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Deflated hopes for Japan joining the TPP negotiations

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In Brief

Negotiations for the enlarged Trans-Pacific Partnership (TPP) agreement began in March last year.

The TPP (originally named P4) was formed by Singapore, Brunei, New Zealand and Chile in 2006. One of the most important characteristics of the TPP is the high level of trade liberalisation involved-it requires its members to remove tariffs on all products without exception within ten years.

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The TPP began to garner the attention of policymakers and others in 2008 when the United States indicated its strong interest in joining the partnership. The US, which proposed the Free Trade Area of Asia-Pacific (FTAAP) in 2006, appeared to consider the TPP a viable option for the establishment of the FTAAP. One important motive behind the strong interest of the US in the FTAAP and the TPP is to maintain and increase its access to the Asian markets, which are expected to grow at a much higher rate compared to other regions. Currently, five additional countries — including the US, Australia, Peru, Vietnam and Malaysia — have joined the original four countries in the negotiations for the enlarged TPP. They are planning to conclude the negotiations by October 2011, to be announced at the APEC meeting in Honolulu in November this year.

Prime Minister Naoto Kan of Japan indicated his interest in the TPP in a speech delivered at the Japanese Diet in October last year. However, because of strong opposition from the agricultural protectionist groups, Kan postponed a decision on joining the negotiations for the enlarged TPP until June 2011.

Joining the TPP would enable Japanese firms to increase their exports in goods and services in other TPP member economies as the TPP lowers/abolishes trade barriers with liberalisation and facilitation measures. Although tariff barriers have come down significantly in many APEC member economies in recent decades, there still exist high tariff barriers for some products, such as a 25 per cent tariff rate on trucks for the US and 30 per cent tariff rate on automobiles for Malaysia. Furthermore, according to the United Nations Conference on Trade and Development (UNCTAD), the incidence of non-tariff barriers (NTBs), including quantitative control measures and technical barriers to trade, has increased in recent years, whereas the tariff barriers have come down. If, on the other hand, Japan were to remain a non-member to the TPP, Japanese firms would be discriminated against in TPP members’ markets vis-à-vis firms from the TPP member economies. Such discriminatory treatment would reduce export opportunities of Japanese firms, contributing negatively to Japan’s economic growth.

Second, import expansion resulting from the reduction or removal of tariff and non-tariff barriers in Japan under the TPP framework would improve efficiency of allocation of production factors, such as labour and capital in Japan, promoting its economic growth. Although one of the immediate impacts of import expansion may be to reduce the sales of Japanese firms that are producing import competing goods, thereby possibly leading to unemployment of workers, in the medium to long-term Japanese firms under competitive pressure from the increased imports would improve their competitiveness by upgrading their technological capability and by introducing new products. Indeed, observing increased competitive pressure from increased imports, the Japanese government may realise the need to undertake policy reforms such as deregulation so that Japanese firms could adopt competitive business strategies under a freer and more open business environment.

Third, joining the negotiation of the enlarged TPP, Japan would benefit from participating in the construction of economic rules and systems in the Asia Pacific region. This is because the TPP is likely to establish the rules on not only trade and investment but also on domestic economic activities such as competition policy, government procurement policy, and intellectual property rights protection policy.

Construction of fair, reliable and transparent economic rules and systems in Asia and the Pacific is important for several reasons. One is to establish a level playing field in the region, where fair competition is ensured. The growing importance of emerging economies such as China, where fair competition is problematic, would hamper economic development as competitive firms may be forced to exit the market as a result of unfair competition. Another reason is the growing importance of Asia and the Pacific in the world economy in that the rules and systems that are established and practiced in the region have a good chance of becoming global rules and systems. Policy makers in the Asia Pacific region will have to set up desirable rules and systems that promote global economic growth.

Fourth, Japan could contribute to the expansion of benefits arising from the TPP by joining the partnership, as the size of the benefits would increase with the number of members. The enlargement of the TPP is important for the US as President Obama last year announced the policy of doubling US exports in five years. Indeed, Japan may be able to remedy its damaged security relationship with the US by opening its market to the US and by contributing to the establishment of desirable economic policy environment in the Asia Pacific through the TPP.

Despite these benefits, the Japanese government has to overcome strong opposition from an overly protected agricultural sector in order to join the negotiations. Several policy measures may be considered to deal with opposition. First, Japan may be able to adopt a phase-in gradual tariff reduction over 10 years if it can successfully persuade other countries in the negotiations to accept this strategy. Indeed, it is not only Japan, but other members that may wish to adopt this approach to dealing with their problems in liberalising protected sectors.

Second, a safety net may be needed to provide assistance to those disadvantaged by the TPP by way of unemployment or reduced income. This program may not need to be specific to the TPP but more general to deal with the problems caused by sharply increased imports, such as the trade adjustment assistance program adopted in the US.

Finally, it is very important for the Japanese government to explain convincingly the importance of the TPP in achieving its future vision of an open and dynamic economy for the Japanese people. So far Prime Minister Kan and his Cabinet members have failed to do this. Since his speech in October, Mr. Kan has not followed up by taking concrete steps except for setting up the Headquarters for the Promotion of Agricultural Structural Reform to formulate the agricultural policy, which may enable Japan to join the enlarged TPP negotiations.

One of the reasons Prime Minister Kan and his Cabinet have not been able to push the TPP debate forward is their low and declining popularity ratings. Without strong support from the general public, the Cabinet cannot implement policies of their preference, especially controversial policies such as the TPP. As Prime Minister Kan and the Democratic Party of Japan continue to waste precious time and energy with their internal problems surrounding Mr. Ichiro Ozawa, there is no possibility of Japan announcing its involvement in the TPP negotiations in June. Even if the Kan government successfully persuades the opposition to accept trade liberalisation and thus joins in the negotiations, June could be too late as many of the important decisions will have been made by then.

Shujiro Urata is Professor of Economics in the Graduate School of Asia Pacific Studies, Waseda University, Tokyo.

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