There seems to be some significant developments in the bilateral trade and strategic partnership between Japan and India in the wake of Indian Prime Minister Manmohan Singh’s visits to Tokyo from Sunday 24th October 2010 for two days to negotiate a highly complex agenda involving trade, strategic partnership, civilian nuclear technology, regional territorial concerns and UN Reforms. After his short trip to Japan, Dr. Manmohan Singh would go to Malaysia to conduct more bilateral discussions and then to Vietnam to attend the Eighth ASEAN-India Summit. Some of the specific issues to be discussed between the Indian Prime Minister and the Japanese Prime Minister Naoto Kan tomorrow range from signing a two-way 125-billion dollars Comprehensive Economic Partnership Agreement, pushing Japanese candidature as a non-permanent member to the Security Council, convincing India to join the International Monetary System under CTBT, signing the CTBT and NPT, pursuing wider UN Reforms to include permanent members to the Security Council to tacking the muscular development of China, forming strategic partnership to police the Asian region vis-à-vis the Senkaku Islands setback and the greater threat of Pakistan in alliance with China. Just as Manmohan Sigh has initiated “Look East Policy,’ Naoto Kan has also kicked off his ‘Vigor of Asia’ plan as part of his political and economic agenda.
Economic Partnership Agreement
The Comprehensive Economic Partnership Agreement between India and Japan will involve a 120-billion USD two-way trade that would include the automobile industry, home appliances and Japanese investments in the ever-expanding Indian market. It is of great importance for both Japan and India that the signing of EPA comes after a tough 4-year negotiation between the two countries. After the signing of the EPA tomorrow India will become the 12th nation to have signed an EPA with Japan. The EPA between the two countries would gradually reduce tariffs and eliminate them completely within a decade. At present the tariffs imposed by Japan are high while tariffs imposed by India on Japanese auto components and steel is only about 10 percent. make up about 94 % of the total value of exports from India. High tariff rates on 94 % of the goods traded between the two countries make Indian trade with Japan virtually unprofitable. Japanese companies are hopeful that once India lowers restrictions on Japanese investment in India, they will be able to build factories and plants in India more easily. For the Japanese investor the increasing middle class population and almost 9 percent annual growth rate of India would allow its 1.2 billion-population to buy automobiles and electronic appliances which is largely controlled by Japan in Asia. An increase in better transportation in India would also require the development of social and transport infrastructure such as industrial corridors, railroads and electric power supply.
Japan is worried about the rising economic power of China and South Korea. Though it finds some difficulty in competing with China, it is still willing to prove its superiority to South Korea in terms of acumen and skill. Already Japan is envious of the EPA signed by South Korea with India in August 2009 where more items are included in the lowering of bilateral tariffs between the two nations and realized in less than a decade. Japan is therefore keen not to allow the lucrative Indian market opportunities to go entirely to South Korea. The Japan-India EPA will give Japanese companies some advantage over their South Korean rivals but Japanese companies will still have to negotiate hard to strike a deal in India. In a climate where Japan is keen to establish better economic ties with India, the Indian Prime Minister may be in a position to break Japanese reluctance to accept Indian nurses and other working class Indians in the Japanese market. There has been some talk in Japan of opening up of the agricultural sector which hitherto has been zealously protected.
Strategic Military Partnership
Strategic partnership between nations invariably rides the twin wings of territorial security and trade relations and is dependent on superpower dynamics. As Indo-American relationship became more accommodating, Japan-India relations have also improved dramatically. The increased threat in the Indian Ocean and the Straits acerbated by China’s military growth, North Korea’s nuclearization and piracy and terrorism in the sea lanes have created a paradigm shift in Japan where Japan not only wishes to play a greater role in regional and global security but wants to cooperate with India to help secure its lanes to the Gulf nations. In recent years as China has become economically and militarily strong it has pushed its nationalist agenda with muscular strength claiming territories such as Senkaku Islands and Arunachal Pradesh. India and Japan now seek to collaborate to contain the super ambition of China in the Asian region. India further wants to enlist the support of Japan to contain Pakistan’s belligerency and its deepening ties with China. The Indian Prime Minister’s visit will further strength strategic and global partnership between India and Japan in an attempt to bring peace and security to the Asian region and diminish the dominance of China.
Civilian Nuclear Technology
Though there is a “political resolve” to sign a civilian nuclear agreement between India and Japan there is no clear political resolution. The agreement on the civilian nuclear technology, or what is termed as ‘civilian atomic cooperation pact,’ between the two nations to facilitate the vending of advanced nuclear technology by Japanese firms such as Mitsubishi, Hitachi and Toshiba is hard to negotiate. The nuclear business is of strategic importance to India as it is estimated to be around 150 billion USD. Both Gautam Bambawala and Mitsuru Kitano negotiating the civilian nuclear deal are unsure when the pact will be signed by their two leaders. There are many issues involved here. The U.S., France, Russian, Mongolia, Kazakhstan, Argentina and Namibia have already concluded bilateral civilian nuclear treaties with India. Both America and France have been urging Japan to conclude a bilateral treaty with India to allow India to build nuclear reactors based on advanced Japanese technology.
