Issues Facing the Japanese Economy in 2012 (January 2012)

TPP and Japan

Senior Fellow, RIETI

Developments from the previous year and the schedule for the coming year

Free trade agreements (FTA) which Japan has so far concluded have excluded agricultural products such as rice and dairy products. The Trans-Pacific Partnership (TPP) is an FTA but one with a higher degree of liberalization, and allows no exceptions in principle. For this reason, the Japan Agricultural Cooperatives (JA) has argued that participation in the TPP would destroy Japan's agricultural industry. There are many within the Democratic Party of Japan (DPJ) with cautious views about TPP participation, leading to a conflict of opinions. Prime Minister Noda, however, announced on November 13, 2011 at the APEC Summit Meeting that Japan "will enter into consultations toward participating in the TPP negotiations with the countries concerned." Participation in the TPP requires an agreement by the nine countries currently involved in the negotiations.

Above all, the United States is in a unique circumstance in which Congress has the constitutional authority over trade negotiations. As the U.S. government is negotiating under delegation by Congress, if any country is to participate in the TPP negotiations, the U.S. government must notify Congress 90 days prior to its participation. If Japan plans to join in the June TPP negotiations, this notification has to be made in March, thus Japan must make a definite decision by then. As noted below, in addition to improving agricultural productivity, a shift in agricultural policy is required, from price support using tariffs to direct payment subsidies, as is done in the United States and the EU. That will enable Japan to export its excellent agricultural products overseas where tariffs will be eliminated by trade liberalization negotiations including the TPP. The domestic market is expected to shrink due to an aging and decreasing population. There will be no future for Japan's agricultural industry with an eye only on the domestic market even if it continues to be protected by high tariffs, resulting in higher than international prices.

Non-participation in the TPP will make recovery from the disaster caused by the Great East Japan Earthquake difficult

At the APEC Ministerial Meeting in November 2011, Canada and Mexico followed Japan's announcement to participate in the TPP negotiations. If the TPP region, which will have unified procedures and rules for trade and investment, expands enormously with Japan's inclusion, participating countries will see greater advantages, while non-participating ones will see greater disadvantages. Canada and Mexico assessed the TPP with Japan participating to be different from its present state with the current nine member countries. After Japan's announcement, statements on the TPP made by the Chinese government appeared to show a change in tone from one of disregard to one of attention. China fears that it might be excluded from the free trade zone in the Asia-Pacific region. China is now very eager to conclude free trade agreements with Japan and Korea. Will those opposing the TPP argue that Japan should seek a fabulous isolation in the Asia-Pacific region by not participating even if Korea and China does so in the future?

Following the Great East Japan Earthquake, it was reported that products made in the auto parts factories in the Tohoku area are used in distant auto plants in Michigan, U.S. and that the shutdown of the auto parts factories made the U.S. auto plants difficult to operate. Japanese small- and medium-sized enterprises (SMEs) are integrated into the supply chain within the larger Asia-Pacific region. If Japan does not participate in the TPP, the plants within the TPP member countries will try to import parts and materials tariff-free from the other member countries, resulting in Japanese SMEs excluded from the vast free trade area in the Asia-Pacific region. Those opposing the TPP argue that farmers in Miyagi and Iwate prefectures were severely affected by the earthquake. In those areas, however, the manufacturing industry's share of the GDP is about 20% while agriculture does not even reach 5%. Not participating in the TPP will make the recovery of the affected areas difficult.

Some argue that the recovery from the earthquake disaster should be given priority over the TPP to avoid dealing another blow to the affected farmers. Farmland cultivated in the affected areas is extremely small, however, and, in reality, the farmers primarily depend on their second jobs in manufacturing and other industries to make a living. Thus, promoting the manufacturing industry is necessary for them. Furthermore, it is difficult for small-scale farmers to resume farming by making new machinery investments. A new type of farming village should be constructed by consolidating farmland in the hands of large-scale farmers to promote efficient management and allowing elderly farmers who offer their farmland for lease to generate revenue for maintaining and managing the land, irrigation ditches, and farm roads. If their management is affected by the elimination of tariffs upon TPP participation, it would suffice to grant them direct payment subsidies, as is done in the United States and the EU.

TPP is essential for promoting agriculture

Rice production in 1994 amounted to 12 million tons. Less than 20 years later, however, the target production for 2012 finally fell below eight million tons. Since the population is expected to decrease in the future, rice production will further decrease. If we try to maintain the Japanese agricultural industry while the domestic market is shrinking, we have no choice but to develop the overseas markets and export these products there. For this purpose, the agricultural circles should positively support the TPP and other trade liberalization negotiations that will facilitate exports by eliminating tariffs on agricultural products with trading partners.

If the rice acreage reduction policy is gradually being abolished to lower the rice price, small part-time farmers with high cost structures will cease to cultivate their land and instead lease it to earn rent income. If full-time farmers with farms of a certain size or larger are given direct payment subsidies, their ability to pay rent will increase and land will be consolidated among them, thus the expanding scale will reduce their costs. For farmers with land of 15 hectares or greater, the cost of producing rice is 100 yen per kg, about one half of the rice price. If dissolving the rice acreage reduction policy, which impedes yield increases, promotes breed improvement and increases rice yields to the same level as that in California, production cost will decrease to 70 yen per kg. This is less than one half of the price of rice imported from China or the United States, which is now about 150 yen per kg.

Compared with the wholesale prices in Hong Kong of Koshihikari rice produced in China and California, which are 150 yen and 240 yen per kg respectively, Japan-produced Koshihikari rice is sold for 380 yen per kg. If this rice, with unmatched quality globally, becomes price competitive, that will make it even more unrivaled.

