Outcome of TPP11: Persuading the United States of the disadvantages of withdrawal

URATA Shujiro
Faculty Fellow, RIETI

Peter A. PETRI
Professor, Brandeis University

The Trans-Pacific Partnership (TPP) took five and a half years to negotiate, and was signed in February 2016. However, in January 2017, U.S. President Donald Trump signed an executive order to withdraw from the agreement, rendering the TPP ineffective. For the TPP to take effect, it must be ratified by a minimum of six countries which account for at least 85% of the 12 countries' collective gross domestic product (GDP). As it was not ratified by the United States, which accounts for 60%, this condition was unfulfilled.

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The TPP is a free trade agreement (FTA) comprising 12 countries which belong to the Asia-Pacific Economic Cooperation (APEC), including Japan, United States, and Australia. These countries account for 36% of the world's GDP and 26% of its trade, and it was considered a high possibility that, in the future, the TPP would become the world's trade rules.

Under the Trump administration, the United States' return to the TPP is unrealistic, and so with Japan and Australia taking leading roles, discussions on creating a TPP11 without the United States began in May. Trade negotiators of the remaining 11 countries have conducted repeated talks with the aim of securing agreement in principle at the Leaders' Meeting in November. There are many cases of demands for the freezing of provisions on which each country conceded due to requests from the United States. The suspension of some provisions, such as the data-exclusivity protection for biologic drugs, will be readily accepted by the countries, however, there are some for which opinions will differ, such as the limit on preferential treatment for state-owned enterprises.

There is a chance that New Zealand's new coalition government, which took office at the end of October, will request revisions regarding investment policy. The Japanese negotiating team is working positively and constructively toward a basic agreement, and through effective cooperation with Australia and other countries with the same idea, an agreement is expected to be reached.

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As the TPP11 negotiations advance, we conducted simulation analysis using a general equilibrium model to examine FTA policies which the United States and other TPP nations should adopt in the Asia Pacific region. We presented the results from the Peterson Institute for International Economics. In this paper, based on the simulation results, we consider the implications of TPP11 on the United States, and examine the FTA policy Japan should adopt.

The Table shows the effect of various FTAs on Japan, United States, TPP11 countries, and the world economy. We analyzed the difference in national income in 2030 depending on whether or not FTAs are formulated.

Table: Effect of an FTA in the Asia Pacific Region on National Income
Table: Effect of an FTA in the Asia Pacific Region on National Income
Source: Analysis by authors

The United States will suffer losses owing to its withdrawal from the TPP and from the establishment of the TPP11. The TPP is a comprehensive 21st century FTA, which, along with high level liberalization of reciprocal trade and investment between members, includes rules of fields which are not part of other FTAs, such as e-commerce, state-owned enterprises, labor, and the environment. Through trade and investment expansion between countries, the members can increase national income, however, owing to its withdrawal, the United States cannot reap such benefit.

If the TPP11 is formed, member countries will give preferential treatment to trade between each other, and reduce trade with the United States. Thus, the United States will suffer damage in the form of a decrease in national income. Furthermore, if the countries which expressed interest after the TPP agreement was reached (South Korea, Philippines, Indonesia, Thailand, and Taiwan), were to join and form a TPP16, the United States would suffer greater damage. The benefits of a U.S.-Japan FTA, in which the United States has shown interest, are smaller than for the TPP, and strong opposition in Japan from the agriculture and other sectors will make realization difficult. It is clear that a return to the TPP would be preferable for the United States.

For Japan, there are at least four reasons why the TPP11 should take effect early. First, the TPP11 in principle is a continuation of the TPP which had high level and comprehensive content, thereby contributing to the economic growth of member states. As sources of Japan's growth, the following factors can be raised: expansion of exports due to tariff reductions on trade of products and harmonization of product specifications and standards, improvement of resource allocation and productivity, and expansion of service trade and investment.

Second, the TPP11 will likely become a future FTA model. Highly liberal, open, and transparent, it will contribute to the construction of a stable trade and investment environment not only in the Asia Pacific region but also in other areas. Third, amid a strengthening tendency for many countries, including the United States, to take protectionist measures, the creation of a mega FTA, such as the TPP11, will curb such movements, and become a stimulus for other mega FTA negotiations.

The fourth reason is that the TPP11 will cause damage to the United States through export restrictions, and it will create a situation in which the United States returns to the TPP to avoid damage. The TPP11 must come into effect and be prepared for the return of the United States.

If the TPP11 discussions appear to yield an agreement, Japan and the other member countries should persuasively invite the countries which have shown interest, and work toward the expansion of the group. If the TPP16 is formed, not only will it increase economic benefits in each of the member countries, but also strengthen pressure on the United States to return to the TPP.

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The development of TPP11 discussions will stimulate other mega FTA negotiations, including the Regional Comprehensive Economic Partnership (RCEP) and the economic partnership agreement (EPA) between Japan and the European Union (EU). The establishment of these mega FTAs which exclude the United States will create an unfavorable situation for the United States in terms of trade, and will enhance the possibility of encouraging a return to the TPP.

The RCEP comprises 16 countries, including Japan, China, India, and Australia. Negotiations began in May 2013, but as there is a large disparity in the development levels among some countries, the negotiations are not progressing. However, regarding trade and investment, if a business environment which is based on highly transparent, liberal, and stable rules is established, the construction of a supply chain at the regional level by multinational corporations including those from Japan will become dynamic, and the East Asian economy will see further growth.

Japan is providing economic support, including technical cooperation to speed up customs operations, to the Association of Southeast Asian Nations (ASEAN) countries, which has an important position in the RCEP negotiations, and is working to advance talks. In addition to strengthening the cooperative relationship with like-minded countries, including Australia and Singapore, Japan must advance cooperation with main countries, such as China and India, in areas in which mutual benefits can be expected, and ensure an early agreement is reached.

Regarding the Japan-EU EPA, an outline agreement was reached in July. It is a comprehensive EPA which matches the TPP in terms of the high standard of trade liberalization and includes various rules. The creation of a mega market will not only bring great benefits to both parties, but also contribute to the construction of world trade rules. From now on, agreement regarding conflict resolution in the investment field must be reached, other remaining points of issue resolved, and early enactment achieved.

Hindering Japan's FTA negotiations is the protection of domestic agriculture. The opening of the agricultural market and its trade liberalization is difficult, and Japan cannot strongly urge its negotiating partners to open the market. The Japanese government's policy toward agriculture is to liberalize trade after progressing with structural reform and strengthening competitiveness, subsequently, liberalization has not advanced over the long term.

In preparation for damage caused by trade liberalization, such as productivity decline and unemployment, a safety net, which includes temporary income compensation and education and training provision, must be prepared, and the government must transition to a policy of pursuing trade liberalization while simultaneously conducting structural reform. Through such actions, the regeneration of the Japanese economy will be achieved, and Japan will be able to contribute to the growth of the global economy.

>> Original text in Japanese

* Translated by RIETI.

November 6, 2017 Nihon Keizai Shimbun

November 28, 2017