Focus of the TPP Negotiations: Be aware of "global rules"

Faculty Fellow, RIETI

The recent round of negotiations for the Trans-Pacific Partnership (TPP) was held in Malaysia from July 15-25, 2013. Japan, which was granted approval to join the talks from July 23, was finally able to participate in the final stage of the TPP negotiations. In devising negotiating strategies, it is necessary to clarify the kind of agreement that entails the TPP.

First, what is the essence of the TPP? It is a trade agreement. Major trade agreements conventionally have been the World Trade Organization (WTO) agreements and bilateral economic partnership agreements (EPAs). It is important to note that although the TPP is an EPA, it is a multilateral EPA that is to be contracted by multiple countries.

Covering 159 countries and regions, WTO agreements mandate all members to observe the rules of trade and ensure market access for other members by setting upper limits on tariffs and adopting other measures. However, the move toward establishing WTO trade rules and deepening market access has stalled due to stagnation in the Doha Development Agenda negotiations, which began in the early 2000s. Rules and market access issues under the WTO agreements have remained unchanged since the WTO's establishment in 1995.

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The expansion of economic activities requires new international rules and deeper market access. To make up for the stagnation in the WTO negotiations, many countries have begun to conclude bilateral EPAs and free trade agreements (FTAs) in the new century. Since bilateral EPAs are conditioned on tariff elimination in principle, these agreements facilitate market access on a bilateral basis, but are ineffective in accelerating the move toward global trade rules, with the exception of investment rules.

Meanwhile, multilateral EPAs can also facilitate market access like bilateral EPAs but in a different way which will be described later. The more there are of partner countries, the stronger that multilateral EPAs can push for establishing global rules. In this respect, multilateral EPAs are compatible with the current status of global corporate activities.

For much of the 20th century, companies conducted all production activities within a single country. Final goods produced in the country were exported overseas and consumed or used as production goods in the importing countries. Such operations occasionally resulted in the type of trade friction that occurred between the United States and Japan in the 1980s. Today, however, many companies have adopted the supply chain business model, in which optimal intermediate goods purchased from multiple production bases located in different countries are assembled into final goods in China or other countries efficiently located near the consuming regions and are then sent to the markets. As a result, trade in intermediate goods currently represents more than 50% of non-fuel merchandise trade.

For companies selling final goods, constructing an efficient supply chain is crucial to gaining a competitive edge. For manufacturers of intermediate goods, efficiently supplying high-quality materials in order to become a player in a supply chain is of utmost importance.

Facilitating supply chain efficiency is difficult in bilateral EPAs. Products are eligible for tariff elimination if the value added in one partner country constitutes, for instance, at least 40% of the value of the product. However, products manufactured using intermediate goods produced in more than one country are not subject to tariff elimination, unless the local value added in each country exceeds 40%. For multilateral EPAs, on the other hand, such products are eligible for tariff elimination if the total of the local value added in member countries accounts for at least 40%. Promoting the harmonization of laws among the countries where production bases are located is also a possibility.

Many companies store final or intermediate goods in a certain country (for example, in Singapore) and, as needed, split up the initial consignment into sub-consignments to transport to the importing country where the products are needed. Under bilateral EPAs, products directly transported from the exporting partner country to the importing country are subject to tariff elimination (direct transport rules). This means that if products are transported from Country A to Country B via Country C, companies that export or import the products cannot benefit under the terms of the EPA between Countries A and B. If the EPA is a multilateral one that covers all three countries, the companies will not face such disadvantage.

To conclude, multilateral EPAs can contribute greatly to the improvement of supply chain efficiency. Since the Asia-Pacific region to be covered by the TPP has built a deep network of supply chains, the TPP will obviously facilitate more efficient supply chains.

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In discussions concerning tariff elimination under the TPP, such expressions as "defense" and "offense" are often used. Although this defense-offense perspective is necessary to some extent, simply viewing blocking tariff elimination in your country as defensive and eliminating tariffs on imports in other countries as offensive, given the characteristics of supply chains, is insufficient. Eliminating tariffs will result in lower manufacturing costs in the production base, a player in the supply chain, as the abolition of tariffs on intermediate goods will help enhance efficiency and attract foreign investment.

Many multinationals and numerous production bases involved in supply chains operate in Japan. Creating an environment in which multinationals opt to set up their headquarters in Japan is crucial to building an efficient supply chain. Furthermore, ensuring that the production bases for intermediate goods located in this country are included in supply chains that are spread across the Asia-Pacific region is important.

For those multinationals, it is a matter of critical importance whether or not they can benefit from a reduced cost burden resulting from tariff elimination or reduction among partner countries, and also whether an environment exists that enables more efficient business operations in their production bases. It is often said that Japan needs to draw in overseas demand through the TPP. This can only be achieved by retaining and attracting more headquarters and production bases that perform supply chain management and other similar business activities.

Improving supply chain efficiency has been widely acknowledged as necessary. The United States has set forth more efficient supply chains as one of the goals of the TPP. Other examples include new initiatives under negotiation such as the Regional Comprehensive Economic Partnership (RCEP) in Asia, and across the Atlantic Ocean, a U.S.-Europe FTA known as the Transatlantic Trade and Investment Partnership (TTIP), which is essentially a multilateral EPA.

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As long as the WTO has not carried out its original function, the rules that will be developed in the negotiation process for multilateral EPAs could become global rules, depending on, for example, how reasonable the EPA is and how many member countries have acceded the agreement.

For example, there are various types of country of origin certification: third-party certificates issued by a third-party body in the exporting country; certification issued by an exporter who is authorized by the exporting country; certification issued by an exporter, for which the exporter is held responsible; and certification issued by an importer, for which the importer is held responsible. If the TPP and the TTIP adopt the same certification system, it is likely to become a global standard.

The TPP, currently consisting of 12 countries, aims to expand its membership to include all of the countries and regions participating in the Asia-Pacific Economic Cooperation (APEC). Given that the United States, a party to the proposed TTIP, will join the TPP, the rules adopted under the TPP will probably develop into global rules in the future. We cannot safely say that the rules developed under the TPP will govern the 12 member countries only. Instead, we need to recognize a strong possibility that such rules will evolve into global rules.

In this regard, Japan's position is very important as it is participating in negotiations for not only one multilateral EPA, the TPP, but also three other ones: one involving Japan, China, and South Korea; the RCEP; and a Japan-EU EPA. As a participant in the process of developing global rules through multilateral EPAs, Japan can play an even more important role than the United States. When negotiating for the TPP, we should aim to establish rules that will qualify as global rules, taking into consideration other EPA negotiations.

How can we make Japan more attractive to multinationals? What rules and market access schemes will benefit them in establishing their headquarters or production bases in Japan? While companies are competing in global markets, the government is also facing tough competition with other countries on various EPAs in respect of the realization of a better investment climate and is aiming to achieve economic growth, which we should bear in mind.

>> Original text in Japanese

* Translated by RIETI.

July 11, 2013 Nihon Keizai Shimbun

August 5, 2013

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