Japan is a non-nuclear nation possessing advanced civilian nuclear technology. It has endorsed non-nuclear policies in the past as enshrined in the Article 9 of its Constitution. There is a deep skepticism and criticism of India in Japan about the nuclear explosion it conducted twelve years ago. Japan wants India to sign the CTBT and NPT before Japan conducts nuclear business with India. There is also concern in Japan that if Obama loses elections, Japan would not be in a position to push the CTBT or NPT agenda with so much vigor. On the other hand, it does not seem that India would change its political position just on the insistence of Japan, though India would like to conduct nuclear trade with Japan. There is, however, hope that since Japan once supported India in 2008 to allow a waiver by the Nuclear Suppliers Club or the 45-Member Nuclear Suppliers Group, Japan would make concessions to the India’s position of not signing the CTBT and NPT. Japan might agree by providing a clause in the agreement to terminate the nuclear pact if India conducts another nuclear explosion. Indians however will be reluctant to agree to this clause.
Japan is interested in India to back an agenda to initiate UN Reforms and expand the number of permanent and non-permanent members to the UN Security Council. Recently India was elected as a non-permanent member of the Security Council for the 2011-2012 period. Japan wants to seek help from India and other G-4 nations such as Germany and Brazil to back its candidature to become a permanent member of the Security Council.
Another issue to resolve is the present international monetary system. The post-Bretton Woods system that abandoned capital controls from 1971 until 2009 was marked by a market led reform as against state-led control. India’s liberalization in the mid-1990s brought in high rates of economic returns, better salaries and investments. But there has been a need for more structural reforms in the financial sector and not just pegging the currency to the unstable US dollar which accounts for 60 percent of the global reserves. If globalization and free trade should continue the international financial architecture must be redesigned. The BRIC nations have argued for a stronger voice and representation in the global financial institutions, now controlled by US and other developed nations. Japan has argued for the internationalization of the yen at least in Asia. The dollar-renminbi-yen controversy may not end soon but Japan wants to push the yen agenda of global convertibility at par with the dollar. Japan has also insisted that India join the International Monetary System (IMS) under the CTBT that has 321 monitoring stations and 16 radionuclide labs. It seems that persuasive negotiations on India’s side may break the deadlock.
Regional Territorial Issues
In recent months Japan has really been rattled by the incident off the Senkaku Islands in the East China Sea where a Chinese fishing trawler rammed into two Japan Coast Guard ships. Japan released the Chinese captain under intense pressure from the Chinese government to the chagrin of the Japanese public and DPJ’s political opponents. Chinese analysts and the public at large were equally dismayed as they felt that China was in a position to extract more concessions from Japan but did not do so. The Senkaku Islands are protected by the United States under the Japan-US Security Treaty and Hillary Clinton reiterated that America will retaliate if it perceives a significant threat to the Japanese islands. There have been protests in China where Japanese property such as Ito-Yokado and sushi bars were damaged and peaceful protests in Shibuya and elsewhere where student and nationalist groups agitated against Chinese claims to the islands. However the Chinese government has issued a 5-point advisory to the Chinese media not to publish any Senkaku-related news (called Diaoyu in China) originating in either China or Japan. The Chinese attempt to contain the problem has to do with the frustrations with the media to incite nationalist sentiments in the Chinese mainland which is now beginning to hurt bilateral trade. But the claims of legitimate ownership by both China and Japan have led to the suspension of rare earth metals by China to Japan.
Rare Earth Metals Supply
China produces 90 percent of the rare earth metal supply of the world and Japan needs rare earth metals for its superconductors, electric polishers and hybrid car components. India wishes to take advantage of the near suspension of rare earth metal supply by China to Japan. India now ranks as the second biggest supplier of rare earth metals in the world with 3 percent of global reserves estimated at about 3.1 million tons. Manhoham Singh wishes to take advantage of India’s potential in this area by asking the Japanese companies to expand their refining and processing capabilities of rare earth in India. However the Indian rare earth mining has been under state monopoly and suspended by the Indian Rare Earth Limited in Orissa in 2005 due to environmental hazards, but IREL plans to open new areas of extraction such as in Kerala and begin trade as early as 2011. If this happens Japan will be the first foreign company to be involved in the mining of rare earth metals in India.
Four years ago when Dr. Manmohan Singh visited Japan this writer made the following remark in the opening paragraph of an article entitled “Japan-India Trade Relations: An Unequal Music,”
The bilateral trade relations between India and Japan are built on a range of breathless possibilities endorsed by tenuous past and new emerging stereotypes. Both Japan and India agree that a sizable trade exists between the two nations, but their assessment of this trade and its potential differ radically. These differing perspectives are based on a number of factors ranging from economic and political to cultural and social. The Indian Prime Minister Dr. Manmohan Singh’s visit to Japan in December 2006 must be seen in this light.
And in the same article he concluded that,
This partnership, however, will remain unequal as long as India depends heavily on Japanese ODA and Japan cannot expand business into other lucrative sectors like mobile phones, urban transit and infrastructure building. The CII has a point when it suggested that India and Japan should link their knowledge economies directly and share the transfer of technologies with each other more substantially than at present. Also the CII recommended that Japan should convert its ODA (Overseas Development Assistance) into FDI (Foreign Direct Investment) in order to substantially increase business with India. (Japan-India Trade Relations: An Unequal Music)
Today many things have changed though some of the fundamental issues connected to “differing perceptions” between the two nations remain. It needs to be seen how well the high level ministerial committees and the prime ministers of the two nations will be able to negotiate to resolve differences and lead the two nations towards, peace, mutual security and economic prosperity.