A Model Free Trade Agreement

This model free trade agreement (FTA) was created drawing on Keidanren's May 1999 proposal, "Challenges for the Upcoming WTO Negotiations and Agendas for Future Japanese Trade Policy", the North American Free Trade Agreement (NAFTA) and the EU-Mexico Free Trade Agreement. It is intended to provide a reference for Japan's consideration of FTAs.

Liberalization of intra-regional trade

Elimination of tariffs on goods

Trade tariffs between contracting parties shall be progressively eliminated over the 10 years following the entry into force of the FTA. The liberalization schedule shall be stipulated separately.

Non-tariff measures

* National treatment

Contracting parties shall extend national treatment to the products of other contracting parties in line with GATT Article III (National Treatment on Internal Taxation and Regulation). However, exceptions may be recognized for some products. (A list of exceptions is needed.)



* Prohibition of quantitative restrictions

Quantitative restrictions on trade with contracting parties shall be eliminated. Existing quantitative restrictions shall in principle be converted to tariffs, which in turn shall be progressively eliminated in line with the liberalization schedule.
Contracting parties may not maintain or adopt measures banning or restricting the export of goods to other contracting parties.



* Prohibition of export subsidies

Export subsidies related to trade between the contracting parties shall be banned.



* Customs cooperation

The following measures shall be taken to simplify customs procedures between contracting parties: (1) information exchanges on customs systems; (2) standardization of related documentation, including certificates of origin; (3) simplification of quarantine procedures; (4) ensuring transparency, efficiency and accountability in regard to customs procedures; (5) technical support related to customs procedures; and (6) regular meetings between the customs authorities of the contracting parties; etc.
Regarding trade among contracting parties, the current customs fee shall be abolished.

Liberalization of trade in services

* Principle

Contracting parties shall promote the progressive and reciprocal liberalization of trade in services.



* Scope and coverage

"Trade in services" is defined as the supply of a service:

1. from the territory of one of the contracting parties into the territory of other contracting parties;
2. in the territory of one of the contracting parties to the service consumer of other contracting parties;
3. by a service supplier of one of the contracting parties, through commercial presence in the territory of other contracting parties;
4. by a service supplier of one of the contracting parties, through presence of natural persons of a contracting party in the territory of other contracting parties.




* National treatment and Market access

1. Contracting parties shall extend most-favored-nation (MFN) treatment or national treatment, whichever is the better of the treatment, to the service supplier of other contracting parties.
   or
   Treatment granted under other agreements concluded by one of the contracting parties with a third country and which have been notified under Article V of GATS can be excluded from this provision. If a contracting party enters into an agreement of the type referred to above, it shall afford adequate opportunity to other contracting parties to negotiate the benefits granted therein.
2. Contracting parties may not restrict market access.
3. Current measures included in the list of exceptions can be specified as exceptions to 1. and 2.




* Liberalization schedule

Contracting parties shall create schedules for the reduction and elimination of measures on the list of exemptions within a specified period of time after the agreement goes into effect, and shall consult on these schedules.

Rules on intra-regional trade

Rules of origin

* Originating products

1. Products shall originate in the territory of one of the contracting parties where one of the following conditions is met:
   1. "Wholly obtained" criteria: Products which have been manufactured entirely in the territory of one or more of the contracting parties (agricultural products, minerals, flora and fauna, etc.), or those which have been processed in the territory of one or more of the contracting parties solely from such products;
   2. "Substantial modification" criteria: Products for which the last substantial modification, where this is recognized as adequate in informing the essential nature of the product, is conducted in the territory of one or more of the contracting parties.
2. The rule of determining substantial modification shall be one of tariff classification change, with the tariff classification of all products from outside the contracting parties considered to have changed through processing in the territory of one or more of the contracting parties.
3. However, as current tariff classification (based on the Harmonized System) is not a system designed specifically for rules of origin, the following exceptions and supplementary rules shall be established:
   1. Even where a tariff classification has changed, an exemption rule shall be established for cases where substantial modification should be recognized;
   2. Even where a tariff classification has not changed, such a change shall be permitted in cases where substantial modification should be recognized, breaking down tariff classification in order to introduce changes by these further divisions.
4. Where origin cannot be determined according to the rules above, supplementary rules at the general level or chapter level shall be observed.

Anti-dumping (AD)

While more detailed considerations are needed concerning the relation between anti-dumping and the MFN obligation under the WTO Agreement, the following two proposals could serve for the meantime.

PROPOSAL 1:

* Principle

Contracting parties can apply their own AD-related laws and regulations to products imported from other contracting parties. The AD-related laws and regulations applied by contracting parties must be consistent with Article VI of the General Agreement on Trade and Tariffs 1994, as well as the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (the Anti-Dumping Agreement).



