input-output tables (1995 and 2000). Forward linkage effects (index of sensitivity ofdispersion) measure the magnitude of production inducement effects resulting from the creation ofdemand in the industry of another country or region by a particular country (region) or industry.
Conversely, backward linkage effects (index of power of dispersion) measure the magnitude of the
production inducement effect exerted on another country (region) or industry by the generation of
additional demand in a specific country (region) or industry. Forward and backward linkage effects
both form an index for the combined average sensitivity or power of dispersion for an entire region
or for all industries covered by an international input-output table. An increase in both the forward
and backward linkage effects indicates a strengthening of mutual dependency among industries in aregion.
The figure shows these factors as calculated for Asian countries and regions and plotted incontrast with the figures for the U.S. Most of the major Asian countries and regions, led by China,
show forward and backward linkage effects that are increasing compared to the U.S. Whereas
forward linkage effects (the magnitude of influence exerted in production inducements) in Japan are
declining somewhat, the backward linkage effects (the magnitude of influence exerted by production
inducements) are on the rise. In Taiwan, on the other hand, the backward linkage effects are
declining while forward linkage effects rise, and so on, indicating that there is a certain amount ofvariation. Overall, however, it is apparent that mutual dependency among industries in the East Asia
region is growing stronger. During the measurement period from 1995 to 2000, the U.S. increased its
influence on the world economy as a whole by leveraging the IT boom. In Asia, on the other hand,
this period included a currency crisis as well as a period of stagnant production. Even under thesecircumstances, however, links among industries in the Asian region grew stronger, in a movementthat crossed national boundaries. When this trend is combined with recent conditions, including
advances in the regional specialization (←division of labor) systems and a rise in intra-area trade asa percentage of total trade, it can be assumed that the development of tighter economic ties throughthe deepening of mutual dependency is progressing further, even today.

134

Fig.

Forward and backward international linkage effects in major Asian countries and regions（1995-2000, all industries, relative comparison with U.S.A.）

Forward linkage effects （index of sensitivity of dispersion）

0.2
Japan

0.1
China
0.0
-0.05
-0.1

-0.15

0.05

0.25

ROK

-0.2
Indonesia

0.15

Tai
-0.3

Malaysia
Explanation of Symbols

1995

Singapore

Thailand-0.4
2000
Philippines-0.5
Backwardlinkage effects (Index of power of dispersion）
Note: Regarding methods of computing forward and backward international linkage effects, see"Ajia kokusai sangyo renkan bunseki handobukku: sakusei to bunseki no shuho" (Handbook of
Input-Output Analysis of International Industry in Asia: Methods of Compilation and Analysis),
Institute of Developing Economies, JETRO (March 2004).
Source: Institute of Developing Economies, JETRO, Asian International Input-Output Table----------------------------------------------------------------------------------------------------------(2) Utilization of FTAs Advancing Step-by-Step in Asia
A succession of new FTAs have been forged in the Asia-Pacific region, but the status of theirutilization is another matter. Thailand and Malaysia publish their record of FTA utilization in termsof the value of exports involved (to be discussed below), but, with some partial exceptions, noofficial statistics are available.
JETRO conducted a questionnaire survey in November and December of 2006 to determine how
Japanese enterprises had been using FTAs in Asia. The questionnaire results show that the largest
group of respondents (42.7%) said they were "not utilizing or not planning to utilize preferential
tariff schemes" for export business in FTAs that are presently in effect in Asia, while the number
responding that they are "utilizing or planning to utilize preferential tariff schemes" amounted to13.3% (97 of 728 responding enterprises). On the other hand, "undecided" enterprises also amounted
to 34.2% (249 enterprises), suggesting that a lack of familiarity with FTAs is one background factor
in this situation.
Regarding the FTAs that are being utilized, some distinctive points are as follows: (1) There isconsiderable utilization of AFTA, where Japanese enterprise production networks are becoming
widely established; (2) there is conspicuous use of the Japan-Malaysia Economic Partnership
Agreement (EPA), which just went into effect in July 2006; and (3) cases can be found of FTA
utilization for export from Thailand, which is a key production base for Japanese enterprises, toIndia, Australia, and other countries outside the ASEAN market area (Table II-10).
According to a questionnaire survey targeting local Japanese companies in ASEAN and India,

135

“Zai Asia nikkei seizogyo no keiei jittai chosa” (the Survey of Business Conditions for Japanese
Manufacturing Companies in Asia) (JETRO, conducted from November 27 to December 27, 2006),
the number of enterprises responding that they "are currently utilizing" FTAs amounted to some
10–20% of the total (Fig. II-5). Of Japanese enterprises in India, 33.3% (10 out of 30 enterprises)
utilize FTAs for imports to India, and the Indian utilization for imports stands out.
The below will examine the circumstances of utilization of individual FTAs that are in effect in
the Asia-Pacific region.
■The Japan-Malaysia EPA: Expecting Expansion in Exports of Automobile Parts and Other
Products from Japan and Expanding Textile Exports from Malaysia to JapanThe Japan-Malaysia EPA and the Japan-Singapore EPA have already gone into effect as FTAs
between Japan and the Asia-Pacific region.
The Japan-Malaysia EPA went into effect in July 2006 as Japan's third EPA following thosebetween Japan and Singapore and Mexico. Among items exported from Japan to Malaysia,
automobile parts are considered to be significantly affected by the elimination of tariffs in theJapan-Malaysia EPA. Malaysia instantly eliminated tariffs on completely knocked down (CKD)
products and plans to eliminate tariffs on passenger vehicles with 2000-cc or larger engines by 2010
and those on other passenger vehicles by 2015. Color television sets are another item subject toinstant elimination or phased reduction of tariffs, and expansion is expected to take place in exportsof Japanese flat-panel television sets and other high value-added products in which Japaneseenterprises are highly competitive.(9)Prominent among the products imported by Japan from Malaysia are textile products. Japanese
import tariffs are already at low levels on most items. Malaysian imports from Japan in mostcategories were originally subject to generalized system of preferences (GSP) rates, which are evenlower than the most favored nation (MFN) tariff rates for developing countries. In this context,
textiles were among the products for which tariff elimination had a relatively large effect in theJapanese tariff structure for both MFN and GSP rates. Japan's MFN and GSP tariff rates on textile
products are within the 0–14% range, with many items of apparel specifically being subject to rates
of around 10%. As a result of the Japan-Malaysia EPA, almost all textile product items imported by
Japan from Malaysia are not subject to tariffs.
An 80% share of textile imports by Japan come from China, where GSP or MFN tariff rates areapplied. Malaysia therefore has an advantage relative to China with respect to tariffs, as well.
Japanese textile imports from Malaysia amounted to $142.61 million in 2006, which is only 0.5% of
total textile imports. It appears, however, that the tariff benefits are being enjoyed since theJapan-Malaysia EPA went into effect. Imports of some items are on a rising trend, with imports ofsheep wool for 2006 increasing 27.5% over the previous year to $36.85 million. The total value of136

imports of these products as a share of total imports from the world also rose from 5.2% the previous
year to 6.2%. No marked increase has been apparent in apparel since the Japan-Malaysia EPA went
into effect, but it is conceivable that the FTA will be utilized because of the large tariff advantage.(10)---------------------------------------------------------------------------------------------------------9. Tariff reductions under the Japan-Malaysia EPA are figured with reference to tariffs in place as of2005. The government of Malaysia has lowered its MFN tariff rate since that EPA went into effect,
however, so that some items are now subject to MFN tariffs that are lower than the Japan-Malaysia
EPA tariffs. It will be necessary, therefore, to check both MFN and EPA tariff rates and confirm
which are lower. For details see the Ministry of Economy, Trade and Industry Website(http://www.meti.go.jp/policy/trade_policy/epa/data/061127malaysia_epa_MFN.pdf)
10. Rules of origin for textile products are subject to manufacturing process criteria. In principle, it isa condition that two processes be carried out in a signatory country or in an ASEAN member
country.
---------------------------------------------------------------------------------------------------------■FTA Signatory Countries Gain Greater Share of Dutiable Alcohol in Singapore
The Japan-Singapore EPA, which became effective in November 2002, appears to be being
utilized for Japanese exports to Singapore of beer. The only items subject to tariffs in Singapore are
six alcohol items. Beer is subject to duty at the rate of 0.8 Singapore dollars (S$) per liter or, forstout beer, S$1.7 per liter. Medicinal liquors (HS 22089010–22089040) are subject to a duty of S$8
per liter. In other words, the only items for which counterpart countries can obtain any tariffadvantage under the FTA with Singapore for their exports to Singapore are these six items. Importsof dutiable alcohol by Singapore in 2006 amounted to $78.33 million. The FTA signatory
countries'(11) share of total import value grew from 63.0% in 2004 to 71.2% in 2006, suggesting that
this tariff advantage in imports of dutiable alcohol is being enjoyed. Japanese imports in 2006
accounted for 2.8% of that share.
A protocol amending the Japan-Singapore EPA was signed in March 2007, providing for an
increase in the number of items subject to lower tariffs from 2008. Certain items had previously been
excluded from tariff reductions on the Japan side, including organic chemicals (HS 29), plastics andarticles thereof (HS 39), cocoa paste, defatted or not, and cocoa powder, unsweetened (HS 1803 and1805), and chocolate and other food products containing 'cocoa’ (HS 1806). Now the tariffs on these
items are to be lowered still further, and utilization of the Japan-Singapore EPA can be expected to
expand from 2008.
---------------------------------------------------------------------------------------------------------11. The FTA signatory countries are ASEAN, Japan, the Republic of Korea, China, Australia,
New Zealand, Jordan, Panama, Switzerland, Iceland, Liechtenstein, Norway, Chile, and the

137

U.S.

---------------------------------------------------------------------------------------------------------■AFTA Eliminates 76% of Intra-Area Tariffs for Original ASEAN Signatories and Lowers
Almost All Tariffs to 5% or Less
This section will examine the utilization of AFTA, which is a preeminent example of the FTAs
now in effect in the Asia-Pacific region, the ASEAN-China FTA, which was the first FTA between
ASEAN as a whole and a country outside its area, and FTAs with Thailand, India, and Australia.
While utilization of AFTA is advancing, use of the ASEAN-China FTA remains restricted, though
the rate of utilization is on an upward trend. In addition to the FTA, ASEAN and China appear to beusing tariff-exempt imports based on an Information Technology Agreement (ITA), which provides
for tariff exemption of IT products and wide-ranging tariff reduction and exemption schemes for the
purpose of promoting exports. It is also apparent that utilization of the FTAs with Thailand, India,
and Australia is centered on Japanese enterprises, and the rate of utilization is high.
AFTA initiated tariff reductions among the original ASEAN signatories (Thailand, Malaysia,
Singapore, Indonesia, the Philippines, Brunei) in 1993, and is among the very oldest FTAs formed in
the Asia-Pacific region. It provided graduated tariff reductions such that, in 2003, tariff rates on the
majority of items were in the 0–5% range for the original ASEAN signatories. There is also the
ASEAN Framework Agreement for the Integration of Priority Sectors, concluded in November 2004,
which identifies 11 sectors to be given priority for integration (agriculture-based products, fisheries,
automotives, electronics, healthcare, rubber-based products, wood-based products, textiles andapparels, e-ASEAN (IT and other related products), air travel, and tourism). The nine sectors dealing
with material goods, out of the 11 sectors identified as priority sectors for integration, are to become
exempt from tariffs, with the exception of excluded items (to be limited to 15% of the subject items
at most), beginning from January 2007 in the original ASEAN member and from January 2012 inCambodia, Laos, Myanmar, and Vietnam (CLMV).
Looking at the status of tariff reductions under the Common Effective Preferential Tariff (CEPT)
scheme to lower tariffs under AFTA, we find that the original ASEAN member countries eliminatedtariffs on 75.7% of all items in 2007 (Table II-11), and the remaining 22.4% of items have had tariffs
reduced to 5% or less, as well. AFTA is becoming a very complete FTA with respect to trade inmaterial goods. On a country-by-country basis, Thailand has exempted 54.4% of items from tariffs,
which leaves its rate of tariff elimination at a relatively low level. In CLMV, only 16.5% of items
have been made tariff-exempt, and 65.0% of items are subject to tariffs of 5% or less. In Vietnam,
however, 51.2% of items have been made tariff-exempt, and it is leading CLMV in tariff reduction.
In AFTA, the original members of ASEAN are to eliminate tariffs on all items on the inclusion listin 2010, and in CLMV, tariffs are to be lowered to the 0–5% range in Vietnam in 2006, in Myanmar

138

and Laos in 2008, and in Cambodia in 2010, and then eliminated by 2015, with the exception ofsome excluded items.
■CEPT Utilization Accounts for 23.5% of All Exports from Thailand and Malaysia
The figures for trade utilizing CEPT published by Thailand and Malaysia provide fundamental
data for determining the status of AFTA utilization. The value of exports by Thailand and Malaysia
utilizing CEPT in 2006 comes to $8.4 billion in total (excluding Singapore, where only alcohol issubject to tariffs in any event). This constitutes a 23.5% share (utilization rate) of the total value ofexports (Table II-12).
Malaysia has published actual CEPT utilization amounts by item (exports). The top items in 2006
were machinery and equipment at 20.5%, chemical products and plastics for a total of 26.3%, andelectronic and electric products at 7.9% (Table II-13). Thailand has not published a breakdown by
item, but Thailand's exports to ASEAN by item in 2006 show that the main part is made up by
general machinery (16.9%), electric machinery (14.8%), transportation machinery (11.5%), andother such mechanical categories, together with plastics and other chemical products (18.0%),
suggesting that CEPT is being utilized for items such as these. Exports of automobiles, in particular,
have increased rapidly since 2003, and the value of $1.3 billion reached in 2006 is 8.9 times the2002 figure.
Examination of CEPT utilization by country shows that Thailand and Malaysia both haverelatively high rates of utilization with exports to Vietnam, together reaching 42.4% of the total. The
simple average of Vietnam's most favored nation (MFN) tariff rate had been high at 16.8%, so that
the January 2006 reduction of CEPT tariffs on most items to the 0–5% level has significantly
expanded advantageous AFTA utilization. Exports to Vietnam from Thailand and Malaysia are
centered on plastic products and other such chemical goods and transportation machinery. Air
conditioners have been a conspicuous presence in the expansion of exports from Thailand toVietnam. Thai exports to Indonesia also show a high rate of CEPT utilization, and that utilization isprogressing. Approximately 50% of exports from Thailand to Indonesia are made up of chemical
products and transportation machinery, and CEPT utilization appears to be particularly notable inpassenger vehicle exports.
■Utilization of the ASEAN-China FTA is Limited but Apparently Still on an Upward Trend
The ASEAN-China FTA began reducing tariffs on agriculture and fishery products (HS 01–08) aspart of the early harvest (EH) scheme. Tariff reductions in non-agriculture and fishery sectors began
in July 2005 on the basis of an Agreement on Trade in Goods. China and the original ASEAN
signatories will be eliminating tariffs on most items classified as normal track, with the exception of
up to 150 deferred items, in 2010. The deferred items are also scheduled to have their tariffs

139eliminated by 2012. Sensitive list (SL) items are to number no more than 400 items at the HS
six-digit level, and are not to exceed 10% of the total value of imports. The upper limit on thenumber of highly sensitive list (HSL) items is to be 40% of the SL or 100 items, whichever issmaller. Although tariffs on these items are to be lowered step by step, it is possible for them to be
declared exceptions. CLMV will be subject to a less demanding tariff elimination schedule than theoriginal ASEAN signatories, such that tariffs will be eliminated on all but deferred items, which areto number up to 250, by 2015. Tariffs on the deferred items are also scheduled to be eliminated in orafter 2018.
Under the ASEAN-China FTA, products in the automobile and household electrical appliancesectors, for which there appear to be high utilization demand by Japanese and other enterprises, areassigned to the SL in many cases. Passenger vehicles are on the SL or HSL in both China and the
major ASEAN countries, while motorcycles are on the SL or HSL in the major ASEAN countries.
Although the majority of items in the household electrical appliance category are assigned to thenormal track in China, television sets are categorized as SL or HSL in China and the major ASEAN
countries, while Thailand, which is seeking to foster the electronics industry, has placed many
household electrical appliances, such as air conditioners, refrigerators, television sets, and so on, in
the SL or HSL categories. The ASEAN-China FTA also includes a reciprocity(12) arrangement so thatwhen items are classified as normal track in the importing country and are nevertheless assigned to
SL or HSL in the exporting country, the agreement tariff rate does not have to be applied (Annex 2of the Agreement on Trade in Goods).
---------------------------------------------------------------------------------------------------------12. Specifically, items positioned as SL in the exporting country and subject to tariff rates above 10% will
be subject to MFN tariff rates in the importing country. For items with tariff rates of 10% or less, the tariff
rate is to be either the country's own SL rate or the counterpart country's normal track rate, whichever ishigher. (However, the importing country's MFN tariff rate is to be the upper limit.)---------------------------------------------------------------------------------------------------------As to utilization of the ASEAN-China FTA by Malaysia and Thailand, the record of Thailand's
actual exports to China in 2006 by value ($11.8 billion) shows that the portion of this amountattributable to FTA utilization was $1.5 billion. The rate of utilization rises no higher than 12.3%, but
this is still double the 2005 figure of 6.7% (Table II-14). Contributory factors in this result were theEH program and the fact that tariff reductions in the non-agricultural and fishery sectors began in
July 2005. Similarly for Malaysia, the portion of the value of actual exports to China in 2006 ($11.7
billion) attributable to FTA utilization was $1.0 billion. The rate of utilization was 8.9%, which wasa significant increase from the 2.9% figure for 2005. The total rate of FTA utilization for the twocountries combined was 4.8% in 2005, which rose to 10.6% in 2006.
Trade between ASEAN and China since the FTA went into effect can be examined by comparing140

the ASEAN share of exports to and imports from China for 2006 with the figure for 2003, before the
FTA went into effect. Although trade appears generally to show little change in terms of total value,
items subject to the EH scheme (HS 01–08) showed a considerable increase in both imports andexports (Table II-15). In agricultural and fishery products, China's imports of cassava and fruit fromThailand are said to have increased. Malaysia also publishes the items that are utilized under the
ASEAN-China FTA, and chemical products account for approximately 50% of the items utilized inexports to China in 2006, while rubber products account for approximately 30%. Other items
utilizing the FTA for export to China include vegetable oil, cocoa products, and so on.
Large amounts of the trade between ASEAN and China and within the ASEAN area has been
covered by wide-ranging tariff exemptions through systems other than FTAs. Many of the Japaneseenterprises that have established presences in China and the ASEAN area have created export bases
there, as typified by electronics and textiles. The importation of capital goods and intermediate
goods to export bases occurs under schemes of export processing zones, bond arrangements, andother such schemes that in many cases provide import tariff reductions and exemptions but that are
different from FTAs (Table II-16). The major Asian countries are prepared to provide a variety oftariff reduction and exemption schemes, including export processing zones and free trade zones aswell as arrangements to grant enterprises bonded status. These systems had been adopted before
FTAs were concluded in order to attract investment and for other such purposes, and tariff reductionand exemption schemes of these kinds are being utilized in a wide-ranging manner, together with
FTAs for trade between ASEAN and China and within the ASEAN area. Tariff-free importation
based on the ITA is widely utilized in China and within ASEAN, which have become export bases
for IT products.
A distinctive characteristic of Japanese enterprises operating in ASEAN is the high proportion of
raw materials and parts that they import free of tariffs and the high proportion of export in their sales.
According to “Zai Asia nikkei seizogyo no keiei jittai chosa” (the Survey of Business Conditions forJapanese Manufacturing Companies in Asia), which was discussed earlier, Japanese manufacturing
companies operating in ASEAN show a high percentage of raw materials and parts procured throughtariff-free importation, and exports make up a large percentage of their sales. Enterprises that obtain
50% or more by value of their raw materials and parts at zero tariff make up 60–70% of theenterprises in the Philippines, Malaysia, and Vietnam, and approximately 40% in Thailand andIndonesia. Similarly, enterprises that receive 50% or more of their sales by value from exports makeup 60–80% of the enterprises in the Philippines, Malaysia, and Vietnam, and approximately 40% in
Thailand and Indonesia (Table II-17). In India, on the other hand, 71.0% of enterprises have less than
10% of their products tariff free, and 61.8% of enterprises export less than 10% of their products.
These figures are extremely low compared to ASEAN, and these enterprises are engaged in
production geared to internal demand.

141

Under export processing zones, free trade zones, and other such tariff reduction and exemption
schemes, goods marketed domestically are generally subject to tariffs. For this reason, FTA
utilization is expected to continue increasing in China and ASEAN, together with domestic
marketing that addresses expanding internal demand.
----------------------------------------------------------------------------------------------------------

Column II-3
Japan-Mexico EPA Shows Effects in Japan's Automobile and Other Exports to
MexicoThe Japan-Mexico EPA (Japan-Mexico Economic Partnership Agreement) went into effect inApril 2005, and trade between the two countries has been expanding steadily since then. Imports to
Mexico from Japan showed an average annual growth of 18.7% from FY2004, before the FTA went
into effect, to 2006. This exceeds the average annual growth of 13.5% in total imports from theworld.
Imports to Mexico from Japan revealed the greatest effects from the EPA in automobiles.
According to the Japan Automobile Manufacturers Association (JAMA), exports of Japan-produced
automobiles to Mexico were favorable. In FY2005 they showed a 36.5% year-on-year increase to81,334 units, and in FY2006 they likewise showed a 23.6% rise to 100,529 units. Mexico as a rule
allows manufacturers of completely built vehicles that manufacture locally a tariff-free import quotaof 10% of their production in number of units. On the other hand, the general tariff rate for
automobiles is set high, at 50%. For Japanese enterprises apart from those Japanese manufacturersthat conduct local production in Mexico (Nissan, Toyota, and Honda) and Mitsubishi Motors, which
can make use of the tariff-free import quota of its business partner DaimlerChrysler, therefore, it was
effectively impossible to import automobiles to market in Mexico. The Japan-Mexico EPA has
established new tariff quotas (tariff-free) such that even Japanese enterprises that do not engage inproduction in Mexico have an opportunity to participate in the Mexican automobile market. After theJapan-Mexico EPA went into effect in 2005, Mazda, Suzuki, and Isuzu began selling in Mexico, as
did Fuji Heavy Industries in 2006.
Imports to Mexico from Japan have also been expanding in items other than automobiles forwhich tariffs were immediately eliminated. Imports from Japan are increasing, for example, in glass
products, railway rails, forklifts, and shock absorbers (Table). The EPA effects are limited on items
other than those immediately made tariff-free. The greatest reason for this is that the government of
Mexico lowered MFN tariffs after concluding the EPA, resulting in a reversal of the MFN tariff rates
and the Japan-Mexico EPA tariff rates. Mexico lowered MFN tariff rates on 9,336 items at the end of
December 2004, and on 6,089 items at the end of September 2006. As a result of these two
reductions, the Japan-Mexico EPA tariff rates were higher than the MFN rates on approximately
5,000 items as of FY2006. The base rate for tariff reductions in the Japan-Mexico EPA is fixed at the142MFN tariff rate at the time of negotiations (end of March 2003), so that reduction of MFN rates
leads to this reversal.
Meanwhile, where imports to Japan from Mexico are concerned, the benefits of the Japan-Mexico
EPA are enjoyed in agricultural and fishery products for which Japan imposes tariffs on many items.
Tariffs on many of these items were not immediately eliminated, however, but rather reduced instages, so import expansion effects were not suddenly apparent. Of the items covered by theJapan-Mexico EPA, there are agricultural and fishery products for which imports have significantly
increased in the two years since the EPA went into effect. These include fresh yellowfin tuna, frozen
octopus, roasted coffee, pumpkins, bananas, and tequila. Japan's MFN tariff rates for manufactured
products are zero for most items, but many items in the footwear and textile categories are dutiable.
Based on the Japan-Mexico EPA, tariffs on apparel products were immediately eliminated. In
apparel, the import volume for women's cotton trousers showed an average annual growth of 45.3%
from FY2004 to 2006.

Table

Items showing duty reduction effect of Japan-Mexico EPA (Mexico imports from Japan

excluding finished vehicles)
Item
Other glass products
Railway rails
Forklifts(w/internal combustion engine;
capacity 7 tons or less)
Automatic transmissions
Theodolite
Shock absorbers

Average
Tariff rate （％）
annual
EPA
increase （％） MFN
46,909203.2
10.0 Duty free
2,528
261.5

Units

FY 2004

FY 2005

FY 2006$1,0005,103

11,616

Tons

193

517

$1,000

1,114

3,065

12,711

237.8

Tons

191

2,901

15,504801.0$1,000

4,752

5,625

20,008

105.2

Units

606

644

1,338

48.6

$1,00016,286

23,51856,061

85.5

Sets

21,784

34,696

61,70668.3$1,000

95

2,492

5,118

634.0

Units

94

771

1,293

270.9

$1,000980

8,309

27,638431.1

1,000 units

59

745

n.a.

n.a.

7.0

Duty free

20.0

Duty free

7.0

Duty free

20.0

Duty free

10.0

Duty free

Note 1. Increase is average annual increase from FY 2004 to FY 2006. Tariff rates are as of January 2007. "MFN" is the general rate, "EPA" is therate for imports from Japan under the Japan-Mexico EPA.
2. Shock absorber amounts are for Japan exports to Mexico.
Source: Compiled from Mexico trade statistics, tariff tables, etc.

---------------------------------------------------------------------------------------------------------■ Thailand’s Utilization of the FTA between Thailand and India was 18% for Only 82
Categories
Like Singapore, Thailand is one of the ASEAN countries most actively engaged in promoting
bilateral FTA negotiations, and it has already concluded bilateral FTAs with India (Early Harvest

143

only), Australia, and New Zealand. The Thailand-India FTA began implementing an Early Harvest
scheme for 82 items in September 2004, with phased reduction of tariffs, and eliminated basic tariffs
from September 2006 onwards. Although it covers only some items, the Thailand-India FTA has
attracted considerable interest from Japanese enterprises, and it is known as the FTA that reversed
the balance of trade between the two countries. The average annual growth in exports of EH items
from Thailand to India from 2004 to 2006 was 58.7%, a major expansion (Table II-18). On the other
hand, imports of EH items and total imports both showed growth of about 20%. As a result, Thailand
overcame the trade deficit with India that had lasted up to 2004, and began showing a trade surplus
from 2005 on.
The value of Thailand's exports to India in 2006 utilizing the FTA was $300 million. Even thoughapplied only to the 82 EH items, this resulted in a utilization rate of 18.1% of Thailand's exports to
India (Table II-14). This accounted for 89.1% of exports from Thailand to India in the Early Harvest
categories, meaning that the majority of those exports utilized the FTA. A background factor here
was that the kind of production activity conducted by export bases supplying intermediate goods toeach other, as occurs within ASEAN and between China and ASEAN, was not occurring between
India and ASEAN. In the trade between India and ASEAN, the bulk of exports to India wereintended rather for the end market. In other words, the exports to India were not directed to export
processing bases, but were mainly exported to meet India's internal demand. Consequently, they arethought to have utilized FTAs more than in-bond and other such schemes that provide import tariff
reductions and exemptions for export processing bases.
Looking at specific items, the export of color television sets from Thailand to India in 2006
amounted to $124.78 million, while television picture tubes similarly amounted to $32.27 million.
These figures represented an average annual growth of 70.5% and 160.1% respectively from 2004 to
2006. There was also a conspicuous expansion in exports of polycarbonates used in a wide range of
products, including air conditioners, CDs, DVDs, and all types of household electrical appliances.
Imports of these products to India are exempt from basic tariffs, so they are contributing to a tax
saving effect and a rise in the price competitiveness against goods imported from other countries. A
background factor in this situation is thought to be the Japanese and other enterprises withproduction bases in Thailand that are using exports from Thailand as an approach to development of
the growing markets in India.
Gear boxes are a conspicuous element in the increase of imports to Thailand from India. Gearboxes are a type of transmission mechanism used in motor vehicles, and this increase suggests thatJapanese automobile manufacturers are supplying the automobile industry clustered in Thailand withparts from India.
■Expanding Trade in Finished Vehicles Utilizing the Thailand-Australia FTA

144

Australian FTAs in the Asia-Pacific region began with the FTA with Singapore, which went into
effect in July 2003, followed by the FTA with Thailand (TAFTA), which went into effect in January
2005.
Exports from Thailand to Australia utilizing the FTA amounted to $2.7 billion in 2006. This madeup 62.6% of the total export value (Table II-14).
Examination of trends in trade after the Thailand-Australia FTA went into effect shows aconspicuous expansion of automobile exports from Thailand to Australia. Australia imposes tariffs of
5% on commercial vehicles and 5–10% on passenger vehicles. With the Thailand-Australia FTA,
however, automobile imports from Thailand have become tariff-exempt. This has provided a tariffadvantage to Japanese enterprises that have clustered their production bases in Thailand. Figures forautomobile imports to Australia show that in 2005, when the Thailand-Australia FTA went into
effect, imports of commercial vehicles from Thailand increased 78.6% year-on-year to $1.2 billion,
and imports of passenger vehicles increased 124.5% to $200 million (Fig. II-6). Although the figure
for commercial vehicles declined somewhat to $1.1 billion in 2006, the figure for passenger vehicles
doubled with an increase of 128.5% to $500 million. The share of vehicles from Thailand inAustralia's commercial vehicle imports has increased from 25.3% in 2004, before the FTA went into
effect, to 32.0% in 2006. Passenger vehicle imports also rose sharply from 1.1% to 4.8%, while
commercial vehicle imports from Thailand overtook those from Japan in 2005, making Australia thegreatest importer from Thailand. These exports of automobiles from Thailand to Australia are thework of Japanese enterprises.(13)Thailand's FTAs with India and Australia have a high rate of utilization, largely from Japaneseenterprises. It would appear that these FTAs, which encompass the promising end markets in India
and Australia, are contributing to market development by Japanese enterprises from their existingbases in ASEAN and other areas.
---------------------------------------------------------------------------------------------------------13. The primary reason for the increase in exports from Thailand to Australia is the way that the Japanese
automobile industry's global strategy has positioned Thailand as an automobile production base. Even if
the Thailand-Australia FTA had not gone into effect, Thailand's automobile exports would probably haveincreased. The FTAs, however, have effectively provided tariff advantages and increased the pricecompetitiveness of automobiles manufactured in Thailand.

---------------------------------------------------------------------------------------------------------■FTAs Between China and Hong Kong Utilized in Service Sectors
The Closer Economic Partnership Arrangement (CEPA) between Mainland China and Hong Kongwas concluded in 2003 and went into effect in January 2004. At present it has been amended threetimes, gradually expanding the scope of liberalization. Agreement on the fourth amendment was145reached in June 2007, and this will open up 11 service sectors for the first time, including public
services, from January 2008. The main distinctive characteristics of the China-Hong Kong CEPA arethat it will enable practically all goods from Hong Kong to be imported tariff-free by China wheretrade in goods is concerned so long as the rules of origin are met, and, in the service sectors, thatHong Kong enterprises, including foreign-owned enterprises that meet certain conditions, will beallowed priority access to the China market.
There are many examples of FTAs in Asia that are utilized for trade in goods, but there are few
instances of utilization in services. Given this circumstance, it is a breakthrough that so many
enterprises, largely in the transportation and physical distribution sectors, including Japaneseenterprises, as shown below, have utilized the CEPA.
The China-Hong Kong CEPA will enable service enterprises in Hong Kong to move into mainland
China before China carries out the commitments it made in joining the WTO. This was intended to
put those enterprises in a position of competitive advantage over other foreign enterprises. It wasalso envisioned as an inducement to foreign enterprises seeking to utilize the China-Hong Kong
CEPA to locate in Hong Kong. A background factor in the situation appears to be the intention toforestall any progressive decline in Hong Kong's position as a center for services directed to China
as a result of that country's liberalization.
The amended version of the CEPA that went into effect in January 2007 allows for priority accessto the Chinese market by 27 industries. Enterprises that attempt to establish a presence in China
utilizing the China-Hong Kong CEPA will have to acquire Hong Kong Service Supplier (HKSS)
certification. The requirements for HKSS certification are: (1) For most industries, having operatedin Hong Kong for three years or more (five years for construction, banking, insurance, andground-based services of air transportation, no period specified for real estate); (2) having paid
corporate taxes in Hong Kong; (3) either owning or renting offices appropriate to the size of thebusiness in Hong Kong; and (4) having half or more of the employees hired in Hong Kong be
residents with permanent residence status or be people from the Mainland of China staying on
residential visas.
A cumulative total of 1,739 HKSS Certificates had been issued by the end of March 2007 (Table
II-19). Transportation and physical distribution account for just under 60% of the total, andwholesale and retail approximately 20%, so that these two sectors together account for 80% of thewhole. About 1,000 enterprises have HKSS certification (some enterprises hold several HKSS
Certificates), and just under half of these are thought to be foreign-owned enterprises. Japaneseenterprises are said to account for about 10% of the total.
Conspicuous examples of utilization by Japanese enterprises can be found in the transportationand physical distribution sector. As of August 2005, there were 19 Japanese enterprises making useof the China-Hong Kong CEPA to establish 22 100%-owned local subsidiaries in China (Japan

146

Maritime Daily of September 27, 2005). For example, the Hong Kong subsidiary of Nippon Express
obtained HKSS certification in April 2004. In a press release, this company pointed out that theability to establish a 100%-owned subsidiary in China before that country carries out thecommitments it made in joining the WTO was an advantage of utilizing the China-Hong Kong
CEPA. That company subsequently established a 100%-owned warehouse company in Zhejiang
Province in November of that year. There is also the case of the Hong Kong subsidiary of Tempstaff,
an employment agency, which utilized the China-Hong Kong CEPA to establish a 100%-owned local
subsidiary in Guangzhou in February 2007. They will build up a full-scale business supplying
Japanese-capable personnel mainly to Japanese enterprises in Guangzhou, where an automobile
industry cluster has formed. In the retail sector, the Hong Kong subsidiary of Aeon obtained HKSS
certification in September 2004, and established Aeon China in Shenzhen to control its business in
China.
The advantages offered by the China-Hong Kong CEPA in the service sectors existed only insofar
as it enabled enterprises to establish a presence in China early, before that country carried out thecommitments it made in joining the WTO. As China gradually carries out its membershipcommitments, therefore, those sectors that were liberalized only under the China-Hong Kong CEPA
scheme are being liberalized on an MFN basis instead, diluting the advantages of utilizing the
China-Hong Kong CEPA. In the transportation and physical distribution sector, for example, 100%
foreign ownership was allowed until December 2005, and in the wholesale and retail sector until
December 2004. (There are some exceptions in both sectors.)
Advantages to utilizing the China-Hong Kong CEPA presently exist only in those particularsectors where the minimum capitalization amounts are set at low preferential levels, for example, orwhere 100% foreign ownership is allowed only under the China-Hong Kong CEPA, such as inairfreight forwarding.

(3) FTAs in Asia Face Issues Affecting Utilization, Including Rules of Origin
Utilization of FTAs in the Asia-Pacific region is advancing, but rules of origin and related matters
are presenting issues for trade in goods.
Rules of origin are standards for deciding whether certain goods are products of an agreement
signatory country in terms of the applicability of the FTA tariff rate to those goods. The substance of
those rules determine the applicability of the agreement tariff rate, and are a major factor in deciding
the FTA's ease of use. Rules of origin are generally of three kinds: value-added criteria,
manufacturing process criteria, and change in tariff classification criteria. The change in tariffclassification criteria provide for the country of origin of goods to be recognized by whether thetariff classification (HS code) assigned to the final goods produced in that country show a change
from the tariff classification of the input goods. The manufacturing process criteria recognize the147country of origin as the country where certain specific processes are carried out on the product, andthese criteria are commonly applied to textile products.
Cumulation rules are also an important part of the rules of origin. Under these rules, all thecountries that are party to the agreement are considered to form one region among them, and theadded value that is added in that region is treated as an originating product. In the case of AFTA, therules of origin in principle require 40% or more of added value. If the cumulative added value that
was added within the ASEAN area amounts to 40% or more, then that product can be certified as of
ASEAN origin.
■Five Types of Asia-Pacific Rules of Origin
At present, the rules of origin that are in effect in the major FTAs are of five general types: (1)Value added criteria alone, (2) change in tariff classification criteria alone, (3) a choice of criteria
type allowing the choice to be of either value added or change in tariff classification, (4) a dual
criteria type requiring both to be of value added and change in tariff classification, and (5)manufacturing process criteria alone. Different rules of origin are applied in different FTAs (Table
II-20). Ordinarily, the dual criteria rules of origin are the strictest of these five types, while thechoice of criteria type allows the greatest flexibility.
The value added criteria alone are applied in AFTA, the ASEAN-China FTA, and so on.
As a rule, 40% or more of cumulative added value is required for certification as the country oforigin. Change in tariff classification criteria are used in the Thailand-Australia FTA, theJapan-Singapore EPA, and the Singapore-Republic of Korea FTA. The choice of criteria type has
been adopted in the Japan-Malaysia EPA and so on. These require either a change in tariffclassification at the four-digit or six-digit level of the product's HS code or cumulative added valueof 40% or more for certification as the country of origin. The dual criteria have been adopted in theThailand-India FTA, the Singapore-India CECA, and other FTAs involving India. These require botha cumulative added value of 40% or more and a change in tariff classification. The manufacturing
process criteria are mainly applied in the China-Hong Kong CEPA and the China-Macao CEPA.(14)The following have been identified as issues that arise because of the existence of differing rulesof origin: (1) Certification procedures under rules of origin for each FTA can become troublesome,and (2) satisfying different rules of origin requires changing the manufacturing process, which islikely to bring increased costs. Troublesome procedures would include the need to carry out two
types of country of origin certification procedures under the dual criteria type, which itself leads toincreased costs. Products that have extremely large numbers of parts, such as passenger vehicles,
entail administrative costs under the tariff classification change criteria that can be significantly
higher than the administrative costs of country of origin certification by the value added criteria. The
choice of criteria type, however, has the advantage that the method with the lower administrative148

costs can be chosen for country of origin certification.
--------------------------------------------------------------------------------------------------------14. The China-Hong Kong CEPA and the China-Macao CEPA provide for tariff classification changes at
the four-digit level and apply an added value criterion of 30% or more, depending on the item, withconsiderable variation among items.

