Issues Facing the Japanese Economy in 2013 (January 2013)

Japan's Zero-sum Thinking and Cringing Mentality as Seen in the Fuss over the TPP

YAMASHITA Kazuhito Senior Fellow, RIETI

While expectations are running high on a growth strategy, which is now being developed under the new government of Prime Minister Shinzo Abe, one thing clear is that there will be no growth without joining the Trans-Pacific Partnership (TPP). In the past two years, however, various arguments against Japan's participation in the TPP have been put forth.

Rebuttals to anti-TPP arguments

Opponents say: "There is no telling whether or not Japan should join the TPP negotiations because sufficient information is not available."

However, countries are still in the midst of negotiations, and no one can tell how the TPP will turn out eventually. If we participate now, we can make efforts to change the course of negotiations so as to avoid unfavorable results for Japan. Although we cannot predict the stock prices printed in newspapers a year from now, we might be able to change the content of a front page article on the conclusion of the TPP by joining the negotiations.

Opponents say: "Japan can join the TPP after its conclusion."

In that case, not only would Japan have to accept the agreement in its entirety, but also it would be forced to make various commitments—tariff elimination, service liberalization, and so forth—to fulfill the unilateral demands from the countries already party to the TPP. On the other hand, Japan's request for exceptions to tariff elimination would be turned down. As a newcomer, Japan would not be allowed to make any request to the existing member countries. This would be a prescription for unequal negotiations resulting in an unequal agreement.

Opponents say: "Japan would be knocked off by the United States."

One university professor said that Japan will never stand a chance against the United States just like Nobita, the bullied, against Gian, the bully, in Doraemon, a Japanese manga series. This is tantamount to advising Japan to become weak and withdraw.

The actual state of the TPP negotiations, however, provides a different picture. The United States is isolated in some of its priority areas such as the treatment of state-owned enterprises and drug prices, facing fierce opposition from other countries. As such, those countries with no chance of winning in bilateral negotiations may be able to isolate the United States in multilateral negotiations if they can find like-minded allies. Even developing countries such as Vietnam and Malaysia or small ones such as Singapore are participating in the TPP negotiations at their own will and are negotiating with the United States on an equal footing. According to TPP opponents, Canada and Mexico have been bullied by the United States. If so, why are they participating in the TPP negotiations at their own will?

Opponents say: "Japan's universal health insurance system will be undermined."

Insurance is a service, and public services are outside of the scope of the General Agreement on Trade in Services (GATS) under the World Trade Organization (WTO). A public health insurance system has never before been taken up in negotiations for a free trade agreement (FTA) compliant with the WTO rules. The TPP negotiations, in which compliance with international laws including various agreements under the WTO are prerequisite, are completely different from past Japan-U.S. negotiations where Washington put forward unilateral demands regarding issues of its interest. Indeed, the U.S. government has made it clear that it does not intend to discuss the issue of public health insurance systems in the TPP negotiations.

Opponents say: "Japan will be forced to remove labeling of genetically modified (GM) foods."

Japan's system requiring labeling of GM foods is same as those of Australia and New Zealand. Therefore, even if the United States makes it an issue, Japan will be able to fight back by uniting with these like-minded countries. This is exactly what I did in the preparatory work for the trade ministers' meeting of the Asia-Pacific Economic Cooperation (APEC) forum in 2003. With negotiations for the expanded TPP having been underway for nearly three years, proposals are already on the table and no discussion has taken place on GM foods labeling. As is the case with public health insurance systems, what has not been discussed in the three-year long negotiations to date will just not be subject to negotiation.

TPP opponents seem to believe that we will be forced to change whatever regulations that are already in place. With regard to food safety regulations, the United States has no intention to change the framework of the WTO Agreement on the Application of Sanitary and Phytosanitary Measures (the SPS Agreement) that allows member countries to set standards for health protection freely as any attempt to do so would be met with protests from U.S. consumer groups. This is clearly provided for in the U.S.-Korea FTA, contrary to TPP opponents' claim that South Korea is facing significant problems as a result of the bilateral agreement.

Some also claim that Japan would be forced to harmonize its standards with those of the United States upon joining the TPP. However, participating countries might be required to harmonize with international standards, not the U.S. standards, under the SPS Agreement. Forcing other countries to adopt the U.S. standards is tantamount to denying the very idea of sovereignty or the international law and order.

Opponents say: "As the TPP agreement is to include investor-state dispute settlement (ISDS) provisions, American companies may file a claim against the Japanese government and force it to remove regulations."

However, such provisions are already included in many FTAs concluded by Japan. Even today, an American company can bring a case against the Japanese government, for instance, by invoking the ISDS provisions under the Japan-Thailand Economic Partnership Agreement (EPA) provided that it has a subsidiary in Thailand and has invested in Japan through it. Indeed, a Japanese company—more specifically, its subsidiary in the Netherlands—filed and won an arbitration case against the Czech government using the ISDS provisions of the bilateral investment treaty between the Netherlands and the Czech Republic. Australia rejected the inclusion of ISDS provisions in its bilateral FTA with the United States. However, an American company was able to pursue its arbitration claim against the Australian government through the Australia-Hong Kong investment treaty. No such claim has been filed against the Japanese government to date simply because it is not taking any policy discriminatory against foreign companies. So long as its regulations and policies are legitimate and reasonable, Japan does not have to worry about arbitration. Even if a dispute is brought against the Japanese government, remedies sought by complaining investors are usually monetary compensation, not changes to its rules and regulations.