* Understanding regarding application of the Anti-Dumping Agreement

1. Contracting parties shall apply the Anti-Dumping Agreement as follows, refraining from the protectionist application of AD measures and making fair and objective AD decisions:
   1. Article 2.4: In comparing the export price and the normal value, contracting party authorities shall deduct the same items of expense from both the export price and the normal value.
   2. Article 2.4.2: When contracting party authorities calculate the weighted average of prices of all comparable export transactions, those products for which the export price is higher than the normal value (in other words, products with a negative dumping margin) shall also be included within the scope of products subject to AD investigations.
   3. Articles 2.2 and 2.2.1: Because it is difficult for the exporting country to calculate the "normal value", where the dumping margin is derived using a "constructed value" (amounts for administration, selling and general costs and for profit), negative profit ratios arising from below-cost sales interest shall also be included, calculating interest.
2. Article 3.3: Where imports from two or more countries are simultaneously subjected to an AD investigation, contracting party authorities shall not make a cumulative assessment of the impact on imports.
3. To ensure the fair and objective gathering of evidence in AD investigations, contracting parties shall take the following measures in regard to the relevant portions of the AD Agreement:
   1. Article 6.2: In conducting AD investigations, contracting parties shall reflect the views of interested parties, and shall also establish the necessary domestic laws to ensure that the defendant has the opportunity to object.
   2. Article 6.8: In cases where the company being investigated is unable to completely fulfill its obligation to respond, the contracting party authorities shall be cautious in resorting to application of the "best information available".
4. Article 9.1: Where the results of AD investigations by the authorities of the contracting party government indicate that injury to domestic industry can be adequately prevented by imposing AD duties lower than the dumping margin, that "lesser duty" shall be charged.
5. Article 11.3: It shall be stated that a "sunset" period (within five years) shall be stipulated in AD duty imposition orders, and that extensions shall be limited to cases where, based on superior evidence submitted by industry, the government authorities determine that terminating the AD duty imposition order could lead to the continuation or reoccurrence of dumping and injury.
6. Article 5.5: Before a formal investigation is launched, notification of suit shall be given not only to the exporting government but also to the party filed against in order to allow that party the opportunity to object regarding investigation scope, etc.




* Consultations

In response to a request from any other contracting party authority, contracting party authorities shall consult on any matter which could arise in the context of this document.




PROPOSAL 2:

Contracting parties shall not apply anti-dumping measures against each other. Contracting parties shall also leave open the option of regulating dumping based on predatory intention as anti-competitive behavior.

Safeguards

* Intra-regional safeguards

Where, for a certain period of time after this agreement becomes effective, tariff elimination or reduction under this agreement results in a sudden increase in imports of products originating from other contracting parties which is recognized as causing serious injury to the domestic industry producing like or directly competitive products, or as threatening to cause such injury, the contracting party may apply safeguard measures to the product.



* Global safeguards

Global safeguard measures shall be applied in line with the WTO Agreement on Safeguards. However, even where a sudden increase in imports of a certain product is recognized as causing serious injury to the domestic industry producing like or directly competitive products, or as threatening to cause such injury, if an increase from other contracting parties is the main factor, contracting parties shall not apply global safeguard measures.
Contracting parties may not apply discriminatory safeguard measures which exempt the application of safeguard measures to other contracting parties.

Investment protection and liberalization

Contracting parties shall protect and promote investment among contracting parties.

* Definition of investors and investment

"Investors" shall be defined under this agreement as natural persons with contracting party citizenship or permanent residence, or those corporations or organizations established according to contracting party laws.
"Investment" shall be defined under this agreement as all assets under the direct or indirect control of investors (companies, stocks, bonds, intellectual property rights, movables and real estates, etc.).



* Scope and coverage

All investments in the territory of one of the contracting parties shall be covered under this agreement. However, provisions under GATT Article XXI (Security Exceptions) may be applied.



* Treatment of investors and investment

The central and local governments of a contracting party shall accord most-favored- nation treatment or national treatment, whichever is the better of the treatment, to the investors and investment of other contracting parties in regard to investment-related establishment, acquisition, expansion, operation, conduct, management, use and sale or other disposition of investments.
Contracting parties shall provide fair and equitable treatment and full protection and security to the investors and investment of contracting parties.



* Transparency

Contracting parties shall promptly and publicly announce applicable laws, administrative procedures and judicial decisions, related to investment, or else make these available for public use.



* Prohibition of performance requirements

Contracting parties may not impose or enforce any of the following performance requirements on the investors or investment of contracting parties: (1) export requirements; (2) a given level or percentage of domestic content requirements; (3) local product or service procurement requirements; (4) export-import balance requirements; (5) domestic sales restrictions corresponding to exports or foreign exchange earnings; (6) technology transfer requirements; (7) specification of supply regions; and (8) employment requirements.



* Temporary entry, stays and employment of investors and key personnel

Contracting parties shall provide prompt permission for the temporary entry, stay or employment of the investors or key personnel necessary to investment from other contracting parties.