--------------------------------------------------------------------------------------------------------■Intermediary Trade Also Involves Differing Criteria
Issues involved in rules of origin include re-invoicing, back-to-back certificates, and other aspects
of intermediary trade (Fig. II-7).
Re-invoicing occurs in a commercial flow in which invoices are issued from a home office orregional headquarters in a third country other than the country of origin. This kind of re-invoicing isa matter of general business in Asia. It is common for invoices to be issued from Singapore, where
many regional headquarters are located, or from head offices in Japan. When products produced in
Malaysia are exported to Indonesia in AFTA, for example, even though the products and country oforigin certificates are sent directly to Indonesia, the invoices show that the regional headquarters in
Singapore bought the products from its subsidiary in Malaysia, and the invoices are issued fromSingapore to Indonesia. This is the re-invoicing pattern. Physical distribution is by direct shipping,but the commercial flow is through a third country.
Back-to-back certification is a phenomenon that occurs in FTAs concluded by three or morecountries. In addition to re-invoicing, both the goods and the country of origin certificates areshipped through a third country. In AFTA, for example, there are cases in which products from
Malaysia are aggregated first at a distribution center in Singapore for a time, then shipped from there
to Indonesia. Where AFTA is involved, products produced in Malaysia will have the AFTA Form D
certificate of origin issued in Malaysia, and the government of Singapore, which is an AFTA
signatory, will issue a new, separate certificate of origin based on the above certificate of origin. Thisis the back-to-back Form D.
Trade conducted on patterns like these is termed intermediary trade, and it is a common form oftrade. The background to trade conducted by enterprises through third countries using re-invoicing
and back-to-back certification is thought to include such factors as the occurrence of substantive
transactions at regional headquarters and through head offices, and the implementation ofcomprehensive exchange risk control and improvements in physical distribution efficiency throughhead offices and regional headquarters.
In an FTA, the question of whether an importing country will accept back-to-back certificates orre-invoicing from a country other than the country of origin becomes an issue. AFTA explicitly
provides for re-invoicing and back-to-back certification.(15) AFTA recognizes these practices, and the149FTA agreed tariff rate is applied even on transactions that are routed through a regional headquarters
in Singapore, for example. The Japan-Malaysia EPA, the ASEAN-Republic of Korea FTA, and othersuch agreements similarly recognize re-invoicing. On the other hand, the ASEAN-China FTA does
not expressly provide for re-invoicing or back-to-back certification. Re-invoicing is therefore
accepted or not according to the understanding of each country's own customs service, and it has
been pointed out that every country's understanding differs. Apparently the FTAs that India isconnected with do not accept re-invoicing.
--------------------------------------------------------------------------------------------------------15. Articles 10 and 21 of AFTA Operational Certificate Procedures (OCP) for the Rules of Origin.

--------------------------------------------------------------------------------------------------------There is demand for the creation of rules of origin that fit according to the actual business practice.
Given these circumstances, it would appear that recognition of intermediary trade, which has
become a general pattern for transactions, would also improve FTA utilization rates.
Enterprises that make use of FTAs have expressed the wish that rules of origin be unified torecognize (1) the most flexible of the five types of rules of origin, the choice of criteria type, as wellas cumulative rules of origin, and (2) intermediary trade using re-invoicing and back-to-backcertification. Other issues related to rules of origin include (3) the occurrence of differences in how
exporting countries and importing countries interpret the HS codes, (4) the appearance of FOB
prices on certificates of origin in some FTAs so that the factory selling price becomes known, which
can pose problems, and (5) technical innovations in physical distribution that have reduced leadtimes, leading to calls for increased speed and computerization of procedures for issuing certificatesof origin.
---------------------------------------------------------------------------------------------------------

Column II-4
EU Adoption of Cumulative Rules of Origin
The EU has presently concluded two customs unions and 17 FTAs with other parties outside its
area. It also has three one-way preferential trade arrangements (generalized system of preferences(GSP), directed to Africa, the Caribbean, and the Pacific (ACP), and directed to Overseas Countries
and Territories (OCT)). These form an extremely complicated system for trade. Up until several
years ago, the EU had also concluded eight European agreements with new member countries inCentral and Eastern Europe (currently expired because of EU accession). Concern was expressed insome quarters that this would result in a so-called spaghetti bowl phenomenon.
The EU, however, has made every effort to realize common rules of origin in order to limit
increases in administrative and regulatory costs resulting from multiple rules of origin and to limit
distorting effects on trade. The EU has been integrating its rules of origin in the manufacturingindustry with the Change in Tariff Heading (CTH, applicable to four-digit HS codes), with the150

value-added criteria (added value of 40–60%), and with manufacturing process criteria (mainly
textile).
The EU has further made attempts to introduce common rules of origin in Europe, theMediterranean, and other such regions. These rules have allowed regions that are joined by multiple
FTAs to be considered as a single country when determining the country of origin. In the case of
Turkish manufacturing industry processing parts produced in Tunisia and exported to the EU, forexample, both Turkey and Tunisia would be seen as a single country. Therefore, for example,
preferential tariffs would be applied even if the percentage of value added in Turkey were low(multilateral cumulation or diagonal cumulation, Figure). This system, however, is applicable only
among those countries that have concluded FTAs including provisions for pan-European andMediterranean cumulative rules of origin.
The full cumulation system has advanced the diagonal cumulation scheme another step. Thissystem grants certification of origin even to non-originating goods (goods such as textile products
originating from outside the covered region), on the condition that they undergo some processing or
manufacturing process within the covered region. (That processing may be distributed over multiple
countries or regions.)
The EU's ACP and OCT one-way preferential trade arrangements are together considered to form asingle country where multilateral (diagonal) cumulation and full cumulation are recognized. Under
the GSP, multilateral cumulation is recognized only within Group 1 (Southeast Asia), Group 2 (Latin
America), or Group 3 (South Asia).
Such a system of cumulative origin makes it possible in some cases for enterprises to enjoy thebenefits from procuring parts and raw materials from within a free trade area, or building up
production network. This system is thought to be utilized most intensively by the textile and apparelindustries.
The precedents established by EU examples suggest that systems of cumulative origin are
significant in two senses. One is that transitional measures can be used until area markets develop
within areas that are linked together by multiple bilateral FTAs. As such, these systems would makeproduction network possible for enterprises. The other significance is for cases in which an alreadyintegrated area market is in the process of moving toward more advanced levels of integration, andother countries seek to join as new members in the integrated area (expansion of regional markets).
The area could deal with candidate member countries that evince different rates of integration by
first forming a network of FTAs with them and adopting the system of cumulative origin. This would
enable those countries to enjoy some of the advantages of participating in the integrated area market.
As the number of FTAs in Asia continues to grow, it is possible that the introduction of common
rules of origin and cumulative origin systems like those implemented in the EU would offer
significant benefits to enterprises in the area.

151

Fig. Cumulative rules of origin in multiple FTAs in the EU

Cumulative Rules of Origin in Multiple FTAs
Country A
Scope of applicationof multilateral
cumulation system

Country E

Country C

Country B

Country D

In a full cumulation system, if processing and work
standards are satisfied among countries A, B, and C,
then it is possible for them to use raw materials fromcountries D and E.

Bilateral with FTA and cumulative rules of origin
Bilateral with FTA but no cumulative rules of origin
Countries and Regions Subject to Cumulative Rules of Origin
Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Syria, Tunisia, Palestinian
National Authority, Iceland, Norway, Switzerland, Lichtenstein, Faeroe
Islands, Turkey
Countries and Regions Subject to Full Cumulative System
Iceland, Norway, Lichtenstein, Tunisia, Morocco, Algeria
Note: Actually applicable to trade among countries and regions that have concluded FTAs, toinclude pan-European Mediterranean cumulative rules of origin provisions.
Source: Compiled from Tanimura, "Gensanchi kisei kyoutsuukaha ookina kanouseiwo
motarasu" (Applying Common Rules of Origina Opens Up Major Possibilities), JETRO
Sensor (July 2007), and European Commission material----------------------------------------------------------------------------------------------------------

152

Table II-7 Value of trade between FTA signatories in the Asia-Pacific region(2006)（dollars in millions, ％）
Japan

China

ROK

Thailand Indonesia Malaysia Philippines Singapore

BruneiVietnam

CLM

India

Australia

New
Zealand

Total

Trade among
FTA signatory
countries

Share

Japan

-

93,95549,893

22,670

7,522

13,4049,020

19,393

98

4,061

194

4,351

12,4102,060

239,030

32,797

13.7

China

91,773-44,558

9,763

9,457

13,5405,738

23,188

100

7,468

2,074

14,588

13,626

1,620

237,494

71,32830.0

ROK

24,91081,653

-

4,610

6,229

6,425

3,544

9,525

72

4,026

326

5,394

5,145

707

152,568

34,75822.8

Thailand

16,571

11,806

2,652

-

3,337

6,667

2,611

8,421

83

3,098

3,039

1,818

4,384

531

65,01848,447

74.5

Indonesia

21,972

8,746

8,908

3,147

-

4,502

1,668

13,415

49

853

218

3,619

3,036

523

70,656

41,507

58.7

Malaysia

14,241

11,646

5,806

8,502

4,074

-

2,173

24,744

346

1,758

279

5,129

4,553

674

83,92573,56987.7

Philippines

7,318

14,620

1,619

1,820

570

2,636

-

4,946

11

250

23

97

530

82

34,521

26,494

76.7

Singapore

14,854

26,513

8,736

11,312

24,90135,536

5,079

-

574

5,459

1,064

7,673

10,186

1,393

153,280

153,280

100.0

Brunei

2,070

196

839

117

1,344

69

1

200

-

-

0

1

750

199

5,785

2,766

47.8

Vietnam

4,927

2,260

740

822

579

1,287

960

1,500

-

-

721

115

3,657

87

17,655

8,869

50.2

CLM

338

307

63

2,621

17

177

2

165

0

172

1

527

47

1

4,437

3,524

79.4

India

3,660

9,518

1,906

1,478

1,681

1,212

533

4,440

39

768

162

-

946

148

26,490

5,917

22.3

Australia

23,57015,106

8,992

3,226

3,335

2,110

769

3,421

21

1,105

74

6,568

-

6,536

74,833

13,184

17.6

New Zealand

2,303

1,220

881

284

399

323

334

346

67

158

4

218

4,598

-

11,134

5,228

47.0

228,507277,544
135,593
70,37363,446
87,88732,432
113,702
1,460
29,176
8,180
50,09763,867
14,563
Total
Notes: 1. Reticular cells are trades between FTA signatories.
2. Share is the ratio of exports between FTA signatories to total exports to ASEAN+6.
3. Trades between the ROK and all ASEAN member countries are counted; the FTA between India and Thailand is only in the Early Harvest stage but the total trade value was counted.
4. The CLM countries are Cambodia, Lao PDR and Myanmar.
Source: IMF "DOT May 2007."

1,176,826

521,667

44.3

Table II-8 Intra-regional trade within major regions of the world
(%)
1980
Asia

ASEAN + 6
(adjusted for re-exports)

1985

1990

1995

1999

2000

2005

2006

-

-

-

-

40.6

42.1

44.2

43.3

ASEAN + 6

34.6

34.8

33.7

40.8

38.9

40.5

43.1

42.7

ASEAN + 3

30.2

30.2

29.4

37.6

35.4

37.3

38.9

38.4

ASEAN

17.9

20.3

18.8

24.0

23.8

24.7

27.2

27.2

ASEAN + China

16.4

17.4

17.0

20.6

20.1

21.0

21.3

21.6

ASEAN + India

17.4

18.7

18.1

23.5

23.4

24.4

26.9

26.8

ASEAN + Japan

24.6

20.6

22.4

29.1

26.2

27.8

27.6

27.2

Ｎｏｒｔｈ
America

NAFTA

33.8

38.7

37.9

43.1

48.5

48.8

46.1

44.2

Europe

EU25

61.3

59.8

67.0

67.4

68.6

66.8

66.4

66.1

EU27

61.6

59.9

67.1

67.7

69.0

67.3

67.2

66.9

Notes: 1. ASEAN + 6 is the ASEAN countries plus Japan, China, the ROK, Australia, New Zealand, and India.
2. ASEAN + 3 is ASEAN plus Japan, China, and the ROK.
3. Adjustments for re-exports among the ASEAN + 6 (adjusted for re-exports) were made as follows: For Hong Kong, a non-member of the ASEAN + 6, thevalue of exports from the ASEAN + 6 to ASEAN + 6 via Hong Kong was added from Hong Kong trade statistics. Exports from China to China via Hong
Kong were regarded as domestic trade and excluded. For Singapore, instead of the total value of exports to the ASEAN + 6, using Singapore trade statistics,
the value of exports calculated as re-exports to ASEAN + 6 countries was excluded from total exports to ASEAN + 6 countries; the resulting figure is
regarded as exports of Singapore origin and used. The same method was used to calculate its world export figure. In addition, of exports from other ASEAN+ 6 countries to Singapore, a given percentage was regarded as being re-exported to non ASEAN + 6 countries. The ratio of re-exports to non ASEAN + 6
countries in Singapore's total imports (converted to FOB by multiplying by 0.9) was calculated for each calendar year, and that ratio multiplied by the value ofSource: IMF, "DOT May 2007."

153

Table II-9 Trade of IT and tranportation equipment among major Asian
countries and region
ExportingcountryJapan

Importing country
and region

Amountshare

Amountshare

2006/2000

China

7,478

5.3

23,06916.7

3.1

ASEAN５

26,15918.5

20,84815.1

0.8

Total export

141,366

100.0

138,235

100.0

1.0

6,514

12.9

21,831

6.9

3.4
4.9

Japan
China

(US$ million, ％, times）
2006

2000

ASEAN５

4,736

9.4

23,299

7.4

Total export

50,525100.0

316,332

100.0

6.3

Japan

19,21410.0

19,8087.2

1.0

IT products

China

4,877

2.5

28,96910.6

5.9

ASEAN5 intra-trade

46,78224.4

64,046

23.4

1.4

Total export

191,729100.0

273,245

100.0

1.4

1,178

1.2

5,384

3.4

4.6
1.3

ASEAN5

China
Japan

ASEAN５

5,580

5.5

7,177

4.5

Total export

101,520100.0

158,595

100.0

1.6

708

7.6

2,946

7.7

4.2
4.2

Japan
Transport equipment

China

ASEAN5ASEAN５

680

7.3

2,824

7.3

Total export

9,268

100.0

38,431

100.0

4.1

Japan

520

7.4

1,411

5.8

2.7

China

118

1.7

924

3.8

7.8

7,036

100.0

24,415100.0

3.5

Total export

Notes: ASEAN5 includes Thailand, Malaysia, Indonesia, Philippines and Singapore.
Sources: National trade statistics.

Table II-10 Firms utilizing/planning to utilize schemes under the FTAs in effectwithin the Asia Pacific region for their export business（number, ％）Number％share （n=37)

AFTA

24

64.9

Japan ・Malaysia

15

40.5

Thailand・Australia

8

21.6

China・Hong Kong

7

18.9

Thailand・India

6

16.2

China・ASEAN

4

10.8

Thailand・New Zealand2

5.4

Japan ・Singapore

1

2.7

FTA

Notes:Firms utilizing schemes under the FTAs in effect.
Source: "Survey on International Operations of Japanese Firms"（JETRO)

154

Fig. II-5
countries

Firms utilizing schemes under the FTAs in effect in major Asian

Thailand（Export）

18.2

Thailand（Import）

17.7

40.6

26.8

Malaysia（Export）

46.4

21.1

15.7

Malaysia（Import）

41.2

35.9

52.0

20.5

63.8

Indonesia（Export）

18.5

40.3

41.1

Indonesia（Import）

20.8

37.7

41.5

15.2

Philippines(Export）

22.1

10.8

Philippines（Import）

23.0

6.6

Vietnam（Export）

66.2

32.8

9.5

Vietnam（Import）

60.7

33.3

4.0

India（Export）

62.8

57.1

48.0

48.0

33.3

India（Import）

0

10

40.0

20

30

40

26.7

50

Utilizing

60

70

80

Under review

90

100
（％）

N/A

Note1: Number of firms : Thailand=Export 187、Import 192、Malaysia=Export 123、Import127、 Indonesia=Export124、Import130、Philippines=Export145、Import148、Vietnam=Export61、Import63、India=Export25、Import30。
Note2: Conducted from 27 November 2006 to 27 December 2007.
Source : "Survey of Japanese Manufacturers in Asia"(JETRO)

Table II-11 CEPT tariff reductions(Number of categories, %)Products on the inclusion list (IL)
Number of
categories

Ratio

? 5%

Ratio

0%

Ratio

Dutiable> 5％

Temporary General
exclusion exception SL/HSL
list (TEL) list (GEL)

Other

Ratio

Thailand

8,301

8,301

100.0

8,288

99.8

4,513

54.4

3,775

45.5

13

0

0

0

0

Malaysia

12,593

12,50499.3

12,439

98.8

9,785

77.7

2,654

21.1

34

31

0

89

0

Indonesia

8,732

8,619

98.7

8,619

98.7

5,730

65.6

2,889

33.1

0

0

0

96

17

Philippines

11,49011,44499.6

11,369

98.9

8,149

70.9

3,220

28.0

75

0

0

27

19

Singapore

10,705

10,705100.0

10,705100.0

10,705

100.0

0

0.0

0

0

0

0

0

Brunei

10,702

10,598

99.0

9,924

92.7

8,444

78.9

1,480

13.8

674

0

0

104

0

ASEAN countries

62,52362,171

99.4

61,34498.1

47,32675.7

14,018

22.4

796

31

0

316

36

Vietnam

10,68910,523

98.4

10,285

96.2

5,478

51.2

4,807

45.0

238

0

0

166

0

Laos

10,69010,389

97.2

9,960

93.2

629

5.9

9,331

87.3

429

0

0

98

203

Cambodia

10,68910,454

97.8

5,301

49.6

603

5.6

4,698

44.0

5,153

0

0

181

54

Myanmar10,68910,611

99.3

9,325

87.2

365

3.4

8,960

83.8

1,286

0

0

51

27

CLMV

42,757

41,97798.2

34,871

81.6

7,075

16.5

27,796

65.0

7,106

0

0

496

284

Total

105,280 104,148

98.9

96,215

91.4

54,401

51.7

41,814

39.7

7,902

31

0

812

320

Notes: 1. Products on the inclusion list (IL) are subject to tariff reductions.
Products on the temporary exclusion list (TEL) are temporarily shielded from tariff reductions (preparations for reductions are not comlete).
General exception list (GEL) items are generally excluded from tariff reductions (defense-related categories, items of scholarly value, etc.).
SL: The sensitive list items (unprocessed agricultural products, for which a flexible approach to transfer to the IL is taken).
HSL: Highly sensitive list items (rice-related).
2. The number of items is based on ASEAN Harmonized Tariff Nomenclature 2002 (AHTN 2002), except for Indonesia and Thailand, for which AHTN 2007 was used.
3. These calculations assume that tariffs on all items slated for tarif elimination in the eleven priority sectors for integration have been entirely eliminated.
4. The items for which tariffs exceed 5% include items for which specific duties rather than ad valorem duties apply. "Other" is 31 items on which Malaysia applies a special tax.
5. 2007 shifts to the IL included Brunei's transfer of items from the GEL and Malaysia, Thailand, and the Philippines from the SL. Vietnam, which had delayed shifting 14 automobile-rela
6. The CLMV countries are Cambodia, Lao PDR, Myanmar, and Vietnam.
Source: ASEAN Secretariat.

155

Table II-12 AFTA (CEPT) utilization ratios in Thailand and Malaysia（measure: %）Country/Region
VietnamPhilippines
Indonesia
Malaysia
Thailand
BruneiSingapore
Laos
MyanmarCambodia
Total

Total forThailand andMalaysia(Except Singapore)

Thailand Indonesia
VietnamPhilippines
Malaysia
BruneiSingapore
Laos
MyanmarCambodia
Total(Except Singapore)

Malaysia Vietnam
Philippines
ThailandIndonesia
Laos
Singapore
Brunei
Cambodia
Myanmar
Total(Except Singapore)

98

99

0.8
9.3
5.0
11.9
3.9
0.1
0.1
0.0
0.0
0.0
2.2
5.6
6.5
1.1
13.1
11.9
0.4
0.2
0.0
0.0
0.0
4.0
7.4
0.2
6.8
3.9
3.5
0.0
0.1
0.0
0.0
0.0
1.2
3.8

6.6
12.7
7.0
14.0
8.0
0.2
0.1
0.0
0.0
0.0
3.3
8.5
12.6
9.0
16.1
14.0
1.3
0.1
0.0
0.0
0.0
5.7
10.7
3.0
10.3
8.0
2.6
0.0
0.1
0.0
0.0
0.0
2.0
6.5

2000
5.3
10.9
10.5
12.7
6.8
0.1
0.1
0.0
0.0
0.1
3.4
8.4
20.8
6.3
14.5
12.7
0.7
0.2
0.0
0.0
0.0
6.4
11.5
3.5
8.7
6.8
2.5
0.0
0.1
0.0
0.4
0.0
1.8
5.6

2001
8.2
16.5
14.9
15.5
10.8
0.8
0.3
0.0
0.1
0.0
5.1
11.9
24.9
8.2
20.2
15.5
1.4
0.4
0.0
0.0
0.0
8.6
14.6
8.1
13.1
10.8
6.1
0.0
0.2
0.8
0.0
0.1
3.2
9.3

2002
12.8
18.2
15.0
20.4
11.3
1.1
0.5
0.0
0.0
0.1
6.2
13.7
23.8
13.8
24.3
20.4
2.3
0.9
0.0
0.0
0.1
10.8
17.7
11.3
12.4
11.3
6.8
0.0
0.3
0.9
0.0
0.0
3.6
9.8

2003
30.3
24.9
20.6
20.7
13.0
0.7
1.1
0.9
0.4
0.0
9.3
18.4
32.1
31.2
31.6
20.7
2.1
1.8
0.9
0.2
0.0
15.5
23.0
28.9
17.1
13.0
8.0
0.0
0.8
0.5
0.0
0.9
5.3
13.2

2004
33.3
29.6
27.1
22.1
16.0
0.8
1.5
3.1
0.6
0.0
12.0
22.2
41.5
33.8
40.4
22.1
3.2
2.7
3.1
0.2
0.0
19.3
27.5
32.6
19.4
16.0
12.1
0.0
1.0
0.3
0.3
2.2
7.2
16.4

2005
38.3
33.2
33.9
22.4
16.2
1.3
1.3
2.8
0.6
0.1
13.3
24.6
45.9
41.5
41.8
22.4
3.9
2.7
2.8
0.2
0.0
21.5
30.0
31.7
24.2
16.2
19.6
0.0
0.9
0.8
0.5
1.7
7.9
18.5

2006
42.4
31.9
29.6
20.5
14.9
3.3
2.8
2.3
0.4
0.1
13.6
23.5
50.6
39.9
37.6
20.5
8.2
2.5
2.3
0.4
0.0
20.2
28.2
46.7
25.0
14.9
12.4
3.8
2.9
2.1
0.5
0.3
9.2
18.4

Note: The CEPT utiliation ratio is value of exports utilizing CEPT/total value of exports.
Source: Ministry of International Trade and Industry, Malaysia and Ministry of Commerce, Thailand and trade statistics of Thailand andMalaysia.

Table II-13

Malaysia's CEPT utilization amounts by item (exports, 2006)（US$ millions, ％）Items

Dollar Amount

Machinery and mecanical appliances

792%share20.5

Chemical products

583

15.1

Plastic products

432

11.2

Food seasoning and preparations

337

8.7

Electrical and electronics products

306

7.9

Vegetable oil and fats

284

7.4

Iron and steel

217

5.6

Cereals and pastry products

110

2.8

Textile and textile products

104

2.7

Wood and wood products

102

2.6

Other
Total

596

15.4

3,861

100.0

Sources: "International Trade and Industry Report2006"(Ministry of International Trade andIndustry)156

Table II-14

FTA usage in Thailand and Malaysia(US$ million, %)Trading partner

2006
China
614
1,450
Australia
2,122
2,746
India
267
328
ASEAN (exclusive of Singapore)
4,942
5,299
Total
7,944
9,824
Value of total
China
9,104
11,797
exports
Australia
3,153
4,383
India
1,519
1,815
(The 82 Early Harvest items only)
338
368
ASEAN (exclusive of Singapore)
16,46718,809Total
37,66845,205
FTA utilization rate China
6.7
12.3
Australia
67.3
62.6
India
17.6
18.1
(The 82 Early Harvest items only)
79.0
89.1
ASEAN (exclusive of Singapore)
30.0
28.2
Total
26.3
26.7
Malaysia
Value of exports
China
274
1,045
using an FTA
ASEAN (exclusive of Singapore)
2,731
3,150
Total
3,005
4,194
Value of total
China
9,303
11,735exports
ASEAN (exclusive of Singapore)
14,75617,141
Total
24,05928,876
FTA utilization rate China
2.9
8.9
ASEAN (exclusive of Singapore)
18.5
18.4
Total
12.5
14.5
Value of exports
Total
China
888
2,495
using an FTA
ASEAN (exclusive of Singapore)
7,673
8,449
Total
8,561
10,944
Value of total
China
18,04823,532exports
ASEAN (exclusive of Singapore)
31,22335,950Total
49,63059,482
FTA utilization rate China
4.8
10.6
ASEAN (exclusive of Singapore)
24.6
23.5
Total
17.2
18.4
Note: The utilization rate is value of exports utilizing an FTA/total value of exports.
Source: Ministry of International Trade and Industry, Malaysia and Ministry of Commerce, Thailand andtrade statistics of Thailand and Malaysia.
Thailand2005

Value of exports
using an FTA

157

Table II-15

Major ASEAN trade items with China(US$ million, %)Exports

Imports

2003
Category
Value
Electrical equipment

7,195

2006

2003

% of allexternal
trade

Value

% of allexternal
trade

8.1

19,360

8.5

2006

Value

% of allexternal
trade

Value

% of allexternal
trade

Electrical equipment

17,248

16.6

39,91418.2

Category

General machinery

6,360

7.6

12,636

6.8

General machinery

8,203

11.5

14,186

13.0

Textiles & textile products

3,627

4.9

7,071

5.1

Chemicals

7,237

12.8

13,808

13.5

Iron & steel

1,107

8.6

6,406

12.3

Mineral fuel

5,511

19.2

7,160

8.1

1,675

19.2

2,813

23.0

567

13.9

1,207

19.4

47,35011.5

89,538

11.3

Chemicals
EH (agricultural andfisheries products)
Total

2,814

9.1

6,045

9.0

Animal, vegetable oils andfats and cleavage products

694

8.4

1,303

10.7

EH (agricultural andfisheries products)

30,935

7.1

71,325

7.4

Total

Notes: 1. EH stands for "Early Harvest" (HS01-08).
2. The % of all external trade is the ratio of ASEAN exports (or imports) to total world exports (or imports) of items in this category.
Source: China Foreign Trade Statistics.

Table II-16 Tariff exemption systems of major Asian countries
Country

Overview of key system points

Thailand・Export processing zones and free zones are exempt from import tariffs. There are nine export processing zones and 19 freezones in operation.
・Bonded factories are exempt from customs duty and so on, on condition that products be reexported. Component members
must be reexported within two years. There are 151 bonded factories.
・Tax exemptions include tariff exemptions for components produced for export instituted by Board of Investment, tariffrefunds for components produced for export allowed under Article 19 of the Customs Law, tariff exemptions for electrical andelectronic components (EEI scheme), tariff reductions and exemptions for automotive parts, and so on.

Malaysia

・Free zones are exempt from import and other tariffs.
・Bonded warehouses (LNW) are granted import tariff exempt status intended for manufacturers that place establishments inlocations other than free zones.
・Raw materials, parts, equipment, and so on that are for export or that were not produced domestically are exempt from importand other such tariffs.
・Export processing zones (EPZ) and stand-alone export processing zones (EPTE) are exempt from import and other suchtariffs.
・There are tariff exemptions on unrefined sugar imported by sugar refiners, tariff exemptions on products imported for
operation of geothermal energy businesses, import tariff reductions and exemptions on major raw materials and secondary
materials for the manufacture of electronic products and parts, and so on.

Indonesia

Philippines

・Special economic zones are exempt from import and other such tariffs. There are 111 special economic zones.
・There are tariff reductions and exemptions for enterprises registered with the Board of Investment.

Vietnam・Export processing zones (EPZ) and export processing enterprises (EPE) are exempt from import tariffs and other such. There
are three export processing zones in operation.

China・Export processing zones (EPZ) are exempt from import tariffs and other such. There are 37 EPZs being operated.
・Free trade zones are exempt from import and other such tariffs. There are 15 FTZs.
・Under the processing trade system, component members are exempt from import tariffs on the condition that they are
reexported.
・Special economic zones (SEZ) are exempt from import and other such tariffs and other such. There are 14 SEZs in operation.
・It is possible to import goods in bond in export-oriented units (EOU). There are 1,924 companies with EOUs in operation.
・There are import tariff reduction and exemption systems of various kinds, including advance authorization schemes (AAS)
that provide tariff exemption to manufacturers that import intermediate goods and parts to manufacture specific export
products, process them, and export them), duty-free import authorization schemes (DFIA) that provide import tariff exemption
for intermediate goods and parts used in manufacturing specific export products, for traders acting as agents for manufacturers
engaging in import and export, duty-free replenishment certificate (DFRC) schemes for intermediate goods, duty entitlement
pass book (DEPB) schemes, export promotion capital goods (EPCG) schemes.

India

Source: JETRO, "Higashi Asia ni okeru FTA oyobi kanzei genmen seido no genjo to kadai" (Status and issues of FTAs and tariff reduction andexemption systems in East Asia), compiled from JETRO-FILEs.

158

Table II-17 Ratio of imported cost which is not subject to tariff to the total
imported cost and ratio of exports to total sales of Japanese affiliated companies in
ASEAN and India（measure: ％）Percentage of raw materials and parts procured through tarifffree importation
0〜 10％
10％〜50％50％〜100％
100%

Percentage of sales from exports
0〜 10％

10％〜50％ 50％〜100％

100%

Thailand
47.6
11.6
31.2
9.5
27.6
30.7
32.2
9.5
Malaysia
15.3
11.5
32.1
41.2
12.8
27.1
40.6
19.5
Indonesia
46.6
17.3
18.8
17.3
32.6
23.2
30.4
13.8
Philippines
19.5
6.7
22.1
51.7
14.1
9.0
35.9
41.0
Vietnam
23.1
13.8
20.0
43.1
25.0
7.4
14.7
52.9
India
71.0
16.1
6.5
6.5
61.8
20.6
14.7
2.9
Notes1: Number of Percentage of raw materials and parts procured through tariff-free importation: Thailand=189、Malaysia=131、Indonesia=133、Philippines=149、Vietnam=65、India=31。
Notes2: Number of Sales by value from exports :Thailand=199、Malaysia=133、Indonesia=138、Philippines=156、Vietnam=68、India=34
Notes3: Conducted from 27 November 2006 to 27 December 2007.
Source : "Survey of Japanese Manufacturers in Asia"(JETRO)

Table II-18 Top five by value of trade among the 82 Thailand-India Early
Harvest categories(US$ million, %)Category
Exports

Imports

2003

2004

2005

2006

Annual average
growth rate, 20042006
70.5

Color TVs

0

43

96

125

Polycarbonates

11

17

112

52

77.6

CRTs for TVs

0

5

21

32

160.1

Air conditioners

9

8

16

28

90.4

Epoxy resins

3

5

11

16

80.1

EH total

66

146

338

368

58.7

Total exports

639

905

1,519

1,815

41.6

Gear boxes

0

4

30

40

206.1

Ferrous and non-metal products

30

36

6

12

-41.7

Cocks, valves, etc.

1

2

4

6

84.3

Anodized aluminum

2

4

6

6

16.0
151.8

Other polyester

0

1

2

6

EH total

73

70

88

101

20.0

Total exports

877

1,138

1,275

1,625

19.5

-239

-233

244

190

-

Balance of trade
Note: EH stands for Early Harvest.
Source: Thai trade statistics.

Fig. II-6

Imports of Australian automobiles

US$ million

%

1,400

40.0
1,157

1,200

35.0
1,070
30.0

1,000

25.0
800
648
600

20.0

488

457

400
400

305
246

200

82
5

15.0
10.0

273
200

60

32

44

63

93

1999

2000

2001

2002

2003

89

2004

5.0

0

0.0
1998

Value of commercial vehicle imports
Ratio to total world commercial vehicle imports

2005

2006

Value of passenger car imports
Ratio to total world passenger car imports

Note: Passenger cars are HS code 8703; commercial vehicles HS code is 8704.
Source: Australian trade statistics.

159

Table II-19

The number of Hong Kong Service Supplier (HKSS) certification

Business Area
Number of IssuanceTransportation/Distribution
1,023
Whole Sales/Retail Sales
337
Advertisement
79
Architecture
73
Employment Placement
36
Management Consulting
32
Total
1,739
Notes: A cumulative total as of March 2007
Source: Hong Kong Trade and Industry Department

Table II-20

Rules of origin in major FTAs in the Asia-Pacific region
FTA

Value addedcriteria

Change in tariffclassification
criteria

ASEAN Free Trade Agreement(AFTA)

Rules of origin
40% or more of cumulative added value.
For iron and steel products and some other categories, the change in tariff classification criteria is applied.

China-ASEAN

40% or more of cumulative added value.

Singapore-New Zealand

40% or more of cumulative added value.

Singapore-Australia

50% or more of cumulative added value. (For some categories, 30% or more.)

Australia-New Zealand

50% or more of cumulative added value.

Japan-Singapore

Change in tariff classification criteria (at 4-digit HS level)
But for 264 categories, the choice of a change in tariff classification or 60% or more of cumulative added
value applies (to be reduced to 40% in the future).

Thailand-Australia

Change in tariff classification criteria (at 4-digit or 6-digit HS level)
But for some categories, a cumulative added value criteria also applies.

Thailand-New Zealand

Change in tariff classification criterion (at 4-digit or 6-digit HS level)
But for some categories, a cumulative added value criteria also applies.

Singapore-ROK

Change in tariff classification criteria (at 4-digit or 6-digit HS level)
But for some categories, a cumulative added value criteria also applies.

Choice of criteria Japan-Malaysia

Either the 40% or more of cumulative added value criteria or the change in tariff classification (at 4-digit
or 6-digit HS level) criteria.

ASEAN-ROK

Either the 40% or more of cumulative added value criteria or the change in tariff classification (at 4-digit
HS level) criteria.

Thailand-India (only the 82 Early
Harvest items)

Both the 40% or more of cumulative added value criteria and the change in tariff classification (at 6-digit
HS level) criteria must be met. But for some items only the change in tariff classification (at 4-digit or 6digit HS level) or only the added value criteria applies.

Singapore-India

Both the 40% or more of cumulative added value criteria and the change in tariff classification (at 4-digit
or 6-digit HS level) criteria must be met. For a fairly large number of items, however, only the change intariff classification criteria is applied.

China-Hong Kong

The manufacturing process criteria applies in a majority of cases, but the change in tariff classification (at4-digit HS level) and 30% or more added value criteria are applied to some categories.

China-Macao

The manufacturing process criteria applies in a majority of cases, but the change in tariff classification (at4-digit HS level) and 30% or more added value criteria are applied to some categories.

Dual criteria

Manufacturing
process criteria

Note: The above rules of origin are those provided in the FTA to apply to a majority of categories; there are exceptions, depending on category.
Source: FTA agreements

160

Fig II-7

Re-Invoicea and Back to Back in the case of AFTA

<case of Re-Invoice>

Malaysia
Certificate of Origin(FormD)

Singapore

Indonesia
Re-Invoice<case of Back to Back>

Malaysia
Invoice
Certificate of origin(Form D)

Re-Invoice
Back to Back Certificate of Origin(Back to Back Form D)

Singapore

Indonesia

Source: JETRO

161

4. Building Asia-Pacific Economic Partnerships■Key Terms for Economic Partnerships in the Asia-Pacific Region are "Wide-Area" and"Comprehensive"
ASEAN+6 (ASEAN, Japan, China, the Republic of Korea, India, Australia, and New Zealand) is
an economic partnership in the Asia-Pacific region that has yielded great benefits for Japan. As seenin the preceding section, GTAP (see the Commentary on pages 56 and 57) shows that ASEAN+6’s
elimination of tariffs and partial removal of non-tariff measures (NTMs) resulted in a 1.3% rise in
the GDP of the signatory countries overall. The free trade agreements (FTAs) that have gone into
effect between Thailand and India and Thailand and Australia have also been actively utilized by
Japanese enterprises, so that FTAs including India and Australia are understood as generating
significant advantages for Japan. No doubt greater effects are still to be achieved from the economies
of scale and improvements in productivity brought about by incorporating the enormous consumer
market in India and the advanced countries of Australia and New Zealand into the Asia-Pacificeconomic sphere.
It is especially important for Japanese enterprises developing their businesses in ASEAN andother developing countries that there be liberalization in the services that accompany the
manufacturing industry, such as the transportation industry and the retail and wholesale industry,
improved predictability for the investment, that equitable competitive conditions be established for
local industries and foreign enterprises from other countries, and that conditions for participation inelectric power and other such large-scale public projects be improved. The benefits would be great.
The fact is, however, that the commitment by developing countries made in the WTO Service
Agreement is limited, and that the developing countries have not joined the voluntary government
procurement agreement. In other words, there are limits to the liberalization of these sectors by thedeveloping countries under the rules of multilateral trade as they stand at present. As explained
earlier, however, the North American Free Trade Agreement (NAFTA) has provided opportunities
for Mexico to take steps to liberalize its service, investment, and government procurement sectors,
which had been closed until then. Mexico's subsequent growth as a production base for automobiles
going to the U.S. and the increasing health of its financial system are as previously described. It may
not be appropriate to apply the NAFTA model directly to the Asia-Pacific region just as it is. In thisregion with its many developing countries, however, a "WTO Plus" economic partnership that
supplements those sectors not addressed by WTO commitments could bring great benefits for Japan.
■Promote Still Further Utilization by Integrating Rules of Origin
Integration of rules of origin appears likely to bring about greater utilization of FTAs byenterprises. The rules of origin, including the selection type allowing the choice of either value
added or change in tariff classification criteria, should be simplified and integrated in the form of162systems that recognize cumulative origin and intermediary trade. It will be necessary, moreover, tostudy the introduction of a system of self-certification for products from enterprises that haveestablished records of adequately satisfying origin ratio requirements and for parts that are requiredfor products from enterprises that carry out local production, as well as to simplify procedures forcertification of origin that would enable enterprises to carry out export procedures more quickly.
■Reducing Service Link Costs by Means of Japan's Economic Partnership Agreements (EPAs)
The liberalization of trade in goods by eliminating tariffs is one key element of the FTA. A look at
the Asia-Pacific region will show that developing countries have relatively high tariff levels, andeliminating these tariffs would have definite advantages. The WTO has announced the average tariff
rates applied in 2006 by advanced countries such as Hong Kong, Singapore, Japan, Australia, and
New Zealand, had reached the low level of 0–5%. The rates in China and Thailand, however, were atthe 10% level, and the rates in Vietnam were staying at or above the 15% level.
The elimination of tariffs alone, however, will not constitute removal of all barriers to trade.
Troublesome customs clearance procedures, high transportation costs caused by inefficient
infrastructure, severe regulation of services and investment systems, and many other such non-tariff
obstacles exist in all those countries. Today, in fact, when a certain degree of tariff reduction has
been realized through past GATT/WTO rounds, the removal of service link costs such as NTMs
could be considered even more important than before. The removal in this way of barriers that havebeen hidden behind tariffs is likely to be of great benefit to Japanese enterprises doing business in
the Asia-Pacific region.
The use of more time than should be required to clear import and export products through customs
is a problem to be found in many developing countries. A World Bank report found that the importprocedures in East Asia and Pacific countries (documentary procedures prior to arrival in port,
overland transport to a warehouse after clearing customs) required an average of 28 days, which is
two times longer than the average of 14 days in OECD member countries.
According to JETRO's “Heisei 18-nendo keizai renkei business kankyo seibi program ‘ASEAN
butsuryu enkatsuka shien’ ni kansuru chosa houkokusho (ASEAN butsuryu chosa)” (Report on
Study of Support for Facilitation of Physical Distribution in ASEAN, an Economic Partnership
Business Environment Improvement Program for Fiscal Year 2006 (Study of Physical Distribution in
ASEAN)), the time required for import clearance in the ASEAN countries ranges from two to fivedays for the most part, excluding Singapore, where customs clearance can be completed within one
day. According to Japanese enterprises in Indonesia, however, customs clearance ordinarily requires
three days, but when clearance involves inspection, this time may extend to nearly two weeks.
Container charges are incurred during the time products are held up at the port, in addition to whichplant inventory increases. This can constitute a significant cost (Table II-21).

