Japan's Choice on the TPP: Quick participation crucial to getting involved in the rulemaking

Faculty Fellow, RIETI

In October 2010, then Prime Minister Naoto Kan announced that Japan would look into participating in negotiations for the Trans-Pacific Partnership Agreement (TPP). And in November 2011, Prime Minster Yoshihiko Noda announced his decision to enter into consultations toward participating in the TPP negotiations with the countries concerned. However, no official announcement has since been made on this. In the meantime, Mexico and Canada have been effectively accepted into the negotiations. With the next round of the TPP negotiations to be held in September, now is the golden time for Japan to announce officially its intention to join. This, however, is unlikely to happen for the time being, given the ongoing mess within the ruling Democratic Party of Japan (DPJ).

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An opinion poll conducted by Jiji Press in November 2011 found that 52.7% of the respondents supported Japan's participation in the TPP negotiations and 28.8% opposed. In the July 2012 poll, the percentage of supporters increased to 57.6% and that of those against decreased to 21.7%. In contrast, nearly half of the Japanese Diet members were against the TPP as of November 2011 and today, opposition remains as strong as ever within the political arena. Those opposed to the TPP can be classified broadly into five groups, i.e., advocates for vested interests (such as those supported by or associated with the agricultural industry), anti-globalization advocates, anti-United States advocates, anti-Noda advocates, and others (such as those concerned about food safety).

Why is there such a huge gap between the results of public opinion polls and legislators' stance? In particular, why does the political power of the agricultural sector--which is the primary anti-TPP force--remain strong despite the contraction of agriculture as an industry? This can be explained using the logic of collection action, a theory developed by Mancur Olson, a political scientist.

Suppose that the TPP will bring benefits worth 10 trillion yen in total to 100 million people whereas two million people will suffer losses worth eight trillion yen in total. In this case, Japan should promote the TPP because the economy as a whole would have a net gain of two trillion yen. In reality, however, this is hard to realize. The reason is that while the expected gain per capita within the group benefitting from the TPP is 100,000 yen, the expected loss per capita within the other group is as much as four million yen.

Indeed, if asked in an opinion poll, most of those in the former group would say that Japan should participate in the TPP. However, it is hard to expect them to travel all the way to the Kasumigaseki government district in Tokyo to demonstrate their support for the TPP because, while responding to opinion polls costs nothing, travelling to Kasumigaseki involves various costs. It is quite different for those in the latter group. They have a strong incentive to pay these costs and sacrifice a whole day's work wages to demonstrate their protest against the TPP. If their voices are heard, they would be able to avoid suffering losses as large as four million yen each.

The point is that even if the economy as a whole is to receive a net gain, its benefits would be spread thinly and broadly whereas losses would concentrate among a small number of people. Because of the sheer magnitude of expected losses to be suffered per person in the event of Japan participating in the TPP, those in the suffering group are compelled to engage in aggressive lobbying activities, such as petitioning and donating to legislators, thereby acquiring strong political power. Provided that the total amount of potential losses remains unchanged, a decrease in the number of potential losers would result in an increase in the amount of losses per person. That is, the fewer the number of people expected to suffer, the greater would be the incentive to engage in lobbying activities against the TPP.

Furthermore, the fewer the number of people in the group, the easier is it to coordinate their voting behavior whereby they would unfailingly vote for those candidates who support their opposition to the TPP. In such case, politicians would be able to garner funds and votes by siding with those opposed to the TPP.

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Government decisions should be made in such a way to reflect public opinion adequately. However, is public opinion always formed properly? That is, does the public have sufficient and accurate information as a basis for their judgment? It is extremely difficult for them to discern the impact the TPP will have. Former Prime Minister Kan dubbed it as the "opening up of Japan in the 21st century." That might have made some people think of drastic changes comparable to those experienced in the years subsequent to the Meiji Restoration in 1868, a revolution that brought about the modernization and Westernization of Japan.

The TPP, however, is just another one of the free trade agreements (FTAs) or economic partnership agreements (EPAs), and Japan has already concluded 13 such agreements to date (see the table below). In discussing a new policy, government leaders need to show to the people what specific impacts it may have on them. In the case of the TPP, the overblown term, "opening up of Japan in the 21st century," seems to have spread alone without sufficient explanation of its meaning. To add further confusion, the government presented three completely different sets of estimates--calculated separately by the Ministry of Agriculture, Forestry and Fisheries (MAFF), the Ministry of Economy, Trade and Industry (METI), and the Cabinet Office (CAO)--on the potential impact of joining or not joining the TPP.

