Japan, India Sign Free-Trade Pact

Japan's government signed a free-trade agreement with India on Wednesday, bolstering ties with the fast-growing South Asian economy with which it shares a mutual concern about larger economic rival China.

The agreement will make Japan and India each other's biggest free-trade partners, and will do away with tariffs on 94% of trade between the two countries within 10 years, according to the Japanese government.

The deal comes days after official data showed Japan ceded its place as the world's second-largest economy to China in 2010. China's growing market for Japanese goods has galvanized corporate Japan. But many business leaders say the risk of diplomatic flare-ups with China highlights the need for more partnerships, like the one with India.

Closer ties with India could potentially open the way for Japanese investment in the development of rare-earth minerals, used in a wide range of products such as cellphones, analysts say.

In October, India's Prime Minister Manmohan Singh agreed with Japanese Prime Minister Naoto Kan in Tokyo that the two countries would explore cooperation in the development of rare-earth resources. Japan has sought alternative supplies since China cut shipments last year amid a territorial spat.

Takeshi Matsunaga, a Japanese foreign ministry spokesman, said the agreement doesn't refer directly to rare earths, but could make it easier for Japanese companies to invest in development of the key resources in India. The issue should be discussed in meetings between the two countries' officials in Tokyo Wednesday, he said.

"Diversifying the sources of rare earths and other natural resources is a major effort" of the government, Mr. Matsunaga said.

Indian Trade Minister Anand Sharma, in Japan to sign the cooperation pact, on Tuesday proposed setting up a revolving $9 billion revolving fund with Japan to help finance an industrial corridor, a move that highlights India's growing efforts to fix its shabby infrastructure, which is blamed for curbing economic growth.

Mr. Sharma met Japanese Prime Minister Kan and updated him on the status of the industrial and transport link between New Delhi and India's financial capital, Mumbai. The project, which started in 2007, is financed by the Indian government, yen loans from Japan and investment from Japanese companies. Mr. Sharma, who expects the project to attract more than $100 billion in investments, encouraged Japanese companies to invest in capital goods such as power equipment.

Wednesday's trade agreement spans a large variety of industries, including agriculture, Mr. Matsunaga said. Yet, with rice an ever-delicate issue for Japan, the agreement doesn't affect pre-existing tariffs on that staple, the government said.

The pact also marks Japan's latest effort to catch up with South Korea, which has leveraged its trade agreements to increase the global competitiveness of its electronics, nuclear power and other sectors.

Mr. Kan has been pushing for Japan to join negotiations for a Trans Pacific Partnership that would include the U.S., despite fierce opposition from Japan's agriculture sector.

The deal with India will likely hearten a range of Japanese exporters, from electronics to auto makers. Suzuki Motor Corp. Chairman and CEO Osamu Suzuki said last year, "We will remain handicapped unless Japan reaches an FTA deal with India as soon as possible."

Japanese players in the big-ticket global market for civilian nuclear power projects, such as Hitachi Ltd., will also likely welcome the agreement. The pact should be seen as a positive sign for separate, continuing negotiations between Japan and India launched last year toward a civilian nuclear deal.

Feb 16^th, 2011

Source: The Wall Street Journal