163

Improvement of the physical infrastructure of roads and ports also shortens the time for products
to reach enterprises and consumers, and leads to lower transportation costs. The status of
infrastructure within ASEAN varies greatly from country to country. According to a study of
ASEAN distribution, improvement of the principal roads in Singapore and Thailand is advanced.
The principal distribution routes linking Thailand with peripheral countries such as Malaysia andCambodia have been designated part of the United Nations' Asia Highway, and all their sections
have been paved. In contrast to this is Indonesia, where the condition of the roads has been identified
as a factor in the decline of the country's industrial competitiveness. The Northern Java Arterial
Highway that links Tanjungpriok Harbor in Jakarta with the suburban industrial parks has inadequate
traffic capacity and is poorly maintained. This has caused chronic traffic congestion.
The GTAP results revealed that removal of NTMs would be important in enhancing the economic
effects of an FTA. The EPAs being promoted by Japan can contribute to improvement ofenvironments for services and investment in the counterpart country by comprehensive
implementation of measures including customs procedures, standards and certification, businessenvironment improvement committees, and bilateral cooperation. In the area of customs procedures,the introduction of information and telecommunications technology and simplification of theprocedures to bring them in line with international standards would work toward greater speed inclearing imports. In the area of standards and certification, thoroughgoing measures to comply with
the Agreement on Technical Barriers to Trade (TBT) and cooperation on joint research would help toprevent the counterpart country's technical standards from becoming a barrier to trade. Improvementof various problems experienced in business would be addressed by organizing businessenvironment improvement committees with joint private and public sector participation. The
Japan-Mexico EPA, for example, provided for a business environment improvement committee that
identified issues with entry and exit procedures for people going from Japan to Mexico, public safety
problems, and other issues. The Mexico side is working to resolve these problems (Table II-22).
Bilateral cooperation is of particular importance in EPAs with developing countries. Japan can makeuse of its accumulated knowhow from past ODA programs to address the counterpart country's
requests through trade and investment promotion, human resource development, information
telecommunications technology, and other such infrastructure projects. Bilateral cooperation leads toimprovement of trade and investment infrastructure in the counterpart country, and in the long term
should provide advantages to Japanese enterprises.
It is important to create mechanisms to address these issues and achieve an overall reduction inservice link costs through economic partnerships in the Asia-Pacific region.

164

Table II-21. Time required for import clearance in ASEAN countries
Country

Time required for import clearance
Number of days required varies greatly according to amount of work in customs. About 1/2 toVietnam
2 days.
Thailand About 1-3 days
Singapore Within 1 day
Philippines Four days for ordinary cargo; 2-3 days for PEZA members.
Two days for document examination, about 1 day for cargo examination. At least 3 days from
Myanmardeclaration to import permission.
Malaysia About 1-2 days.
Single window arrangement with Vietnam makes 20-minute clearance possible. SimilarLaosscheme planned with Thailand.
Indonesia About 3-5 days for ordinary cargo; about 1-2 days for in-bond entry to bonded factories.
One week from document examination to customs clearance authorization. In some cases,
Cambodiaseveral weeks are required to obtain authorization.
―
Brunei
Source: JETRO, "Heisei 18 nendo keizai renkei business kankyo seibi program "ASEAN butsuryu enkatsuka sien ni kansuru chosahokokusho" (Report on Study of "Support for Facilitation of Physical Distribution in ASEAN," an Economic Partnership Business
Environment Improvement Program for Fiscal Year 2006.)

Table II-22. Progress of Mexico's business environment improvement under theJapan-Mexico EPA (as of July 2007)
Area

Public Safety

Entry and Exit
ProceduresSpecific problem
・Deteriorating public safety at airports and in districts
where Japanese reside.
・Many thefts and robberies of products, rising cost ofcrime prevention.

Progress/Results・Continuing consultations with Secretariat of Public Safety.
・Rail terminal monitoring implemented.
・Improved public safety at Mexico City International Airport.
・Studies being made of augmentation of security guards on
freight transport routes.

・Procedures for US-Mexico border customs aretroublesome.
・Mistakes by border official resulted in restrictions on
traveler's destinations.
・Factual errors by regional immigration officials haveresulted in unnecessary procedures.

・Service improved by placement of new border stations.
・Written notification that traveler's destinations would not be
restricted.
・"Visa Manual" created in cooperation with immigration
authorities.
・Visa seminars held in regional cities with responsible officers
from the National Institute of Migration as instructors.

・Continuing consultations to be held with the Mexican
・Circulation of counterfeit products has negative
Intellectual Property Institute (IMPI).
impact on sales and brand image.
・IMPI sends warning letters to trademark violating companies
・Exposure of infringing goods requires damaged
enterprises to request administrative judgement and file at request of Japanese corporations.
suit, so they hold back from action because it exposes ・IMPI personnel dispatched to Japan to study customs systems
Intellectualfor enforcing control.
them to risk of revenge by the infringing enterprise.
Property Rights ・Customs does not have authority to seize infringing
・Promises of cooperation with customs on borderenforcement measures.
goods.
・Representatives of Japanese corporations participate as
observers in government committees dealing with intellectual
property.

Standards andCertification

・Domestic testing is required (double effort) andstandards are old and incompatible with international
standards so procedures are troublesome andintroduction of new products takes considerable timeand additional expense.

・Decision has been made to revise technical standards forelectronic equipment, with participation by Japanese
corporations promised.

Infrastructure・High electricity costs and frequent power outages.
・High overland transport costs.
・Expansion of Otay frontier required (Tijuana-San
Diego).

・Consultations to be held with regional governments forinfrastructure improvement in border zones.
・Roads paved in city of Tijuana.

・Customs clearance takes time and imposes costs,
lowering competitiveness.
Tax and Customs ・Method of resolving differences in tariffclassifications is unclear.
Procedures
・Value added tax refund procedures are timeconsuming.

・Contact people in customs and tax administration designated.

Source: Compiled from Tanimura, "Gensanchi kisei kyoutsuukaha ookina kanouseiwo motarasu" (Applying Common Rules of Origina Opens Up Major Possibilities),
JETRO Sensor (July 2007), and European Commission material

165

III. Global Business Models and Concerns for Japanese Companies
1.

Enhancing company capacity to build international business models■ The growing debate over innovation
When Japan decided on its “New Economic Growth Strategy” in June 2006, the government set a
goal of accomplishing real GDP growth of about 2.2% per year on average from FY2004 to FY2015.
In a society with a falling birth rate and aging population, the strategy identified innovation as the
key to new economic growth. The government merged this in June 2007 with other strategies toform its Strategic Framework for Economic Growth, with innovation singled out as particularly
important for making Japan more internationally competitive. The government envisioned making
Japan into the world’s innovation center, from which position it could partner with other Asian
countries to continue developing and offering new, internationally competitive technologies andproducts, creating a positive cycle at the world level.
Nippon Keidanren, meanwhile, has initiated its INNOVATE Japan campaign and says that if
Japan is to continue to be a major player in the world economy, it must work nonstop to hone its
competitive edge with innovation.
The idea that innovation is crucial to international competitiveness is echoed in the U.S. andcountries of Europe and Asia, inspiring a noteworthy trend among individual countries and regions
to step up their own innovation strategies.
Driving these trends is the fact that this is an era of global competition, together with an
acknowledgement that innovation makes a nation competitive and that competitors are multiplying
around the world at a breathtaking rate, and finally the belief in a need each country has to change its
citizens’ awareness so that they may be fairly prepared for these realities.
In the Global Competitiveness Report1, in which the World Economic Forum (WEF, based in
Switzerland) ranks the countries and regions of the world for their level of competitiveness, out of
125 countries and regions around the world, Japan ranked number 1 for innovation during
FY2006-07. Private investment in research and development in Japan, the usefulness of its scientists
and engineers, and its excellent record in acquiring large numbers of general patents were all major
factors pushing Japan’s overall ranking so high (Table III-1).
All around us, innovative new products keep appearing, from hybrid cars and flat-panel
televisions to game machines like the Nintendo Wii built on a concept never before imagined.
■ Toward a profitable international business model
According to the “Survey on Japanese Firms’ International Competitiveness and Business
Development” conducted by JETRO and given to 1,605 Japanese manufacturing companies between
March and May 2007 (response rate, 29.1%), when asked about the innovativeness of Japanese166

companies on an international scale, 22% of respondents, or 104 companies, said that their own
businesses were “capable of creating innovative technologies and profitable international businessmodels using them” (Fig. III-1). This reflects the opinions of those in supporting industries for metal
products as well as those in the electrical machinery and automobile industries.
On the other hand, 62% of companies (289 companies) answered that they were “technologicallyinnovative but not good at creating profitable international business models.” A further 8% (38companies) said that they were “not technologically innovative and not good at creating profitableinternational business models.” Combining the number of respondents giving the latter two answers,
70% of companies felt that they were insufficiently able to create international business models.
In probing the reasons for these results, we examined this issue from three points of view: 1) thequestion of whether currently used business models are consistent with international trends, 2) the
effectiveness of the strategic use of outsourcing, and 3) issues of overseas marketing.
First, the previously mentioned questionnaire asked the participants about changes in the overseas
business environment facing the responding company compared to five years before (2001), towhich 65% of respondents said that the environment had “improved” (Fig. III-2). Reasons given for
claiming improvement included “our overseas market share has expanded” (46.5%), “our profit
margin from overseas has expanded” (40.3%) and “our brand is stronger” (28.4%) (Fig. III-3).
Industries for which the overseas business environment was improving included “generalmachinery,” “automobiles and parts/other transportation equipment,” “fiber and textile
products/apparel,” “chemicals,” “ferrous and nonferrous metals/metal products,” and so on (Table
III-2).
On the other side, only 14% of companies answered that the business environment had“worsened,” but the percentage was high in such industry sectors as “communication equipment,
electronic components and devices” (43.3%). The reasons given for a worsening environment by thisindustry included “sales prices have fallen because of product and component standardization, etc.”(69.2%) and “companies in other countries are catching up technologically” (53.8%) (Fig. III-3).
The trend toward standardization (modularization) of products and components in the electronics
industry was already apparent in the 1990s, but as digitalization has advanced in recent years, it has
become easier for new businesses seeking to get into this industry with an assembly (modularization)business model, as long as a supply of funding and semiconductors is available (refer to Column
III-1). Companies in the U.S., South Korea, Taiwan, China and so on created this trend, and year by
year they have increased their share of the international market for digital products.
Also in recent years, the product cycle of digital goods has grown shorter and shorter, with theresult that capital investment costs are a huge burden for companies. As a result, a trend has emergedin which vertically integrated finished product manufacturers are ensuring a certain amount ofrevenue by selling intermediate goods (such as semiconductors and electronic devices) to competing167

companies, thus recovering a portion of their capital investment. The result of this is a dilemma for
manufacturers: a trend toward price erosion of the final product and the commoditization of goods
because of the competition.
■ Strategic use of outsourcing
Many Japanese companies in general, such as those in the electronics and drug industries, havedeveloped and produced goods on the principle of vertically integrated self-sufficiency. This
principle has its merits: namely, it raises the motivation of engineers who want to build fine products
in-house, brings out the overall strength of the company by fusing company technologies (that is, thetechnologies of different departments), and maintains employment. On the other hand, however,companies must consider strategic outsourcing in those areas where they aren’t as strong, in order tomake themselves more cost competitive. So-called fabless companies, which do not have their own
factories (such as Qualcomm and Broadcom) have rapidly grown in the U.S. to become world
leaders in terms of semiconductor sales. These companies specialize in product development andmarketing, but leave production to Taiwanese foundries (manufacturing contractors). Under thisarrangement, each business recognizes its own strengths; this is a horizontal and non-integrated
business model.
In the previously mentioned JETRO questionnaire, 47% of Japan’s manufacturing companies said
that “offshore outsourcing is effective” for maintaining and expanding global competitiveness(including those who modified this remark by saying that this posed some problems). The result
indicates that there is a high level of awareness that outsourcing is effective (Fig. III-4).
On the other hand, 29% of companies answered that outsourcing “is not very effective.” By
industry sector, 43% of the “communication equipment, electronic components and devices”
industry answered that “offshore outsourcing is not effective.” Asked to explain why, therespondents who answered this way said that offshore outsourcing causes a “risk of leak oftechnology” (69.2%), entails “problems with quality and delivery” (61.5%) or “leads to a decline ofadded value” (30.8%) (Fig. III-5). It would therefore appear that if outsourcing is to be adopted, it
will be necessary to take approaches and steps different from those of companies in the U.S. and theemerging countries of Asia (this is addressed later).
■ Active promotion of product value overseas and hiring of local talent

Next, looking at overseas marketing, the active promotion of product value overseas
is necessary to get overseas companies and consumers, who have different businessmodels and cultures, to understand the value of one’s own products. Asked on thequestionnaire about their plans for overseas marketing in the future, 63.6% ofcompanies gave the most common answer that they would “promote the value of their168

products overseas,” following which 44.1% of companies said that they intend to“actively hire local talent to develop markets” (Fig. III-6).
In terms of R&D, it will be necessary to investigate whether product development is taking placethat is consistent with the needs of world markets. Because Japan is the world’s second largest
economy, companies can expect to earn fairly sizable revenue, just from Japan, as long as they
develop products focusing on this market.
If the goal is to reach world markets, however, products have to be created with the world in mind
from the very start of development, and efficient R&D investment should be leveraged to generatemuch of a business’s profit.
The automobile and parts industry, which largely answered on the questionnaire that the overseas
business environment had improved compared to five years before, may fairly be described as anindustry that has properly read the needs of the time and thus successfully increased its share of theinternational market and its profitability. Now that international concern has grown about theenvironment, including global warming and the high price of gasoline, Japanese manufacturers havegained an increasing amount of trust as they have developed hybrids and highly fuel-efficient autos.

1

The Global Competitiveness Report consists of general statistical data along with results of studies that

the World Economic Forum conducted jointly with research institutes and companies. It uses results ofquestionnaires given to 11,000 businesspeople in 125 countries and regions of the world.

Column III-1
 The Product Architecture Theory: integral type or modular type?
The Product Architecture Theory systematizes the source of a company’s competitiveness, statingthat when people are designing a new product or process in a factory or laboratory, there are two
approaches, which can be classified as integral type and modular type. Professor Takahiro Fujimotoof the University of Tokyo has developed this theory in Japan.
An integral type product seeks to enhance total performance by making fine adjustments among
components. The typical example is the automobile: to make an automobile more comfortable toride, for example, one must adjust not only the seats but also make mutual adjustments between theseat and the springs, tires, body and so on.
A modular type product is created in a production system where pre-designed components arebrought together into a finished product. Personal computers, DVD players and so on are typicalexamples; standardized interfaces among components make them easy to assemble. In a DVD player,
for example, LSI devices play the interface role, while the various structural components areconnected by the LSI devices and are independent of other components. Because of this, such169

products are typically easy to outsource.
Under this theory, additionally, product architectures may be classified under the two concepts ofopen and closed. An open architecture is one in which the product’s structural components andinterfaces have been standardized beyond any one company’s specifications, while a closedarchitecture is any other. In short, an open architecture is accessible to those outside the company,
while a closed architecture is closed to all but one company.
In the JETRO survey, many respondents in the fields of “drugs, medicines and cosmetics,”“plastics,” “chemicals” and so on reported the prevalence of an integral type architecture in theirindustries, while many in the fields of “communication equipment, electric components anddevices,” “rubber products” and so on reported the dominance of a modular type architecture.

Column III-1: How enterprises describe their own product architecture

Drugs, medicines, cosmetics
Plastic products
Chemicals
Metal products
General machinery
Fiber and textile products
Automobiles and parts
Foodstuffs and beverages

Integral type

Ferrous metals
Modular type

Ceramic, stone and clay products

Elements of
bothElectronic components and devices
Precision machinery
Electrical equipment
ApparelRubber products
Information and communicationequipment
Other transportation equipment
0%

20% 40% 60% 80% 100%

Notes: 1. 467 companies responding (of which, 15 did not respond to this question).
2.The survey asked each company to select whether their own industry sector is “integral type” or“modular type” or “has elements of both.”
Source: Survey on Japanese Firms' International Competitiveness and Business Development, May 2007 ,
JETRO

170

Table III-1 Japan's Global Innovation Index rankings
Factors

Rank

Overall

1st

2nd: Switzerland, 3rd: Germany

Company spending on research anddevelopment

2nd

1st: Switzerland, 3rd: U.S.A

Availability of scientists and engineers

2nd

1st: Israel, 3rd: Finland

Utility patents

2nd

1st: U.S.A, 3rd: Taiwan

Capacity for innovation

2nd

1st: Germany, 3rd: Switzerland

Quality of scientific research institutions

5th

1st: Switzerland, 2nd: U.S.A

5th

1st: Singapore, 2nd: Malaysia

9th

1st: Switzerland, 2nd: Sweden

12th

1st: Germany, 2nd: Finland

Government procurement of technology
products
University/industry researchcollaboration
Protection of Intellectual property

Other upper countries/economies

Source: The Global Competitiveness Report 2006-2007, World Economic Forum

Fig. III-1

Innovative capacity of Japanese corporations(single answer, N= 467)

Not
technologicallyinnovative but
excels at creatinginternational
business models.
5%

Not
technologicallyinnovative but
excels at creatinginternational
business models.
8%

Other
1%

No answer2%
Capable ofcreating
innovativetechnologies orinternational
business models.
22%

Technologicallyinnovative but notgood at creatinginternational
business models.
62%

Source: Survey on Japanese Firms' International Competitiveness and Business
Development, May 2007 , JETRO

171

Fig. III-2 Changes in the overseas business environment, compared with five
years ago (N= 467)

unchanged
19%

no answer2%

Worsened
14%
Improved
65%

Source: Survey on Japanese Firms' International Competitiveness and Business
Development, May 2007 , JETRO

Fig. III-3 Reasons why the overseas business environment has improved orworsened<Reason for improvement>
Our overseas market share has expanded.

46.5

Our profit margin from overseas has expanded.

40.3

Our brand is stronger.

28.4

Prices have risen because of higher functionality
and added value.
Product/component standardization has reduced
costs, causing demand to increase.
Japanese companies are technologically stronger
than before.

14.5
13.2
4.3

Note: 303
companies
responding.

8.9

Other
0

5

10 15 20 25 30 35 40 45 50（％）

Source: Survey on Japanese Firms' International Competitiveness and Business
Development, May 2007 , JETRO

172

<Reason for worsening>
Selling prices declining due to standardization of products
and components

48.5

Firms in other countries catching up on the technology

47.0

Profit margin overseas is declining

23.1

Price erosion of products as a whole arising from supply ofcore components

15.4

Shrinking market share overseas

13.6
15.4

Declining demand for high performance, high value added
products

25.8

N = 66 (of which 13 arecommunications
equipment, electronic
components and devices
companies)

7.6
12.1
15.4

Other
0

10

20

53.8

31.8

10.6

Brand power has weakened

69.2

30

Communications equipment, electronic components and devices

40

50

60

All companies

70

80

(%)

Source: Survey on Japanese Firms' International Competitiveness and Business
Development, May 2007 , JETRO
Table III-2 Changes in the overseas business environment, compared with five
years ago (by industry, N= 467)
Industries reporting no
Industries reportingchangeworsening
Communications
Lumber, wood products,
equipment, electronic furniture, construction
components and devices materials, paper, pulp
(43.3%)(50.0%)

Rank

Industries reporting
improvement

1

General machinery(80.4%)

2

Automobiles, parts,
other transport
equipment (71.1%)

Textiles and textile
products, apparel(21.1%)

Ceramic, stone and clay
products(33.3%)

3

Textiles and textile
products, apparel(68.4%)

Precision parts(20.7%)

Drugs, medicines,
cosmetics(31.3%)

4

Chemicals(68.3%)

Electrical equipment(14.3%)Petroleum and coalproducts, plastic andrubber products(27.6%)

5

Ferrous and nonferrous
metals, metal products(66.7%)Petroleum and coalproducts, plastic andrubber products(13.8%)

Electrical equipment(23.8%)

Note: The percentages in parentheses are the proportion of replies by companies in each industry.
Please refer to Fig.Ⅲ-2 for number of respondents.
Source: Survey on Japanese Firms' International Competitiveness and Business Development, May 2007 , JETRO

173

Fig. III-4

Effectiveness of overseas outsourcing (SA, N= 467)

Don't know
9%

No answer2%

Quite effective
9%

No connection
betweeninternational
competitivenessand outsourcing
13%
Effective, though
are some problems
38%

Not very effective
29%

Source: Survey on Japanese Firms' International Competitiveness and Business Development, May
2007 , JETRO

Fig. III-5

Reasons for not outsourcing overseas
65.2

Risk of outflow of technology

69.2

Problems with quality and delivery
schedule

53.3

61.5

29.6

Hard to find a good partner

23.1

Low value added

19.3

Difficult to separate off operations
for outsourcing

18.5
15.4
14.1

Communication is difficult

z

7.7
10.4

CostlyRisk of outflow of managerial
expertise

30.8

N = 135 (including 13
communications equipment
or electronic components
or devices companies)

15.4

6.7
7.7
5.9

Other
0

10

20

30

40

50

60

70

80

(%)
Communications equipment, electronic components and devices

All industries

Source: Survey on Japanese Firms' International Competitiveness and Business Development, May 2007 ,
JETRO

174

Fig. III-6

Future strategies for expanding overseas marlket share(MA, N=467)

PR activities overseas to communicate value of
our company's products

63.6
44.1
31.7

Product develop for niche markets
25.5
19.1

Joint marketing via an international alliance
2.8
No response

2.6

0

10

20

30

40

50

60

70
(%)

Source: Survey on Japanese Firms' International Competitiveness and Business Development, May 2007 ,
JETRO

175

2. The global competitiveness of Japanese industry(1) Digital home electronics■ Emergence of businesses in emerging countries
The digital home electronics market is expected to continue growing in 2007, spurred byflat-panel televisions such as liquid crystal and plasma display panel (PDP) televisions. According to“Nikkei Market Access,” in its forecast of growth rates of annual world production of electronic
devices in 2007, liquid crystal televisions will grow by 46.5% and PDP televisions by 29.5%, suchthat flat-panel televisions will enjoy the strongest growth of all digital home electronics. The Japan
Electronics and Information Technology Industries Association (JEITA), moreover, forecasts thatworld demand for flat-panel televisions will grow by an average rate of 22.5% between 2006 and2011, while DVD recorders will grow by 16.7% on average.
Japanese brands have a comparatively high share of world markets for digital home electronics.
By manufacturer, in 2006, the largest share of the world market for liquid crystal televisions(production volume basis) was held by Samsung, with 15%, followed by Philips, Sharp and Sony,each with 13% (Fig. III-7). Matsushita Electric Industrial was the leader for DVD recorders in 2006,
with a share estimated at 18.5%, followed by Sony with 12.7%, South Korea’s LG Electronics with
11.7%, and Funai Electric with 10.3%.
Looking at the market as a whole, however, manufacturers from emerging countries, although not
well recognized as brands, have gained increasing market presence in recent years. According to
Nikkei Market Access’s overview of annual production volume share by manufacturer in 2002, the“Other” category, which included everyone other than the major brands, accounted for merely 5.1%of the total, but in the second quarter of 2006, these manufacturers’ share had grown to 30%. This
primarily reflects the market entry by manufacturers from emerging countries and regions such as
Taiwan and China. Most of these manufacturers have entered the market as modular typemanufacturers, who procure components such as semiconductors and panels externally and thenassemble them. There are also many manufacturers who have entered the market that do not evenhave their own factories; the U.S. home electronics manufacturer Vizio is an example of this type ofcompletely OEM-based producer.
■ Digital home electronics market characteristics
It is said that the field of digital home electronics offers low profitability for finished products andmakes it difficult for any one product to distinguish itself from others.
The low profitability of finished products is primarily because prices tend to drop precipitously.
Although most analog product prices drop after a one year cycle, the prices of digital homeelectronics drop after a cycle of just half a year or even three months.

Figure III-8, for example,

illustrates price trends for liquid crystal television panels (inter-business transactions), indicating that176

prices have dropped year by year.
The number one reason for price declines is that digital home electronics tend to becomecommoditized. Because of worldwide oversupply and the advancement of information networks,
technologies and components become standardized more quickly than in the past. Digital homeelectronics can be simply manufactured by procuring the parts externally and assembling them tocreate a product with a certain level of performance. Therefore, once intermediate products andmodular components make it to the market, even companies that do not have the fundamental
technology can enter the market. Any company can develop a new product simply by modifying theassembly of modules, so it is easier for manufacturers from emerging countries, since they canassemble modules at low-cost, to get into the market.
Second, companies such as general home electronics manufacturers who handle digital homeelectronics find it difficult to influence market prices. The sales structure of the market is such thatcompanies do not have affiliated dealers, but rather the volume stores and other retailers determine
the sales price. Once retailers start competing with each other to set the lowest price, it becomes very
difficult to bring the price back up. This is particularly true of the U.S. market, where volumeretailers have so much influence and the price competition is so severe. For that reason, maintaining
brand influence and developing a relationship of trust with local retailers both affect pricing
strategies.
Because so many of their functions tend to be concentrated in the semiconductors, which are theircore technology, it is difficult for digital home appliances to make themselves distinctly different
from each other. Even if the producer goes to great expense to add many functions, the basic
functions are evolving day by day, making it all the more difficult for customers to recognize value.
As the digital home electronics technologies and markets mature, the more the market will be subject
to price and brand influence competition.
■ Responding to modular type products
Most Japanese manufacturers, who specialize in products with high function and high added value,find that competing with modular type products is one of their biggest challenges. In the early 2000s,
when the market for liquid crystal televisions started to expand, the Japanese manufacturers who
were driving this field owned more than half of the market share (Sharp had 60% of the world
market share in 2002, Matsushita 8%, Sony 5% and so on), but as products became morecommoditized, non-Japanese manufacturers gained market share. Worldwide demand has been
increasing, so it is not as if Japan’s leading manufacturers have seen their world sales or profit
margins deteriorate, but their shares of the world market have certainly declined.
In response to these circumstances, many Japanese manufacturers have tried first of all to keepcompanies from other countries from catching up by creating a technology lead time. Although177commoditized goods have low profit margins but sell in high volume and thus are very economic,
high-performance, high-added-value products need only sell in small volumes for the manufacturer
to maintain profitability, until such time as the competition catches up technologically.
Second, manufacturers such as Sharp and Matsushita use the technique of simultaneous
worldwide product launches. This is a marketing technique that causes sales to be higher than usual,
directly after the launch, when product value is highest, by selling the product at essentially the sametime around the world. To do this, companies are finding ways to reduce the time spent intransportation. In the past, manufacturers who produce liquid crystal panels in-house would have
manufactured their products up to the point of the liquid crystal modules, then would use
inexpensive marine transportation and the final product would be assembled at overseas factories.
Marine transportation, however, could take weeks or even more than a month to ship a product to its
overseas destination, leaving the product open to the risk of price declines in the meantime. For thatreason, liquid crystal panels are now produced up to the point of forming the glass component
consisting of thin transistors, then are shipped in a state more compact than modules, enabling themto travel by air and shortening transportation time.
Third, manufacturers are increasingly compensating for the price drops of flat-panel televisions bycreating entire lineups of peripheral equipment (such as DVD recorders, PCs and digital cameras),thus helping to keep up purchase prices. Although this offers little profitability for individual
products, it can increase sales as consumers buy bundles of products. It also gives customers
motivation for repeat purchases of that company’s products the next time they make a purchase.
■ A business model with a double-sided strategy
The previously described strategies are characteristic of high-end markets, and they are primarily
used in developed countries such as Japan, the U.S., and Europe, but in view of future growth
expectations, a strategy for expanding markets in such places as emerging countries is essential.
Because digital home electronics are generally not widely diffused in new markets such as the
BRICs (Brazil, Russia, India and China), companies have an opportunity to expand their share as
markets switch from analog to digital products. However, if the technology from non-Japanesemanufacturers ends up satisfying the demand of consumers in these countries, the verticallyintegrated Japanese manufacturers will need to seriously consider how far to go in the pursuit of highfunctionality and high added value and whether they should be manufacturing under the principle ofself-sufficiency. Put another way, it seems necessary for these companies to take a more active rolein the market for general-use products in order to advance their businesses while assimilating thepositive cycle of growth in emerging countries skillfully into their own growth strategies. However,if the principle of self-sufficiency is used when developing and producing integral typecommoditized goods and this creates obstacles to the proper allocation of management resources,178active outsourcing and alliances with competitors should be considered. When forming alliances,moreover, businesses should be careful to ensure royalty income. If a Japanese company could
ensure things are arranged so that it receives royalty income even as competitors’ sales increase andits own share falls, it can increase revenue and cover the cost of new R&D.
Also, in order to maintain and spread Japanese brands, it is necessary for a company not only tobuild distribution and sales networks for their products but also a system that addresses corporatesocial responsibility (CSR) and after-sales service.
Accordingly, it is important that Japanese companies follow a two-sided strategy, catering to thehigh-end market as in the past by taking full advantage of Japan’s integral type technology andworking to secure lead time, while also serving the market for general-use products by actively
engaging in outsourcing and working within alliances. These companies need to put such a businessmodel into effect and simultaneously work on building their overseas marketing. The “Survey on
Japanese Firms’ International Competitiveness and Business Development, ” conducted by JETRO
between March and May 2007, found that only 4.7% of the 467 companies responding replied that
their “overseas marketing skill” was a source of their international competitiveness (Fig. III-9). In
other words, the more effort companies put into overseas marketing, the more they can expect theirbusinesses to prosper.

Column III-2
 Different price ranges in Japan and the U.S.
A significant gap exists between price ranges of high-tech products in Japan and the U.S. At
volume retailers in the U.S. such as Best Buy or Circuit City, the most common price range of laptop
computers handled, for example, is $1,000 or below (basic models), whereas the price range handled
the most by Japanese stores Yamada Denki and Yodobashi Camera is $1,500 (¥180,000) or more(high function models) (based on local studies of April 2007).
The models of flat-panel televisions handled in Japan and the U.S. are also very different.
Best Buy sells many televisions below $1,500, whereas Yamada Denki makes most of its sales inhigh-end models at $4,000 (¥480,000) or higher, indicating completely opposite trends in the twomarkets.
Although even products at the high end of the price range sell well in the Japanese market, to sellin the American market, products must at the very least be inexpensive and feel like a good buy toconsumers.

179

Column III-2: Selling prices of large−screen TVs in Japan and the U.S.A. (40−49
inch; April, 2007)
U.S.A.

$1,499or less$1,500-1,999$2,0002,699$2,700-3,299$3,300-3,999$4,000 or moreBest Buy

13 models

10 models

９ models

4 models

0 models

0 modelsJapan¥179,999or less¥180,000~
239,999¥240,000~
323,999¥324,000~
395,999¥396,000~
479,999¥480,000or moreYamadaDenki

0 models

0 models

2 models

13 models

4 models

19 modelsNote: The table covers LCD and plasma televisions.
Source: Each company`s website.

(2) Semiconductors
Most of the Japanese semiconductor businesses that started out as divisions of general homeelectronics manufacturers are oriented toward a vertically integrated business model, in which
everything from development to production takes place in-house. In the 1980s, these companies led
the world market in production, particularly in DRAM products. Today, they have a solid reputationin application-specific semiconductors (ASIC) and custom semiconductors. The major applicationsof these semiconductors are in digital home electronics, mobile telephones, automobiles, and so on.
■ Loss of share in world market
Since the Japanese semiconductor industry lost the lead to Intel in 1991, its share of sales ininternational markets has slowly declined, so that by 2006 only two Japanese companies ranked in
the top 10 for sales: Toshiba and Renesas Technology (Table III-3).
Considering that in the middle of the 1980s, six of the top 10 semiconductor manufacturers wereJapanese (NEC, Toshiba, Hitachi, Fujitsu, Matsushita Electric, Mitsubishi Electric), Japan’s presence
has relatively declined in this area.
On the other hand, looking at average operating profit margins for the past five years, although
Japan’s semiconductor manufacturers cannot rival the industry benchmarks Intel (23.6%) andSamsung (29.5%), No. 4 Toshiba has achieved a double-digit operating profit margin.
■ Japan: a latecomer to modularization

180

The first reason that the presence of Japanese semiconductor manufacturers has declined isbecause they have clung to high-function, high-added-value integral type products even as theindustry has moved toward modularization, which allows producers to create inexpensive
general-use products.
Modularization in the semiconductor industry refers to a product architecture incorporating
combination processes (systems) in the various development and production processes. In otherwords, not only are design and software embedding processes combined; technology and know-how
are embedded even within production systems. All the producer needs to do is to purchase such
systems to be able to make products more or less of the desired specifications, even if the producer
does not have any particular integrating technology.
Semiconductor manufacturers in the U.S., South Korea and Taiwan have actively pursued thistrend to modularization. In part because Japanese companies have been oriented toward
high-added-value products, they have been passive towards the modularization trend, and as a result
they have allowed South Korea and Taiwan to gain share and the U.S. to recover its share.
A second reason is related to the modularization trend: the fact that in semiconductor development
and production, processes are being spun off. The great example of this is the sharing of processes
between fabless companies in the Silicon Valley in the U.S. (i.e., semiconductor manufacturers
without factories) and Taiwanese foundries (production contractors). This arrangement allows eachside to specialize in its strengths and to run its business more efficiently. As a result, it is possible toenter the industry without the need for massive capital investment, a characteristic which has
allowed fabless world companies like QUALCOMM and Broadcom to emerge.
Third, since most of Japan’s semiconductor manufacturers have put their main effort into meeting
demand from their parent companies (general home electronics manufacturers), they have not
become industry platform leaders and have not had many products that could affect pricing on theworld market. Many of the top manufacturers in the world have actively pursued standardization,
establishing industry standards for such items as microprocessors (Intel), DRAM (Samsung
Electronics) and DSP (Texas Instruments) and thereby assuring high profitability.
In contrast, many Japanese semiconductor manufacturers have put their energy into system LSI
technology, which is believed to require about as much capital investment and R&D cost as
microprocessors and general DRAM, but which is mostly suitable for small-lot custom products forparticular customers, making it difficult to achieve economies of scale.
Thus it is not the case that Japanese semiconductor manufacturers have lost share on theinternational market because their technology is declining, but rather differences in businessstructure and management policies have had the major impact. It is difficult to directly compare
technical strength against any benchmark (in part because of the strict practice of information control
at each company) and there have been few examples of research in which the international

181

competitiveness of company technologies in the semiconductor industry have been discussed.
However, Japanese semiconductor manufacturers in general apply a high level of elemental
technology and create high-quality products, but they have been late to respond with product lineupsthat meet the needs of emerging markets, where demand is increasing, or in the U.S. market, where
prices have been declining.
■ Generating a profit in the market for general-use products
At Japan’s IDMs (vertically integrated device manufacturers), a business model has been adopted
such that, after the depreciation of highly advanced factories built for custom items and system LSI
technology that required a high degree of integration technology, the same production line could be
used to produce a high volume of general-use products to generate a profit. The reason is because in
the semiconductor industry, the chips are getting smaller and smaller with the passing years, so that
one needs to make very large capital investments (about ¥100 billion) and as such, each company istrying to recover its development investment and expand profits by reusing the assets earned by thedevelopment of leading edge products.
The problem is how the relative weight is placed in such a portfolio; the part of the portfolio forleading edge products is very important in terms of the level of technical development, but if too
much emphasis is placed here, it is difficult to benefit from economies of scale because these aresmall-lot custom products, making this a management structure in which it is difficult to generate aprofit overall.
Ideally, Japanese manufacturers would find a way to sell to the market the products they have
manufactured with their strong internal integration capacity, which others cannot copy, as de facto
standards (as Intel and AMD have done), and they would also be able to incorporate the integral type
technologies they have developed into general-use products to set themselves apart from businesses
that have focused on modular type technology. As a specific example, a business could apply
ASIC-derived technology to ASSP (system LSI technology for non-specific products).
It is additionally important for companies to make the noncompetitive portions of their businesses
more efficient, for example by jointly developing with other companies the embedded software
platforms (embedded operating systems and middleware) for system LSI technology that eachcompany currently develops individually, and by seeking industry standardization.
■ A double-sided strategy: high-end products and general-use products
In the future, semiconductor applications expected to face growing demand include highperformance microcomputers and systems on chip (SoCs) for high-end digital home electronics(organic EL TVs and other next-generation flat-panel TVs, next-generation DVD players andrecorders, single lens reflex digital cameras, etc.) as well as automobiles, industrial equipment,182medical devices and robots. Also anticipated are applications in products with integrated functions
such as recent 1seg mobile telephones.
The growing application of electronics in automobiles in particular in recent years has given a lift
to the microcomputer industry. High precision electronic control units are now required for new
types of engine drive systems, most typically in hybrid cars, so that demand has risen for fast 32-bit
microprocessors and the SoCs internal to them. This market for automobile microcomputers is one
that can make full use of the strengths of Japanese companies. This is because automobile
microcomputers are vital to protecting human safety, so that customers and consumers want to feelthey can depend on these products. This field can truly use the business model of a Japanese IDM,
which takes responsibility for the product all the way from design to production.
Thus Japan’s semiconductor manufacturers need to have a double-sided strategy in which theywork to expand the market for high-end products, which take advantage of the vertically integrated
form of these companies, in balance with developing the market for general-use products, for which
the company, as described previously, can exert some influence over pricing.

