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Canada and Japan should pursue a free-trade agreement that would eliminate all tariffs, remove export subsidies and reduce non-tariff barriers and boost the gross domestic product of each country, says a joint study done by the governments of the two countries.Matjaz Boncina/iStock photo

A free-trade agreement between Canada and Japan took a step closer to reality after a high-level government study concluded a deal would sharply boost trade and economic activity for both countries.

Japan and Canada should pursue a free-trade agreement that would eliminate all tariffs, remove export subsidies and reduce non-tariff barriers, spurring the gross domestic product of each country, said the joint study by the governments of the two countries and submitted to Foreign Affairs and International Trade Canada.

"A comprehensive and high-level [free-trade agreement]between Canada and Japan would significantly contribute to further strengthening economic relations between the two countries," says the study, delivered to top officials of the two governments this month.

Prime Minister Stephen Harper, on a three-country swing to Asia, will arrive in Japan this weekend where he and Japanese Prime Minister Yoshihiko Noda are expected to announce that formal free-trade negotiations will be launched.

Canada-Japan trade was worth $22.6-billion (Canadian) in 2010. A deal would add between $3.8-billion (U.S.) and $9-billion to Canada's annual gross domestic product and increase growth by 0.24 to 0.57 percentage points, the report found. Japan's GDP would grow by between $4.4-billion and $4.9-billion or about 0.08 percentage points, the report said.

More than a quarter of Japan-Canada trade is represented by automobiles and parts imported into Canada from Japan.

That's also where controversy about a free trade deal is likely to arise. Vehicles from Japan currently face a 6.1-per-cent tariff, a cost that competing North American auto makers are not eager to see disappear.

The Detroit Three auto makers, which employ about 20,000 people at large manufacturing operations in Canada, are staunchly opposed to a free-trade agreement Canada is negotiating with South Korea that would eliminate the tariff on vehicles imported from that country. They're likely to take the same position on a Japan deal unless there are ironclad assurances that Japan will eliminate what they deem non-tariff barriers to North American vehicle imports.

Mark Nantais, president of the Canadian Vehicle Manufacturers Association, which represents the Detroit Three, said they don't support Japan-Canada free trade talks "at this time."

The free trade study comes after a year of tremendous upheaval in Japan, following the disastrous earthquake and tsunami on March 11, 2011, and a surge in the value of the yen, which has led to fears of a hollowing out of the country's vital manufacturing sector.

It also comes amid a push by the Canadian government for more free-trade deals, including a request to participate in the massive Trans-Pacific Partnership, which includes the United States, Chile and Malaysia, and which Japan has also asked to join.

Ottawa is shifting its gaze to Asia after the U.S. government delayed the Keystone XL pipeline proposal, aimed to ship Canadian oil to refineries in the southern United States.

For Canada, opportunities abound in one of the world's largest economies. The highest-value Canadian export to Japan is oil and natural-gas products at $1.9-billion, followed by grains and other agricultural produce at $1.4-billion. Meat exports are the third-largest group at $1.2-billion.

The free-trade report notes that each country is increasing investment in the other.

"More Japanese companies are starting to focus on Canada as an investment destination in order to gain access to the North America market, taking advantage of factors such as lower operating costs in Canada compared to the United States," it says.

"Similarly, Canadian companies often invest in Japan to gain access not only to Japan, but to Asian global supply chains through the incorporation of their products into exported Japanese goods and services."


With files from Campbell Clark