The United States may be Gian, the bully, but it is definitely not a winner with a perfect record. In disputes against the Canadian government, American investors have won only two cases and lost five. The same can be said about state-state trade disputes before WTO panels. The United States lost a case to a small Caribbean country with a population of only about 70,000. Criticism within South Korea against its bilateral FTA with the United States has been cited to argue that the ISDS provisions in the TPP would be used to attack Japan's public health insurance system. However, the U.S.-Korea FTA explicitly excludes public health insurance systems from the application of the ISDS provisions.

TPP is crucial to the sustainability of Japan's agriculture

What can be drawn from the above anti-TPP arguments is the negative self-image of Japan as a sorry country with no bargaining power or the zero-sum mentality or fear of losing vested interests that have been protected by regulations. In particular, there is a fear that all of the existing interests in the areas of agriculture, medical services, and labor might be undermined. The viewpoint of a plus-sum game, which is to pursue a win-win situation by expanding the pie, is completely lacking here. Actually, the TPP will neither take away the public health insurance system nor force us to allow unskilled labor into our country. By looking at the backgrounds of those opposed to the TPP, we can easily tell that they have little knowledge in trade negotiations, international economics, and international economic law. However, their groundless arguments have scared those trying to keep the status quo for any sake.

We must not forget that whatever benefits we have today are not guaranteed into the future. We are heading into an era of an aging and dwindling population. For instance, in the case of the agricultural sector where opposition to the TPP is the strongest, the domestic market, which has long been protected by imposing high import tariffs, will shrink as Japan's population ages and declines. Zero-sum thinking entails a minus-sum outcome. If we want to avoid the shrinking pie game, we must look to overseas markets. In doing so, zero would definitely be preferable over 100% as a tariff rate on our agricultural exports if we are to choose between the two. If we want to maintain domestic agriculture, we have no choice but to push forward trade liberalization and seek the removal of tariffs by other countries through the TPP and by other means. That is, the TPP is a must for sustaining Japan's agriculture.

Japan's rice production has decreased from 12 million tons in 1994 to eight million tons today. An aging and shrinking population spells a further decline in domestic rice consumption. Shutting ourselves up in the domestic market by enhancing broader control is to put Japan's agriculture on the road to ruin. None of those agricultural leaders vociferously opposed to the TPP are capable of drawing a vision for Japan's agriculture 10 or 20 years from now.

Today, rice accounts for less than 20% of Japan's agricultural production in value terms. Only several percent of tariffs are imposed on vegetables—whose production value is greater than that of rice—as well as on fruits, while flowers are subject to zero tariff. Thus, they will hardly be affected, if at all, by tariff elimination. Japanese rice is renowned internationally for its high quality. Furthermore, with international rice prices increasing, the price gap between the domestic and overseas markets has narrowed significantly over the years, and some Japanese rice farmers are already exporting to overseas markets. It is a false argument to say that this price gap is too large to overcome. The acreage reduction program, which is pushing up domestic rice prices, should be abolished to lower the prices. Japanese rice will then be undefeatable. In order to alleviate the impact of the policy change, the government can subsidize affected fulltime farmers in the form of direct payments. Such payments are being made in the United States and the European Union (EU). Japan also utilized the direct payment scheme in liberalizing its beef market. The abolition of the acreage reduction program will lead to an increase in rice yields per unit area, while a shift to direct payments will facilitate the consolidated usership of farmland by fulltime farmers, enabling them to expand the scale of farming operations. As a result, the cost of rice production will be cut by half.

At the moment, Japan is imposing high tariffs on the import of wheat, which accounts for 86% of domestic consumption, for the sake of maintaining the high prices of domestically-grown wheat, which accounts for only 14%. By shifting its agriculture protection policy from the conventional price-support policy to direct payments, the Japanese government can eliminate tariffs on agricultural imports, thereby reducing the burdens on consumers. As it stands today, Japan's agricultural policy is regressive per se. The government is considering the introduction of reduced tax rates for daily necessities such as food as a way to partially offset the regressive impact of the planned consumption tax hike. However, a more desirable way to achieve that end is to join the TPP, whereby the government can save on the cost of collecting taxes.

Zero-sum thinking generates no benefits to Japan

Conversely, what will happen if Japan succumbs to the phantom threat and fails to join the TPP? Parts and materials used to produce final products account for the majority of goods traded in the world today. Japanese companies are part of global production networks, whereby high-tech parts and materials produced in Japan are exported to overseas locations to be assembled into final products. Those manufacturing such parts and materials are mostly small and medium enterprises (SMEs). Major Japanese companies can move their operations overseas, but SMEs find it difficult to do the same. If the TPP emerges as a scheme to liberalize trade and investment only among the participating countries encompassing the Asia-Pacific region, Japanese SMEs will be virtually shut out from this region, resulting in massive job losses. When Japan announced its intention to participate in the TPP negotiations a year ago, Canada and Mexico quickly followed the move. A sense of fear of being left outside of the enormous free trade zone including Japan is what prompted the two countries. By turning its back to the TPP, Japan is putting a noose around its neck.

No other countries are making a fuss over whether or not to participate in the TPP. Those farmers who may be affected constitute a part of Japan's agriculture that accounts for only 1% of the gross domestic product, and many fulltime farmers are in favor of the TPP. Furthermore, there exists a policy instrument that can transform Japan's declining agriculture into a thriving industry while alleviating the negative impact. Due to the zero-sum thinking and cringing mentality hanging over the Japanese economy, we have wasted so much time. The world will no longer wait for us. It is about time to take a formal decision on early participation in the negotiations.

January 8, 2013

February 14, 2013

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