Column III-3
 Japan’s metal processing technology: supporting world innovation
Thanks to its imaginatively designed products and international business model, the U.S. company
Apple has earned a solid reputation as an extremely innovative company. As its rival Microsoft
became a major player, however, Apple reached a crisis point in the mid-1990s. It based its
comeback strategy on a dedication to product design and was reborn as an innovative company
offering new digital lifestyles to consumers.
Apple’s business model was that of a fabless company, not having a factory of its own, and so it
found itself needing to find a partner that could bring Apple’s vision to life. Since the typical user
cannot distinguish the different brands of components that go into a computer, the external
appearance became all-important. At the time, laptop computers were thick and difficult to carry.
Apple decided to base its design on the thickness of one inch initially and then centered its
development around finding a way to assemble components to achieve that goal. Still, internal
components such as motherboards and batteries as well as the liquid crystal monitor were limited in
how thin they could be made, so ultimately the issue became how to make the external components
thinner while protecting the design characteristics. Apple’s achievement of this goal seemed out ofreach, however, after it searched the world for a metal processor with the capacity to bring out such adesign but was unable to find one.
While one of Apple’s designers working with this project was making an occasional visit toEurope, he found a camera by Leica and discovered that the case was made with titanium. Realizingthat if titanium could be used in a camera, it could also be used in a computer, he began a search for183the company that produced the camera case. He ultimately tracked down a company in Tsubame City,
Niigata Prefecture, better known for its western tableware. Since then, the company has regularly
undertaken R&D and manufacturing of exterior components for new Apple products including theiPod and iPhone.
The president of the company in Tsubame describes his business’s strength as the ability tointegrate base technology with customer specifications, along with the company’s persistence inproduct development.
The T company manufactures these external components under contract from Apple.
While it is willing to manufacture the entire run on its own during the period of new productdevelopment, once the market grows to a certain size, it finds it prudent to outsource its production
to competitors in China or elsewhere. This is because as the scale of the company grows to meetdemand, the capital investment is burdensome and the risk increases, and in addition it does not wish
to bear responsibility alone for supplying a world company like Apple. In other words, its objective
is not merely to survive on low margins and high volume, but rather to make itself more competitiveby using its technical development as its strong suit at the appropriate scale and taking advantage ofthe company’s strength in integration.

(3) Automobiles and parts■ Japan: Strong at integral type products
In order to survive intense competition from European, U.S. and South Korean companies,
Japanese auto manufacturers have assembled cars with very precisely integrated components. In thedevelopment process, which is where the design of the automobile begins, and in the manufacturing
process based on this, Japanese companies are vertically integrated, such that most of theseprocesses take place in-house. An advantage of vertical integration is that, by controlling the various
processes, one can easily maintain a high degree of functionality and quality assurance over the
automobiles.
To give an example, enhancing the handling of an automobile requires integrating components,
not only those of the steering but also of the body, suspension, brakes and tires. Japanese automobile
and parts manufacturers are well-known for their integral type architecture, which allows them toachieve an optimal balance of functions and parts. This is a very important reason why they are socompetitive internationally.
Actually, research by Professor Fujimoto et al of the University of Tokyo2 suggests that Japanesecompanies have a smaller number of developmental processes for automobiles and spend less timein development as compared to their international counterparts in Europe and the U.S. By bothmeasures, the gap shrank between Japan and its counterparts in the U.S. and Europe in the first halfof the 90s, but the gap began to widen again in the latter half of that decade. On top of that, Japanese184

companies keep far fewer project members than their counterparts, indicating high efficiency.
One explanation for this discrepancy could be that project managers play a greater role inJapanese companies, efficiently carrying out the integration function when the 20,000 to 30,000
components are assembled. An additional reason for efficient production is that Japanese companies
start developing and designing their components with integration in mind from the earliest stages. In
other words, the level of efficiency is so high because problems are predicted from the beginning ofdevelopment rather than adjusted for afterwards.
During development and production processes, the manufacturer of the finished vehicle is notalone as it practices integration: parts manufacturers are also involved. In the U.S. and Europe, an
auto manufacturer simply tells the parts maker what design to use (referred to as the “automanufacturer-design system“). Japanese auto manufacturers, in contrast, give parts manufacturers ageneral idea of the overall vehicle but often choose to let the parts manufacturer take charge of actual
parts design (the “parts manufacturer-design system“).

More recently, however, the predominant

trend among Japanese automakers is to start coordinating at an earlier stage than in the past to raise
the level of development productivity. The industry is transitioning from a “design-in” principle, or
engaging parts manufacturers starting with the design stage, to “concept-in,” getting them involved
even earlier. This attempt to streamline development processes and development time, coupled withan integral type production system, helps Japanese manufacturers continuously enhance theircompetitiveness.
■ Different approaches to modularization
When Japanese auto manufacturers develop parts with parts manufacturers and procure from them,
they are practicing a type of outsourcing, but rather than just handing the whole process over, thetwo sides work together and practice constant communication. In other words, the auto
manufacturers embrace a development system that reaches beyond company boundaries, as if theparts manufacturer were a division of the auto manufacturer. As an outgrowth of this, auto
manufacturers have begun directing parts manufacturers to develop units, or assemblies ofcomponents, in order to reduce costs and processes.
In contrast, in the U.S. and European manufacturers are asking their suppliers not just forassemblies of a limited number of components, but even large modularized units that completely
integrate components, such as instrument panels (including the speedometer, other instruments andair-conditioning vents). Near a factory, there may be sub-lines where doors, front ends or othermodules are put together, and these are then brought by truck or conveyor belt to a production line
for assembly. In recent years, some parts makers have started to undertake nearly every auto
production process, which is modularization to its extreme. The reason this trend has taken hold in
the U.S. and Europe is because the markets in those regions have matured while demand in emerging

185

countries is expanding, forcing manufacturers to become more cost competitive. This trend brings inmodular type production, in which various components are gathered and pieced together like Legoblocks, in place of the integral type manufacturing traditional to the auto industry.
Modularization has several advantages: it makes assembly less labor intensive, cuts costs because
fewer suppliers are used, makes just-in-time parts procurement easier, makes development anddesign less of a burden for manufacturers, and so on.
The reasons that Japanese auto manufacturers have not actively endorsed modularization until
now may be because they already had a fairly advanced practice of procuring assembled units,
because modularization would make them more dependent on parts manufacturers in terms of
quality maintenance control and technical development, and because the cost savings would besmaller than those afforded in the U.S. and Europe owing to the wage differential. It would appear,
therefore, that Japanese manufacturers chose to counter the practice of modularization by their U.S.
and European counterparts by further strengthening the integral type elements of their own
production systems, engaging components’ manufacturers under the “concept-in” principle.
This does not mean, however, that Japanese companies are ignoring the modularization trend. In
the “Survey on Japanese Firms’ International Competitiveness and Business Development,” of the
35 companies responding from the automobile and parts industry, 18 companies, or just over half,
said that they were expanding the use of modularization. Although there was a divide between
Japanese companies who are proactive about modularization and those passive about it,
modularization is on the increase, with doors, front ends, instrument panels and even platforms
already being shared, so there is no question that the industry will continue to move in this direction.
Whereas U.S. and European auto manufacturers are pursuing open modularization, which makes
them increasingly dependent on a number of parts manufacturers, Japanese auto manufacturers
appear more inclined to avoid black boxes by pursuing closed modularization, a form that preserves
their current pyramid-type keiretsu system, which is close to a vertically integrated structure.
■ The impact of electronic technology on competitivenessElectronic technology has rapidly grown in the auto industry in recent years with the advance of
information technology, hybrid cars and so on. A high-end car may contain 100 electronic control
units (ECUs), and the wiring harnesses that connect devices in the car may be more than 100 km in
length (Fig. III-10). ECUs consist of multiple units such as those for engine control, brake control,
steering control and multimedia control, necessitating a great number of software programs.
Research on the integration of the different software programs is being undertaken.
To do this, ECU software must be standardized. As things stand now, however, each business isdeveloping its own ECU software, and using another company’s software programs can sometimes
create problems, such as cars being unable to work. Thus, if the automobile industry were to work186

together to standardize their software, it would make it easier to cut costs and development times.
As an example of ECU standardization, automakers in Europe and Japan are working together tostandardize automobile LANs, the communications networks that connect the ECUs. By so doing,
they can potentially decrease the number and weight of wiring harnesses. Additional research is
being undertaken to standardize the ECU software platform, which, if used as an interface, would
make it easier to integrate application software from other companies, and this would in turn allow a
number of ECUs to integrate, helping to reduce the number of required LSI devices anddevelopment costs.
These joint projects represent a shift from the vertically integrated (closed) development internal
to individual companies in favor of horizontally integrated (open) development that engages outside
parties. If the only joint development that a company engages in is with its own partners, it may beable to produce more closed products, but if ECU software platforms could be standardized, auto
manufacturers would be able to create ECU products from electronic components and application
software sourced from Japan and abroad, much as the case with DVD players and PCs. This could
allow not only doors and instrument panels but also ECUs themselves to be modularized, which may
diminish one source of competitiveness of the Japanese auto industry; its strong integral typemanufacturing.
Consumers, however, will continue to think highly of the feel and ride of automobiles
manufactured under the integral type model, and they will pay a corresponding premium. Drivers do
not always like open modular automobiles assembled under a standardized system. Even with thestandardization of ECU software platforms, manufacturers will be able to develop products byintegrating individual application software programs with each other and thereby distinguishing theirproducts from others.
In the development of ECU embedded software, links can be made between the various processes
such as design, analysis, mounting and testing, or the mechanical and electrical specialists can work
together, thereby creating integral type products even with ECUs, much as is done with skilled
manufacturing. Moreover, in the development of automobile LANS and software platforms for
ECUs, standardization of ECU software, grounded in Japan’s technological foundation, should resultin international predominance.
In sum, the likely future international business model for Japan’s automobile industry would
appear to be one with a two-sided strategy: a side that deals adequately with the open modular
assembly system created by modularization and the increasing use of electronics, and a side that
holds to and furthers the traditional closed integral type development and production system. At thesame time, the industry will need a product strategy to meet the strong need for cost performance
among the middle income class in emerging countries.

187

(4) Finance■ The pursuit of high profitability
Although Japan’s major banks are starting to recover profitability, the return on equity (ROE) forJapanese banks is stuck at more or less 15%, lower than the 20%-30% of European and U.S. banks,
which have actively dealt with the globalization of the economy. This is not only because theEuropean and U.S. banks have proven the strength of their investment banking services (that is, theprocurement of funds from securities markets by issuing stocks and bonds, intermediation incorporate mergers and acquisitions (M&A) and the advice they give on financing and capital
strategy), but also because they have earned stable revenues in their retail services (individual
savings, foreign currency savings, home loans, credit cards, pension insurance, investment trust andso on). Japanese banks have a more difficult time in retail services because their profit margin onloans is lower than that of European and U.S. banks. While Japanese banks earn a profit margin of
about 1.5%, North American banks earn profit margins of between 4 and 5%. In addition, theloan-to-savings ratio (the amount of money lent divided by the amount of savings) is more than
100% at banks in the UK, Germany and France, but the rate is declining in Japan and is now below
80%. Loans from Japanese banks to companies are stagnating. Those to the high-profit
manufacturing industries in particular are on a declining trend. Up to now, company financing has
been a major part of profitability at Japanese banks. At a time when financing for both individuals
and companies is stagnant, savings are being used in such instruments as low-yield national bonds.
Low interest and stagnating profit margins continue to hamper Japan’s financial industry, andthere is little in the environment to suggest that the interest rate situation will rapidly improve forJapanese banks. Accordingly, Japan’s financial institutions must work to build profitability with
non-interest income, which yields relatively low results compared to those in Europe and the U.S.
Non-interest income includes fees on savings, investment trusts, pension insurance, home loans,credit card services and so on.
There is already an increasing trend among Japanese financial institutions of expanding sales inhome loans and investment trusts as well as pension insurance to individuals, and the credit card
market can be fostered by raising credit card settlement rates and loan rates. It is also possible forbanks to expand services to companies such as syndicate loans (i.e., a loan in which multiple
financial institutions work together to provide financing under identical conditions) and working
thereby to increase revenue from fees.
■ Dealing with globalization
As Japanese financial institutions face severe competition at home, they are reviewing theirbusiness strategies. One trend is to globalize. According to the Bank for International Settlement(BIS), at the end of 1990, reporting banks from Japan had an international position (i.e., the total of188foreign assets and foreign denominated domestic assets) equivalent to a 34% share of the world total,
but this had declined drastically to just 8% by the end of March 2006. In contrast, in Germany therate has risen from less than 10% to 16%.
As world demand for funds has grown, particularly in emerging economies, European and U.S.
banks have aggressively globalized. Japan, on the other hand, has prioritized the disposition of badloans since the end of the bubble era, so that in the meantime it has fallen behind Europe and the U.S.
in terms of globalization. The international divisions of Japan’s major financial institutions havecontributed on average only between 10 and 20% of those institutions’ overall profits. Overseas
profit rates for European and U.S. banks, however, have already reached about 70% for Deutsche
Bank and more than 50% for Citigroup of the U.S.; several other banks derive nearly half theirprofits from this area. Particularly noteworthy is the fact that such European and U.S. banks earn
about 10% of their income from the Asia-Pacific region. Also, according to the BIS, at the end of
2006, just 5% of the loan balance of Japanese banks to foreign countries went to the Asia-Pacificregion, lower even than the 13% for U.S. banks (Fig. III-4).
The way in which European and U.S. financial institutions approach globalization can beclassified into several styles: the Citibank pattern of globalization that offers a full line of services toall customers around the world; a form of globalization focusing on investment banking services
such as M&A support and derivatives; and globalization that targets emerging countries and the U.S.
market even as it strengthens the domestic foundation of the financial institution. Considering thefact that Japan’s manufacturing industry has actively developed its business in emerging markets,
especially in Asia, it would appear that for Japan’s financial institutions, the most realistic choice is a
global strategy that focuses on the third item above: emerging countries and the U.S. market.
As Europe’s financial institutions have globalized, their strategy has actively focused on M&As.
Because this strategy has paid off, these institutions have been able to hire local talent and enhancetheir sales systems and auditing functions, among others, in a short amount of time. M&As would
also appear to be very effective in efforts to globalize Japan’s financial institutions, who might also
benefit from simultaneously securing licenses in the U.S. to act as financial holding companies(FHCs), establishing a network of branch offices overseas and expanding their networks throughalliances with local financial institutions.
One factor to be aware of if using this strategy is that Japan’s affiliated companies in Asia areprocuring more of their funding from within their own groups to reduce capital procurement costs,
meaning that they are less dependent on Japan’s financial institutions. The financial institutions will
have to build advantageous funding procurement systems in order to deal with this, and will alsoneed to enhance services providing information relevant to the local area.
In their expansion of business overseas, Japanese banks have in some cases recently been ranked
among the leaders in project financing (a funding procurement mechanism used for resource

189development, the construction of large plants and so on) and in leveraged buyouts in Asia. This
would appear to be proof of the efforts Japanese banks have made up to now. For these institutions tomaster the investment banking business in global markets, however, they will need several things:
the capacity to build and assess systems in the field of M&As, syndicate loans, equity finance (theprocurement of funds from capital markets by issuing securities) and others; the ability to networkwith world companies and major financial institutions; and the ability to form personal relationships.
Serving as an advisor in project financing and syndicate loans and playing the role of executive
coordinator are examples of a solutions service, and will require exercising integral type functions. A
high level of management capacity and authority, such as that invested in a project manager whendeveloping an automobile, is necessary in order to carry out the function of coordinating diverse
elements.

Making the financing industry more globally competitive requires a strong “open”
business model that engages numerous customers and companies at home and abroad at
the retail and other levels and demands the continued expansion of markets ininvestment banking services, such as project financing and leveraged buyouts. This
necessitates the overseas development and hiring of persons with international
management skills and access to financial networks and the provision of support
systems in Japan for these personnel.
2 “Seihin kaihatsu no soshiki noryoku–Nihon jidousha kigyo no kokusai kyosoryoku–”(Organizational
Strength for Product Development: The International Competitiveness of Japan’s Automobile Industry;)
Kentaro Nobeoka (Kobe University), Takahiro Fujimoto (University of Tokyo); University of Tokyo
Manufacturing Management Research Center, January 2004.

190

Fig.III-7

2006 global LCD TV market share by manufacturer (unit base)Samsung
Electronics
15%

Other
22%
Vizio
2%

Philips
13%

Syntax Brilliant
2%

Toshiba4%

TCL
3%

Matsushita ElectricIndustrial
5%

Sharp
13%
LG
8%

Sony
13%

Samsung Electronics

Philips

Sharp

Sony

LG

Matsushita Electric Industrial

Toshiba

TCL

Syntax Brilliant

Vizio

Other

Note: The 2002 global market shares were Sharp, 60%, Matsushita 8%, Sony 5%. (Nikkei Market
Research survey).
Source: iSuppli

Fig. III-8

Prices of panels for LCD TVs

2500

2000

20 inch1500

30 inch37 inch1000

40 inch

500

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5
Q
4'0
5
Q
1'0
6
Q
2 '0
6
Q
3 '0
6
Q
4'0
6
Q
1 '0
7

0

Source: DisplaySearch

191

Fig. III-9 What companies see as sources of their international competitiveness(Multiple answers)

47.8

Specialization in their field of strength
Ability to develop products that meet customer requirements
Strong base technology
Proactive overseas business development
Strong production technology
Brand strength
Fast decision-making
Strong applied technology
R&D capacity in new fields
Capacity to integrate development and production
Internationality of employees
Strong management capacity
Use of overseas outsourcing
Ability to build international alliances
Use of multinational talent
Overseas marketing skill
Ability to develop products with commonly available
components
Capital strength
Other

37.0
29.3
27.0
25.9
22.1
20.1
18.4
15.4
14.3
7.1
6.2
5.8
5.4
5.1
4.7
4.3
3.6
1.9
0

10

20

30

40

50

Note: The number of firms answered is 467.
Source: Survey on Japanese Firms' International Competitiveness and Business Development, May
2007 , JETRO

Table III-3 Rankings of semiconductor manufacturers by sales（unit: US$ 1Million, %)

Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

Company(country)
Intel(U.S.A.)
Samsung Electronics(ROK)
Texas Instruments(U.S.A.)
Toshiba(Japan)
STMicroelectronics(France-Italy)
Renesas technology(Japan)
Hynix(ROK)
AMD(U.S.A.)
Freescale Semiconductor(U.S.A.)
NXP(Netherlands)
NEC Electronics(Japan)
Qimonda(Germany)
Micron technology(U.S.A.)
Infineon Technologies(Germany)Sony(Japan)
Qualcomm(U.S.A.)
Matsushita Electric(Japan)
Broadcom(U.S.A.)
Elpida Memory(Japan)
Sharp Electronics(Japan)

Sales
31,542
19,842
12,60010,141
9,854
7,900
7,865
7,506
5,988
5,874
5,679
5,413
5,210
5,119
4,852
4,529
4,022
3,668
3,527
3,341

Source: Each company’s website

192

Growth ratefrom 2005

Sales share

△11.1
12.0
17.3
11.7
11.0
△2.6
41.5
91.6
7.0
4.0
△0.5
0.0
9.1
△38.3
6.1
31.0
△2.6
37.3
98.6
2.3

12.1
7.6
4.8
3.9
3.8
3.0
3.0
2.9
2.3
2.3
2.2
2.1
2.0
2.0
1.9
1.7
1.5
1.4
1.4
1.3

Average
operatingincome2002-2006
23.6
29.5
17.1
10.6
6.3
n.a.
8.5
△8.9
△11.7
△12.9
1.4
△5.1
△12.3
△5.6
n.a.
38.2
n.a.
△53.3
△14.2
n.a.

60

Fig. III-10 Complex in-vehicle electronic control unit(ECU)
Driving
supportEngine

Brake

Body

control

control

control

control

SteerinMultimedigacontrol

control

Airbagcontrol

Table III-4 Consolidated foreign claims on individual countries by nationality ofreporting banks / Amounts outstanding(End-December 2006, Unit: US$ billion, %)Japan

United Statedshare
Developed countries
1,383
74.6
Japan
United States
676
36.5
Canada, Australia and NZ
77
4.2
Europe630
34Developing countries
135
7.3
Asia & Pacific93
5.0Europe16
0.9
Latin America/Caribbean
150.8
Africa & Middle East
12
0.6
Offshore centers336
18.1
Int. Organizations
0
0
Others00
All countries
1,854
100.0
Source: BIS Quarterly Review, June 2007

193

813
65
99
649
393
174
45
145
29
128
0
0
1,334

Europe
share
60.9
4.9
7.4
48.7
29.5
13.0
3.4
10.9
2.2
9.6
0
0
100.0

15,143
498
4,605
512
9,528
2,225
519
914
498
294
1,167
41
7
18,583

share
81.5
2.7
24.8
2.8
51.3
12.0
2.8
4.9
2.7
1.6
6.3
0.2
0
100.0

3. Issues with the service industries’ activities in emerging markets
As Chapter 1 mentioned, Japan’s service industries have been slower than the manufacturingindustries to develop overseas; one reason for this is that compared to the U.S. and other countries,
many service businesses operate on a small scale, so they do not have the management systems inplace to develop overseas in the first place. Moreover, because of the lateness of their efforts tofranchise and modularize, productivity has stayed at a very low level, so that the Japanese service
industries appear weaker in terms of international competitiveness.
An international comparison of productivity in the manufacturing industries (other than electricalequipment) and service industries on a macro basis shows Japan’s manufacturing industries
contributing a decreasing share to the overall economy, but productivity is growing at an improving
rate and is very close to the level of the leading developed countries. In contrast, the service
industries are greatly increasing their contribution to the overall economy, as is the case in theleading developed countries, but productivity has dropped markedly, which is different from the U.S.
and UK, whose economies are increasingly service-oriented and continue to grow (Fig. III-11). In
addition, a comparison of total factor productivity between Japanese companies on the one hand andChinese and South Korean companies on the other shows that in the service industries, theproductivity of Japanese companies has been lower than that of their South Korean counterparts
since the mid-1990s. Japanese companies ranked higher than Chinese companies in both service andmanufacturing industries, but the difference has been relatively small for the service industries (Fig.
III-12).
Some of Japan’s service industry members are steadily increasing their presence in Asia, emerging
countries and elsewhere. In China in particular, the Measures for the Administration on Foreign
Investment in Commercial Fields, which came into force in June 2004, removed limitations on
geographical regions where wholesale and retail industries could be established, while in Decemberof that year, restrictions on the percentage of capital investment, with the exception of some products
and services, were abolished, leading a series of Japan-affiliated distribution companies to set up
shop.

Subsequently, China lifted a ban on foreign-owned franchises, prompting members of

the food service industry and others to get into the area. In recent years, these trends appear to bebroadening to include even business service and content providers targeting companies in China,
such as those for human resources development (Table III-5)
The first reason that Japan-affiliated companies are steadily increasing their presence in China isthat, as China deregulates, Japan-affiliated companies have met existing demand by becoming
increasingly native, actively hiring local human resources and considering local customs during
product development. Second, industry sectors and businesses with highly developed manual-based,
standardized operations, such as convenience stores, are using their advantages in terms of
productivity and efficiency to be the leaders in competitiveness in the local market. Third, in fields

194where it is difficult to run a business from procedural manuals, such as services for individual
customers, Japan-affiliated companies are creating new demand by using their accumulated
know-how and providing a high level of added value. These and other factors could be mentioned.
These companies are creating success by taking advantage of their strengths from the Japanesebusiness world and adapting themselves to the local market.
Even so, the service industry faces numerous issues when expanding overseas. First of all,because the quality of service offered is highly dependent on personnel, the industry must work tosecure and develop excellent employees. Costs are an obstacle, however, in emerging countries
where salaries in particular rise very quickly, which can only make it difficult to secure humanresources. At the same time, while developing human resources is an issue, even those businesses
that already have the know-how to develop personnel locally need to be flexible in terms of how
they meet local requirements.
Additionally, the competition is getting more intense not only with foreign-affiliated companies
from Europe, the U.S. and so on, but also from local businesses. This means that Japan-affiliatedbusinesses need to improve their level of productivity to rival that of European- and U.S.-affiliatedcompanies. Another important factor they must consider is how to deal with the rapid changes anddiversification of customer needs that are likely to occur in emerging countries and regions in the
future. On the other hand, Japan-affiliated companies have already gained significant experience
with these types of changes in the Japanese market since the 1990s. The key to survival in thecompetitive international market is how well such companies can turn Japan’s strengths, i.e., theattention to detail and quality of service that come from experience in the Japanese market, into asource of competitiveness.
As Japan’s population has been falling since 2005, making future market growth unlikely, theservice industries face issues on both the supply and demand sides, such as the increasing difficultyof acquiring the personnel that are so crucial to these industries. Given the circumstances, it seems
increasingly important, not only for the retail industry (which has already proven successful
overseas) but also for fields such as finance and services to business and individual
customers—industries that have a strong domestic orientation—to make good use of local personnel
and take steps to turn the high level of growth in emerging countries into profitable businessenterprises.

195

Fig III-11 Share and TFP Growth Rate of Service Indusrties and Manufacturing,excluding electrical in Major Countries（1980-95 and 95-2004）
Service Indusrties in Major Countries

2.0

Growth rate of Total Factor Productivity(Annual average, %)1.5

U.S.A.
Finland

1.0
U.K.
0.5
0.0
Japan
-0.5

France

-1.0

Spain
Italy

-1.5
40.0

45.0
50.0
55.0
60.0
Share of Service Industry in Gross Value Added (%)

Source: EU KLEMS

Total Manufacturing Industries excluding Electrical
3.5
Growth rate of Total Factor Productivity(Annual average, %)

3.0

Spain

2.5
Fance

2.0
1.5
1.0

Finalnd0.5

Germany

U.K.

0.0

Japan

-0.5
-1.0

U.S.A.
Italy

-1.5
20

22

24

26

28

30

Share of Service Industry in Gross Value Added (%)

196

Fig III-12 Productivity of Chinese and Korean Companies compared withJapanese Companies（% points）

0.8
0.6

China （Manufacturing）
China （Services）
Korea （Manufacturing）

0.4

Korea （Services）

0.2
0
-0.2
-0.4
-0.6
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
Notes:
1. Based on a total factor productivity standard that is standardized for each company (see references below for
calculation procedures), the median is found from samples of businesses in each country, each industry sector andeach year, and the difference with Japanese companies is then calculated.
2. Service industries include transportation, communication, electricity, gas, wholesale and retail, finance, real estateand other private and public services. Manufacturing industries include all industries other than service industries,
agriculture, forestry, fishing, mining and construction.
3. For Chinese companies, figures were only available since 1999.
Source“Database on Productivity of Japanese, Chinese and South Korean Companies” (Based on East Asian Listed
Companies (EALC) Database 2007 by the Japan Center for Economic Research, Hitotsubashi University Center for
Economic Institutions, Nihon University Center for China and Asian Studies, Seoul National University Center for
Corporate Competitiveness)

197

Table III-5 Japanese service companies actively doing business in China
Company

Seven-Eleven Japan

SectorConvenience store

Business areas
In January 2004, established joint venture Seven-Eleven Beijing, with central
government authorization (total investment $70 million). Opened 50 stores in
Beijing by December 2006 and plans to have 350 stores by the end of
December 2008.

Convenience store

Opened store in Shanghai in 2004; in July 2004, Shanghai FamilyMart Co.,
Ltd. began operating stores in Shanghai (25 stores under direct management).
First franchise store opened in December 2004. In January 2007, it opened thefirst Japan-affiliated convenience store in Guangdong Province. As of May
2007, 111 stores operating in China.

LawsonConvenience store

Established joint venture in 1996; has opened 291 stores in Shanghai since then(end of December 2006). Is the leader in per-store sales, offering a productlineup that adapts to rapidly changing local tastes and encourages thepenetration of Japanese foodstuffs locally.

AEON

Retailer

In February 2007, opened the first mall type shopping center in South China;
putting its effort into developing large shopping centers that anticipate
increasing motorization.

FamilyMart

Kumon

Established local corporation in Shanghai in 1995; since then, the "Kumon
method" has become a local fixture as interest has grown in education. Using its
Education and study
years of know-how and putting its energy into training instructors, it has set up
support200 classrooms with 25,000 students currently.

Watabe Wedding

Wedding producers

Established local corporation in 2004. Offers set services including
photography at ceremonies held at five-star hotels, together with hairstyling,
make up, clothing and event site decoration. With Shanghai's wedding rush andincreasing expenditures on wedding related services as income levels haverisen, its sales have increased by 300% and operating income by 170% in 10
years as of March 2007.

Wilson Learning Worldwide

Human resources
development andtraining

Established local corporation in China in 2002; provides human resources
development consulting for Japan-affiliated companies in China and forEuropean and U.S. companies. In the three years leading up to March 2007,
sales in China have risen 40% and operating income by 55%.

Food service

Began expanding its chain of stores when a ban on foreign-owned franchises
was lifted in February 2005. Has 34 stores in Shanghai and more than 70
throughout China. Has become popular because it stays true to the original
taste, incorporating local tastes, provides Japanese style non-pushy service.

Music

Established joint venture in Beijing in November 2006. Does business primarily
in discovering and developing Chinese artists and producing live events, notlimiting itself to J-POP licensing.

Ajisen Rahmen

Avex Group Holdings

Source: Compiled based on interviews in China and Japan, company press releases, etc.

198

4. Current status and issues with Japanese companies’ overseas
intellectual property strategy■ The importance of patent strategy

At a time when the economy is becoming more global and competitive, Japanesecompanies increasingly need a comprehensive intellectual property strategy, executedfor example by actively turning R&D breakthroughs into an important source ofinternational competitiveness.
For Japanese companies to demonstrate their competitiveness in total, they are required to makeproper judgments, such as whether to pursue patent rights to the original technology generated bytheir R&D, or whether to keep it internal as know-how. A company must avoid situations in which it
loses its global competitiveness because of the unintentional leak of the technology it has developed.
Once a technology is developed, getting it adopted as the international standard is crucial to securingdominance in world markets. Additionally, although Japanese companies have taken steps against
counterfeit and pirated goods, there is room for further improvement in the situation and they need tocontinue strengthening their countermeasures. The content industry in particular sees the promise of
new development with the rapid globalization that is afforded by the Internet, but the growth ofrelated companies greatly depends on an effective anti-pirating strategy.
■ Pursuing intellectual property rights in overseas business development
When a business expands overseas, it is extremely important for it to pursue the rights to its
inventions and other intellectual property. Japan’s pursuit of such rights, as seen by the number ofinternational patent applications, is second only to the U.S.: Japan filed 26,906 applications in 2006,
or 18.2% of the world total (Table III-6).
In the world’s five largest patent producing countries and regions (the U.S., Japan, EU, China,
South Korea), Japanese companies acquired 36,807 patents in the U.S. (2006, a gain of 21.3% overthe previous year), 9,546 in Europe (European Patent Office) (2005, down 8.6%), 15,099 in China(2006, includes patent inventions only, up 8.7%) and 11,000 in South Korea (2005, up 50.2%),
showing that patent rights are in a growing trend overseas.
■ Growing revenues from licensing
Japan’s international balance of royalty payments, etc., shows that the $600 million deficit in 2002
has ultimately reversed, leading to a surplus of $4.6 billion in 2006 (Table III-7). By region, although
Japan continues to have deficits with North America, its deficits with Asia and Western Europe havechanged to a surplus, with contributions in the industrial fields of transportation equipment andelectrical equipment. The royalties arise primarily in the form of compensation from overseas
subsidiaries and other affiliates of Japanese companies.

199

According to the 2006 Outline of Survey of Research and Development (Ministry of Internal
Affairs and Communications, released December 2006), technology licensing to other companies
overseas accounted for 25.1% of technology exports in FY2005, slightly lower than the previous
year, and companies are expected to make active use of their intellectual property in the future suchas by increasing the licensing of their technology.
■ Need for linkage between intellectual property strategy and technical standards
Getting the technologies that companies have developed to be adopted as international standards
is a very crucial element in maintaining market predominance, so much so that the goal of promoting
their own technologies as international standards needs to be an integral part of companies’
intellectual property strategy.
Technologies adopted as international standards often have their patent rights licensed out, andwhen companies form a patent pool3, they are allowed to use other companies’ patent inventions
royalty-free, in exchange for sharing their own patent inventions when they manufacture products. It
is easy to acquire royalties from companies that do not provide patent inventions to patent pools. In
addition, if a third party uses a patented invention without permission, one can prove patent
infringement simply by the fact that the business manufactured products conforming to theinternational standard. If in contrast, a company’s patented invention is not adopted as aninternational standard, it will necessarily be less competitive because, instead of receiving revenue, itwill have to pay a royalty to use patented inventions, so that it will not be cost competitive and its
product development will be playing catch up.
The Japanese government’s Intellectual Property Strategy Headquarters announced aInternational Standardization Comprehensive Strategy in December 2006. The strategy pointed out
the importance of setting international standards and said that the industrial world, especially top
management, needs to change its way of thinking. Whereas the U.S. and Europe (particularly
Europe) have long been especially influential in the area of international standards, in recent years,
China has been accelerating its efforts on setting international or domestic standards on its own forsuch products as 3G, wireless LANs and DVDs. There is now a stronger movement to promote theirown technologies as international standards, as demonstrated by the fact that South Korea
contributed to creating the international standards for wireless broadband.
■ Technology leaks: current status and prevention measures
In a globalizing economy and the more competitive business environment that results, the leakageof confidential R & D results is a serious issue because this outflow damages the business foundationof a company and takes away from its competitiveness.
To give an example, one reason that South Korea and Taiwan have taken over production of liquid200

crystal flat panel displays is because, according to some, the technology had been leaked to theseplaces. This is an example of how technology that a company tries to keep concealed as its own
know-how is able to end up in the competitors’ hands through various channels. Coming up with astrategy to prevent leaks of technology effectively is a most urgent issue.

1) Current state of technology leaks
Technology leaks occur when information flows out through one of two agents: humans (becauseof their mobility) and things (including electronic data).
Human mobility can cause technology leaks when staff members reach retirement age and then go towork for a competitor overseas or when members hired locally by affiliates quit and go to work
somewhere else.
Several examples can be mentioned of how technology leaks through things: information may slip
out from disclosure materials given to licensees, joint venture partners and development
collaborators; it could also come from disclosure documents such as specification sheets whenequipment is ordered; information can also leak out during factory visits or by service professionals
while performing equipment repair.
In either case, most often the cause is an inadequate control system made faulty by insufficient trade
secret awareness.

2) Effective leakage prevention strategy
Japan and other countries have seen many cases whereby a company has lost a lawsuit (or had its
demands thrown out of court) over trade secrets in cases of unfair competition. The cause of this ispoor confidentiality management. In other words, if confidentiality is not thoroughly managed, it
will be impossible to protect information as a trade secret no matter how valuable that information
might be. Japanese companies in particular have tended not to be very interested in controlling theirconfidential information because they have long done business in the belief that human nature isbasically good. Once information leaks out, however, it is impossible to restore it to its confidential
state.

Therefore, it is critical to have measures in place to prevent such outflow of information.

■ Japanese content and overseas business: a need for anti-piracy measures
The world content industry has steadily expanded in recent years and is expected to continue
growing in the future. While the world content market in 2005 was worth $1.33 trillion, the same
market in 2010 is expected to reach $1.83 trillion.4 The size of the content market in Japan in 2005
was $124.4 billion, second only to the U.S.; the market at this point had remained fairly flat since2001. In order for the Japanese content industry to continue growing, it has no choice but to expand
its market overseas.

2013) Expansion of the content industry via networks
Looking over the trends in the world content industry, in many cases content has only been used ina relatively small area, i.e., the originator’s domestic market and a few neighboring countries,
because of such factors as language and cultural differences. Content is generally considered adomestic industry, with a few exceptions such as Hollywood movies. As technical changes have led
to digitalization and networking, however, content has become increasingly accessible by theInternet, mobile phones and so on, and content users themselves are becoming increasingly
borderless, willing to take content from beyond their own countries. South Korea has embarked on anational campaign to bring its TV dramas, movies and online games to the Asian markets that are
expected to grow greatly in coming years. China, moreover, seeing a rapid growth in demand fordomestic content thanks to the nation’s solid economic growth, is strengthening its domestic content
industry. While Japanese content has received high praise overseas for its quality, related businesses
need to be sensitive to changes in overseas markets and to develop overseas with strategies of theirown.

