Truths and Falsehoods about TPP: Revitalizing the economy by "opening up the country"

Consulting Fellow, RIETI

Prime Minister Naoto Kan, at a press conference he gave at the beginning of the year, defined this year's two key policy tasks as making final decisions by June on whether to join the TPP and whether to raise the consumption tax. What is the TPP? Why the TPP now? And what are the advantages of joining the TPP?

What is the TPP?

Suddenly, the acronym TPP has emerged alongside those of FTA and EPA in discussions on trade liberalization. A free trade agreement (FTA) mainly liberalizes trade in physical goods such as farm produce, automobiles, and electrical machinery, whereas an economic partnership agreement (EPA) is broader, also covering such areas as services, investment, and economic cooperation. The Trans-Pacific Partnership (TPP), meanwhile, is an EPA for the Pacific Rim. It was launched in 2006 by four nations (Chile, New Zealand, Singapore, and Brunei), though the U.S., Peru, Australia, Vietnam, and Malaysia are now also participating, with negotiations among the nine countries ongoing.

A key difference between the TPP and previous FTAs and EPAs is that although it calls for rapid trade liberalization in a wide range of fields, it does not necessarily demand the immediate scrapping of tariffs on all goods and services. Brunei, for example, is excluding alcohol and tobacco on religious grounds. Meanwhile, Chile, New Zealand, and Brunei have said that they will take 10-12 years to remove tariffs on products accounting for 20%-30% of their trade, such as farm produce, petroleum products, textiles/footwear, and transport equipment.

Also noteworthy is that the TPP comprises 24 working groups. The long-standing issue of tariffs on farm produce is only one of the areas under negotiation. A wide variety of other issues are being examined, such as safety standards for food products; government procurement, including bidding for construction projects; and the acceptance of foreign workers.

Why the TPP now?

One of the reasons why discussions on EPAs have become so lively of late is due to the difficulties currently faced by industry. Japan has been a slow starter in the global battle to ink FTAs. Of its main trading partners, Japan has only concluded an EPA with ASEAN. Furthermore, of those countries to which the EPA applies, trade correlates to only about 17% of Japan's trade. South Korea, meanwhile, concluded an FTA with the EU in October 2010 and reached a final agreement on an FTA with the U.S. in December, and countries with which South Korea has EPAs now account for 36% of its trade. Fears have been growing that the competitiveness of Japan's key export industries (automobiles, electrical/electronic products, etc.) could be at risk if Japan continues to lag behind.

A key factor behind the emergence of the TPP, on the other hand, stems from the circumstances in which the U.S. finds itself. Japan has placed priority on an EPA covering ASEAN+6 (i.e. ASEAN + Japan, China, South Korea, Australia, New Zealand, and India), with the aim of establishing a free trade area in Asia-Pacific (FTAAP). Meanwhile, the U.S. president no longer has full authority in trade and commerce negotiations. Accordingly, to make progress in concluding an EPA with the U.S., it is believed that participation in the TPP, a forum in which negotiations involving various nations are already under way, will make for smoother progress.

The TPP consultations are soon to reach a critical juncture. The deadline is November 2011, when the U.S. will host the APEC summit. In its basic policy concerning EPAs, which it determined in November 2010, the government laid out a road map for the next year. In March 2011 it will decide on a policy for regulatory reform and in June will determine policies concerning foreign workers and the structural reform of agriculture. At the same time, rounds of TPP negotiations will be held every two or three months. As such, keeping a close eye on both domestic policy setting and international negotiations, which will be occurring at the same time, is required.

The advantages of the TPP

We estimate that if Japan joins the TPP, its GDP will climb by around 0.8% (or 4 trillion yen). This should be regarded as the difference between GDP with liberalization and GDP without liberalization when looking back from a point about ten years later. Trade liberalization would not boost the economy by around 1% each year, and its effects should not be overestimated. Furthermore, with regard to effects on prices, the impact of exchange-rate fluctuations is probably larger than that of the removal of tariffs.

However, trade liberalization would increase the disparities between "winning" industries and "losing" industries. In the case of farm produce, imports would increase and domestic output would plummet. With automobiles, however, exports would rise, as would domestic production. And with electrical machinery, overseas production by Japanese companies would increase. Meanwhile, as the volume of trade would expand, those sectors directly involved in it, such as transportation, distribution, and trading would benefit.

It should also be borne in mind that it might be impossible to make up for the lost time in concluding EPAs. For example, now that South Korea and the EU have signed an EPA, tariffs on exports of South Korean components to the EU may soon be scrapped, which might lead to EU manufacturers using South Korean components on their production lines. Even if Japan concludes an EPA with the EU in a few years, South Korean components may already be at a stage of being installed, so it is possible that the manufacturing sector will take a harder hit than the analysis of price effects and other economic analysis envisages.

What is even more important is that by sending the message overseas that the country is being "opened up," Japan will attract money and people from overseas. It is crucial that this message convey expectations that even agriculture might be partially liberalized, something that has hitherto regarded as being impossible for Japan, as well as make overseas investors think that Japan may be moving toward the acceptance of foreign workers, which is the thing in which these investors are most interested. This would spur investment from abroad, which could revitalize the Japanese economy. And on a macro level, trends in international capital movements should be watched more closely than those with aspects of the real economy such as exports and output.

January 18, 2011

January 18, 2011