On the Use of FTAs by Japanese Firms

The paper examines the use of free trade agreements (FTAs) by Japanese firms. The analysis utilizes information collected by way of a questionnaire survey. The analysis finds that the use of FTAs by Japanese firms is very limited. Many Japanese firms do not take advantage of free trade via FTAs as they think that benefits are small because their trade volume with FTA partner countries is small and because the tariff differentials between most favored nation (MFN) rates and FTA rates are rather small for many products. Probit analysis of the determinants of the use of FTAs reveals that large rather than small firms do use FTAs, reflecting the high cost of such practice. In addition, firms with close trade and FDI relationships with FTA partner countries are found to use FTAs. Our findings indicate the need to reduce costs of using FTAs in order to expand their use by simplifying application procedures and by providing assistance through public and semi-public institutions such as the Ministry of Industry, Trade and Economy (METI); the Japan External Trade Organization (JETRO); and the Japan Chamber of Commerce and Industry. The paper also argues that the Japanese government should establish FTAs with Japan's large trading partners, including the United States and China.