4) Anti-piracy measures as a basic part of the business environment
As the content business starts to aim overseas for further business development, it cannot getaround the need for anti-piracy measures. The success of such measures in China, Hong Kong andTaiwan has come thanks to the efforts of the Content Overseas Distribution Association (CODA).
CODA leads joint initiatives to use the CJ mark (applied to Japanese content distributed overseas) to
expose fake versions of Japanese content (Fig. III-13).
Under this initiative, the CJ mark is registered as a trademark in different countries and regions(the U.S., EU, China, Hong Kong, Taiwan, etc.); even beyond copyright issues, it is intended as aneffective measure for exposing pirated goods. By applying the trademarked CJ mark to authentic
goods, any pirated goods in packages to which the CJ mark has been copied can be jointly controlledon the basis of trademark infringement. Some countries are currently considering the application for
trademark, while CODA is going ahead with joint activities to detect pirated goods as based on
copyright. Between January 2005 and April 2007, CODA had successfully exposed 3,587 cases ofpirating in China, Hong Kong and Taiwan. This series of exposures resulted in the seizure of 3.74
million pirated DVDs, CDs and other goods and the arrest of 1,242 individuals, indicative of how
effective the strategy has been.

5) Going on the offense
Although pirated goods are said to make up more than 90% of the content available in China, thatnation is looked upon hopefully as a market for future growth, and overseas groups such as the202Motion Picture Association of America (MPA) are stepping up their measures against pirated goods.
In December 2006, the MPA, together with the Business Software Alliance (BSA), the Associationof American Publishers (AAP) and The Publishers Association (TPA) of the UK, concluded amemorandum of understanding with the National Copyright Administration of China (NCAC)(which has authority over all copyright matters for the Chinese government) to create a cooperative
structure to protect copyright on the Internet.
Protection of copyrighted materials on the Internet has now been legislated in China with the“Regulations on Protection of the Right of Communication through Information Networks,”
announced on May 18, 2006 (enforced July 1, 2006). Though overseas copyright holders may
demand that websites be shut down and that works be eliminated if they infringe on copyright,
however, in practice the difficulties are many. For that reason, the above memorandum of
understanding calls for copyright holder information and other data to be added to a list of works to
be protected on the Internet and submitted to the NCAC, which will then control pirated works basedon this list.
At the same time, the Japanese content industry participates as CODA in joint public-private
missions sent to China each year by the International Intellectual Property Protection Forum (IIPPF).
In a meeting that took place in April 2007 on a visit to the NCAC, the problem of illegal uploading
to the Internet came up in conversation. CODA suggested that a transmission prevention systemusing “reliability checking groups” as adopted in Japan be used as a concrete way of helping China’s
domestic providers respond quickly. CODA seeks to make cooperative proposals, not just one-way
requests for improvements, and hopes to conduct dialogue-based lobbying, which is intended toresolve problems through dialogue and cooperation.
Such copyright protection initiatives by groups concerned with content in each country areimportant

in

terms

of

preparingthecontent

business

environment.

Going

on

the

offensive—eliminating pirated goods and other examples of copyright infringement and turning suchbusinesses into a legitimate ones—can lead to capturing the market in the content business. The
skillful use of anti-piracy measures could give the industry a globally competitive edge in thecontent business, and Japan’s content related businesses need to be actively pursuing this goal as anadvance investment in future success.

3 In this case, a system established for the mutual licensing of a number of patents, allowing the holdersof those patents to take advantage of each other’s patents while reducing the time and cost of licensing
negotiations and other coordination.

4 Based on “Entertainment and Media Market Outlook 2006- 2010” (PWC).

203

Column III-4
 Cooperation and request are the key to Public-private Intellectual Property Protection
Missions, Japanese companies’ trump card for protecting intellectual property in China
According to the OECD’s “The Economic Impact of Counterfeiting and Piracy,” released in June
2007, counterfeit and pirated goods accounted for $200 billion of international trade in 2005. If thevalue of such goods produced and consumed within national borders, as well as that of digitalcontent illegally traded over the Internet, were added in, the total would come to several hundreds ofbillions of dollars. Regionally, the OECD points to Asia as the largest source of counterfeit goods,
with China the single largest national source.
It was under these circumstances that in April 2007 the International Intellectual Property
Protection Forum (IIPPF) (a cross-industry organization set up to protect the intellectual property ofJapanese companies in partnership with the government (Chairman: Yoshihide Munekuni, former
Chairman of Honda Motor, Vice Chairman: Yasuo Hayashi, Chairman of JETRO), the Secretariat:
JETRO) sent the fifth joint public-private working-level mission to Beijing.
The mission consisted of about 60 members in total, including representatives from the private
sector (electrical/electronic, automotive, pharmaceutical, content, nursery and other industries) andthe public sector (METI, MOF, Ministry of Foreign Affairs, Ministry of Agriculture, Forestry and
Fisheries, Japan Patent Office, Agency for Cultural Affairs, JETRO, etc.). When in China, they
visited 12 ministries and agencies and 15 institutions.
These missions have had a steady string of successes, including revision to and better execution oflegal regulations at the request of the Japan side, such as: 1) a lower threshold for indictment, 2)
complete elimination of rights-infringing characteristics before the auction of infringing goods, 3)
the introduction of a law reducing the burden on rights-holders, 4) publication of decisions on theInternet, and 5) revised standards for examining patents (patents, utility models and designs). The
critical element to these successes has been cooperation. The stance of these missions is that “Japan
will do whatever it can to ensure that intellectual property protection in China moves forward, even alittle bit.” These efforts will ultimately result in a win-win relationship, with Japanese companies
protecting their intellectual property and the Chinese preparing their regulatory system and properly
enforcing their laws. In fact, the Chinese government has expressed its appreciation toward thesemissions and cooperative projects, and has stated its hope for the continuation of these projects
because they are so important to the government itself.

By conducting such events yearly, withpublic and private sectors working together rather than separately, China is beginning to see mission
members as old friends, and with each visit the level of sincerity rises.

204

Table III-6 Trends in number of international patent applications for threeleading countries

U.S.
Japan
Germany
Total for members of Patent Cooperation Treaty (PCT)

2002
41,296
14,063
14,326110,392(Units: applications)
2004
2006
43,35050,08920,264
26,906
15,216
16,866
122,627 147,500

Source: The International Patent System in 2006, PCT Yearly Review

Table III-7 Trends in Japan's balance of payments of patent royalties, etc.

IncomeExpenditures
Balance of payments(Units: $100 million)
2002
2004
2006
104
157
201
110
136
155
-6
21
46

Source: Based on "International Balance of Payments Statistics" (Bank of Japan) data, converted at the
Bank of Japan's interbank quarterly average dollar exchange rate.

Fig III-13

CJ Mark

205

Supplement: Japanese Companies’ Growth Strategy and Emerging
Markets■ The growing middle class
The attention being given to emerging economies has resulted in a number of them being
nicknamed the “BRICs” (Brazil, Russia, India, China). After the BRICs are the so-called “Next 11”(Bangladesh, Egypt, Indonesia, Iran, South Korea, Mexico, Nigeria, Pakistan, the Philippines,
Turkey, Vietnam). In addition, the BRICs are now commonly referred to as the BRICS, with thecapital S standing for South Africa.
The trajectory of economic growth in each of these countries is different depending on theirrespective national systems and economic structures, but they all have two things in common: a highrate of economic growth in recent years and an emerging middle class.
The World Bank says that because of global economic growth, the “global middle class” indeveloping countries will grow from 4.2% of world population in 2000 to 14.9% in 2030 (Fig.
III-14). At the microeconomic level, active consumerism has led to a continuing rush to build
European and U.S. style shopping malls and to open brand-name stores in emerging economies,
while at the same time the state of distribution is changing greatly.
Given the emergence of this middle class, Japanese companies seeking to achieve stable growthneed to incorporate the positive cycle of growth in the emerging economies into their businessactivities and to form business partnerships and develop new markets in the emerging countries.
However, although these emerging economies are often lumped together, each country has its own
consumption patterns and culture, and naturally a unique approach will need to be taken in eachmarket.
Acknowledging this reality, this supplementary section gives an overview of market
characteristics in India, China, Brazil, Russia, South Africa and Turkey, as well as case studies ofmarket development strategies.
■ India■ Middle class to make up more than 40% of population in 2025
India’s consumer market is expected to grow from 17 trillion rupees in 2005 (about $385.5 billion,
no. 12 in the world) to 40 trillion rupees in 2015 and 70 trillion rupees in 2025, making it the fifthlargest market in the world.5
Other forecasts regarding income classes in the future are that 1) average household income willrise from 113,744 rupees in 2005 to 318,896 rupees in 2025, and that 2) the middle class6, defined ashaving an annual household income of 200,000 to 1,000,000 rupees (purchasing power parity
equivalent, $23,530 - $117,650), will grow to be 41% of all households by 2025, or about206

583,000,000 people.
Behind these projections of rapidly growing markets and income are active manufacturing andservice industries and the resulting increase in wages. Sales at 673 major companies listed on stock
exchanges were up 32.3% year on year during FY2006 (April 2006 to March 2007), while net profit
rose 46.3%. Because positive corporate performance is reflected in employee wage standards,
India’s wage increase of the past few years, remarkable even by Asian standards, will continue.
■ Domestic retail markets rapidly organizing
Under the circumstances, India’s retail industry has been rapidly transforming in recent years.
Large shops under corporate management are quickly appearing, especially in large cities and theirsuburbs, and “organized markets” such as department stores, shopping malls and supermarkets, areforming. As a result, non-organized or individually managed shops are starting to reorganize or dropout of the market, indicative of the waves of reform starting to lap against the retail industry as awhole.
According to India Retail Report 2007 (published January 2007) by India’s Ministry of Commerce& Industry and an American group of consultants, the estimated size of the retail market in India in
FY2006 was 12 trillion rupees (about $270 billion), equivalent to approximately 60% of total
consumer expenses; the share of this total from organized markets, those providing retail services
under corporate management, was 550 billion rupees (about $12.4 billion).
While India’s retail market has grown 5.7%7 annually since FY2004, organized markets havegrown 34.8% annually, and their share of the entire market has risen from 3.0% in FY2004 to 4.6%
in FY2006 (Table III-8).
Organized markets have a high share of the following categories: apparel and fashion (18.9%
share), timepieces (45.6%), shoes and footwear (37.8%) and so on. Specialty shops under corporate
management and targeted at high income customers are seen as growing quickly in those fields
dominated by fashion and luxury articles. The growing number of shopping malls, primarily in urban
centers, is also spurring the opening of new shops for these specialty stores. As of 2006, there werealready in operation 100 large shopping malls housing various specialty stores, department storesand supermarkets, with about 600 more such malls under construction (or in planning). Over the
next four to five years, more than 20,000,000 square feet of new shopping mall space is expected tobe constructed annually (Table III-9).
The development of new forms of retail, such as shopping malls, department stores andsupermarkets, not only diversifies the means of sales and simplifies distribution, but also gives
greater access to leading edge and high function products and at the same time gives consumers awider range of choices, thereby encouraging new demand among the middle class with its buying
power. The changing market structure and new consumer demand will be a growing business

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opportunity for Japanese companies in the coming years.
■ Taking advantage of rapidly growing organized retail chains is key
In 2006, such major domestic zaibatsu (financial clique) company groups as Reliance Group andTata Group were seriously getting into the retail business, committing large amounts of capital todevelop retail chains for the nationwide market. Existing retail chains, such as ITC Group, RPG
Group and K Raheja Group, likewise have stepped up the pace of opening new shops on a national
scale, and India’s retail market is expected to change greatly in the next few years.
According to industry group estimates, the number of hypermarkets (extra large supermarkets thatcombines a supermarket and a department store) managed by major company groups will expand
from 50 in 2006 to 1,200 in 2011.
Similarly, volume home electronics chains like Next, Vivek and Vasanth have rapidly expanded
their store numbers in recent years, especially in the vicinity of large cities like Delhi, Mumbai and
Chennai, further spurring organized markets. The Tata Group, in addition, formed a business
partnership with Woolworths, a major Australian retailer, leading to the opening of Chroma, the firstin a chain of retail stores of a nationwide scale, in Mumbai in October 2006. By 2010, the groupexpects to be operating 100 stores nationwide, each with a spacious 15,000 to 20,000 square feet ofretail area and a wide selection of more than 6,000 types of products.
As this has been happening, companies like Sony, Hitachi, and Matsushita in recent years havebeen devising serious sales strategies in the market for high-end home electronics such aslarge-screen flat-panel televisions and digital appliances. For Japanese electronics manufacturers to
expand their share of the home electronics market in the future, they need a strategy for expanding
the number of shops through franchises and must additionally form partnerships with the nationwide
specialty retail chains mentioned earlier to build their sales and after-sales service networks.
■ China■ Consumer markets based mainly in urban centers

Although China’s rural population greatly outstrips the number of urban dwellers, theretail market is mainly urban in character. Markets in urban centers make up more than
two-thirds of China’s total consumer market.
The National Bureau of Statistics of China divides the urban population into eight income classes
and calculates the average per-capita income for each of these. Based on this average income,
JETRO has estimated the average monthly income for each income class and found that in 2005 theaverage monthly household income for the upper class in the urban centers (estimated to be about
10% of all households) was about $839. According to the statistics bureau’s data, the monthly
income for the highest income households has grown 130% in the past five years and 60% for208middle income households, while that of the lowest income households has grown only 20%,indicating a growing income gap even in the urban centers (Table III-10). Furthermore, in 2005, thehighest income households made 8.9 times the income of the lowest income households, and the gap
is increasing year by year.
The Chinese government does not at this time clearly define the middle class, but the income
range of 60,000 - 500,000 yuan annually (about $7,500 - $62,700) is a widely accepted definition.
Though there are no definitive statistics concerning the population in this range, some estimates say
it includes 80 million income earners, making up 6% of China’s total population (Shanghai
Securities News, June 18, 2007).
Next, the statistics on the number of durable goods owned per household in urban areas (Table
III-11) indicate that private automobiles have shown the greatest growth rate over six years. In 2006,
4.3 households out of 100 owned an automobile, which is low compared to other durable goods, but
the annual growth rate of 44.0% is very high in relative terms. Another category showing a similarlyhigh growth rate is mobile telephones, which grew by 43.5%. Still other products with high growth
rates include personal computers and video cameras. At the other end, washing machines,
refrigerators, color televisions and so on grew only by single digits.
■ Rural area consumption starting to resemble urban pattern

Statistics for the number of durable goods owned by households in rural areas
showed very similar characteristics as the urban centers. Color televisions and mobile
telephones for example showed a relatively high diffusion rate. Other products with ahigh ownership growth rate include air conditioners (33.8%) and personal computers(33.2%). Nonetheless, there were large gaps in ownership numbers with the urban areas
in 2006: 88 air conditioners were owned by urban households for every seven owned byrural households, and for PCs the ratio was 47:3. In rural markets, consumer demand forsuch products is expected to continue growing in the future. However, the breakdown
and prices of products consumed will vary by income class, even for the same types of
products. While lower income households will only consume the necessities, middle
income households will exhibit a certain level of demand for quality and specificmodels. The high income class, moreover, will mimic consumption patterns of urban
areas, for example by showing interest in product brands, quality, models and service.
■ Changes in target markets

The Chinese market consists of smaller markets from diverse income classes, andconsumption patterns vary considerably depending on the income class.
Because of this, those wishing to develop their markets in China must clarify their target market

209and then proceed accordingly. The high-end market, however, which is the target of many foreign
owned companies, already has many participating companies and is limited in scale, making thecompetition very intense.
One direction that a company can go in this situation is to expand the scope of the company’s
strategy to encompass markets other than those previously targeted. A company might expand, forexample, from the high-end to mid-range market, or from there to the low-end market.
In 2003, Nokia of Finland began reorganizing its sales system in the mobile telephone industry. Its
goal was to expand sales further by stepping up marketing in regional cities and rural areas, as wellas in urban areas, filling out its product line with an awareness of the needs of its Chinese consumers.
The strategy paid off as Nokia’s share in the Chinese mobile telephone market rose to 35% in 2006.
In the cosmetics industry, Procter & Gamble of the U.S. had based its business since 1999 solely
on the Olay brand for general users, but in recent years, as consumer income has risen, it has been
adding mid-range and high-end products. During this time, it has been expanding its target to thehigh-end market with the 2005 launch of high-end products in the CoverGirl cosmetics brand andthe 2006 rollout of the illume skincare brand. The target of the L’Oreal brand extends all the way
from the wealthy class to consumers in inland areas and regional cities. Procter & Gamble hasoffered many independent brands, from high-end goods priced at 200 yuan and above to inexpensive
products of 50 yuan, which compete with local brands. It has recently announced a strategy to
expand its target to include rural areas.
Foreign companies doing business in China have very diverse strategies for developing markets
there. Japanese companies might consider continuing to specialize in the high-end market, putting
most of their investment there and differentiating themselves from other brands and products to
expand the high-end market, or they might consider a strategy of expanding from the high-end to the
mid-range and then the low-end market. On the other hand, the more the Chinese market ischaracterized by the mid-range and low-end markets, the greater the competition will be against
local Chinese companies. To do business effectively in such a market requires refraining fromcompeting on price and domestic sales capacity and competing instead on quality and brand power.
■ Brazil■ Breakdown of consumer income

The popular image of Brazil’s consumer market is characterized by a wide gap
between rich and poor and with only a small target customer base for products sold byJapanese companies. Certainly, the statistics indicate that the lower income class makes
up more than 40% of the economically active population in the Brazilian consumer
market.

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■ More than half of households are target of mid-range product market
In Brazil, however, characterized by many working individuals in a single family, the standard
that companies commonly use when they conduct marketing is monthly income per household(Table III-12). The exact standard that each company uses varies somewhat, but households withmonthly income of more than $1,234, or 10 times the minimum wage, are largely considered thetarget of high-end products.8 The target of mid-range markets is households with monthly incomesof more than $247 and up to $1,234 (two to 10 times the minimum wage), and that of low-end
products is households with incomes of $247 (twice the minimum wage) down to no income. In
2005, the number of households targeted by the mid-range market reached 27,760,000, or 52.3% of
all households, while the number of households targeted by the low-end market was 18,910,000, or
35.6% of the total. Between 2002 and 2005, the growth rate for these two markets was 11.6% forhouseholds targeted by the mid-range market and 22.4% for those in the low-end market.
■ Rising standard of income for lower income class

In recent years, Brazil’s lower income class has become more willing to spend. Thisis the result of President Lula’s so-called Borsa Familia program for the redistribution ofincome to low income people and growing demand for the resource industry. Retailsales have been strong in the north and northeast, regions considered to be not highly
developed. Whereas the retail sales index for 2006 was up 6.2% over the previous year
for the country as a whole, in the north and northeast it grew far faster than otherregions, at 17.6% and 10.4%, respectively. Incidentally, the average growth in thesoutheast, where the state of São Paulo is located, rose 8.1%.
■ Installment payment plans contribute substantially to rising purchasing power

Although middle income and low income consumers make up the bulk of theBrazilian market, the country has a relatively high rate of diffusion of televisions,refrigerators and other consumer durables. Per-household diffusion rates for durables in2005 were 91.4% for televisions, 88.0% for refrigerators, 35.8% for washing machines
and 18.6% for personal computers. The diffusion rate for personal mobile telephones
among the population aged 10 and up was 36.7%.
The custom of installment payments makes it possible for low income people to buy durables withhigh unit prices. To give an example, an LG brand 21-inch flat-panel color television priced at 599
reais can be purchased in 12 monthly installments of 49.92 reais (about $20; as of April 2007).
Although these installment plans are advertised as charging no interest, the purchase price in factappears to have interest built in. What is important to the consumer is not the lump-sum price, butwhether or not the price can be paid in monthly installments; in many cases, the price tag shows the211monthly installment price in larger lettering than the lump-sum price.
Casas Bahia, Brazil’s rapidly growing volume retail chain of home electronics and furniture forlower income customers, gets only 10% of its sales from customers who pay the price in one lumpsum; all other sales come from installment plans. The chain offers financing to low income
customers who would not qualify for financing at ordinary shops, and for that reason sets a highaverage interest rate of 4.5% monthly (69.6% annually) (as of 2006). Because customers with credit
problems can purchase products here that they could not purchase on installment from other shops,
the probability of defaulting on a loan is actually said to be reduced.
■ Riding the wave of a growing purchasing class
Brazil does not have any wholesale or distribution companies with nationwide networks. For thatreason many industry sectors have to build their own distribution networks in each region. Very few
large foreign owned retailers such as Wal-Mart of the U.S. and Carrefour of France have penetrated
the north and northeast, which are dominated by the many small-scale, locally owned shops.
Different advertising techniques are used in each region as compared to those used in the cities.
Newspaper advertising is effective in the southeast and south, but less so in the north and northeast.
With radio the opposite is true. There is supposedly little difference in the effectiveness of televisioncommercials in different regions. In the north and northeast, a “direct appeal” to consumers is said tobe often effective. Advertising techniques frequently used include putting advertisements on vansand bicycles and having them go around town, as well as the use of pop-up advertising insupermarkets. Some foreign-owned companies have conducted product PR as part of the curriculumin social studies, etc., at public elementary schools, which are attended by many children from low
income families.
Professor Eduardo Ayrosa of the Brazilian School of Public and Business Administration remarksthat “Very few foreign-owned companies have a deep understanding of the consumer characteristics
of Brazil’s lower and middle classes, but marketing effectively to these classes will be increasingly
important in the future.”
In addition to appealing to the upper income class as in the past, Japanese companies will need toride the wave of the growing purchasing class that has recently emerged.
■ South Africa■ Where 80% of consumers are black
Of the total population of 47,810,000 in South Africa, 37,390,000 (78.2%) are Black, 5,120,000(10.7%) are White, 4,130,000 (8.7%) are Coloured (mixed race) and 1,160,000 (2.4%) are Asian.
Although whites make up only about 10% of the population, they account for 39.0% of the total
income. Per-capita income in 2005 was $12,671 for Whites but only $2,100 for blacks, $7,246 for212

Asians and $3,519 for Coloureds, indicating that a large economic gap persists between the races(Table III-13).
There is a widening income gap even among Blacks, however, so the income of Blacks is not
uniformly low. The Gini coefficient for Blacks is the highest at 0.63, followed by 0.56 for Coloureds,
0.51 for Asians and 0.45 for Whites.
Statistics for the number of households in different economic classes in 2005 indicate that there
were 1.37 million Black households in the class earning more than 96,000 rand annually,outnumbering the 1.19 million white households in the same class (Fig. III-15). The 480,000 White
households in the class earning at least 360,000 rand annually were 59% of the total, but these were
followed by 220,000 Black households, which outnumbered the 60,000 Coloured households and
50,000 Asian households.
Although it is true that an increasing number of Blacks in South Africa have seen their incomesgrow in recent years, it is also a fact that the number of Black households making no more than
2,400 rand annually has increased from 210,000 in 1996 to 590,000 in 2005, so there is a growing
income gap not just among the races but also among Blacks.
The fact that some high income individuals have appeared among the Black race, of whom there
are so many low income persons, is due in part to the government’s effort to integrate black people
into the South African economy. Under the apartheid system, blacks faced occupational restrictions
and their salaries were kept lower than those of whites. Ownership of the means of production was
also prohibited from them. Since democratization, the South African government has passed the
Employment Equity Act, banning discrimination such as the use of race or sex as a condition of
employment, and requiring companies to give priority to Blacks, non-Whites and women inproportion to population. In order to raise the equity interest of non-Whites in companies, thegovernment has made certain levels of equity interest held by Black people a requirement for
winning procurement orders. Because a certain level of Black equity interest is a requirement formembers of the banking and mining industries to get an operating license, such businesses havetransferred shares to Black companies at discount prices and Black people have taken somemanagement positions.
■ The rapidly growing consumer market

South Africa’s household consumption has demonstrated strong growth since 2003,
greatly spurred by purchases of durable and semi-durable goods (Table III-14).
The growth in household consumption can be attributed first to the increasing employment ofBlack people and the growing income of their households, as mentioned previously. Second, thenumber of households is increasing (i.e., the number of members per household is decreasing) andthere is a growing population of young people, leading to greater demand for durable goods. Third,

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the rand has been strong on the exchange market, bringing down the prices of imports; particularly
in categories with a high percentage of imports such as automobiles and home electronics, prices
have declined on a year-to-year basis. In addition, wages have risen faster than the consumer priceindex (CPIX), causing the price of such products to decline in relative terms.
Fourth, access to financial services has improved. Interest rates have fallen in response to thedecline in the CPIX since 2002. As these rates have come down and the incomes of Black people
have risen, financial institutions are actively extending financing to Blacks, whom they would nothave served in the past. Aside from financial institutions, retailers are actively offering sales on an
installment basis to accommodate the new middle class consisting mainly of Blacks, which in turn is
expanding consumption by Blacks beyond their present income levels.
■ The emergence of a new Black middle class

The UCT Unilever Institute of Strategic Marketing, based at the University of CapeTown, released a study report in 2006, referring to the new middle class of Blacks withgrowing economic clout as the “Black Diamond.” The report suggested that this new
middle class would spur future consumption.
The new Black middle class as described by the Institute refers to a group of people who 1) makeup 2.6 million (12%) of the country’s 23 million Black consumers but account for 54% of those
consumers’ purchasing power, and 2) generally speaking, are wage earners, have higher education,and have an average monthly income of 6,100 rand (about $900). They also have what is describedas incredibly high confidence in their own future and the future of their country and tend to be glad
to make long-term investments. They take pride in their African culture and heritage and believe innationalism as well as peace and cooperation among the races. Members of this class say that theirbiggest concern is their amount of debt, but at the same time many of them are managing their debt
relatively well. They take loans to purchase real estate, automobiles, home electronics (heaters,
refrigerators, washing machines, televisions, DVD players, etc.), apparel and so on. Goods that theywould like to buy next include real estate, the latest mobile telephones, laptop computers, decoders
for paid television broadcasts, and plasma televisions.
■ Business models for South African companies

A variety of business models are being looked to, especially in the distribution
companies, targeting the growing new Black middle class. At the present time, shopping
centers are being built in many townships (formerly districts set aside for Black
residents), and a steady stream of supermarkets, apparel dealers and fast food shops areappearing in the same areas, expanding sales at a very quick pace. Most retailers issue
their own installment sales cards to get customers.

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Woolworths, a large South African supermarket targeting relatively high income customers, has
tried offering products for low and middle income customers and changing its store brands, but thiswas unsuccessful. The retailer now believes that township residents want access to the same types of
products as those available in urban shopping centers, so it is currently converting to the unified
national Woolworths brand and looking to rally with mid-range and high-end goods.
Foschini, another apparel dealer that is getting into the townships, likewise believes that
low-priced goods are not necessarily what customers in these areas are looking for. The company
says that a house, a car and the right clothing are critical to being seen as a success in the townships,
and in the area of clothing the trend is to purchase items that are different from what other people are
wearing. Thus the association between Blacks and low-priced goods is being rejected.
On the other hand, home electronics dealer Hi-Fi Corporation says that its venture into thetownships was a mistake. The company opened for business in Soweto, a township on the outskirtsof Johannesburg, in 2006, but sales fell short of plan. It notes that members of the new Black middle
class who own automobiles tend to purchase expensive products such as plasma and liquid crystal
televisions in stores located in districts where many Whites live, and the Soweto store tends to sell
inexpensive home electronics like irons and lower-priced models of televisions. The company
creates newspaper insert advertisements especially for Soweto, primarily featuring low-priced items.
It does not actively promote installment purchases because that tends to increase prices.
Thus, South African companies are eager to win customers from the new Black middle class by
distinguishing what they sell according to product type and region.

5

Based on The Bird of Gold: The Rise of India’s Consumer Market, a report on India’s consumer markets

by McKinsey & Company in May 2007.
6

Based on definition by the National Council of Applied Economic Research (NCAER). Of households

in the middle class, 25% owned automobiles and 66% owned such home electronics as refrigerators andair conditioners.
7

Real growth rate, based on FY2003 as benchmark year.

8

Based on categories defined by Brazilian consulting company Data Popular.

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Column III-5
 The middle class: driver of automobile sales (Russia)
Russia’s strong economy of recent years has energized its consumer market. After the wealthyclass, it is the middle class that is mainly driving consumption.
The automobile market has been particularly active with the growth in income. In November 2005,
the major auto dealer Avtomir conducted a survey of about 1,700 customers who had purchased new
autos from the company and found that those making more than $400 and up to $1,000 per month
were the largest income class of customers (54.1%). While it is possible to buy an auto for about$5,000 in Russia if it is a compact, the best-selling autos are those priced between $10,000 and$20,000.

 Foreign brand autos in high demand
For several years after the 1998 fiscal crisis, the Russian market for automobiles stagnated, but it
has steadily expanded since 2003. While the market share for Russian brand autos manufactured bymajor domestic automaker AvtoVAZ has fallen, that of foreign brand automobiles has climbed
rapidly.
In 2006, sales of foreign brand autos passed the one million mark for the first time, outstripping
the number of Russian brand autos sold. While foreign brand autos increased sales by 64% over theprevious year, AvtoVAZ sales increased less than 3%, and its market share fell from 49% to 41%.
Some of the big reasons why foreign brands are so popular include rising incomes, the growing useof auto loans, and the more ready availability of foreign autos that were once considered
unattainable.

 GM sets aside special sales area for wealthy customers
In this market environment, Klarus Trading, official dealer for U.S.-based General Motors (GM),has been greatly successful with a two-sided strategy that clearly distinguishes between wealthy
customers and all others.
This dealer handles four lines (Cadillac, Hummer, Chevrolet and Opel), but the first floor of its
store in Moscow displays just Chevrolet and Opel, for ordinary customers. The average monthly
income of these customers is $700-$2,000, and about 70% of these take out auto loans. The main
target here is company employees and managers of smaller companies. On the second floor, however,Cadillacs and Hummers are on display.

Wealthy individuals such as politicians, artists andmanagers of major companies are the main target here. Almost none of these customers take out autoloans, and in many cases they make lump-sum payments in cash.

216Column III-5: automobile purchaser's average monthly income in Russia
No answer
6.9%
Low income（under
150US$）
1.5%

High income(over2,000US$)
4.0%
Upper middle
income(1,001US$〜
2,000US$)17.1%

High income(over 2,000US$)

Lower middle income（150US$〜400US$）
16.4%

Upper middle income(1,001US$〜
2,000US$)
Middle income(401US$〜1,000US$）
Lower middle income（150US$〜
400US$）
Low income（under 150US$）
No answer
Middle income(401US$〜
1,000US$）
54.1%

Source: Avtomir217

■ Turkey■ Vigorous private sector consumption
Turkey’s economy has continued to grow by an average of more than 7% since 2002. The greatest
contributing factor to this growth is personal consumption, which is valued at more than 60% of
GDP. Particularly vigorous spending on such durables as automobiles, home electronics andfurniture, as well as non-durables like apparel, bags and shoes is supporting this economy. Per-capita
GDP (nominal purchasing power parity base) continues to climb, reaching $7,711 in 2005. That
represents an increase of 40.3% over the figure from a decade earlier in 1995. As past concerns overhigh interest rates and a drop in the exchange market recede, it has gotten easier for consumers totake out lira-denominated loans, as demonstrated by the significant growth in consumer loan andcredit card loan balances since 2004. Most customers purchasing automobiles, home electronics orhome furnishings in particular take out a loan to do so.
The average household’s disposable income in Turkey climbed from $5,542 in 1994 to $8,996 in
2004, a 62.3% gain in 10 years. By income class, average disposable income doubled for the 20% of
the population with the lowest income in the decade between 1994 and 2004, indicating that theeconomy has raised the income floor for the low income class (Table III-15). As for the distributionof disposable income, whereas in 1994 there was a very significant gap between the poorest class(4.9%) and wealthiest class (54.9%), by 2005 the gap had narrowed to 6.1% for the poorest and
44.4% for the wealthiest.
Even so, however, there is an income gap with a multiplier of seven between the wealthiest classand the lowest class, and even comparing the upper class and lowest class reveals an income gap
with a multiplier of approximately two. Figures show that the wealthiest class spends more than 50%of their income on education, transportation and culture, with household effects such as apparel anddurable goods accounting for about 40%. The 15,000,000 people in the wealthiest class, or to put it
more precisely, those at the upper end even within this group, substantially support Turkey’s growthin consumption.
■ Contest to reach consumers with TV commercials intensifying
As if to symbolize the vigorous growth in private sector consumption, the rush to build large
shopping malls in recent years continues in Istanbul and other major cities. In Istanbul alone there
are now about 40, with 20 or more in planning, while in the suburbs large foreign owned shops arealso increasing their presence, including Metro (Germany), Carrefour (France) and Ikea (Sweden).
Of Turkey’s 81 provinces, 18 had a population of at least 1,000,000 in the year 2000, starting with
Istanbul and its 10,010,000 residents. Targeting regional consumer markets, major commercial
facilities are being constructed at an accelerating pace in the capital Ankara (population 4,010,000)
as well as Izmir (3,370,000), Konya (2,190,000), Bursa (2,130,000) and Adana (1,850,000).

218

At the same time, there are signs that the competition to grab customers is starting to overheat.
Simply providing favorable treatment such as installment purchases, which are alreadycommonplace, is not enough; what determines success is effective advertising through the optimal
media. A brand survey conducted by a private survey company revealed that the most recognizedbrand in Turkey during 2006 was Arçelik, a domestic leader in home electronics that has retained the
top spot in recognition for the past 10 years. Others highly recognized were the Turkish brand Ülker
(pastries), Nokia (mobile telephones) and Coca-Cola (soft drinks). All of these were so wellrecognized because of their frequent TV commercials. Among the reasons that television isconsidered the most effective means for developing a market is the fact that television is such an
intimate part of the Turkish people’s lives, in part because the entertainment industry is so advancedin the nation.
■ Availability of after-sales care critical to success
Turkish companies and consumers are reportedly characterized by a love of new items and brandgoods and a desire to show off; this mindset is a major motivation for consumption. There is a
deeply rooted contradiction in this market, however: on the one hand, consumers are adept enough toabsorb new products and leading-edge technologies, but on the other hand they prioritize price and asense of getting a good deal over getting a lot of functions for a higher price. This is an extremelycomplex market, simultaneously offering goods for the “high-end market” and the “inexpensive
market,” designations which apply regardless of income class. High-tech products, where Japan has
so much expertise, are very highly regarded, and newspapers frequently feature new technologies
and products developed in Japan, but when business actually takes place, the customer often tends todemand a lower price, since he does not really need all the added functions. Japanese products,
therefore, face brisk competition from three sources: 1) Turkish brands, which have high recognition
and are affordable, 2) European products, which enjoy the quality and price benefits of being part of
the EU customs union and whose brand names have widely penetrated the market, and 3) very
inexpensive Chinese products.
The supplier countries that have most successfully used these characteristics of the Turkish market
are South Korea and China. In the mobile telephone market, Samsung of South Korea is competingas an equal with European companies such as Nokia, and Motorola, a U.S. company. Mobile
telephones are seen as a status symbol in Turkey, and partly because of this they are very common
even among the low income class. Many people have more than one mobile telephone, and it isestimated that about 50 million such phones were in use at the end of 2006, with the number
expected to continue growing steadily into the future. Recently, the purposes for using a mobile
telephone have been partly recreational, including text messaging and shooting photos and video,and for this reason Samsung is enhancing their telephones’ audio function and storage capacity,219

introducing extra thin and wristwatch-type models. As new models come out featuring the latest
technologies such as these, Samsung simultaneously conducts product promotion using various typesof advertising media, and the company has successfully grasped the psychology of the Turkish
consumer.
In the case of China, most of the business consists of orders from Turkish companies looking to
reduce costs, but in the past five years the value of imports from China has grown sevenfold, taking
a portion of the business by consumers who prioritize price. Products from China now make up 7%
of imports.
Amidst this competition against products from Europe, China and South Korea, the key to success
is whether or not a company provides after-sales support in Turkey. In the Turkish market forcommercial sewing machines, where Japan is a strong player, low-priced Chinese goods havethreatened Japan’s share in recent years. This, however, has resulted in a large number of claims overbreakdowns and lack of repair services, so customers are returning to Japanese manufacturers, whohave local representative offices and have provided after-sales care for many years.
While there is some demand in Turkey for low-priced products, there is also a strong tendency torepair products when they break down and to use them for a long time, and so Turkish consumers
feel uneasy about foreign companies who do not have some kind of base in the country. This is why,in the Turkish home electronics market, the leading domestic manufacturers, who have set up strong
nationwide after-sales care networks with strong local ties, have such a big share of the market.

