Priorities for the Japanese Economy in 2018 (January 2018)

Japan Should Lead Trade Talks in the Asia Pacific Region

Senior Fellow (Specially Appointed), RIETI

Anti-globalism in the United States

Trade was more of an issue than any other in the U.S. presidential election in 2016. During the Democratic Party's presidential primaries, Senator Bernie Sanders, who started out as a fringe candidate, garnered much support by advocating anti-globalism. Along with others, he stressed the need for the United States to withdraw from the Trans-Pacific Partnership (TPP). As multitudes of placards rejecting the TPP were waved at the Democratic Party Convention, most Americans became aware of the presence of this trade deal.

During the presidential election, Donald Trump of the Republican Party maintained that American jobs had been lost because of free trade and immigrants. It was the first time since 1936 that a Republican Party presidential candidate had argued against free trade. Trump won Ohio, Pennsylvania, and other impoverished Rust Belt states, which are characterized by the steel and other smokestack industries. These states were originally strongholds of the Democratic Party, which is backed by the labor unions. These states except Ohio, a closely contested state, were originally strongholds of the Democratic Party. The discontent of many U.S. citizens catapulted Trump to the U.S. presidency.

After assuming the presidency, Trump withdrew from the TPP as he announced. Prime Minister Shinzo Abe explained the importance of free trade and the TPP's geopolitical significance in the Asia Pacific region and urged Trump to reconsider, but it fell on deaf ears.

Just reject a Japan-U.S. FTA

Trump is set to forge ahead with bilateral free trade agreements (FTAs) rather than mega FTAs involving many countries like the TPP. He seems to believe that it is easier to press U.S. demands that way.

During the 1980s, Japan had a hard time in trade talks with the United States as it had a weak point in that it protected key agricultural products such as rice and beef with import quantity restrictions that contravened the General Agreement on Tariffs and Trade (GATT), in addition to a political climate overshadowed by the Cold War. These circumstances are now gone. During the 1980s, Japan was terrified by the prospect of the possible application of Section 301 of the U.S. Trade Act of 1974, which authorized the president to unilaterally retaliate against any nation he was dissatisfied with; however, establishment of the World Trade Organization (WTO) negated it.

If the United States calls for negotiations to reach a Japan-U.S. FTA, all Japan needs to do is to convince the United States that a Japan-U.S. FTA is undesirable, based on the following. First, the TPP has been defined as one of the initiatives aimed at achieving a free trade area for the whole Asia-Pacific Economic Cooperation (APEC) region, i.e. the Free Trade Area of the Asia-Pacific (FTAAP). It is inappropriate to veer off the course that APEC leaders have committed themselves to and seek a bilateral FTA instead. Second, the accumulation of bilateral FTAs will result in the "spaghetti bowl effect" where confusion results from multiple rules and regulations becoming tangled up with one another. A mega FTA has the major advantage that the rules and regulations will be unified among the many participating states.

Strategic impacts of the TPP without the United States

As many Republican Party leaders also expressed dissatisfaction with the TPP, it became difficult to win Congressional approval for the trade deal under the Obama administration. Since this became clear in the summer of 2017, I have been arguing that the 11 TPP partners excluding the United States should go ahead among themselves (TPP11). If a TPP 11 is launched first, the United States will have to pay a tariff of 38.5% in order to export beef to Japan while Canada and Australia will pay only 9%. The same thing will happen with wheat, pork, wine, butter and cheese. U.S. agricultural products will be ousted from the Japanese market, and associated jobs will be lost accordingly. If Japan concludes an FTA with the European Union (EU)—a major exporter of wine, pork, cheese, and pasta—the position of the United States in trade talks with Japan will be critically undermined. TPP 11 is the most effective way to encourage the United States to rejoin the TPP.

However, the Japanese government argued against my proposal, stating that a TPP without the United States would be meaningless and that the TPP signatories who made concessions in one sector in exchange for greater access to the U.S. market in another would demand renegotiations. There were many academics who agreed with the government's stance.

In reality, however, as Japan refused to abolish tariffs on agricultural produce in the TPP negotiations, it would take 25 years to eliminate U.S. tariff on Japanese cars, whereas the tariffs on South Korean automobiles was eliminated in 2017. The TPP will increase access to Asian markets. These markets are not limited to industrial product markets in developing economies that have been protected with high tariffs. Government procurement markets that involve public works projects will be opened as well. The TPP includes a provision which allows consignees to receive cargo within six hours from the start of customs clearance procedures if they require a rush shipment. This arrangement will contribute significantly to the development of logistics networks in the Asia Pacific region. There should be meaning for a TPP without the United States.

Changing Japanese government's stance

When the Trump administration's stance of seeking to hold Japan-U.S. FTA negotiations became clear, a sea change occurred in the prospects for a TPP11. The Japanese government started to worry about the risk that if Japan agreed to hold FTA negotiations with the United States, the U.S. administration would demand a pledge to give more concessions in the agricultural field than under the TPP negotiations. In consideration of the risk, the Japanese government appeared to be hoping to make it difficult for the United States to take an aggressive approach by implementing a TPP11 first and putting U.S. agricultural products at a disadvantage in the Japanese market.

Vietnam has been reported as being reluctant toward a TPP 11 as it made concessions in the regulations on state-owned enterprises in exchange for greater access to the U.S. textile market. However, Vietnam's concerns will dissipate if the United States rejoins the TPP; after all, a TPP without the United States is a trick to persuade it to join. In June 2017, Vietnam turned positive, clearing a major impediment to a TPP 11.

In this way, a broad agreement on the TPP11 was reached on November 11, 2017. One notable feature of the TPP11 is that its provisions concerning the 20 items over which TPP partners made concessions in response to the United States' demands will be frozen and be suspended from taking effect for the moment in the hope that the United States will return to the TPP in the future.

Despite the U.S. withdrawal from the TPP, the high-level rules that have been established under the pact will serve as a useful reference for many potential mega FTAs as well as for WTO negotiations. The participation of major states such as Canada, Australia, and Mexico will mitigate the spaghetti bowl effect.

Aiming for a higher level TPP and free trade blocs

Japan should convince other Asian countries to join the TPP. There is no reason for countries such as Thailand not to be able to join the TPP when even Vietnam, which is more behind in economic development, has already joined. If more countries join the TPP, the United States may reconsider its withdrawal from it. If China follows suit, the United States will find itself in a difficult position from a geopolitical perspective as well.

Under the broad agreement, four items remain pending to be addressed in 2018. However, if these items threaten to stand in the way of reaching a full agreement on the TPP, Japan should wrap up the agreement by making some concessions if necessary. Under the GATT, tariffs were reduced and rules were improved through similar rounds of trade liberalization negotiations. Concerning items other than those four, high tariffs on Japanese agricultural products have remained, and many exceptions have been granted with respect to state-owned enterprises. These points should be improved through future negotiations. If the economic situation changes, it will become inevitable to revise the TPP. We should regard the conclusion of a TPP11 as nothing more than a milestone on the way toward realizing a higher-level free trade area in the future.

December 27, 2017

December 27, 2017

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