Table: Current status of Japan's FTAs/EPAs
∇Brought into effect (year/month)
Singapore (2002/11), Mexico (2005/4), Malaysia (2006/7), Chile (2007/9), Thailand (2007/11), Brunei (2008/7), Indonesia (2008/7), ASEAN (2008/12), Philippines (2008/12), Switzerland (2009/9), Vietnam (2009/10), India (2011/8), Peru (2012/3)
∇Under negotiation
Australia, Gulf Cooperation Council (GCC), South Korea (currently suspended), Mongolia
∇Pre-negotiation stage
Canada, China/South Korea (trilateral), Columbia, European Union (EU)
Source: Ministry of Foreign Affairs

Whereas the MAFF and the METI estimated the impact only on their respective concerned sectors, i.e., agricultural and manufacturing, the CAO calculated the impact on the entire economy. Those opposed to the TPP typically base their arguments on the figures provided by the MAFF, according to which, Japan's agricultural production will decrease by 4.1 trillion yen, bringing down the food sufficiency ratio from the current 40% to 14% and reducing the nation's gross domestic product (GDP) by 7.9 trillion yen.

Looking at these figures alone, many people may feel alarmed by the potential magnitude of the impact. However, though presented as the estimated impact of the TPP, these figures represent the impact of elimination of tariffs on 19 agricultural items all across the world. The MAFF also assumed that all of these tariffs will be removed immediately, whereas in reality, general practice is to allow a 10-year moratorium after an agreement is enforced. As such, loss amounts are apparently overestimated.

The METI estimates that Japan's GDP and employment in 2020 would be decreased by 10.5 trillion yen and 812,000 jobs respectively compared to the current levels if it fails to join the TPP. However, these figures are based on the potential impact on exports of Japan's three major manufacturing sectors--automobile, electrical and electronic appliances, and machinery--assuming that South Korea will enter into an FTA with China in addition to those with the United States and the European Union whereas Japan remains unchanged (i.e., staying outside of the TPP).

The CAO estimated and compared GDP figures for both the participation and non-participation scenarios, concluding that cumulative differences between joining and not joining the TPP would amount to three to four trillion yen in GDP over the next 10-year period. This translates into several hundred billion yen in annualized terms, representing less than 0.1% of GDP. However, some people say that this underestimates the impact, for instance, noting that the liberalization of investment and the greater mobility of people resulting from participation in the TPP have not been factored in. In any event, the government needs to provide useful and easily comprehensible information adequately so as to enable people to make well-informed judgment on whether or not Japan should participate.

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With the Doha Round multilateral trade negotiations under the World Trade Organization (WTO) stuck in a deadlock, countries around the world are currently racing to conclude FTAs. Given this state of affairs, if Japan is to promote trade liberalization in the Asia-Pacific region, it has no choice but to do so through the TPP or under the framework of the Association of Southeast Asian Nations (ASEAN) +3 (or +6). In particular, the TPP aims to form a Free Trade Area of the Asia-Pacific (FTAAP) as its ultimate goal. If Japan remains on the sidelines, it would become unable to take initiative in the Asia-Pacific region. In order to avoid this, the participation in the TPP negotiations needs to be reconsidered quickly and from a more strategic point of view.

First, Japan must recognize the importance of getting involved in the rulemaking process of the TPP. Since it aims to achieve a higher level of liberalization as compared to other FTAs, the outcome of rulemaking negotiations for the TPP will strongly shape the future trade system in the Asia-Pacific region. Therefore, it is crucially important for Japan to engage actively in the rulemaking from the stage of negotiations.

Second, participating at an early stage often renders greater bargaining power in negotiations relative to those joining later. Indeed, it has been pointed out that South Korea and China changed their attitudes significantly after Japan announced its intention to enter into preliminary negotiations with respective TPP members in preparation for joining the TPP negotiations. China, which had long insisted on the ASEAN+3 framework so as to exclude influence of India, began to say that it would not mind considering the ASEAN+6 framework advocated by Japan.

Roughly put, the United States is taking the lead under the framework of the TPP and China in the ASEAN+α frameworks. For both of them, it is crucial to bring Japan, a major economic power, into their own leagues. Thus, if Japan successfully demonstrates its strong commitment to FTAs with an eye on both the TPP and the ASEAN+α, it may be able to put itself at a relative advantage in negotiations for both. With Russia's accession to the WTO adding further uncertainty over the course of the Doha Round, Japan must make and push forward trade policy from a more strategic point of view.

>> Original text in Japanese

* Translated by RIETI.

August 28, 2012 Nihon Keizai Shimbun

September 19, 2012