Japan, Indonesia in basic agreement on free trade pact

Tokyo, Nov 28 | Updated: Nov 29 2006, 09:23am hrs
Japan and Indonesia agreed in principle on Tuesday to forge a free trade pact - Japans first to include energy - that will eventually end import taxes on more than 90 percent of their trade and require Indonesia to commit its liquefied natural gas (LNG) to contractual supply. Japanese Prime Minister Shinzo Abe and Indonesian President Susilo Bambang Yudhoyono reached basic agreement on key elements of the Indonesia-Japan Economic Partnership Agreement, a joint statement said.

The agreement includes a chapter that requires Indonesia to commit LNG supplies to contract Japanese buyers even when events force it to cut exports.

The pact marks the first time that resource-poor Japan has reached a trade agreement that includes a section dedicated solely to energy, Keita Nishiyama, a director at Japans Ministry of Economy, Trade and Industry, told reporters.

We did this because we are concerned about LNG supplies, Nishiyama said. We want Japan to be prioritised over other countries that do not have similar agreements.

Japan is the worlds largest LNG importer, absorbing about 58 million tonnes in 2005 or almost half of global exports. Indonesia is the worlds largest LNG exporter and biggest supplier of the fuel to Japan.

An Indonesian energy ministry official said last month that it might halve export contracts for LNG with Japanese buyers to 6 million tonnes per year when they expire at the end of the decade. Japan has been already shifting to other sources, such as Sakhalin in Russias Far East, as Indonesia has already faced problems meeting contractual commitments to traditional buyers such as utilities in Japan, South Korea and Taiwan because of a production slump and increased domestic demand.

That could hurt Indonesias income. At private-sector levels, some are negotiating to reduce (contract) volumes because not so much can be extracted any more, Nishiyama said. Still, long-term contracts should be respected. The pact aims to end tariffs on about 93% of the goods that Japan imports from Indonesia, such as industrial products, fruit and shrimp, within seven years after it is signed, Japanese officials said. Japan imported goods from Indonesia worth about 2.3 trillion yen ($20 billion) in 2005.

It is Indonesias biggest customer for exports and ranks second among Indonesias sources for imports, according to U.S. Central Intelligence Agency public data. About 90% of the goods that Indonesia imports from Japan, such as electronics products, cars, machinery and certain kinds of steel products, will become duty-free.