220

Fig. III-14

Developing country share of the global middle class

(%)
16
0.5
14

1.6
0.8

12

2.6

Sub-Saharan Africa
South Asia
Middle East and North Africa
Latin America and Caribbean
Eastern Europe and Central Asia
East Asia and the Pacific

10
2.2

8
6
4

0.2
0.1
0.4

2

7.3
1.5
0.8
1.3

0
2000

2030

Note: Thresholds of Brazil and Italy are annual per capita incomes (2000 PPP) of US$3,914 andUS$16,746.
Source: Global Economic Prospects 2007, World Bank

Table III-8 Retail Market by segments in India(2006)
Fashion segments

Total Rs. Crore

Growth Rate

Clothing, Textile & Fashion
Jewellery
Watches
Footwear
Health & Beauty Care Services
Pharmaceuticals
Consumer Durables, Household electronics
Mobile handsets
Furniture & Furnishings
Food and Grocery
Catering Services
Books, Music & Gifts
E entertainment
Total

113,500
60,2003,950
13,7503,800
42,20048,10021,65040,650743,900
57,00013,30038,0001,200,000

10.7%
9.3%
10.2%
9.1%
14.9%
10.2%
13.9%
19.9%
3.1%
2.2%
18.6%
18.4%
14.5%
5.7%

% Share in total
Organised
Retail Rs. Crore organised retail
Growth Rate
21,400
18.9%
1,680
2.8%
1,800
45.6%
5,200
37.8%
400
10.6%
1,100
2.6%
5,000
10.4%
1,740
8.0%
3,700
9.1%
5,800
0.8%
3,940
6.9%
1,680
12.6%
1,560
4.1%
55,0004.6%

Note: The Growth rate is the average growth rate from FY04-06 at 2003 prices.
Source: India Retail Report 2007

221

Growth Rate
30.3%
30.6%
18.2%
34.2%
52.9%
31.4%
31.2%
33.7%
20.6%
30.8%
30.8%
34.9%
44.1%
34.8%

Table III-9

Number of Malls Across India
Number of Malls (As of
2006)

Built-up Square
Feet Area

27
19
5
3
3
3

3.50
5.11
1.33
1.27
0.37
0.90

Delhi(NCR)
MumbaiBangalore
KolkataHyderabad
Chennai

Number of Malls inplanning or underconstruction to be
65
80
22
19
12
9

Total Square Feet
Area
19.99
15.64
9.20
5.37
1.99
4.90

Source: India Retail Report 2007

Table III-10

Average household income trends in China's cities(Unit: US$)
Proportion

2000

2005

Growth rate, %(2000〜2005)
133.7

Highest Income

90〜100％359

839High income

80〜90％

274

509

85.8

Upper middle income

60〜80％

225

386

71.6

Middle income

40〜60％

187

297

58.8

Lower middle income

20〜40％

154

226

46.8

Low income

10〜20％

125

170

36.0

Lowest income

0〜10％

96

115

19.8

(impoverished)

0〜5％

85

94

10.6

Source: China Statistical Yearbook

Table III-11 Chinese household durable goods ownership (average units owned /100 households)
Urban
2000
Color TV
Refrigerator
Washing machine
Air conditioner
Cell phone
ComputerCameraFamily car
Motorcycle

116.6
80.1
90.5
30.8
19.5
9.7
38.4
0.5
18.8

Rural

Average2006
growth rate
(2000-2006)
137.4
2.8
91.8
2.3
96.8
1.1
87.8
19.5
152.9
43.5
47.2
30.9
48.0
3.8
4.3
44.0
25.3
5.1

Source: China Statistical Abstract 2007

222

2000
48.7
12.3
28.6
1.3
4.3
0.5
n.a.
n.a.
21.9

Average
growth rate
(2000-2006)
89.4
10.7
22.5
10.6
43.0
7.0
7.3
33.8
62.7
57.7
2.7
33.2
n.a.
n.a.
n.a.
n.a.
44.6
12.6

2006

Table III-12 Number of households in each market in Brazil
2002
Number of households in high-end market (morethan 10 times the minimum wage)
Number of households in mid-range market(more than two times, up to 10 times the
Number of households in low-end market (up to
two times the minimum wage, down to no wage)
Other (unknown because income not reported)
All households(Units: 1,000 households)
Growth rate
2005
2002 - 2005

6,306

5,485

-13.0

24,88527,763

11.6

15,455

18,912

22.4

961

935

-2.7

47,60653,095

11.5

Notes: Brazilian household income statistics compiled using indicators that are based on multiples of minimum wage.
"No income" includes people who live only on pensions or other funds provided by society.
Source: Compiled from data of the Brazilian Institute of Geography and Statistics (IBGE).

Table III-13 Annual income per capita in South Africa(Unit:US$)

Indigenous
EuropeanColouredIndian/Asian
Total

2001
1,023
7,072
1,691
3,712
1,826

2002
941
6,255
1,548
3,411
1,643

2003
1,451
9,171
2,384
5,223
2,469

2004
1,893
11,633
3,124
6,703
3,172

2005
2,100
12,671
3,519
7,246
3,481

Source: Global Insight Southern Africa

Fig. III-15 Number of households by income group in South Africa(2005)
1,600,000
1,400,000
1,200,000
1,000,000

Indigenous
European

800,000
600,000
400,000
200,000

02,4
2,
00
40
06,
00
6,0
0
00
-1
2,
12
00
,0
0
00
-1
8,
18
00
,00
0
030
30
,0
00
,0
00
-4
2,
42
0
00
,0
00
-5
4,0
54
00
,0
00
-7
2,
72
00
,0
0
00
-9
96
6,0
,00
00
013
13
2,
2,
00
00
0
019
19
2,
2,
0
00
00
036
0
,0
O
00
ve
r3
60
,00
0

0

Source: Statistics South Africa

223(Rand)

Table III-14

Real final consumption expenditure by households(Unit:%)

Durable goods
Semi-durable goods
Non-durable goods
Services
Total

2000
12.4
9.0
-0.6
6.1
4.1

2001
4.6
5.3
1.5
4.7
3.5

2002
0.7
8.9
2.1
3.3
3.2

2003
8.6
6.2
1.8
3.3
3.5

2004
16.2
18.2
4.8
3.4
6.7

2005
18.7
16.5
4.8
2.6
6.6

2006
15.5
18.6
4.8
3.6
7.3

Source: South Africa Reserve Bank

Table III-15

Disposal income by stratum in Turkey (1994-2005)
Year

Distribution of household
disposable income bystratum (%)

Average disposable income
per family (US$)

1994
2003
2004
2005
1994
2003
2004
2005

All
Income level strata, at 20% intervals
incomePoorestRichest⇒levels
100.0
4.90
8.60
12.60
19.00
54.90
100.0
6.00
10.28
14.47
20.93
48.32
100.0
6.04
10.69
15.22
21.88
46.17
100.0
6.05
11.08
15.83
22.60
44.44
5,542
1,346
2,391
3,494
5,272
15,207
7,212
2,162
3,708
5,219
7,548
17,423
8,996
2,716
4,809
6,845
9,842
20,768
10,865
3,287
6,018
8,602
12,27824,139Source: The Turkish Statistical Institute224

IV. The Growing Use of Free Trade Agreements in Asia and JapaneseCompany Growth Strategies (Conclusion)■ World trade and investment: more than three years of strong continuous growth
The remarkable aspect of the world economy, trade and investment in recent years is that all threeof these have sustained a high level of growth. Because the three are interrelated, it makes sense thatthey should follow the same trends over the long term. Looking at the past two to three years,
however, one notes that they are not simply moving in parallel; a major feature of the three is thatthe economy has grown at a strong steady rate of about 5%, while both trade and investment havemaintained double-digit growth rates, putting them all on very high growth trajectories.
The fact that the three elements have shown such high growth rates while moving in unison witheach other can be attributed to several factors: growing demand and increasing exports fromdeveloping countries, especially emerging countries; the rapid growth in resource trading andcorporate mergers and acquisitions (M&A); and the boost given to trade and investment by afavorable financing environment.
In China and India, the economy has grown at the rate of about 10% annually, causing someconcern of the danger of overheating. Chinese stock prices have risen rapidly, reflecting the increasein domestic demand, and financial risk is growing greater. With the growing risk, the higher
investment cost and revisions to government policies favorable to foreign ownership, there has been
negative growth in foreign direct investment in China since the previous year, although the amountis still large in scale.
■ Japanese foreign investment hits an all-time high
The Japanese economy has shaken off its three areas of excess (excess capacity, excess
employment and excess debt) and is now achieving solid growth. This has resulted in greatly
increased domestic profitability, which in turn has led to active expansion overseas. The low yen
boosts corporate revenues when payments for exports and profits from overseas are converted to yen.
At the present time, this effect is absorbing the increasing cost of resources and energy, allowing theJapanese economy to grow steadily. Reflecting improvements in the profit structures of Japanesecompanies, Japan set a new record for foreign direct investment in 2006, surpassing the previous
record of 16 years earlier in 1990. This has much to do with the fact that Japanese companies have
expanded aggressively into emerging countries, are increasing their investments to secure rights toenergy and resources, and are experiencing M&As on a large scale.
■ Overseas profit: dependent upon local growth
As a result of overseas expansion, especially in Asia, Japanese companies now get one-third of225

their total sales from overseas, and one-third of this comes from the Asia-Pacific region. The
percentage of sales from the Asia-Pacific region in FY2006 (10.3%) was more than double that of
FY1998 (4.9%), while in the meantime the share from Europe and the U.S. changed very little,
indicating that Japanese companies are increasingly dependent upon sales in Asia.
On the other hand, however, although Japanese companies’ operating profits in FY2006 roseoverseas, the increase was relatively lower than the growth in the domestic market. Additionally,
when return on assets (ROA; operating profits during the term divided by value of assets at the endof term) is broken down into the operating profit ratio and total asset turnover, turnover is shown to
be a bigger contributor to ROA than profit ratio in the overseas business area in contrast to thesituation in domestic business, and this trend is particularly strong in Asia. This may be because
rising ROA is less dependent on the competitiveness of products and service than it is on theeconomic growth of the area in which one is located. This suggests, in other words, that during timesof continued strong growth such as Asia is experiencing, it is best to offer products and services tomeet the growing demand, and when growth slows down, it is best to have a supply system that cancreate profitability backed by competitiveness.
■ Reaping the benefits of the middle class and the positive cycle of growth in emerging markets
The growing consumption in emerging markets such as the BRICs, Turkey and South Africa bears
some astonishing characteristics. The consumer markets in these countries are facing a period ofmajor change. The important characteristic here is the rapid entry of “organized markets” such as
department stores, shopping malls and supermarkets. India’s retail sector for apparel and homeelectronics grew by about 10% in 2006, but the growth for organized markets in each case was morethan 30%. In China’s rural areas, far fewer households own such durable goods as televisions and air
conditioners than urban households, but in recent years the diffusion rate has tended upwards.
At the same time, the percentage of people in the middle class in these emerging countries is
growing at a quick rate, and this is a major factor supporting demand in the organized markets. The
World Bank estimates that by 2030, the percentage of the world’s population consisting of
middle-class persons in developing countries will grow to 14.9%, up from just 4.2% in 2000. The
spread of the middle class and the growth of organized markets are leading companies to get into themarket both for ordinary goods and high-end goods in China, not just for mobile phones but also forcosmetics. Even in such markets as South Africa and Turkey, the middle class’s demand istransitioning from low-end goods to mid-range products.
In this scenario, competition among businesses will grow stronger and stronger in global markets,and the push to offer lower-priced goods is spreading widely even in developed countries such as the
U.S. The U.S. market is characterized by spacious homes, and televisions there are getting larger.
Even as they get larger, they are also getting less expensive, such that volume retailer Best Buy

226mainly displays widescreen televisions of a lower price range than those on display at similar storesin Japan. This is true not only of televisions but also of DVD players and PCs.
■ A double-sided strategy: general-use products and high added-value products
Japanese companies are stronger at integral type production and sales, as best demonstrated in theareas of automobiles and digital home electronics with a high degree of added value; on the other
hand, in recent years these companies have become less competitive at the modular type ofgeneral-use products. Dell Computer of the U.S., to give an example of a company that uses themodular type of production, outsources production of components overseas when a consumer places
an order for a custom-made PC, then in the end assembles the components at its U.S. factory. It also
sells products directly to consumers, with some products sold by volume retailers.
Japanese companies have typically depended primarily on integral production systems, in which
products are completed in house, and have been very cautious about using any modular type systemthat requires outsourcing. One option that may allow Japanese companies to take advantage of thegrowing middle class and favorable cycle of growth in emerging markets, and to keep up with thetrend toward lower prices in such markets as the U.S., would be to adopt a double sided strategy thatis based on an integral type system that also incorporates elements of a modular type system.
In order to do this, one option for Japanese companies is to use outsourcing for general-use
products and sell them under their own brand names, or to form alliances with companies indeveloping countries. Another idea is to apply integral type technology to general-use products andsell modular type products using Japanese technology. Finally, the public and private sectors could
actively work together to provide information so that the world becomes more widely acquainted
with the significant value of Japan’s integral type products.
■ A Japanese growth strategy using free trade agreements with major Asian countries
A trade strategy that liberalizes tariff and non-tariff barriers among major Asian countries is one
step that can be taken to increase global competitiveness of Japanese companies. The Asia-Pacificregion is the site of active trade in goods and services at this time, thanks to trade deregulation.
Along with trade deregulation negotiations taking place at the WTO, there are some other notableactions taking place, including the formation of free trade agreements (FTAs) and economic
partnership agreements (EPAs) that seek to eliminate national and regional tariff and non-tariffbarriers.
At this time, a total of 22 FTAs are in effect in the Asia-Pacific region, nearly all of which havebeen concluded since 2000. The second oldest of these, the ASEAN Free Trade Area (AFTA, ineffect since 1993), is one of the most commonly used FTAs, and the Common Effective Preferential
Tariff (CEPT), the scheme for reducing tariffs within the AFTA, is used on average 23.5% of the227

time in Thailand and Malaysia. Looking at this figure alone, one might conclude that the usage of
CEPT is not very high. A closer look at the actual situation, however, reveals that Japanesecompanies and others are already taking advantage of tariff exemption systems in special economic
zones in certain countries of Asia, and that they are also using tariff exemptions on products that theyexport from countries where they are doing business to other member countries (or the U.S.).
Additionally, Information Technology Agreements (ITAs) eliminate tariffs on IT products traded
between countries that are members to such agreements. Because such schemes have penetrated sofar, one cannot necessarily conclude that the usage of CEPT is low.
What is particularly noteworthy concerning FTAs going forward is the exporting of products fromASEAN to India and Australia, two major markets outside of ASEAN, for internal sale there. For
example, the percentage of all exports traded under FTA arrangements between Thailand and India
make up just 18.1%, but if one looks at just 82 “early harvest” items (items whose tariffs have been
reduced before their FTA took effect), the usage shoots up to 89%. The rate for Thai exports toAustralia is 62.5%, suggesting that if the purpose is internal sales in the importing nation, the rate ofusage of FTAs will be quite high. Thailand uses FTAs to export color televisions, air conditioners
and other products to India and private and commercial automobiles to Australia. In both cases,
Japan-affiliated companies are major users, but in 2005, Thailand passed Japan to become the top
source of Australia’s commercial vehicle imports.
Progress is being made for new FTAs/EPAs in the Asia-Pacific region in the form of ASEAN + 1(i.e., ASEAN plus either Japan, China or South Korea), ASEAN + 3 (ASEAN plus Japan, China andSouth Korea) or ASEAN + 6 (ASEAN plus Japan, China, South Korea, India, Australia and New
Zealand). Considering how much FTAs are actually used by companies in the Asia-Pacific region, an
FTA that involves India, Australia and New Zealand could have the greatest effect.
When this was actually run through the GTAP model, deregulation within the ASEAN + 6 scheme
showed a greater economic effect than ASEAN + 3. However, as one can tell from the actual CEPT
usage rate, even a model that examines the economic effects of just reducing tariff rates was notenough to create much benefit, but one that also looks at the benefits of reducing non-tariff barriers(regulations, standards, volume restrictions, complex tariff procedures, etc.) showed a greater
economic benefit. Based on this, one would hope for a reduction of overall service link costs, i.e.,the costs of the links between different production bases such as tariffs, non-tariff barriers andtransportation costs, to be built into any FTA/EPA in the Asia-Pacific region.
In FTAs already concluded in the Asia-Pacific region, five types of regulations stemming from theproduct origination side may be identified: (1) Value added criteria alone, (2) change in tariffclassification criteria alone, (3) a selection type allowing the choice to be of either value added orchange in tariff classification, (4) a dual criteria type requiring both to be of value added and change
in tariff classification, and (5) manufacturing process criteria. Of these, “the dual criteria rules of228

origin” are the strictest, while “the selection type” allows the greatest flexibility. Accordingly, themost preferable course for the future would be a convergence into flexible criteria easy forcompanies to use.

229

Appendix

230

Note 2: Estimates of world trade in 2006

Note 1: Definition of products
1. Products
Name of products
Total Value
Machinery and equipment
Genral equipment
Air conditioners
Electrical equipmet
Transport equipment
Automobiles
Passenger vehicles
Motorcycles
Automotive parts
Precision instruments
ChemicalsIndustrial chemicals
Pharmaceuticals and medical supplies
Plastics and rubber
Foodstuffs
Seafood

Tuna
GrainsCorn
Processed food products
Ethanol (Ethyl alcohol)
Oils, fats, and other animal and vegetable products
Soybeans
Animal and plant fats
Miscellaneous manufactured goods
Iron ore
Mineral fuels, etc.
Mineral fuels
Coal
LNG
Petroleum and petroleum products
Crude oil
Textiles and textile products
Synthetic fibers and textiles
Clothing
Knit products
Cloth
Base metals and base metal products
Steel
Primary steel products
Steel products
CopperNickelAluminum
Lead

HS
00〜99
84〜91
84
8415
85
86〜89
8702〜8705
8703
8711
8707〜8708
8407.31〜8407.34
90〜91
28〜40
28〜38
30
39〜40
1〜11、16〜24
030302.31〜0302.32
0302.34〜0302.36
0303.41〜0303.42
0303.44〜0303.46
10
1005
16〜24
2207.10
12〜15
1201
15
64〜67、92〜972601
27
2701〜2705
2708〜2713、2715
2701
2711.112708〜2710
2712〜2713、2715
2709
50〜63
54〜55
61〜62
61
62
72〜83
72〜73
72
73
7403
7502
7601
7801

The value of world trade in 2006 was estimated based on customs statistics fromHS
8471、8473
8471
8473
8469、8470、9009
8517、8525.10
8525.20、8526
8540〜8542
8540〜8541
8542
8504、8518、8522、8523
8529、8532〜8536
8529.90
8521、8525.30、8525.40
8528、9006
8519〜8520
8543、9014〜9015
9024〜9027、9030〜9032
8473、④、⑤
8471②、③、⑥、⑦、⑧
Parts, finished products

rate during the term.

2. IT products①Computers and peripherals
Computers and peripherals
Parts for computers and peripherals②Office equipment③Telecommunications equipment④Semiconductors and electronic components
Electron tubes and semiconductors
Integrated circuits⑤Other electronic components
Flat panel displays⑥Video equipment⑦Audio equipment⑧Measuring and testing equipment
IT parts
Finished IT products
Total IT equipment

52 countries and regions from which data was available in July 2007; a grand
total was found for each of the three following categories (the amount of
product-specific trade was found by adding categories 1 and 2 below).
1. The total value of exports (total value of imports) from 52 countries andregions added together.
2. For countries and regions from which customs statistics were not available(about 120 countries and regions, mainly developing ones), the value of imports
from those regions (CIF basis) extracted from customs statistics for the 52
countries and regions and converted to FOB basis (for imports, value of exports(FOB basis) converted to CIF basis).
3. For approximately 150 countries and regions where customs data was notavailable, mainly developing ones, data was taken from “Direction of Trade
Statistics” May 2007 (IMF).
<52 countries and regions>Japan, U.S.A., Canada, Belgium, Netherlands, Luxembourg, Germany, France,
Italy, Ireland, Denmark, Greece, Spain, Portugal, Austria, Finland, Sweden, UK,
Norway, Switzerland, Australia, New Zealand, ROK, Taiwan, Hong Kong,
Singapore, Thailand, Malaysia, Indonesia, Philippines, China, India, Mexico,
Argentina, Brazil, Chile, Columbia, Costa Rica, Panama, Peru, Venezuela,
Czech Republic, Hungary, Poland, Slovakia, Slovenia, Lithuania, Russia,
Ukraine, Romania, Turkey, South Africa.

Note 3: Estimates of world direct investment in 2006
World direct internal and external investment in 2006 was estimated as below.
1. Data was collected as below from 55 countries and regions where data wasavailable for 2005 and 2006.
i. For U.S.A., Canada, Australia, Austria, Belgium, Finland, France, Germany,
Greece, Ireland, Italy, Portugal, Luxembourg, Netherlands, Spain, Denmark,Norway, Sweden, Switzerland, UK, China, Hong Kong, India, ROK, Malaysia,
Philippines, Singapore, Thailand, Taiwan, Cyprus, Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Malta, Poland, Russia, Slovakia, Slovenia, Israel,
Argentina, Brazil, Chile, Columbia, Mexico, Venezuela, Turkey, international
trade balance statistics were used for each nation and region. Data denominatedin local currency was converted to the U.S. dollar at the IMF’s average annual
rate.
ii. For Japan, the international trade balance statistics announced by the Bank ofJapan were converted to the U.S. dollar at the Bank of Japan’s interbank averageiii. For Armenia, Belarus, Georgia, Iceland, Uruguay and South Africa, data wasused from the IMF’s Balance of Payments Statistics (BOPS, May 2007).
2. The process above was used to calculate the world total and growth rate ofworld direct internal and external investment. Fifty-four countries and regions(the above 55 countries and regions, exclusive of Taiwan) made up 90.5% of theworld direct internal investment in 2005 according to BOPS (May 2007) and
98.0% of direct external investment.
3. Figures for the Netherlands used data that included special purpose enterprises(SPEs), so in the BOPS total (May 2007), data from the Statistical Office of theEuropean Communities (Eurostat) was replaced with EU15 data for 1995-2000
and EU25 data for 2001-2005 to recalculate the world total.
4. Growth in total value as calculated for the 55 countries and regions was taken
as the growth rate for world direct investment in 2006 and multiplied by the2005 total of world direct investment as found in 3 to estimate total
world direct investment.

Table 1 GDP growth rate and contribution rate by country and region

U.S.A.
EU25
EU15
Japan
East Asia
China
ROK
ASEAN10
ThailandSingapore
Malaysia
VietnamIndia
Latin America
BrazilRussiaMiddle East
AfricaWorld
For reference
Developing countries
BRICｓ

(%)
2003
2004
2005
2006
Growth rate Contribution Growth rate Contribution Growth rate Contribution Growth rate Contribution
2.5
13.1
3.9
15.2
3.2
13.3
3.3
12.3
1.3
7.4
2.4
10.1
1.8
8.0
2.9
11.3
1.1
5.7
2.3
8.8
1.6
6.4
2.8
9.9
1.4
2.5
2.7
3.5
1.9
2.6
2.2
2.6
8.0
39.7
8.6
33.6
8.6
37.2
8.9
36.3
10.0
30.8
10.1
24.9
10.4
28.9
10.7
28.4
3.1
1.4
4.7
1.6
4.2
1.5
5.0
1.6
5.9
6.2
6.5
5.3
6.0
5.3
5.9
4.9
7.1
1.6
6.3
1.1
4.5
0.8
5.0
0.8
3.1
0.2
8.8
0.3
6.6
0.3
7.9
0.3
5.5
0.6
7.2
0.6
5.2
0.5
5.9
0.5
7.3
0.7
7.8
0.6
8.4
0.7
8.2
0.6
7.3
10.1
7.8
8.4
9.2
10.9
9.2
10.3
2.4
4.6
6.0
8.5
4.6
7.1
5.5
7.7
1.1
0.8
5.7
2.9
2.9
1.6
3.7
1.8
7.3
4.4
7.2
3.4
6.4
3.3
6.7
3.2
6.5
4.4
5.6
3.0
5.4
3.1
5.7
3.0
4.7
3.9
5.8
3.6
5.6
3.8
5.5
3.4
4.0
100.0
5.3
100.0
4.9
100.0
5.4
100.0
6.7
8.0

73.0
46.1

7.7
8.8

65.0
39.5

7.5
8.9

70.0
44.8

7.9
9.2

68.6
43.8

Notes: 1. The world growth rate was calculated by the IMF using purchasing power parity weighting.
2. Each country or region's contribution rate was calculated using 2006 prices and purchasing power parity weighting.
3. Figures may differ from those found elsewhere due to revisions, differing source data, and other factors.
4. East Asia includes the ASEAN10, China, the ROK, Hong Kong, and Taiwan.
5. Developing countries are as defined by WEO (IMF).
Sources: WEO (IMF), national statistics.

Table 2 World Export matrix(2006)(US$ million)
World
NAFTA

Japan

EU25

East Asia

UnitedStatesWorld
NAFTA
United States
Japan
EU25
East Asia
China
ASEAN
APEC
BRICs

11,967,300 2,335,105 1,776,390
1,652,536
880,808
499,561
1,037,070
364,424
642,353
165,029
145,936
4,499,025
394,379
337,2672,628,711
488,060
438,100
969,284
228,242
203,898
791,733
119,077
110,6625,429,648 1,576,184 1,117,016
1,515,143
295,593
260,605529,306 4,579,150 2,240,647
70,247
248,647
202,167
59,649214,147
183,174
91,691
297,806
55,969 3,002,093
212,555
230,770
393,862 1,114,838
91,773
182,058
293,625
82,292
99,218374,087
338,992
935,557 1,697,808
104,717402,730
361,200

APEC
China

ASEAN

769,31064,09955,224
93,955
79,632358,407
76,093555,783
36,651

662,780
61,14457,31876,36260,968353,638
71,328
197,919
507,573
86,814BRICs

5,457,890 1,147,085
1,193,938
103,188642,347
89,260485,543
108,226
790,538
222,715
1,915,344
442,294
646,891
37,798603,996
100,140
3,775,761
709,276805,179
83,894

Notes: 1. Exports from each country/region to Taiwan were converted to FOB figures by multiplying 0.9 to Taiwan's CIF imports.
2. East Asia consists of 15 countries: China, ROK, Taiwan, Hong Kong, and ASEAN10.
3. APEC includes Japan, U.S.A., ROK, Taiwan, Hong Kong, Singapore, Thailand, Malaysia, Indonesia, Phillippines, China, Canada, Mexico, Chile,
Vietnam, Papua
4. East Asia includes the ASEAN10, China, the ROK, Hong Kong, and Taiwan

Table 3 World trade by country and region(US$ million, %)
2004
Value
Asia
China
Japan
ROK
TaiwanHong Kong
Singapore
ASEAN4Thailand
Malaysia
Indonesia
Phillippines
Vietnam
India
Oceania
Australia
New Zealand
North America
U.S.A.
CanadaCentral and South America
MexicoPanamaBrazilChile
EuropeEU25
EU15
Germany
FranceUK
Italy
Denmark
IrelandNetherlands
Belgium
Luxembourg
Spain
Portural
GreeceAustria
SwedenFinland
PolandCzech Republic
Slovakia
Hungary
Slovenia
Switzerland
Russia, CIS
RussiaUkraineMiddle East
Iran
Saudi Arabia
KuwaitU.A.E.
Oman
Qatar
IsraelTurkeyAfricaEgypt
Nigeria
AngolaSouth Africa

2,523,596
593,369
565,039
253,845
174,350
265,763
198,791
334,127
97,098125,857
71,58539,58824,33775,631
112,467
86,406
20,334
1,136,279
818,775
317,504
451,755
189,200
887
96,47530,901
4,173,264
3,728,093
3,461,246
909,296
451,892
347,563353,52277,052
104,730
357,432
306,769
16,256
182,581
35,727
15,322
118,307123,218
61,57974,952
68,94027,51655,55916,353
118,700
198,236
136,926
32,672
345,492
31,832
97,36522,52443,292
10,742
15,95233,154
63,167
206,560
7,555
31,095
11,72245,973Growth
rate
24.8
35.4
20.3
31.0
21.0
16.0
24.2
20.4
21.0
25.7
17.2
9.8
26.8
31.6
22.5
22.8
23.0
14.0
13.0
16.6
22.2
14.8
11.1
32.0
53.4
20.2
19.2
18.1
20.9
15.1
13.5
17.8
15.8
12.7
20.7
19.9
21.9
16.8
12.5
14.4
21.7
20.6
15.6
39.1
41.4
25.6
28.6
28.0
17.8
43.0
43.2
41.6
30.8
25.2
29.2
34.9
37.9
16.5
27.8
20.1
33.7
32.5
30.1
42.8
37.1
31.4

Exports
2005
GrowthValue
rate
2,906,344
15.2
761,99928.4
598,215
5.9
284,41912.0
188,963
8.4
292,32810.0
229,68115.5
377,495
13.0
109,84813.1
140,979
12.0
85,66019.7
41,007
3.6
32,442
33.3
99,651
31.8
134,652
19.7
105,891
22.6
21,7386.9
1,266,606
11.5
905,97810.7
360,62913.6
537,48119.0
213,995
13.1
955
7.6
118,308
22.6
38,59824.9
4,575,255
9.6
4,031,007
8.1
3,721,963
7.5
969,884
6.7
462,968
2.5
394,090
13.4
372,689
5.4
84,951
10.3
109,604
4.7
405,806
13.5
334,237
9.0
18,715
15.1
192,526
5.4
38,137
6.7
17,16912.1
124,998
5.7
130,220
5.7
65,9697.1
89,24619.1
77,97613.1
31,95016.1
62,801
13.0
19,21217.5
130,795
10.2
257,076
29.7
184,91635.0
34,2874.9
453,72731.3
42,65534.0
138,17841.9
30,96337.5
62,16343.6
14,54035.4
22,32540.0
37,72913.8
73,47616.3
263,877
27.7
9,720
28.7
40,81831.3
20,37973.8
51,870
12.8

2006
Value
3,399,831
969,073647,290
325,465
213,004
322,664
271,916
439,301
130,621
160,845
100,799
47,03739,826
121,259
153,271
123,372
22,4491,424,748
1,036,635
388,113635,688
250,461
985
137,470
55,884
5,184,717
4,536,175
4,156,494
1,113,036
489,853447,619
411,234
92,890111,982
462,848369,328
22,798205,482
43,35520,900140,533
147,506
77,130110,449
95,19941,83874,601
23,287
147,884
317,345
226,524
38,368570,381
60,597173,237
40,97474,954
18,98830,085
41,21485,502322,741
14,33754,43029,67057,8972004
Growth
rate
17.0
27.2
8.2
14.4
12.7
10.4
18.4
16.4
18.9
14.1
17.7
14.7
22.8
21.7
13.8
16.5
3.3
12.5
14.4
7.6
18.3
17.0
3.1
16.2
44.8
13.3
12.5
11.7
14.8
5.8
13.6
10.3
9.3
2.2
14.1
10.5
21.8
6.7
13.7
21.7
12.4
13.3
16.9
23.8
22.1
30.9
18.8
21.2
13.1
23.4
22.5
11.9
25.7
42.1
25.4
32.3
20.6
30.6
34.8
9.2
16.4
22.3
47.5
33.3
45.6
11.6

Value
2,330,543
561,423454,669
224,463
168,715
273,361
173,719
291,058
95,197105,297
46,52544,03932,09597,313
135,421103,686
21,716
1,743,836
1,469,704
274,132
442,534
197,303
3,582
62,782
22,3394,091,210
3,715,238
3,401,605
715,730
470,831466,784
355,258
68,14061,842319,725
285,566
20,049258,31254,85952,731
119,905
100,432
51,442
89,666
69,91929,45160,472
17,751
111,777
132,196
68,12528,996
338,048
31,72342,407
10,706
68,243
5,378
7,161
39,30897,540202,336
22,674
15,515
6,859
47,653Growth
rate
26.7
36.0
19.2
25.5
32.3
16.8
27.4
27.2
25.8
31.5
42.9
8.8
29.4
36.7
21.3
22.2
24.7
16.5
16.9
14.1
21.8
15.7
14.6
30.1
31.6
20.6
20.1
19.3
18.3
18.0
18.2
19.2
18.6
14.7
20.7
21.5
23.8
23.6
16.1
17.5
20.4
20.2
20.9
31.1
34.9
30.3
26.2
28.0
15.8
33.2
34.8
26.0
28.6
26.4
9.2
11.1
29.9
29.2
46.1
23.9
40.7
27.2
29.2
11.3
58.3
38.5

Notes: Figures of some countries are estimated. See Reference Section "Note2"for the estimating method.
Sources: National trade statistics.

Imports
2005
GrowthValue
rate
2,693,134
15.6
660,11917.6
518,63814.1
261,23816.4
181,7437.7
300,63510.0
200,075
15.2
334,49114.9
118,11224.1
114,626
8.9
57,70124.0
44,0520.0
36,97815.2
138,37042.2
156,253
15.4
118,610
14.4
24,54113.0
1,988,034
14.0
1,673,455
13.9
314,58014.8
519,226
17.3
221,414
12.2
4,111
14.8
73,551
17.2
29,78833.3
4,516,531
10.4
4,067,146
9.5
3,714,639
9.2
775,5538.4
503,7447.0
502,1437.6
384,533
8.2
75,43910.7
68,52510.8
363,191
13.6
318,551
11.6
21,8198.8
288,479
11.7
61,165
11.5
54,0772.6
127,137
6.0
111,340
10.9
58,941
14.6
101,402
13.1
76,332
9.2
35,27919.8
66,405
9.8
20,285
14.3
126,440
13.1
169,74128.4
91,481
34.3
36,141
24.6
404,85419.8
34,3608.3
52,43023.6
12,38715.7
90,584
32.7
6,525
21.3
8,764
22.4
42,9809.3
116,77419.7
235,597
16.4
26,55817.1
18,655
20.2
7,978
16.3
55,029
15.5

2006
Value
3,119,632
791,614579,294309,383
202,038
335,753
238,900
372,473
128,652
131,223
61,06551,53344,891
172,876
170,888
132,753
24,7882,203,733
1,853,938
349,795
619,283
256,205
4,657
91,39634,7505,179,620
4,624,074
4,187,369
909,523534,845566,031437,759
86,381
72,788416,892
353,843
26,636316,62166,64963,290140,383
126,771
68,957
126,229
93,38345,996
77,071
24,148141,468
229,745
128,151
45,035466,085
35,733
61,981
13,306104,143
8,004
13,67946,255
138,295
274,274
31,391
22,184
11,034
68,157Growth
rate
15.8
19.9
11.7
18.4
11.2
11.7
19.4
11.4
8.9
14.5
5.8
17.0
21.4
24.9
9.4
11.9
1.0
10.8
10.8
11.2
19.3
15.7
13.3
24.3
16.7
14.7
13.7
12.7
17.3
6.2
12.7
13.8
14.5
6.2
14.8
11.1
22.1
9.8
9.0
17.0
10.4
13.9
17.0
24.5
22.3
30.4
16.1
19.0
11.9
35.4
40.1
24.6
15.1
4.0
18.2
7.4
15.0
22.7
56.1
7.6
18.4
16.4
18.2
18.9
38.3
23.9

Table 4 World exports by major products (2006)(US$ million, %)World
Growthrate11874183
15

U.S.A.
GrowthValuerate
1036635
14EU15
GrowthValue
rate415649412Japan
GrowthValue
rate6472908

China
GrowthValue
rate96907327

ASEAN4GrowthValuerate439301
16

AsiaNIES
GrowthValuerate113304814

4926611
1583395
24841
1633948130763264423154103918310
281531
40166315023111005270289964497041686362
62202
2262
46675
12960
309768
3495
78688
16056
43125
34285533760
1559176
149428650346
51209
127657785201655180666456
306229147777
158452965735531721326775204947
49969
15229
51640
3260

13
12
10
15
11
10
10
11
9
13
12
12
15
13
10
8
-11
12
16
12
65
10
3
16
10
19
25
26
8
33
28
30
9
3
12
16
8
26
17
15
20
81
55
36
31

555593
1823872292
145908164652
48081
34847
1085
38880
62646
162365109889
25345
52477
59874
3841
42
13461
7254
21535
45
11655
6949
2120
24652
636
34897
32309
3537
159
25229
853
22724
3689
4252
2510
1742
54949
26084
12581
13504
469
147
1094
65

13
9
8
13
19
12
11
25
8
12
12
12
17
12
12
4
-37
18
43
12
-18
10
11
12
18
9
31
30
7
1
46
36
4
3
-4
-3
-5
24
15
10
19
87
19
41
29

18304866471226132
438551
6000353100742635885708
118417144778757725543428201851214297317133
15988
393
9630
1792
160001
692
21222
468
14156
1199932330
2461662015292469
1717595342575
146736
20031
74189
32238
41951
379430224455135372
89084
7174
2706
10530
713

10
11
8
13
7
5
4
10
8
11
11
11
13
11
8
7
22
2
-13
10
-2
10
-7
14
8
23
24
28
18
-88
29
56
5
2
7
8
7
25
19
19
18
76
49
38
30

4488391259091284
127956
158595104946
94429
6391
28913
36379
74202
45334
2476
28868
3112
990
66
11
1
1803
1
244
0
88
6413
0
5895
5416
1
0
4970
0
8099
3549
349
147
202
52313
36985
25957
11028
2310
17
64
15

7
5
13
5
13
18
18
5
1
-1
9
8
-3
11
8
14
2
50
-50
3
-81
3
-78
6
-7
-45
34
32
-31
179
36
-100
0
2
-6
-10
-2
14
9
6
17
130
-39
-14
37

4871091866185710
227447
38431
3471
1538
3196
9628
34613
67390
37753
1531
29638
28286
4743
2
1038
412
13802
431
1925
146
391
82534
1
17776
16802
3683
0
10762
2737
138102
12131
88624
44901
43724
85317
51930
25144
26785
1475
403
2841
712

29
25
13
32
35
87
81
32
34
26
22
19
12
27
15
9
4
-27
-62
23
604
5
-14
38
19
82
1
0
-14
-36
9
2
28
18
34
45
25
49
52
67
41
176
75
19
50

19895769747
3258
102640
18292
7345
3525
373
5541
8279
48630
16200
444
32430
26078
4602
128
2914
76
13884
27
14246
8
13836
11400
218
57223
56287
6087
16347
31986
18755
22188
5140
13025
6268
6757
22245
9962
4537
5425
2347
1
647
30

12
17
5
7
21
27
32
3
12
21
26
20
22
29
14
9
29
21
102
15
1
17
18
17
7
60
19
18
40
16
18
6
8
5
10
18
4
40
36
34
37
112
200
43
74

6969021687092272
387420
79932
34733
32344
769
14159
60840
117905
60337
5774
57567
12193
2521
731
29
1
7089
2
958
6
441
30879
13
68298
66854
1
0
66080
78
68505
12380
31815
17161
14654
72392
42266
27227
15039
1977
841
856
256

14
7
4
16
15
10
11
0
16
24
13
16
64
9
4
-14
-28
-18
33
9
-55
6
2
7
0
56657
28
28
-58
-83
28
34
1
-3
3
3
4
21
12
8
20
178
150
14
70

52271630787121484622169
27885442216073493
34866735459698206
13501313455
1497519916029063941897996

10
9
10
19
19
14
13
15
16
21
17
-9
13
14
14
14

47575
26621
20954
1044
19638
53091
6767
46324
27202
5110
4390
968
31131
10124883791
185039

4
5
4
19
10
10
8
10
13
25
21
21
15
9
11
10

136073
85674
50399
7822
114886
57767
10639
47128
77393
14455
26122
2122
55117
185558291743477301

5
2
12
15
25
-1
10
-3
10
11
18
-5
7
7
13
10

22946
7051
15894
790
4027
41695
10993
30702
36046
12340
15508
199
17024
93635
44600
138235

0
-3
1
-34
-9
5
2
6
12
17
-6
-41
5
7
-3
3

126051
93018
33033
7572
48922
29214
7658
21556
63062
23963
29530
6602
5378
125310191022316332

20
22
16
51
45
43
32
48
30
38
24
-5
35
28
28
28

52473
33621
18851
766
7731
51505
14019
37487
17204
3297
7851
780
3757
87561
54505
142066

18
18
17
46
12
12
15
11
12
24
-3
-7
8
13
13
13

100958
36011
64947
3107
45751
17332018767
154553
96944
33040
17006
2372
16285
335210120533455743

3
-6
8
-7
5
22
17
23
18
20
-6
-26
30
18
1
13

Value
Total value
Machinery and equipment
General machinery
Air conditioner
Electrical equipment
Transport equipment
Automobiles
Passenger vehicles
Motorcycles
Automotive parts
Precision instruments
ChemicalsIndustrial chemicals
Pharmaceuticals and medical supplies
Plastics and rubber
Foodstuffs
Seafood
Tuna
GrainsCorn
Processed food products
Ethanol (Ethyl alcohol)
Oils, fats, and other animal and vegetable products
Soybeans
Animal and plant fats
Miscellaneous manufactured goods
Iron ore
Mineral fuels, etc.
Mineral fuels
Coal
LNG
Petroleum and petroleum products
Crude oil
Textiles and textile products
Synthetic fibers and textiles
Clothing
Knit products
Cloth
Base metals and base metal products
Steel
Primary steel products
Steel products
CopperNickelAluminumLead
IT products
Computers and peripherals
Computers and peripherals
Parts for computers and peripherals
Office equipment
Telecommunications equipment
Semiconductors and electronic components
Electron tubes and semiconductors
Integrated circuits
Other electronic components
Flat pnel displays
Video equipment
Audio equipment
Measuring and testing equipment
IT parts
Finished IT products
Total IT equipment

Notes: 1.See Reference Section "Note 1" for the definition of products.
2. Value of world exports based on JETRO estimates.
Sources: National trade statistics.