American conspiracy theory

TPP opponents once argued that the United States was inviting Japan to join the TPP in order to promote its exports because the United States could not increase its exports substantially to the current TPP-negotiating countries with low GDP. The United States and Japan both have large GDP. These opponents argue that a TPP in which both countries participate is a de facto U.S.-Japan FTA and that the United States will force Japan to change its rules and regulations, just as the former had demanded from the latter in the previous bilateral talks.

An FTA, however, is about trade and has nothing to do with GDP size. Both Japan and the United States depend lightly on foreign trade. U.S. exports to the eight other countries participating in the TPP, which comprises 8% of total U.S. exports, is greater than that to Japan, which comprises 5%. Since Japanese tariffs on industrial products are low, the United States will not be able to increase export of industrial products to Japan even if Japan participates in the TPP. Now, will its export of agricultural products increase? Agricultural products and foodstuff only account for 18% of U.S. exports to Japan and 1% of total U.S. exports. In addition, corn and soy beans, which are among the most competitive American agricultural products, are mostly exported tariff-free already. If U.S. export of agricultural products is to increase, it will likely be in beef and pork. Any increase in these items, however, cannot possibly be considered to have such an effect as to create an impression of doubling or substantially enlarging total U.S. exports.

As Japan's export industries such as the auto industry comprise only a small portion of its GDP and thus a minor impact, TPP opponents also argue that its advantages will be few. However, this is also the case with the United States. Its dependence on foreign trade is lower than that of Japan. The TPP's advantages include not only the liberalization of trade in goods but also of financial services in developing countries. Furthermore, such aspect should be stressed as it will create new rules of trade and investment in the Asia-Pacific region.

American threat theory

Some opponents either argue that Japan may experience unilateral defeat to the United States or claim that they are concerned about Japan's bargaining power. They seem to have entrenched the impression that Japan was forced to accept unreasonable demands by the United States in the past bilateral talks. Unlike those talks, however, coalitions on each issue can be formed in multilateral talks. On what occasion will Japan be isolated in TPP negotiations and pushed around or knocked down by the United States? No one argues or analyzes this point. All they say is that the United States is strong and intimidating.

Regarding drug prices and food safety control, Japan can form coalitions with Australia and New Zealand, which share the same interests and regulatory systems, to voice against the United States. On the other hand, Japan can form a coalition with the United States in areas where Japan wants to accomplish successful negotiations, including investment protection and liberalization, stronger piracy regulation, opening up of developing countries' governmental procurement, and elimination of tariffs on industrial products. There is no other partner as strong and powerful as the United States.

Fundamental change of public health insurance programs and further liberalization of local governmental procurement, with which TPP opponents are concerned, may not even be brought up. Japan can easily dismiss such agendas even if they are discussed. The U.S. public health insurance program is very unique among the advanced nations, and the Obama administration has tried to change it in vain. It is hard to believe that the United States would demand Japan, Australia, and New Zealand to adopt the same kind of public health insurance program as itself. In addition, any service provided by the public sector is out of the scope of service negotiations under either the WTO or FTAs. The United States has made commitments with only 37 of its states under the WTO's Government Procurement Agreement. It is difficult for the United States to make further commitments since the federal government is empowered to deal with only inter-commerce issues. If Japan is demanded to make further commitments on local governmental procurement, we can make a counter-argument that the United States should make commitments with all 50 states.

The only possibility that Japan may become isolated is if it demands exceptions to tariff eliminations for agricultural products. If Japan insists on excluding rice, expanding the minimum access (low-tariff import quota), which now amounts to 770,000 tons, will be demanded as a trade-off or compensation. If Japan shifts its policy to compensating price declines with direct payments instead of protecting farmers with tariffs, however, Japan will not be isolated in the agricultural industry either.

Even developing countries such as Vietnam and Malaysia are participating in the TPP negotiations and squarely negotiating with the United States at the large sacrifice of the elimination of high tariffs on industrial products and the reviewing of preferential treatment of state-owned enterprises or Malay companies. How do they look upon a country which identifies itself as an Asian leader yet does not participate in negotiations, being concerned about slight problems and intimidated by the United States?

TPP and the Chinese market

China is a promising market for Japanese industries and agriculture. Even if an FTA is concluded between Japan and China, eliminating Chinese tariffs on rice, rice cannot be exported to China as we had expected. Japanese rice, which can be bought for 500 yen per kg in Japan, is sold for 1,300 yen per kg in Shanghai or Beijing as state-owned enterprises monopolize the distribution channels. Even if tariffs are eliminated, as long as de facto tariffs charged by state-owned enterprises remain, Japan cannot export freely to China. In fact, discipline on the state-owned enterprises is what the United States aims at through the TPP. By hypothetically regarding Vietnam—which is another socialist country with state-owned enterprises— as China and negotiating with it, the United States intends to discipline China when it participates in the TPP sometime in the future. Without the TPP, Japanese rice can not be freely exported to China. Participation in the TPP along with an FTA with China will successfully pave the way for cultivating the Chinese market.

Just like last year, participation in the TPP talks and the increase of the consumption tax will remain as the two most important and controversial economic issues in national politics, along with recovery from the Great East Japan Earthquake. There are politicians for and against those two issues in either the ruling DPJ or the opposing Liberal Democratic Party (LDP). A group of politicians is in favor of structural change. Another group is opposed to any change and is trying to preserve the vested interests. There might be political realignment in line with a distinct attitude for those two issues. The TPP issue could trigger the change of the Japanese political landscape.

December 28, 2011

December 28, 2011

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