China in Transition
What Is Missing in Discussions on TPP
Chi Hung KWAN
Consulting Fellow, RIETI
(Published on the March 10, 2011 edition of the Allatanys Newspaper Guide)
In Japan, the Trans-Pacific Strategic Economic Partnership Agreement (TPP) centering on Japan and the United States has emerged as a hotly debated issue. The topic has been taken up at least seven times since last October in the editorials of three national newspapers, namely the Asahi Shimbun, the Nihon Keizai Shimbun, and the Yomiuri Shimbun (Note). However, the discussions focus only on the impact on domestic agriculture, which will be forced to open to the world as a result of participation in the TPP, and measures to alleviate the impact. They fail to discuss the argument about whether participation in a TPP without China, Japan's largest trading partner, is the best choice for Japan.
From the East Asian Community to the TPP
As part of these moves, Prime Minister Naoto Kan expressed the government's intention to participate in the TPP for the first time in his policy speech at the plenary sessions of both houses of the Diet on October 1, 2010. This was followed by the government's adoption of the Basic Policy on Comprehensive Economic Partnerships on November 9, which said with respect to the TPP that "Japan will commence consultations with the TPP member countries." In addition, in his policy speech to the Diet on January 24, 2011, Kan cited participation in the TPP negotiations as one of the key issues for the government once again and declared that "The government will form a conclusion about the participation in negotiations by June 2011."
The TPP is a form of free trade agreement (FTA) that was commenced by four countries of Singapore, Brunei, Chile and New Zealand in May 2006. At present, nine countries including the United States and Australia are advancing negotiations to participate. In principle, a country joining the TPP is obliged to abolish tariffs on all items including main agricultural products imported from other member countries. Given that the current members and those that are participating in the negotiations are small economies except for the United States, it is widely believed that the TPP will become a de facto FTA between Japan and the United States if Japan becomes a member ("TPP to Become a De Facto FTA Between Japan and the U.S., Tariffs to Be Abolished with Participation in the TPP," the Nihon Keizai Shimbun on November 10, 2010).
Increasing Dependence on Exports to China
Despite these political considerations, the center of gravity in Japan's external economic relationships has been steadily shifting from the United States to China. The degree of Japan's dependence on exports to China has risen from 6.3% in 2000 to 19.4% in 2010, while the degree of dependence on exports to the United Stated has fallen from 29.7% to 15.4%. The fall in the degree of dependence on exports to the United Stated almost matches the rise in the dependence on exports to China. Reflecting this, in 2009 China became the largest export market for Japan for the first time in the postwar era, in place of the United States. Although China's GDP was still about one third that of the United States as of 2009, it is on track to exceed that of the United States, given that China's growth rate is much higher than that of the United States and the yuan is strengthening against the dollar. With these trends as the backdrop, the shift in Japanese exports from the United States to China is likely to continue in the years ahead, and exports to China could account for more than one third of total Japanese exports by around 2020. Not only Japan, but almost every country is exporting more to fast-growing China, which has replaced the United States as the engine of the global economy.
Meanwhile, China has actively entered into FTAs with neighboring countries and regions. The Framework Agreement on Comprehensive Economic Co-operation was concluded between China and ASEAN in 2002, and an FTA between China and the ASEAN came into force across the board in January 2010 through a gradual reduction of tariffs starting 2004. China also concluded Closer Economic Partnership Agreements (CEPA) with Hong Kong and Macau in 2003, both of which came into force on January 1, 2004. In June 2010, China and Taiwan signed the Economic Cooperation Framework Agreement (ECFA), an FTA with Taiwan, in which the two sides agreed to gradually reduce tariffs on imports starting 2011, aiming to reach zero by January 2013. China has also entered into FTAs with other countries including Pakistan, Chile, New Zealand, Singapore, Peru, and Costa Rica, but an FTA between Japan and China has yet to even be put on the table.
While countries and regions that have concluded an FTA with China can export to China without tariffs as a general rule, because Japan has yet to enter into an FTA with China it must add tariffs to prices when exporting its goods to China and so is at a disadvantaged position in competing in the increasingly tough Chinese market.
In addition, some Japanese companies with international competitiveness in their own right will be forced to take steps to overcome the tariff barrier by either starting local production and local sales in China or engaging in roundabout exports to China by setting up a base in ASEAN and other countries that have concluded an FTA with China. In either case, they will have to switch from exports to direct investment as a means to access the Chinese market and, as a result, employment opportunities in Japan will be lost.
An FTA for Japan and China
If Japan were to conclude an FTA with China, Japanese companies would be able to export their products to China directly from Japan without limitation. As a result, the key industries in Japan such as automobiles will not need to take the risk that accompanies investing in China, and employment opportunities will be created in high value-added areas at home. Thus an FTA with China will be a more effective growth strategy for Japan than other actions to prevent a hollowing-out of industry.
It goes without saying that not only a bilateral FTA between Japan and China, but broader-based agreements such as the TPP in which more countries participate are needed to promote trade liberalization. Therefore, rather than excluding China from the TPP, Japan and the United States should ask China to join it.
The editorials of three newspapers that took up the TPP are as follows:
- "Quickly Show the Direction of Agriculture Reform to Participate in TPP," the Nihon Keizai Shimbun on October 29, 2010
- "Don't Leave the Announcement to Participate in TPP Unfinished," the Nihon Keizai Shimbun on November 7, 2010
- "TPP Policy: No Time to Waste in 'Opening of Japan in the Heisei'," the Yomiuri Shimbun on November 10, 2010
- "Review the National Isolation in Human Resources and Regulations to Participate in TPP," the Nihon Keizai Shimbun on November 10, 2010
- "TPP and Agriculture: Opportunity to Break Out of a Failing Model," the Asahi Shimbun on December 20, 2010
- "Kan Administration: Too Slow to Move on TPP Negotiations," the Nihon Keizai Shimbun on January 24, 2011
- "EPA between Japan and Australia: Early Agreement Is Touchstone of TPP," the Yomiuri Shimbun on February 12, 2011
March 15, 2011
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