Table 5 World imports by major products (2006)(US$ million, %)World

12,239,837
4,525,245
1,429,956
21,3601,603,005
1,104,312
578,197
482,520
15,577
263,023
387,987
1,419,361
960,872
276,638
458,489
623,352
66,7792,399
33,503
11,477
275,984
3,295
69,987
16,45035,247
351,608
46,163
1,655,853
1,577,653
56,97956,842
1,303,678
943,409465,042
48,228275,637
129,721145,916
869,564
466,148
293,126
173,02146,062
16,94352,581
3,203

Growth
rate
14.6
11.0
9.2
4.8
13.9
8.8
9.3
9.3
5.2
7.1
12.2
10.3
9.7
12.3
11.5
8.4
9.2
-3.4
10.4
15.1
8.8
89.3
5.3
-7.2
13.0
8.7
15.8
21.4
21.2
1.6
31.4
23.0
23.6
5.0
-2.8
7.2
9.0
5.7
22.5
12.1
9.7
16.4
75.8
54.7
36.7
25.9

503,084
299,261
203,823
21,156242,615
482,719
66,446416,274
335,357
88,987130,816
14,618140,213
1,021,899
848,679
1,870,578

7.1
4.8
10.6
12.4
15.3
14.1
8.9
14.9
16.2
25.9
15.1
-6.1
11.3
14.0
10.2
12.3

Value
Total value
Machinery and equipment
General machinery
Air conditioner
Electrical equipment
Transport equipment
Automobiles
Passenger vehicles
Motorcycles
Automotive parts
Precision instruments
ChemicalsIndustrial chemicals
Pharmaceuticals and medical supplies
Plastics and rubber
Foodstuffs
Seafood
Tuna
GrainsCorn
Processed food products
Ethanol (Ethyl alcohol)
Oils, fats, and other animal and vegetable products
Soybeans
Animal and plant fats
Miscellaneous manufactured goods
Iron ore
Mineral fuels, etc.
Mineral fuels
Coal
LNG
Petroleum and petroleum products
Crude oil
Textiles and textile products
Synthetic fibers and textiles
Clothing
Knit products
Cloth
Base metals and base metal products
Steel
Primary steel products
Steel products
CopperNickelAluminumLead
IT products
Computers and peripherals
Computers and peripherals
Parts for computers and peripherals
Office equipment
Telecommunications equipment
Semiconductors and electronic components
Electron tubes and semiconductors
Integrated circuits
Other electronic components
Flat pnel displays
Video equipment
Audio equipment
Measuring and testing equipment
IT parts
Finished IT products
Total IT equipment

U.S.A.
EU15
GrowthGrowth
Value
Value
rate
rate
1,853,938
10.8 4,187,369
12.7
764,003
9.2 1,591,576
8.5
243,936
9.7 523,659
8.3
3,572
18.8
8,421
-5.2
229,20210.5 422,016
10.8
236,357
7.8 519,664
6.4
156,292
9.1 262,670
6.8
135,982
9.8 224,348
6.3
3,712
5.0
7,786
1.7
50,433
1.3 115,115
7.9
54,5097.3 126,237
10.9
177,255
9.8 633,842
10.7
125,31210.1 447,594
10.2
42,20519.1 155,987
10.0
51,943
9.1 186,248
12.1
75,775
11.6 317,726
6.9
10,1979.9
28,946
13.8
236
-2.3
329
-6.3
1,131
48.0
10,917
3.6
179
43.6
2,893
3.4
38,02915.7 138,900
5.9
1,489
366.0
1,203
29.6
4,701
15.6
28,526
10.6
56
-10.5
4,198
-4.2
2,794
17.9
16,742
20.6
101,769
7.5 140,063
7.3
621
17.1
9,205
16.3
332,592
14.8 575,263
24.9
329,098
15.0 518,735
23.0
1,765
23.1
18,835
4.8
4,295
-15.5
12,004
58.5
292,797
20.2 404,773
21.7
225,156
23.1 278,433
22.6
96,284
3.9 187,662
7.4
3,763
1.6
17,377
3.0
73,392
3.6 123,458
9.0
35,532
6.7
56,962
11.0
37,8600.9
66,495
7.4
114,260
27.8 372,025
30.7
57,28223.4 203,625
21.4
28,87329.9 135,428
24.6
28,41017.4
68,197
15.5
6,693
95.2
19,674
106.8
2,674
58.0
7,077
53.8
9,105
26.6
21,051
50.8
414
46.3
1,186
15.6

Japan
GrowthValue
rate
579,294
11.7
167,326
8.1
54,672
4.4
1,379
3.3
67,692
10.2
19,688
3.5
7,846
-5.2
7,653
-5.7
507
5.0
4,920
20.1
25,27415.1
49,3269.0
35,800
7.0
7,584
4.1
13,52714.8
49,475-2.7
10,850
-6.1
1,445
-6.3
4,726
-0.1
2,584
-0.3
19,192
5.0
260
23.1
4,725
-4.4
1,282
-10.5
858
-3.6
18,032
7.4
7,169
28.9
161,64821.7
160,299
21.8
13,862
1.3
22,85827.0
115,138
23.8
98,917
24.5
29,072
5.6
967
6.4
22,3905.7
10,361
5.9
12,0305.5
30,62918.5
11,165
0.4
6,136
-10.5
5,029
18.0
510
80.2
1,066
38.8
7,530
33.7
68
121.6

China
GrowthValue
rate
791,61419.9
417,84722.1
109,195
13.3
542
24.2
218,990
25.3
29,720
49.4
7,510
47.2
6,943
48.0
5
-12.7
10,034
32.5
59,942
17.4
102,498
14.5
56,221
11.2
2,401
22.6
46,27718.9
11,421
7.9
3,155
9.6
20
276.5
821
-41.1
12
764.4
4,074
17.8
4
-38.7
12,213
5.3
7,489
-3.7
3,921
18.4
3,346
14.9
20,92413.9
89,10039.087,936
39.2
1,619
17.0
115 63195.4
83,28041.3
66,411
39.2
25,678
9.5
6,623
-5.8
1,585
5.0
717
3.1
868
6.5
59,795
5.7
26,984-15.4
20,036
-23.6
6,948
22.0
5,500
22.7
2,180
63.8
999
-1.9
67
24.0

ASEAN4
AsiaNIES
GrowthGrowth
Value
Value
rate
rate
372,473
11.4 1,086,074
15.1
174,100
9.3 532,108
12.3
50,5792.8 143,600
11.0
499
-4.4
1,608
15.7
97,22713.0 309,767
13.9
17,7787.2
28,502
9.4
3,973
-7.9
7,596
4.2
2,481
-2.1
6,589
5.6
433
26.4
319
19.8
5,263
-12.2
5,833
2.2
8,517
14.0
50,2398.7
42,98812.4 101,860
11.6
27,343
10.3
66,877
12.0
2,230
20.8
5,935
22.3
15,64516.2
34,983
10.9
18,68013.0
33,379
8.8
2,083
8.5
5,080
10.6
258
3.9
58
39.4
3,427
21.0
3,465
3.7
742
73.9
2,040
4.6
8,098
10.7
13,387
8.8
7
-48.4
121
21.6
2,357
5.6
3,451
-1.7
872
-10.9
978
-12.7
1,056
22.9
1,329
-0.3
2,539
16.0
26,969
8.8
515
10.2
3,443
24.8
64,577
19.7 178,214
28.0
63,77619.3 175,747
28.2
1,253
22.9
9,374
-3.2
0
142.9
15,68237.0
59,65418.9 146,639
29.8
37,98023.2
99,932
26.0
7,607
5.3
46,284
5.2
2,022
3.1
5,248
0.0
699
27.3
24,8007.5
275
24.9
12,4355.5
424
28.8
12,365
9.7
37,32910.1
82,78521.9
22,794-2.8
41,253
4.4
15,236-8.9
32,035
1.3
7,557
12.5
9,218
17.3
3,016
83.1
7,919
83.8
71
3.8
2,652
61.7
2,171
35.0
5,836
39.4
265
44.3
527
44.0

101,743
67,51934,224
1,599
53,532
27,942
5,118
22,82436,971
5,442
41,536
4,266
20,676
99,137
189,129
288,266

25,771
18,057
7,714
390
4,129
24,693
2,907
21,785
16,177
5,354
3,901
982
9,707
48,58337,16785,75039,06819,925
19,142
1,443
7,101
121,732
14,576
107,156
57,31919,258
3,633
242
13,265
198,193
45,609243,802

20,333
5,468
14,865343
5,440
59,451
5,521
53,93017,823
2,827
1,696
155
5,628
92,13918,731
110,871

Notes: 1.See Reference Section "Note 1" for the definition of products.
2. Value of world imports based on JETRO estimates.
Sources: National trade statistics.

8.4
6.4
12.7
3.9
8.4
5.3
9.7
4.4
8.7
-0.6
20.5
-9.8
9.7
9.0
9.7
9.5

180,891
118,065
62,826
12,077
94,89057,373
13,051
44,322
72,90016,082
48,411
4,653
41,742
193,099
319,838
512,937

5.8
1.5
15.1
18.5
14.5
-0.1
20.0
-4.8
12.7
27.0
16.9
-5.3
6.8
9.3
8.5
8.8

-5.0
-3.8
-7.5
-15.2
18.4
16.2
8.8
17.2
3.9
-2.6
-16.3
-14.6
16.0
7.6
0.7
4.5

13.3
10.6
16.3
20.8
27.1
27.7
11.1
30.4
22.4
18.6
39.3
27.8
24.8
25.0
19.3
23.9

5.4
2.6
6.5
17.9
-2.5
16.6
10.4
17.3
16.0
39.5
-7.5
-21.7
24.1
14.7
5.4
13.1

66,69623,82542,872
2,045
28,306
155,748
17,545
138,203
67,845
17,864
12,0702,302
23,511
266,464
92,058358,523

7.8
12.5
5.4
-5.4
26.4
14.5
9.6
15.1
16.5
22.8
-5.1
-15.6
12.8
13.4
12.2
13.1

Table 6 FDI of major economics (net flows based on balance of payment)(US$ million, %,)Inward FDI
United States
CanadaEU25
EU15

Belgium
Luxembourg
Austria
Danmark
FinlandFranceGermany
GreeceIreland
Italy
Netherlands
Portugal
Spain
SwedenEngland
10 new EU members

Czech Republic
Republic of Hungary
PolandSlovakia
Slovenia
Estonia
LatviaLithuania
CyprusMalta
NorwaySwitzerland
Australia
Japan
East Asia

China
ROK
TaiwanHong Kong
ASEAN

Thailand
Malaysia
Philippines
Singapore
India
Argentina
BrazilChile
Colombia
MexicoVenezuela
RussiaIsraelSouth Africa
TurkeyWorld

Outward FDI

Growth rate Shrare contribution
Growth rate Shrare contribution
2005
2006
2005
2006
108,996 180,580
65.7
12.7
24.5
-7,662 235,358
n.a.
16.4
56.0
28,922
69,041
138.7
4.9
13.8
33,54245,24334.9
3.2
2.7
654,761 668,688
2.1
47.0
4.8 779,470 794,904
2.0
55.4
3.6
616,767 629,882
2.1
44.3
4.5 771,821 782,922
1.4
54.5
2.6
33,97071,479
110.4
5.0
12.9
31,78062,552
96.8
4.4
7.1
116,373
96,960-16.7
6.8-6.7 124,029
81,507
-34.3
5.7
-9.8
9,045
248
-97.3
0.0
-3.0
10,023
4,087
-59.2
0.3
-1.4
13,740
4,675
-66.0
0.3
-3.1
15,942
4,910
-69.2
0.3
-2.5
4,507
3,705
-17.8
0.3
-0.3
4,477
9
-99.8
0.0
-1.0
81,063
81,0760.0
5.7
0.0 120,971 115,036
-4.9
8.0
-1.4
35,86642,86819.5
3.0
2.4
55,51479,422
43.1
5.5
5.5
606
5,364
784.7
0.4
1.6
1,451
4,167
187.2
0.3
0.6
-31,132
12,811
n.a.
0.9
15.1
13,568
22,10162.9
1.5
2.0
19,922
39,11496.3
2.8
6.6
41,754
41,9940.6
2.9
0.1
97,66377,423-20.7
5.4-6.9 190,952 169,892
-11.0
11.8
-4.9
3,965
7,371
85.9
0.5
1.2
2,078
3,508
68.8
0.2
0.3
25,02020,016
-20.0
1.4
-1.7
41,82989,679
114.4
6.2
11.0
10,16927,231
167.8
1.9
5.8
26,54024,600
-7.3
1.7
-0.4
195,990 139,543
-28.8
9.8
-19.4
90,91379,457
-12.6
5.5
-2.6
37,99438,806
2.1
2.7
0.3
7,649
11,98256.6
0.8
1.0
11,603
6,021
-48.1
0.4
-1.9
-27
1,355
n.a.
0.1
0.3
7,585
6,115
-19.4
0.4
-0.5
2,331
3,064
31.4
0.2
0.2
9,602
13,922
45.0
1.0
1.5
3,024
4,266
41.1
0.3
0.3
2,107
4,165
97.7
0.3
0.7
157
368
134.7
0.0
0.0
541
363
-32.8
0.0
-0.1
629
740
17.7
0.1
0.0
2,998
1,600
-46.6
0.1
-0.5
609
1,039
70.5
0.1
0.1
730
1,635
123.9
0.1
0.3
127
148
16.6
0.0
0.0
1,032
1,812
75.6
0.1
0.3
343
276
-19.6
0.0
0.0
1,214
1,492
22.9
0.1
0.1
482
732
52.0
0.1
0.1
582
1,681
188.9
0.1
0.4
-25
-5
n.a.
n.a.
0.0
6,391
1,635
-74.4
0.1
-1.6
21,052
12,232
-41.9
0.9
-2.0
-1,26625,089n.a.
1.8
9.0
54,30881,50650.1
5.7
6.3-35,056
24,531n.a.
1.7
20.4 -34,376
20,973
n.a.
1.5
12.7
3,223
-6,789
n.a.
n.a.
-3.4
45,46150,16510.3
3.5
1.1
150,467 174,407
15.9
12.3
8.2
57,574
91,37858.7
6.4
7.8
79,12778,095
-1.3
5.5
-0.4
11,306
17,830
57.7
1.2
1.5
6,309
3,645
-42.2
0.3
-0.9
4,298
7,129
65.9
0.5
0.7
1,625
7,424
356.9
0.5
2.0
6,028
7,399
22.7
0.5
0.3
33,62542,89427.6
3.0
3.2
27,196
43,46059.8
3.0
3.7
29,78242,350
42.2
3.0
4.3
8,747
15,561
77.9
1.1
1.6
8,957
9,751
8.9
0.7
0.3
552
790
43.2
0.1
0.1
3,967
6,047
52.4
0.4
0.7
2,971
6,041
103.3
0.4
0.7
1,854
2,345
26.5
0.2
0.2
189
103
-45.5
0.0
0.0
15,00424,207
61.3
1.7
3.2
5,034
8,626
71.3
0.6
0.8
6,676
16,881
152.9
1.2
3.5
2,495
9,676
287.8
0.7
1.7
5,008
4,809
-4.0
0.3
-0.1
1,151
2,008
74.5
0.1
0.2
15,066
18,782
24.7
1.3
1.3
2,517
28,2021020.6
2.0
5.9
6,960
8,053
15.7
0.6
0.4
2,209
2,797
26.6
0.2
0.1
10,255
6,295
-38.6
0.4
-1.4
4,662
1,098
-76.4
0.1
-0.8
15,763
19,037
20.8
1.3
1.1
6,474
5,758
-11.1
0.4
-0.2
2,583
-543
n.a.
n.a.
-1.1
1,183
2,089
76.6
0.1
0.2
12,76628,732
125.1
2.0
5.5
12,763
17,979
40.9
1.3
1.2
4,754
14,150
197.7
1.0
3.2
3,323
13,633
310.2
0.9
2.4
6,133
-11
n.a.
n.a.
-2.1
909
6,496
614.3
0.5
1.3
9,801
20,125
105.3
1.4
3.5
1,078
934
-13.4
0.1
0.0
1,129,748 1,421,452
25.8
100.0
100.0 1,001,596 1,435,762
43.3
100.0
100.0

Notes: 1. JETRO estimates for the world.
2.ASEAN consists of Thailand, Malaysia, Indonesia, the Philippines, and Singapore.
3. For the Netherlands, from the 2007 JETRO White Paper on, the data include special-purpose entities (SPE).
Sources: IMF, National and regional balance of payments statistics, Eurostat and other sources.

Table 7 World cross-border M&A (by country and region)(US$ million, %, number of cases)

World

United States
CanadaTarget

Ｅ Ｕ 25
Ｅ Ｕ 15EnglandFranceGermany
Netherlands
Spain
10 new EU members

C
o
u
n
t
r
y
a
n
d
r
e
g
i
o
n

A
c
q
u
i
r
e
r

Slovakia
Lithuania
Switzerland
AustriaJapan
East Asia

China
ROK
TaiwanHong Kong
ASEAN6Singapore
Thailand
Malaysia
VietnamIndia
MexicoBrazilArgentina
Chile
South African Republic
RussiaUnited States
CanadaＥ Ｕ 25
Ｅ Ｕ 15EnglandFranceGermany
Netherlands
Spain
Luxembourg
10 new EU members

c
o
u
n
t
r
y
a
n
d
r
e
g
i
o
n

Switzerland
Australia
Japan
East Asia

China
ROK
TaiwanHong Kong
ASEAN6Singapore
Thailand
Malaysia
Indonesia
India
MexicoBrazilChileSouth Africa
Russia

2003

2004

2005

Value

Value

Value

Value

Growth rate

Shrare338,302
72,044
5,664
153,798
149,314
41,64019,41827,0999,464
10,276
4,484
498
138
10,958
11,46012,53020,397
4,801
4,155
429
5,975
5,037
2,077
92
146
23
1,242
3,422
6,014
2,497
284
1,574
7,886
98,297453,462
84,71522,359230,936
226,757
72,72825,89948,384
19,265
9,284
4,180
432
104
4,978
15,414
10,38125,306
8,782
6,039
622
4,048
5,815
1,352
1,429
993
79
2,508
6,675
8,018
639
1,871
2,255
6,524
133,414848,603130,629
29,199505,572
485,958
203,774
34,91264,85335,15820,60919,614179
72
10,256
11,782
3,256
48,462
14,287
8,367
814
9,523
15,472
5,752
443
1,625
7
5,485
5,425
8,626
2,733
716
6,684
9,174
155,459

974,459
182,662
74,026481,385
468,158
208,344
46,05256,274
34,047
14,08013,2271,315
2,451
14,547
17,976
3,421
56,54815,446
3,650
5,859
14,812
16,781
7,563
5,120
2,707
220
7,944
2,239
10,820
3,057
3,964
5,635
10,323
207,340

14.8
39.8
153.5
-4.8
-3.7
2.2
31.9
-13.2
-3.2
-31.7
-32.6
636.9
3,313.1
41.8
52.6
5.1
16.7
8.1
-56.4
619.9
55.5
8.5
31.5
1,055.9
66.6
3,188.1
44.8
-58.7
25.4
11.9
453.7
-15.7
12.5
33.4

100.0
18.7
7.6
49.4
48.0
21.4
4.7
5.8
3.5
1.4
1.4
0.1
0.3
1.5
1.8
0.4
5.8
1.6
0.4
0.6
1.5
1.7
0.8
0.5
0.3
0.0
0.8
0.2
1.1
0.3
0.4
0.6
1.1
21.3

7,953
1,263
439
3,232
2,923
693
387
595
142
223
309
20
26
107
306
87
892
291
42
35
195
329
130
50
76
12
226
88
99
54
28
56
127
1,754

630,169
125,201
39,894
316,627
306,988
130,880
39,896
42,57522,987
19,491
9,639
56
604
15,473
16,047
17,074
26,244
5,037
245
1,407
4,297
15,258
4,222
752
3,502
87
16,616
3,237
4,038
924
198
339
10,797
136,960

36.6
55.6
135.9
24.9
24.7
5.4
47.4
37.6
256.5
614.4
31.0
-95.5
1,191.5
737.8
353.9
593.5
-26.2
-43.7
-91.8
-51.2
-57.2
42.4
-9.9
-85.1
1,425.1
116.3
274.8
246.7
-7.7
8.3
-94.5
-92.0
152.6
36.5

100.0
19.9
6.3
50.2
48.7
20.8
6.3
6.8
3.6
3.1
1.5
0.0
0.1
2.5
2.5
2.7
4.2
0.8
0.0
0.2
0.7
2.4
0.7
0.1
0.6
0.0
2.6
0.5
0.6
0.1
0.0
0.1
1.7
21.7

4,235
723
245
1,616
1,470
393
172
250
105
106
146
7
7
79
200
57
465
156
10
15
91
193
74
21
54
10
88
48
55
29
9
27
65
914

18,504
145,669
144,026
75,41434,909198,217
197,067
73,06223,016
480,669
478,854
125,223

37,978430,402422,828
87,863

65.0
-10.5
-11.7
-29.8

3.9
44.2
43.4
9.0

500
3,356
3,261
1,046

26,231
294,113
293,471
90,328

128.6
35.7
36.2
136.9

4.2
46.7
46.6
14.3

283
1,739
1,693
539

2006

first half year of 2007
No. of cases

Value

Growth rate

ShrareNo. of cases

9,791

24,05094,747

68,767

-27.4

7.1

417

34,853

57.1

5.5

230

20,655

16,93937,00951,953

40.4

5.3

392

40,360

70.2

6.4

205

9,906

6,701

92,997

21,627

-76.7

2.2

260

7,933

-44.1

1.3

124

4,516

34,25730,86998,444

218.9

10.1

161

35,180

-58.7

5.6

77

1,234
1,643
13,365

604
1,150
8,604

7,563
1,816
18,17024,591
7,574
47,739

225.2
317.2
162.7

2.5
0.8
4.9

54
95
206

3,583
642
12,627

-49.6
-48.8
-37.3

0.6
0.1
2.0

17
46
91

18,11815,13653,30153,544

0.5

5.5

342

29,728

113.8

4.7

215

7,398
16,713
4,684

6,074
21,092
2,297

12,16635,384
8,606

19,90145,97814,331

63.6
29.9
66.5

2.0
4.7
1.5

212
642
54

30,925
14,501
2,003

210.1
-45.6
-59.7

4.9
2.3
0.3

120
350
47

643

218

225

1,861

726.2

0.2

22

189

2,417.3

0.0

17

701

1,016

593

461

-22.2

0.0

18

367

-1.3

0.1

13

1,392

2,778

11,416

10,083

-11.7

1.0

163

4,812

-14.2

0.8

85

9,294
5,380

14,78412,01014,544
8,867

19,241
13,871

32.3
56.4

2.0
1.4

385
190

7,130
5,820

-54.6
-53.4

1.1
0.9

188
95

90

75

220

101

-54.1

0.0

13

214

150.7

0.0

4

3,794

2,008

2,856

4,662

63.3

0.5

160

963

-63.7

0.2

80

29

443

620

363

-41.5

0.0

11

45

-85.5

0.0

3

1,137

857

2,157

7,084

228.3

0.7

144

29,556

541.9

4.7

82

5,318

2,096

3,144

3,860

22.8

0.4

24

4,191

558.1

0.7

15

2,047

8,600

2,212

19,725

791.9

2.0

24

4,252

436.8

0.7

17

51

390

1

590

73,625.0

0.1

11

6

-97.1

0.0

5

524

637

2,440

5,845

139.6

0.6

47

3,967

-24.3

0.6

26

1,035

2,414

6,781

4,245

-37.4

0.4

68

4,102

420.4

0.7

38

Notes: 1. Data as of July 5, 2007.
2.ASEAN consists of Thailand, Malaysia, Indonesia, the Philippines, and Singapore.
Source: Thomson Financial

Table 8 World cross-border M&A (by industry)(US$ million, %, number of cases)
Industry Total
Primary industries
Oil and Gas; Petroleum Refining
Agriculture, Forestry, and Fishing
MiningManufacturing
Food ・Tobacco
Food and Kindred Products
Tobacco Products
Textile and Apparel Products
Wood and paper products
Wood Products, Furniture, and Fixtures
Paper and Allied Products
Stone, Clay, Glass, and Concrete Products
Chemicals
Chemicals and Allied Products
Drugs
Metal and Metal Products
Machinery and equipment
Machinery
Electronic and Electrical Equipment
Computer and Office Equipment
Communications Equipment
Transportation Equipment
Aerospace and Aircraft
Measuring, Medical, Photo Equipment; Clocks
Printing, Publishing, and Allied Services
Miscellaneous Manufacturing
ServiceElectric, Gas, and Water Distribution
Transportation
Transportation and Shipping (except air)
Air Transportation and Shipping
Telecommunications
Construction Firms
RetailWholesale Trade
Retail Trade, Eating and Drinking Places
Real Estate; Mortgage Bankers and Brokers
Finance, insurance
Commercial Banks, Bank Holding Companies
Investment & Commodity Firms,Dealers,Exchan
Insurance
Hotels and Casinos
Other service
Advertising Services
Business Services
Prepackaged Software
ＩＴ

2003
Value
338,30233,64423,916
1,435
8,292
113,740
30,98825,555
5,433
458
3,294
393
2,901
2,874
25,3198,361
9,122
10,43828,844
8,920
4,432
1,732
235
4,204
3,637
5,684
9,734
1,792
190,919
17,067
15,813
14,454
1,358
28,880
1,833
16,057
5,320
10,737
16,50862,242
19,253
16,1897,760
3,925
28,59528
11,1672,213
49,2502004
Value
453,462
29,82021,4761,422
6,922
130,842
23,15622,224
932
4,947
4,439
907
3,533
5,598
44,944
14,111
22,294
5,203
31,006
5,289
11,252
1,220
2,490
3,715
497
6,543
10,857
692
292,800
26,987
9,470
6,049
3,421
33,9781,227
30,294
7,320
22,97447,201
100,690
36,20329,034
18,4705,859
37,093754
18,905
5,808
64,662

2005
Value
848,603
135,537
119,891
2,032
13,614
236,464
54,71349,146
5,567
3,421
8,193
4,005
4,188
15,22060,37728,09927,766
31,05547,304
4,891
11,802
3,190
1,589
8,051
3,061
14,72011,462
4,719
476,60265,32336,64630,0006,646
72,935
7,514
50,057
8,481
41,57655,271
108,742
59,43928,621
15,0808,752
71,362
1,589
24,12812,480124,616

Value
974,459
100,440
37,7852,280
60,376244,497
25,861
24,554
1,307
3,441
5,626
3,463
2,163
11,014
67,24528,632
29,085
17,21084,94919,10419,085
1,852
19,602
6,576
9,673
9,057
27,451
1,700
629,52251,48064,49827,671
36,827
109,021
17,94933,797
8,047
25,75066,043
156,368
76,45337,77237,36725,423104,944
2,057
28,127
20,120
195,0772006
Growth rate
Share No. of cases
14.8
100.0
7,953
-25.9
10.3
695
-68.5
3.9
305
12.2
0.2
56
343.5
6.2
334
3.4
25.1
2,450
-52.7
2.7
264
-50.0
2.5
256
-76.5
0.1
8
0.6
0.4
93
-31.3
0.6
133
-13.5
0.4
62
-48.4
0.2
71
-27.6
1.1
113
11.4
6.9
501
1.9
2.9
179
4.8
3.0
204
-44.6
1.8
234
79.6
8.7
929
290.6
2.0
250
61.7
2.0
257
-41.9
0.2
49
1133.5
2.0
52
-18.3
0.7
116
216.0
1.0
21
-38.5
0.9
184
139.5
2.8
139
-64.0
0.2
44
32.1
64.6
4,808
-21.2
5.3
191
76.0
6.6
304
-7.8
2.8
248
454.1
3.8
56
49.5
11.2
227
138.9
1.8
132
-32.5
3.5
595
-5.1
0.8
372
-38.1
2.6
223
19.5
6.8
399
43.8
16.0
825
28.6
7.8
176
32.0
3.9
451
147.8
3.8
131
190.5
2.6
116
47.1
10.8
2,019
29.5
0.2
47
16.6
2.9
1,115
61.2
2.1
405
56.5
20.0
1,467

Note: 1. Data as of July 5, 2007.
2. Based on industries of sellers.
3. ITconsists of computer and accessory equipment hardware, communications equipment, software, telecommunication services.
Source: Thomson Financial.

Value
630,169
59,042
46,793
1,148
11,102
198,526
30,633
9,592
21,041
2,092
7,814
3,940
3,874
8,521
64,7409,248
50,06432,70843,921
9,881
10,305
1,482
2,591
4,307
8,264
7,093
7,492
605
372,601
57,851
13,371
9,009
4,362
37,5248,512
43,5207,101
36,42035,461
101,970
34,095
46,23319,7588,233
66,1592,541
22,123
7,942
82,141first half year of 2007
No. of cases
Growth rate
Share
36.6
100.0
4,235
148.6
9.4
406
265.0
7.4
144
-48.3
0.2
31
27.5
1.8
231
109.3
31.5
1,278
151.9
4.9
155
-20.3
1.5
149
16299.5
3.3
6
-23.0
0.3
43
535.5
1.2
61
315.2
0.6
33
1281.0
0.6
28
-6.6
1.4
59
78.9
10.3
264
-2.3
1.5
112
147.1
7.9
105
283.3
5.2
134
102.1
7.0
460
190.7
1.6
125
125.9
1.6
132
138.2
0.2
25
-15.6
0.4
28
17.1
0.7
53
475.5
1.3
13
42.8
1.1
84
344.5
1.2
68
-59.4
0.1
34
8.7
59.1
2,551
522.8
9.2
103
-75.0
2.1
147
-52.3
1.4
119
-87.4
0.7
28
-56.7
6.0
123
-45.6
1.4
85
97.9
6.9
326
43.4
1.1
205
113.8
5.8
121
2.7
5.6
211
53.0
16.2
449
2.1
5.4
99
243.1
7.3
238
8.5
3.1
73
-40.4
1.3
47
62.4
10.5
1,060
371.7
0.4
22
88.0
3.5
623
24.6
1.3
194
-26.9
13.0
758

Table 9 Japanese trade by country and region(US$ million, %,)

Asia

China
ROK
TaiwanHong Kong
ASEAN10
Thailand
Malaysia
Indonesia
Philippines
Singapore
Vietnam
India
Oceania

Australia
New Zealand
North America

United States
CanadaMiddle East

MexicoPanamaBrazilChile
EuropeEU15

Germany
FranceEngland
Italy
Danmark
IrelandNetherlands
Belgium
Luxembourg
Spain
Portugal
GreeceAustria
SwedenFinland
Switzerland
Central Eastern Europe

PolandCzech Republic
Slovakia
Republic of Hungary
Bulgaria
Romania
Russia・CIS

RussiaMiddle East

Iran
Saudi Arabia
KuwaitUnited Arab Emirates
Oman
Qatar
IsraelAfricaEgypt
Nigeria
LiberiaSouth African Republic
World
APEC
ASEAN
NAFTA
Mercosur4
EU25
SAARC

2004
Value
Growth rate273,708
25.4
73,81829.0
44,20027.5
41,95934.6
35,37418.8
72,89619.6
20,25026.8
12,552
12.0
9,064
26.8
9,587
6.9
17,957
21.5
3,178
21.6
3,040
27.4
14,80921.4
11,796
19.4
2,289
26.0
134,477
9.6
126,839
9.9
7,638
4.0
21,649
30.6
5,182
43.0
6,051
11.8
2,344
25.6
721
25.9
94,471
18.9
84,25817.2
18,946
16.0
8,353
18.5
14,968
13.8
6,454
17.9
817
24.0
1,985
4.7
13,370
14.2
7,211
25.4
215
42.6
4,846
35.9
941
45.7
1,319
-1.1
1,252
8.5
1,857
12.8
1,725
26.0
2,187
12.2
3,877
53.8
832
43.3
1,246
108.6
106
64.7
1,458
32.4
28
72.6
88
34.8
3,764
71.9
3,111
76.3
14,464
12.6
1,117
-0.2
3,671
-1.1
935
-10.7
4,605
27.1
1,161
20.4
592
25.1
1,161
37.3
7,658
37.7
762
4.7
385
7.5
932
47.8
2,904
43.7
565,03920.3
425,915
20.2
72,896
19.6
139,659
10.5
2,880
30.7
88,903
18.4
5,120
24.5

Exports
2005
Value
Growth rate
289,661
5.8
80,3408.8
46,880
6.1
43,9104.7
36,132
2.1
76,0744.4
22,601
11.6
12,608
0.4
9,297
2.6
9,117
-4.9
18,545
3.3
3,610
13.6
3,539
16.4
15,617
5.5
12,492
5.9
2,455
7.3
143,7626.9
134,889
6.4
8,873
16.2
25,112
16.0
6,921
33.5
7,426
22.7
2,728
16.4
947
31.4
93,952-0.6
82,644-1.9
18,761
-1.0
7,817
-6.4
15,174
1.4
5,776
-10.5
873
6.8
1,946
-2.0
13,203
-1.3
7,175
-0.5
227
5.7
5,113
5.5
747
-20.6
886
-32.9
1,080
-13.7
1,972
6.2
1,894
9.8
2,172
-0.7
4,858
25.3
1,011
21.5
1,443
15.8
233
119.1
1,830
25.5
33
16.2
180
104.4
5,191
37.9
4,485
44.2
16,575
14.6
1,347
20.6
4,192
14.2
1,185
26.8
4,868
5.7
1,393
20.0
994
67.9
1,226
5.6
8,253
7.8
792
4.0
522
35.8
1,112
19.4
3,287
13.2
598,2155.9
454,562
6.7
76,0744.4
150,682
7.9
3,375
17.2
88,036
-1.0
5,986
16.9

Note: Exchange rates are converted to US$ based on applicable customs rate.
Source: Ministry of Finance, Trade Statistics.