* Prohibition of nationality requirements

Contracting parties may not establish provisions on the nationality of executives, senior managers, or boards of directors of enterprises set up within the territory of the contracting party by investors from other contracting parties.



* Transfer

Contracting parties shall permit the prompt and free transfer in internationally convertible currencies of profits and other amounts derived from investments by the investors of other contracting parties. Contracting parties shall also permit that investors from other contracting parties can freely convert their moneys to any other currency.



* Expropriation and Compensation

Contracting parties may not expropriate the investment of investors from other contracting parties except where such expropriation is:

1. for a public purpose;
2. on a non-discriminatory basis;
3. in accordance with the due process and the principles of international law; and where
4. Compensation is paid without delay and in an internationally convertible currency equivalent to the fair market value of the expropriated investment immediately before the expropriation took place.




* Dispute settlement

Where a dispute arises between contracting parties, or between contracting parties and investors, regarding provisions in this agreement, consultations or negotiations shall be conducted between the parties involved. Where a solution cannot be reached through consultations or negotiations between the parties involved, an arbitration panel shall be established to rule on the matter.



* Exceptions

Contracting parties may establish exceptions to investment liberalization only where there is a rational reason for doing so. In such cases, contracting parties must create lists of those areas where they have reserved the right not to liberalize.

Rules for trade and investment facilitation

Harmonization and mutual recognition of standards and conformity assessment systems, etc.

Contracting parties shall ensure that technical regulations and standards do not create unnecessary obstacles to trade between contracting parties through the arbitrary or discriminatory application of conformity assessment procedures under the laws of the contracting parties.
Contracting parties shall recognize mutually the conformity assessments of other contracting parties in regard to technical regulations and standards for products agreed between both parties. Contracting parties shall also cooperate in harmonizing the standards and conformity assessment procedures.

Intellectual property rights

* Protection of intellectual property rights

Contracting parties shall put into force and conform with the Agreement on Trade-Related Aspects of International Property Rights (the TRIPS Agreement) and international conventions related to the protection of intellectual property rights. Contracting parties shall also cooperate in protecting copyrights, trademarks, industrial designs, and patents, etc.



* Treatment

Contracting parties shall accord national treatment to other contracting parties in regard to intellectual property rights protection and implementation.



* Harmonization of patent systems

Contracting parties shall harmonize their patent systems.

Government procurement

* Scope and coverage

Government procurement shall be defined under this agreement as procurement relating to goods, services or construction valued at or above a certain level which is undertaken primarily by central governments, government institutions or local governments.



* Procurement procedures

Contracting parties shall open to the enterprises of other contracting parties the conditions relating to government procurement on a non-discriminatory basis.
Contracting parties shall ensure transparency and apply procurement regulations and procedures so that enterprises from other contracting parties can participate in procurement under non-discriminatory conditions with domestic enterprises.



* Prohibition of offsets

Contracting parties may not use local content requirements, or requirements for investment or technology transfer, as offsets to encourage local development or improve their balance of payments accounts.



* Bid challenge

Where enterprises which participated in procurement procedures in any of the contracting parties submit bid challenges that the procurement process violated this agreement, the contracting party in question shall seek to resolve the issue.



* Cooperation

Contracting parties shall pursue cooperation relating to government procurement such as information exchanges and technical assistance.

Facilitation of the movement of businesspersons

Contracting parties shall cooperate in facilitating the movement of persons among contracting parties, including temporary entry by businesspersons for business purposes, in order to encourage intra-regional trade and investment.

Competition policy

Contracting parties shall cooperate in the application of competition law and policy, including information exchanges.

Electronic commerce

Contracting parties shall cooperate in regard to electronic commerce between the contracting parties. In particular, they shall cooperate toward mutual recognition and harmonization of systems such as digital authentication, privacy, and consumer protection between contracting parties.

Dispute settlement

* Definition of "dispute"

"Dispute" shall be defined as follows:

1. Differences in views among contracting parties in regard to interpretations or application, etc., of this agreement;
2. Measures by any of the contracting parties which are regarded as violating this agreement;
3. Annulment or impairment of benefits which should be guaranteed under this agreement.




* Dispute settlement procedures

Contracting parties shall resolve disputes related to this agreement in accordance with the following process:

1. Consultation among the parties involved;
2. Where a resolution cannot be reached through 1., establishment of an arbitration panel;
3. Conciliation, coordination and mediation by the arbitration panel;
4. Where a resolution cannot be reached through 3., ruling by arbitration panel;
5. Implementation of the ruling;
6. Where any of the parties involved does not implement the ruling, other parties may take retaliatory and other countermeasures.




* Relation with WTO dispute settlement procedures

Dispute settlement procedures under this agreement shall be without prejudice to contracting parties' rights in regard to WTO dispute settlement procedures. However, contracting parties must, with regard to a particular matter, institute a dispute settlement procedure under either this agreement or the WTO agreement.