2006
Value
Growth rate
307,779
6.3
92,852
15.6
50,321
7.3
44,1520.6
36,4690.976,3490.4
22,924
1.4
13,223
4.9
7,378
-20.6
9,015
-1.1
19,360
4.4
4,142
14.7
4,457
25.9
15,502-0.7
12,509
0.1
2,096
-14.6
155,6148.2
145,651
8.0
9,963
12.3
30,574
21.8
9,283
34.1
8,096
9.0
3,049
11.8
1,088
14.9
100,835
7.3
87,6196.0
20,433
8.9
7,628
-2.4
15,238
0.4
6,428
11.3
886
1.5
1,638
-15.8
14,740
11.6
7,155
-0.3
202
-11.0
5,633
10.2
768
2.7
1,420
60.4
1,194
10.6
1,848
-6.3
2,407
27.1
2,420
11.4
5,638
16.1
1,057
4.6
1,943
34.7
487
109.3
1,758
-4.0
82
150.1
188
4.7
8,315
60.2
7,065
57.5
19,194
15.8
1,174
-12.8
4,641
10.7
1,190
0.4
6,050
24.3
1,731
24.3
1,460
46.8
1,206
-1.6
9,459
14.6
1,140
43.9
565
8.1
873
-21.5
4,062
23.6
647,2908.2
488,067
7.4
76,3490.4
164,897
9.4
3,831
13.5
93,869
6.6
7,272
21.5

2004
Value
Growth rate
205,305
20.9
94,22725.3
22,02723.5
16,670
17.0
1,623
21.0
67,405
15.6
14,08819.0
14,097
12.4
18,670
14.1
8,236
17.4
6,281
15.9
3,855
25.3
2,611
20.4
22,69827.7
19,430
29.6
2,465
20.4
70,8997.1
62,435
6.4
8,398
12.2
13,742
32.2
2,170
22.6
116
12.0
3,643
27.0
4,174
59.9
64,44016.3
56,48815.8
17,056
20.5
8,336
15.7
6,652
14.3
6,891
13.4
2,795
18.0
3,792
7.2
1,987
6.6
2,086
13.5
51
-1.1
1,716
26.7
198
19.5
125
13.9
1,305
24.4
2,110
7.2
1,386
13.9
4,810
24.6
1,290
34.2
210
66.8
275
28.4
126
71.4
508
18.7
27
8.6
105
66.9
6,184
34.0
5,694
35.0
62,704
23.2
8,260
11.5
18,460
27.3
5,743
26.5
18,320
28.3
1,621
-35.3
7,876
21.3
787
13.9
8,695
35.4
57
-11.7
1,426
60.9
0
286.1
4,602
28.6
454,669
19.2
307,386
18.6
67,405
15.6
73,002
7.5
4,177
23.3
57,796
16.1
3,152
18.9

Imports
2005
Value
Growth rate
230,38312.2
109,105
15.8
24,536
11.4
18,187
9.1
1,580
-2.6
73,076
8.4
15,667
11.2
14,7784.8
20,937
12.1
7,771
-5.6
6,744
7.4
4,560
18.3
3,216
23.2
28,18224.2
24,609
26.7
2,528
2.6
73,5433.7
64,497
3.3
8,976
6.9
16,107
17.2
2,552
17.6
44
-61.7
4,435
21.8
5,161
23.6
65,974
2.4
57,542
1.9
17,966
5.3
8,564
2.7
6,754
1.5
6,924
0.5
2,396
-14.3
3,793
0.0
2,143
7.8
2,137
2.5
43
-16.2
1,747
1.8
197
-0.6
118
-5.3
1,334
2.2
2,182
3.4
1,242
-10.4
5,064
5.3
1,544
19.7
229
8.8
393
43.2
108
-14.2
569
11.9
39
40.9
156
49.1
6,825
10.4
6,205
9.0
87,66739.8
10,35425.4
28,739
55.7
7,667
33.5
25,324
38.2
2,741
69.1
10,692
35.8
842
7.0
9,934
14.2
118
105.8
999
-29.9
0
215.6
5,541
20.4
518,63814.1
341,916
11.2
73,076
8.4
76,025
4.1
4,862
16.4
59,066
2.2
3,726
18.2

2006
Value
Growth rate
252,506
9.6
118,516
8.6
27,345
11.4
20,345
11.9
1,521
-3.7
79,9909.5
16,896
7.8
15,4884.8
24,149
15.3
7,963
2.5
7,485
11.0
5,295
16.1
4,058
26.2
31,765
12.7
27,947
13.6
2,534
0.2
77,7575.7
68,071
5.5
9,623
7.2
20,411
26.7
2,823
10.7
35
-20.8
5,089
14.8
7,256
40.6
67,001
1.6
58,0820.9
18,463
2.8
8,972
4.8
6,718
-0.5
7,037
1.6
2,037
-15.0
3,494
-7.9
2,176
1.5
1,848
-13.5
33
-23.7
1,926
10.3
188
-4.7
77
-35.2
1,543
15.7
2,215
1.5
1,355
9.1
5,106
0.8
1,711
10.8
263
14.8
424
7.7
168
55.0
579
1.8
50
28.7
184
17.7
7,369
8.0
6,658
7.3
109,190
24.6
11,113
7.3
37,215
29.5
9,105
18.8
31,590
24.7
2,673
-2.5
14,814
38.6
834
-1.0
13,266
33.6
397
235.8
811
-18.8
8
3084.1
6,635
19.7
579,29411.7
374,233
9.5
79,9909.5
80,517
5.9
5,715
17.6
59,830
1.3
4,662
25.1

Table 10 Japanese import by product（2006）(US$ million, %,)World
United States
EU25
China
ASEAN10
Asian NIEs
Value Growth rate Value Growth rate Value Growth rate Value Growth rate Value Growth rate Value Growth rate
Food
Raw material
Mineral fuels
Chemicals
Organic chemicals
Medical products
Plastic materials
Manufactured goods
Iron and steel products
Nonferrous metals
Manufactures of metals
Textile yarn, fabrics
Non-metallic mineral ware
Rubber manufactured
Paper & paper manufactures
Machinery
Power generating machine
Computers and units
Parts of cumputer
Metalworking machinery
Pump and centrifuges
Construction machines
Mechanical handling equip
Heating or cooling machine
Textile machines
Bearings
Electrical machinery
Semiconductors etc
Integrated circuits
Visual apparatus
Video rec or repro app
Television recivers
Audio apparatus
Parts of audio,visual app
Electrical power machinery
Telephony,telegraphy
Electrical measuring
Electrical apparatus
Batteries and accumulators
Transport Equipment
Motor vehicles
Passenger motor cars
Buses and trucks
Parts of motor vehicles
Cycles with engines
Ships
Other
Scientific,optical inst
Photographic supplies
Blank/recorded media
Total

Note, Source: Same as Table 9.

3,078
7,742
5,550
58,445
17,8833,201
17,572
74,63929,987
10,752
9,023
6,824
7,406
7,891
2,557
127,344
19,952
7,060
15,301
11,537
9,095
9,729
6,358
5,268
2,390
3,023
138,262
41,74927,343
15,252
10,9283,337
814
13,3246,729
4,261
10,89816,495
3,254
156,898
105,787
94,338
10,74326,0006,399
13,63375,333
21,2374,706
4,718
647,290

6.4
516
14.6
497
30.8
1,161
9.7
6,905
4.1
1,700
-4.8
1,218
12.5
1,497
10.7
8,628
8.2
2,031
47.8
724
6.3
1,999
0.1
508
6.6
882
6.3
1,979
0.1
496
4.6 31,318
0.1
6,133
-3.4
3,078
0.6
4,473
6.6
2,688
4.5
1,769
19.3
2,930
8.6
1,277
9.2
791
7.0
111
4.5
628
4.4 23,144
4.2
3,064
3.5
1,848
-6.5
4,832
-5.5
3,171
-14.8
1,271
-25.9
347
13.6
1,436
9.8
1,512
-8.4
1,707
3.7
2,664
7.5
2,105
1.2
425
13.3 58,862
16.9 45,363
17.9 44,095
10.2
1,268
2.0
8,657
4.2
2,709
18.7
0
6.3 14,620
-6.1
3,702
0.0
931
6.0
1,420
8.2 145,651

1.1
50.9
75.8
-0.4
-5.6
-9.0
2.6
9.7
24.9
14.4
8.8
2.2
4.9
5.4
-7.3
2.9
-5.4
2.3
1.2
11.8
2.1
11.8
11.7
18.5
-15.4
2.9
-1.7
8.9
10.5
-14.6
-9.0
-31.0
-30.7
-1.4
7.0
-2.5
1.6
1.3
-12.8
18.2
25.3
25.0
35.6
-6.8
5.4
n.a.
-1.3
-2.3
-0.8
-0.5
8.0

117
581
471
6,912
2,269
997
1,435
5,756
842
588
1,161
519
912
1,539
191
23,241
3,896
2,075
4,626
1,517
2,289
1,760
859
1,120
123
611
20,800
3,819
1,790
4,775
3,751
752
196
2,543
915
707
1,731
1,655
384
23,707
15,741
15,197
545
3,664
2,450
1,266
12,284
2,846
886
1,099
93,869

5.8
20.1
18.4
5.7
-7.1
-8.4
12.0
7.6
26.1
34.5
0.1
2.5
8.6
0.4
-4.9
5.9
4.0
-7.8
5.3
-5.4
12.6
31.2
11.7
8.5
-3.1
5.9
0.4
0.3
1.0
-8.5
-10.5
-6.5
-30.8
13.1
7.2
-23.2
8.6
9.5
-3.3
8.5
5.6
7.1
-24.5
4.0
0.8
234.1
15.4
-2.2
1.1
4.5
6.6

423
3,220
1,380
12,206
4,929
144
4,365
15,061
5,951
2,599
1,549
3,024
868
481
499
18,947
2,280
455
2,491
2,273
1,153
482
832
948
1,019
379
25,215
8,187
5,579
1,004
896
36
68
2,895
1,343
281
1,540
3,959
1,326
5,373
1,557
1,357
190
3,308
1
4
11,027
4,046
427
358
92,852

19.8
18.8
13.4
16.6
6.3
-3.9
23.7
13.7
5.3
70.1
18.8
-0.2
5.8
39.7
2.0
10.9
15.9
-9.6
7.3
9.0
5.3
17.0
10.8
25.8
32.7
18.6
21.3
25.4
32.0
95.6
102.9
28.5
2.0
2.7
27.3
-25.5
22.5
20.8
20.2
33.0
20.6
15.7
74.2
28.2
-23.8
-61.4
5.6
-2.3
13.2
7.6
15.6

321
749
402
6,791
1,520
89
2,307
13,685
6,541
2,304
1,812
888
945
635
531
15,634
2,416
360
2,101
1,560
1,077
718
863
513
206
504
21,734
10,240
6,188
864
611
198
49
1,477
905
366
1,176
2,948
325
7,337
3,078
1,590
1,205
2,907
105
863
9,695
1,649
309
903
76,349

2.0
1,480
8.7
2,321
1.9
1,467
6.1 22,863
0.2
6,038
11.5
363
5.2
7,350
4.0 21,939
-5.2
9,918
49.4
4,293
1.0
1,654
2.0
1,324
3.9
3,294
2.5
704
6.6
691
-5.8 25,883
-20.5
1,856
-17.1
989
-5.5
2,029
-3.4
2,929
-10.9
1,554
-19.1
1,047
-1.7
1,285
-6.3
1,426
-14.9
280
-4.3
720
2.4 41,687-2.4 18,678-11.8 14,256
-10.7
2,040
-15.1
1,426
0.0
473
-7.6
89
27.2
2,718
-3.4
1,455
30.8
480
-4.7
3,278
7.6
5,340
12.8
602
-13.5
6,904
-15.3
2,715
-17.7
2,050
-11.0
502
-10.9
1,794
37.9
179
-30.2
1,457
10.1 25,757
2.6
8,249
4.3
1,790
20.9
980
0.4 150,301

5.7
3.2
34.1
12.7
11.8
8.9
11.5
8.8
4.5
41.6
-1.0
-4.1
5.1
-0.7
-0.6
1.9
0.1
-5.1
-12.1
18.1
0.2
19.9
-4.1
5.4
-16.1
5.7
0.0
-1.1
-0.7
-11.2
-14.1
-6.4
-22.9
-0.4
11.5
-15.0
1.1
0.8
-20.5
-15.9
2.7
4.9
-8.0
-10.7
26.1
-26.4
3.2
-11.9
-3.8
6.5
3.3

Table 11 Japanese export by product（2006）(US$ million, %,)World
United States
EU25
China
ASEAN10
Asian NIEs
Value Growth rate Value Growth rate Value Growth rate Value Growth rate Value Growth rate Value Growth rate
Food
Fish
Shrimps
Meat
Cereals
Vegetabls
FruitsRaw material
Wood
Ore of nonferrous
Iron ore and concentrates
Soy beans
Mineral fuels
Petroleum
Petroleum products
Petroleum spirits
Liquefied natural gas
Liquefied petroleum gas
Coal
Chemicals
Organic chemicals
Medical products
Manufactured goods
Iron and steel products
Nonferrous
Manufactures of metals
Textile yarn,fabrics
Non-metallic mineral ware
Wood manufactured
Machinery
Power generating machine
Computers and units
Parts of computer
Electrical machinery
Semiconductors etc
Integrated circuits
Audio and visual apparatus
Video rec or repro app
Electrical power machinery
Telephony,telegraphy
Electrical measuring
Transport equipment
Motor vehicles
Parts of motor vehicles
Aircraft
Other
Scientific, optical inst
Clothing and accessories
Furniture
Bags
Total

Note, Source: Same as Table 9.

49,122
13,532
2,133
8,412
5,771
3,657
3,437
40,7245,000
14,3807,175
1,282
160,496
99,235
16,05911,95422,881
8,081
13,872
42,23911,593
8,523
56,382
6,521
18,603
7,643
6,142
6,192
6,787
53,677
6,872
18,073
7,318
74,35324,716
21,637
13,413
2,284
4,796
4,155
5,155
19,442
7,881
4,514
5,009
82,85815,49823,654
5,123
4,075
579,294

-3.1
-5.0
-0.1
-14.4
-0.2
1.2
-1.9
27.5
4.8
58.5
28.4
-10.8
21.4
24.1
19.4
18.7
26.6
29.5
0.9
7.1
7.1
3.2
14.1
-10.8
39.6
15.9
5.7
5.4
10.5
3.9
19.4
-4.2
-10.4
10.3
15.7
17.0
-7.9
-14.3
14.1
18.0
15.7
3.5
-5.5
17.9
5.5
7.5
17.2
5.2
2.8
5.7
11.7

12,890
1,256
14
1,465
3,664
636
891
4,009
709
432
0
980
957
0
525
90
364
1
67
8,756
1,405
1,445
4,167
185
1,260
774
274
630
177
11,118
4,216
1,588
758
12,115
4,675
4,326
1,056
39
300
490
2,295
5,831
631
652
4,259
8,227
4,214
259
189
77
68,071

-3.6
-9.7
-10.6
-13.9
0.4
6.5
-4.7
12.1
-2.2
80.6
−
-3.9
-21.4
−
4.9
-28.9
-2.3
-96.0
-79.8
8.3
7.7
2.7
14.4
-3.6
42.5
15.0
6.8
12.8
1.3
8.6
16.5
-11.8
-13.4
15.1
17.4
20.4
18.0
18.4
0.9
13.7
18.7
3.1
-3.1
13.3
1.7
0.7
6.1
-12.6
-0.3
11.4
5.5

5,311
470
10
1,143
305
197
165
2,115
868
52
0
0
150
0
138
93
0
2
0
14,299
4434
4,976
5612
435
1,382
824
697
1,035
434
7,369
1,338
865
260
6,318
1,095
930
290
42
708
304
1,412
8,174
5,929
1,371
559
10,482
2,833
1,583
646
1,638
59,830

-4.4
8,041
3.1
3,149
-1.8
163
-30.1
1,018
-2.5
443
-5.9
1,977
-0.9
609
3.1
1,749
5.7
302
-65.1
92
-70.1
0
−
79
6.4
2,845
−
469
6.6
553
26.0
465
−
0
-19.3
4
−
1,497
0.3
5,352
0.1
1,217
-0.9
303
5.4 14,817
2.6
1,599
28.0
2,054
-1.9
3,458
-2.8
3,357
-4.9
2,016
14.0
1,237
0.9 20,020
7.4
523-14.3 10,340
-14.0
3,422
10.4 23,038
20.6
2,195
18.7
1,524
-2.5
7,069
56.2
1,401
69.5
2,467
3.2
1,678
1.0
622
-0.4
1,949
-6.4
20
6.0
971
95.2
3
-0.3 40,705
1.4
2,725
-1.9 19,383
-3.3
2,683
-0.3
2,167
1.3 118,516

1.8
1.5
-2.4
9.0
-7.6
5.8
3.2
3.6
4.8
-26.7
1802.0
-32.6
-13.8
73.3
-6.7
-8.3
−
-27.3
-18.2
25.0
21.6
10.8
12.3
-6.9
20.0
21.4
10.0
11.0
13.4
7.1
94.2
1.0
-3.9
10.5
25.1
30.2
-5.8
-13.7
10.0
22.1
46.6
23.7
77.5
45.4
23.4
8.2
-3.0
6.5
7.5
11.5
8.6

5,699
2,775
1,160
529
231
201
723
8,506
531
3,779
373
0
21463
4,499
3,003
1,541
11871
152
1,938
4,097
770
80
7650
135
979
1,050
759
861
2,838
7,568
360
3,617
1,275
15,136
5,301
4,033
3,127
669
871
612
410
975
72
775
11
8,897
1,210
1,407
1,002
101
79,990

1.8
-2.1
0.7
5.5
-5.9
3.0
-6.4
44.0
5.0
60.9
72.8
-83.4
10.2
22.0
17.8
10.8
8.2
-64.6
5.3
5.8
13.9
-2.8
16.7
-10.8
53.1
20.4
0.7
15.0
16.6
0.9
41.6
-5.4
-8.6
0.4
-0.2
-3.1
-17.9
-18.4
2.5
2.1
21.6
20.3
9.1
23.7
43.1
7.6
0.9
4.2
-1.0
-2.0
9.5

2,340
1,210
5
40
91
238
99
1,340
24
1
5
0
4,553
80
4,421
2,362
0
49
0
5,131
1,336
197
6,782
2,519
1,032
1,360
644
647
64
7,404
253
2,272
1,803
17,418
12,204
11,574
1,752
121
344
950
181
932
58
525
25
10,794
3,685
439
340
54
56,695

-13.3
-22.0
-31.2
-6.2
-4.4
-22.0
1.9
34.4
-45.2
-47.8
16.2
n.a.
23.9
205.3
22.5
20.1
−
60.8
-72.0
7.6
13.0
20.0
1.8
-16.3
64.0
13.7
2.5
9.6
9.8
-6.9
23.3
-15.1
-21.8
17.1
20.4
21.8
-9.1
-20.9
15.5
49.3
16.8
19.4
18.2
20.2
49.8
25.0
106.3
-15.9
-6.4
-16.0
11.1

Table 12 Japan's Foreign Direct Investment by Country and Region (Based on Balance of Payments, net)
(U S$ m illion, %)O u tw a rdAsia
C hinaAsia N IES
H ong K ong
Taiw an
R .K orea
Singapore
ASEAN 4ThailandIndonesia
M alaysia
Philippines
India
Vietnam
N orth Am erica
U .S.A.
C anadaC entral and South A m erica
M exicoB razilC aym an Islands
P anam a
B erm uda
D utch Antilles
B ritish Virgin Islands
P eru
Argentina
P uerto R ico
O ceania
Australia
N ew Zealand
G uam
M arshall
W estern Europe
G erm any
U .K.
FranceN etherlands
Italy
B elgium
Luxem bourg
Sw itzerland
Sw edenSpain
N orw ay
D enm ark
Ireland
Austria
C yprusTurkeyM altaEastern Europe, R ussia, etc.
R ussia
P olandH ungary
C zechM iddle East
Saudi Arabia
U .A.E.
Egypt
AfricaSouth Africa
Liberia
M auritius
W orldR eference
ASEAN 10EU

In w ard

2004

2005

2006

10,531
5,863
1,873
491
473
771
138
2,534
1,867
498
163
6
139
n.a.
7,601
7,559
42
3,120
191
-65
2,726
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
1,856
1,651
151
n.a.
n.a.
7,097
645
1,649
25
3,337
163
664
-82
-110
-70
183
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
439
49
n.a.
n.a.
n.a.
-63
-38
-19
n.a.
378
124
n.a.
n.a.
30,962

16,188
6,575
4,902
1,782
828
1,736
557
4,276
2,125
1,185
524
442
266
154
13,16812,126
1,042
6,402
629
953
3,915
451
151
108
-98
95
29
39
943
640
62
-24
262
7,509
270
2,903
541
3,315
44
-195
25
56
82
363
128
82
-111
8
-30
73
-61
721
95
275
191
150
542
494
19
25
25
-17
-284
309
45,461

17,167
6,169
3,893
1,509
491
1,517
375
6,038
1,984
744
2,941
369
512
467
10,188
9,297
892
2,547
-2,603
1,423
2,814
558
-305
0
255
64
11

2,800
7,341

5,002
7,872

723
466
125
98
20
18,029
1,128
7,271
842
8,497
51
133
-478
183
416
136
17
6
-229
41
-11
7
-1
367
160
234
-102
-18
242
254
-56
21
899
466
-99
533
50,165

34.2
12.3
7.8
3.0
1.0
3.0
0.7
12.0
4.0
1.5
5.9
0.7
1.0
0.9
20.3
18.5
1.8
5.1
n.a.
2.8
5.6
1.1
n.a.
n.a.
0.5
0.1
0.0
n.a.
1.4
0.9
0.2
0.2
0.0
35.9
2.2
14.5
1.7
16.9
0.1
0.3
n.a.
0.4
0.8
0.3
0.0
0.0
n.a.
0.1
n.a.
0.0
n.a.
0.7
0.3
0.5
n.a.
n.a.
0.5
0.5
n.a.
0.0
1.8
0.9
n.a.
1.1
100.0

G row thR a te
6.0
-6.2
-20.6
-15.3
-40.6
-12.6
-32.7
41.2
-6.6
-37.2
460.9
-16.4
92.7
204.4
-22.6
-23.3
-14.4
-60.2
n.a.
49.2
-28.1
23.6
n.a.
n.a.
n.a.
-32.6
-62.3
n.a.
-23.3
-27.2
100.6
n.a.
-92.2
140.1
318.1
150.4
55.8
156.3
13.9
n.a.
n.a.
229.9
403.9
-62.5
-86.9
-92.6
n.a.
428.1
n.a.
-90.9
n.a.
-49.1
68.5
-15.1
n.a.
n.a.
-55.4
-48.7
n.a.
-17.2
3549.8
n.a.
n.a.
72.4
10.3

6,923
17,925

13.8
35.7

38.4
127.7

S h are

.

2004
A sia
C hinaAsia N IES
H ong K ong
Taiw an
R .K orea
Singapore
ASEA N 4
ThailandIndonesia
M alaysia
P hilippines
India
N orth Am erica
U .S.A.
C anadaC entral and South Am erica
M exicoB razilC aym an Islands
Panam aB erm uda
B ritish Virgin Islands
O ceania
Australia
N ew ZealandW etern Europe
G em any
U .K .
FranceN etherlands
Italy
B elgium
Luxem bourg
Sw itzerland
Sw eden
Spain
Ireland
Austria
Eastern Europe, R ussia, etc.
R ussia
M iddle East
Saudi A rabia
U .A .E.
IsraelA fricaSouth A frica
M auritius
W orldR eference
ASEA N 10
EU

Notes:
1.Figureswere firstreleasedin Japaneseyenand quarterly convertedinto USdollarsusingBankof Japan averageinter-bank rates.
2."-"indicatesnet outflow.
3."0"indicatesanamount oflessthan one million USdollars; "."indicatesnoinvestmentrecorded duringthe correspondingperiod.
4.EUincludesthe 10accession states(AC10) fromthe second quarter of 2004.
5."World"includescountriesthoseare notclassifiedintoeach region.Therefore, "World"isnot necessarily equaltothe sumofregional component.
Sources: Ministry of FinanceBalance of Payments Statisticsand Bank of Japanforeignexchange rates.

994
-9
1,009
295
74
251
389
2
-1
2
0
1
0
2,294
1,407
890
-1,114
0
20
-752
n.a.
n.a.
n.a.
-4
-4
1
5,623
1,170
-310
1,049
3,611
33
-417
260
108
-82
115
n.a.
n.a.
-1
0
3
0
1
n.a.
-13
.
n.a.
7,808
392
5,492

2005

2006

0
3,223

63
-6,789G row thR a te
n.a.
2.3
n.a.
n.a.
n.a.
244.2
77.4
n.a.
n.a.
15036.3
n.a.
n.a.
n.a.
n.a.
-66.0
n.a.
-55.7
n.a.
n.a.
n.a.
-32.4
n.a.
-11.7
n.a.
n.a.
n.a.
n.a.
n.a.
1266.3
n.a.
n.a.
661.0
n.a.
n.a.
n.a.
n.a.
-2.2
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
11429.0
n.a.
n.a.
n.a.

592
1,858

1,063
-4,274

79.6
n.a.

1,565
11
1,563
960
-26
31
598
-5
-6
0
0
1
1
-636
308
-944
1,278
.
1
1,069
14
-38
205
-114
-113
1
1,123
237
132
-78
2,541
6
-1,188
363
-748
-63
41
-123
-1

-852
12
-856
-2,136
110
108
1,062
3
1
3
1
-1
-1
-2,666105-2,771
566
0
.

.
.
9

-82
9
428
181
36
35
0
-3,938
-542
1,807
274
-7,583
48
884
-12
317
669
40
128
40
-4
.
-1

.
-1
10
1

.
0
-1
63

.

.

Table 13 Japan's Foreign Direct Investment by Industry (Based on Balance of Payments, net)
(US$ million, %)InwardOutwardManufacturing(total)
Food
TextileLumber and pulp
Chemicals and pharmaceuticals
Petroleum
Rubber and leather
Glass and ceramics
Iron, non-ferrous and metals
General machinery
Electric machineryTransportation equipment
Precision machinery
Non-manufacturing(total)
Farming and forestry
Fishery and marine products
MiningConstruction
Transportation
Communications
Wholesale and retail
Finance and insurance
Real estate
Services
Total

2005

2006

26,146
1,685
416
826
3,363
531
831
258
1,331
1,296
4,377
8,611
1,419
19,315
23
-44
1,372
148
824
1,712
4,623
9,227
-851
1,086
45,461

34,513
1,025
180
420
4,413
2,921
1,107
2,759
1,795
1,663
7,041
8,597
1,420
15,652
42
28
1,577
-64
1,507
-3,368
5,483
5,562
-811
188
50,165

Share
68.8
2.0
0.4
0.8
8.8
5.8
2.2
5.5
3.6
3.3
14.0
17.1
2.8
31.2
0.1
0.1
3.1
n.a.
3.0
n.a.
10.9
11.1
n.a.
0.4
100.0

Growth
Rate
32.0
-39.2
-56.8
-49.1
31.2
450.0
33.3
967.6
34.8
28.3
60.8
-0.2
0.1
-19.0
82.0
n.a.
15.0
n.a.
82.9
n.a.
18.6
-39.7
n.a.
-82.7
10.3

2005

2006

-2,191-211
188-22-1,168
-44
1
103
-34
164
-1,195
32
-59
5,414
-1
0
0
41
2,108
912
1,157
645
15
178
3,223

254
-717
58
-23
1,538
37
35
193
60
-24
32
-1,408598-7,043
11
-39
1
37
28
-9,715
-387
2,265
72
122
-6,789Notes: 1.Figureswerefirst released in Japaneseyenandquarterly convertedinto US dollars using Bankof Japanaverageinter-bank rates.
2."-"Indicates net outflow.
3."0"indicatesanamount oflessthan one million USdollars
4. Figuresby industry are released since 2005.
Sources: Ministry of FinanceBalance of Payments Statisticsand Bank of Japanforeignexchange rates.

Growth
Rate
n.a.
n.a.
-69.1
n.a.
n.a.
n.a.
4314.5
86.1
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
273.7
-9.8
-98.7
n.a.
n.a.
251.2
365.6
-31.1
n.a.

Table 14 Japan's Foreign Direct Investment Stock by Country and Region (Based on Balance of Payments, net)
(US$ million, %)OutwardAsia
China
AsiaNIES
Taiwan
Korea
Hong Kong
Singapore
ASEAN4ThailandIndonesia
Malaysia
Philippines
India
North America
U.S.A.
CanadaSouth and Central America
MexicoBrazilCayman Is.
Oceania
Australia
New Zealand
EuropeGermany
U.K.
FranceNetherlands
Italy
Belgium
Luxembourg
Switzerland
SwedenSpain
Eastern Europe, Russia, etc.
RussiaMiddle East
Saudi Arabia
U.A.E.
Iran
AfricaSouth Africa
OECD nations(Note4)
ASEAN
EU25
TOTAL

Inwardend of 04

end of 05

end of 06

76,416
20,20829,506
5,455
6,602
6,275
11,17523,806
9,909
6,520
4,080
3,296
1,756
146,967
142,302
4,665
26,5882,888
4,560
15,00815,091
12,844
850
101,886
6,990
26,845
12,93736,499
1,092
8,848
1,107
1,035
1,560
1,150
1,551
87
1,022
859
39
5
1,628
967
273,288
35,794
101,417
371,755

88,187
24,65532,708
5,932
8,251
6,715
11,81027,657
11,677
7,681
4,803
3,496
1,802
156,189
150,152
6,037
33,064
3,635
6,001
18,071
12,961
10,618900
92,453
6,197
24,264
11,32534,591
845
7,774
763
869
1,563
1,390
1,824
157
1,685
1,439
185
5
1,332
793
273,584
40,47892,140388,197

107,653
30,31639,042
6,328
10,6697,776
14,27034,313
14,839
7,457
7,763
4,253
2,315
163,230
156,411
6,818
39,291
1,773
7,829
21,44013,794
12,181
994
118,657
7,415
31,61313,06445,419
807
9,630
1,128
985
2,199
1,348
2,315
258
2,038
1,753
183
4
2,701
1,125
309,275
49,837
118,852
449,680

Share
23.9
6.7
8.7
1.4
2.4
1.7
3.2
7.6
3.3
1.7
1.7
0.9
0.5
36.3
34.8
1.5
8.7
0.4
1.7
4.8
3.1
2.7
0.2
26.4
1.6
7.0
2.9
10.1
0.2
2.1
0.3
0.2
0.5
0.3
0.5
0.1
0.5
0.4
0.0
0.0
0.6
0.3
68.8
11.1
26.4
100.0

end of 04

end of 05

end of 06

5,889
90
5,658
1,605
537
2,136
1,380
120
48
8
15
49
10
45,91940,872
5,049
3,004
5
33
2,666
637
634
4
41,7793,915
2,310
13,693
14,210
555
613
1,650
3,172
542
186
52
53
9
2
2

6,702
102
6,475
1,391
313
2,612
2,159
105
42
6
13
44
10
47,72943,888
3,841
8,218
4
31
5,599
478
472
3
38,101
5,904
3,033
10,777
11,654
559
474
1,632
2,264
352
111
47
46
14
2
1

8,247
100
8,032
1,475
423
1,928
4,205
107
42
8
13
43
9
44,273
41,9892,284
12,123
4
30
8,400
492
485
3
42,367
4,582
4,983
11,54912,175
495
1,901
1,635
2,640
742
195
47
46
14
2
1

.
-12

.
1

.
88,785
1,501
38,50397,305.
63.
86,5532,264
35,758101,322.
87,463
4,310
39,625
107,663

Share
7.7
0.1
7.5
1.4
0.4
1.8
3.9
0.1
0.0
0.0
0.0
0.0
0.0
41.1
39.0
2.1
11.3
0.0
0.0
7.8
0.5
0.5
0.0
39.4
4.3
4.6
10.7
11.3
0.5
1.8
1.5
2.5
0.7
0.2
0.0
0.0
0.0
0.0
0.0
n.a.
0.1
n.a.
81.2
4.0
36.8
100.0

Notes: 1. Figures werefirst released in JapaneseyenandconvertedtoUS dollars using Bank of Japan average inter-bankrates.
2."-"Indicates net outflow.
3. "." Indicatesnoinvestment recordedduringthe corresponding period.
4. OECD member countries include the EU15, Australia, Canada, Iceland, New Zealand, Norway, Switzerland, Turkey, U.S.A., Mexico, Czech Republic, Hungary, ROK and Poland (28 countries intotal).
Sources: Ministry of FinanceandBankof Japanbalanceofpaymentandcross-borderinvestment statisticsand Bank of Japanforeignexchange rates.

Table 15 Worldwide FTA
Area

Name

European Union
European Free Trade Association(EFTA)
EU−Switzerland
EU−Algeria
EU−Syria
Gulf Cooperation Council(GCC)
EUーAndorra
EFTA−Turkey
Economic Cooperation Organization(ECO)

Date of theagreement
1958/1/1
1960/5/3
1973/1/1
1976/7/1
1977/7/1
May-81
1991/7/1
1992/4/1
Nov-92Area

Name

AlbaniaーRepublic of Moldova
Republic of MoldovaーMacedonia
AlbaniaーBosnia And Herzegovina
Europe, Russia
EFTA−Tunisia
and the NIS,
Middle East, TurkeyーPalestinian Territories
TurkeyーTunisia
AfricaTurkeyーMorocco
Turky−Syria
EFTA−Lebanon

1993

2004/11/1
2004/12/1
2004/12/1
2005/6/1
2005/6/1
2005/7/1
2006/1/1
2007/1/1
2007/1/1
1961/10/12

Economic Community of West Afarican States(ECOWAS)EFTA−Israel
ArmeniaーRussia
KyrgyzstanーRussia
Faroe IslandsーNorway
Faroe IslandsーIceland
European Economic Area(EEA)
GeorgiaーRussia
Common Market for Eastern and Southern Africa(COMESA)
Commonwealth of Independent States（CIS)economic union
Faroe IslandsーSwitzerland
KyrgyzstanーArmenia
KyrgyzstanーKazakhstan
ArmeniaーRepublic of Moldova
EUーTurkey
GeorgiaーUkraine
ArmeniaーTurkmenistan
GeorgiaーAzerbaijan
KyrgyzstanーRepublic of Moldova

1993/1/1
1993/3/25
1993/4/24
1993/7/1
1993/7/1
1994/1/1
1994/5/10
1994/12/8
1994/12/30
1995/3/1
1995/10/27
1995/11/11
1995/12/21
1996/1/1
1996/6/4
1996/7/7
1996/7/10
1996/11/21

ArmeniaーUkraine

1996/12/18

Bangkok Agreement

1976/6/17

1997/1/1

Papua New GuineaーAustralia
South Pacific Regional Trade and Economic Cooperation Agreement（SPARTECA）
Australia/New Zealand Closer Economic Relations Trade Agreement（ANZCERTA）
Lao People's Democratic RepublicーThailand
ASEAN Free Trade Area（AFTA）
Melanesian Spearhead Group(MSG)
South Asian Association for Regional Cooperation(SAPTA)
New ZealandーSingapore
IndiaーSri Lanka
JapanーSingapore
SingaporeーAustralia
ChinaーMacau
ChinaーHong Kong
ASEAN−China（Framework Agreement）
ThailandーIndia
ThailandーAustralia
ThailandーNew ZealandSingaporeーIndia
ROKーSingapore
JapanーMalaysia
ROK−ASEAN

1981/1/1
1983/1/1
1991/6/20
1992/1/28
1993/7/22
1995/12/7
2001/1/1
2001/12/15
2002/11/30
2003/7/28
2004/1/1
2004/1/1
2003/7/1
2004/9/1
2005/1/1
2005/7/1
2005/8/1
2006/3/2
2006/7/13
2007/6/1

EUーFaroe Islands
TurkeyーIsrael
EUーPalestinian Territories
Eurasian Economic Community(EAEC)Europe, Russia CroatiaーMacedonia
and the NIS, the Pan Arab Free Trade Area
Middle East, KyrgyzstanーUkraine
EU−Tunisia
AfricaKyrgyzstanーUzbekistan
GeorgiaーArmenia
Economic and Monetary Community of Central Africa(CEMAC)
EFTA−Palestinian Territories
GeorgiaーKazakhstan
EFTA−Morocco
EU−South Africa
GeorgiaーTurkmenistan
Western African Economic and Monetary Union(WAEMU/UEMOA)EU−Morocco
EU−Israel
East African Community（EAC）
TurkeyーMacedonia

1997/5/1
1997/7/1
1997/10/8
1997/10/30
1998/1/1
1998/1/19
1998/3/1
1998/3/20
1998/11/11
1999/6/24
1999/7/1
1999/7/16
1999/12/1
2000/1/1
2000/1/1
2000/1/1
2000/3/1
2000/6/1
2000/7/7
2000/9/1

Southern African Development Community（SADC）
CroatiaーBosnia And Herzegovina
EFTA−Macedonia
EU−Macedonia
ArmeniaーKazakhstan
EFTA−Jordan
EFTA−Croatia
EU−Croatia
EU−Jordan
AlbaniaーMacedonia
MacedoniaーBosnia And Herzegovina
EU−Lebanon
CroatiaーAlbania
TurkeyーBosnia And Herzegovina
TurkeyーCroatia
AlbaniaーKosovo
Republic of MoldovaーBosnia And Herzegovina
EU−Egypt
CroatiaーSerbia and Montenegro
Republic of MoldovaーSerbia and Montenegro
AlbaniaーSerbia and Montenegro
Republic of MoldovaーCroatia

2001/1/1
2001/1/1
2001/6/1
2001/12/25
2002/1/1
2002/1/1
2002/5/1
2002/5/1
2002/7/1
2002/7/15
2003/3/1
2003/6/1
2003/7/1
2003/7/1
2003/10/1
2004/5/1
2004/6/1
2004/7/1
2004/9/1
2004/9/1
2004/10/1

2000/9/1

Western
HemisphereAsia-PacificCentral American Common Market（CACM）
Caribbean Community（CARICOM）
Asociacion Latinoamericana de Integracion（ALADI）
Andean Community(CAN)
Common Market of the South（Mercado Comun del Cone Sur）
North American Free Trade Agreement（NAFTA）
Costa RicaーMexico
CanadaーChile
MexicoーNicaragua
ChileーMexico
MexicoーEl Salvador
GuatemalaーMexico
HondurasーMexico
ChileーCosta Rica
ChileーEl Salvador
CanadaーCosta Rica
PanamaーEl Salvador
United StatesーChile
United Statesーthe Dominican Republic＋Central America（５）(CAFTA-DR)

Date of theagreement

TRIPARTITE
EU—Overseas Countries and Territories(OCTs)
Protocol relating to Trade Negotiations among Developing Countries(PTN)
United StatesーIsrael
Global System of Trade Preferences among Developing Countries(GSTP)
CanadaーIsrael
IsraelーMexico
EU−MexicoEFTA−Mexico
United StatesーJordan
EFTA−Singapore
Cross-Regional
EU−Chile
United StatesーSingapore
ROKーChile
EFTA−Chile
United StatesーAustralia
JapanーMexico
United StatesーMorocco
United StatesーBahrain
JordanーSingapore
EFTA−South Korea

Notes: 1EEAhas reported only to GATS,buttheagreementcontains GATTelements.
2.Based onthe data reportedby membercountriestoWTOexcept ROK-ASEAN,Thailand-India, Singapore-India.
Source:WTO website (http://www.wto.org/english/tratop_e/region_e/region_e.htm)as ofMarch 1, 2007.

1973/8/1
1981/3/18
1988/5/25
1991/11/29
1994/1/1
1995/1/1
1997/7/5
1998/7/1
1999/8/1
2001/3/15
2001/3/15
2001/6/1
2002/2/15
2002/6/1
2002/11/1
2003/4/11
2004/1/1
2006/3/1

1977/2/1

1968/4/1
1971/1/1
1973/2/11
1985/8/19
1989/4/19
1997/1/1
2000/7/1
2000/7/1
2001/7/1
2001/12/17
2003/1/1
2003/2/1
2004/1/1
2004/4/1
2004/12/1
2005/1/1
2005/4/1
2005/12/31
2006/7/31
2005/8/21
2006/9/1