RIETI Report January 2011

Japan Must Act Quickly to Join the TPP Negotiations to Find a Realistic Solution

This month's RIETI Report features the argument that Japan must stop stalling and act quickly to join the ongoing Trans-Pacific Partnership negotiations for its own good, as failing to do so and keeping to the status quo will allow Japan to be left behind and is a prescription for the country's decline. KOTERA Akira, RIETI Faculty Fellow and Professor of the Graduate School of Arts and Sciences, University of Tokyo, discusses the recent debate taking place in Japan about whether or not the country should join the TPP, and points out how remarks made by both the media and politicians are misguided.

Professor Kotera also presents Japan's experience with economic partnership agreements (EPAs) and free trade agreements (FTAs), as well as discusses the fundamental principles of trade under the WTO with respect to free trade areas, economic-integration arrangements, and the concept of tariff elimination. In conclusion, Professor Kotera notes that in light of the economic globalization unfolding at present, Japan must enhance its attractiveness or it will be unable to compete against other countries in becoming a global production center. In order to avoid this situation and be able to take advantage of the growth and dynamism in the Asia-Pacific region, it is imperative for Japan to at least join the TPP negotiations as a first step, before moving on to a discussion or debate about whether to join the TPP itself.

This month's featured article

Japan Must Act Quickly to Join the TPP Negotiations to Find a Realistic Solution

KOTERA AkiraFaculty Fellow, RIETI
Professor of Graduate School of Arts and Sciences, University of Tokyo

There has been a vociferous debate over whether or not Japan should join the Trans-Pacific Partnership (TPP). However, media reports as well as remarks made by politicians concerned are often based on misperception. It is often said that a multilateral economic partnership agreement (EPA), which sets uniform criteria applicable to all members, tends to achieve a higher level of liberalization compared to a bilateral EPA, as the latter tends to provide more leeway to accommodate the special needs and circumstances of the countries concerned and hence a compromise in the degree of liberalization. Another often-expressed view is that it is difficult for Japan to join the TPP because it includes farm products that would be subject to liberalization.

Both of the aforementioned views can be easily shown to be wrong by pointing out three facts. First, the level of liberalization achieved through the ASEAN-Japan Comprehensive Economic Partnership Agreement (AJCEP), a multilateral agreement among Japan and the member countries of the Association of Southeast Asian Nations (ASEAN), is no greater than those achieved through the bilateral EPAs concluded by Japan. Second, all the bilateral EPAs Japan has concluded to date include the liberalization of agricultural products. Third, Japan's negotiations with Australia for concluding a bilateral EPA have been brought to a deadlock over the liberalization of agricultural products.

Almost all arguments about the TPP seem to look at the TPP only in the context of trade liberalization. But is trade liberalization all about the TPP? How should we define or understand the TPP?

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EPAs and free trade agreements (FTAs) are defined as agreements that include the establishment of a "free-trade area" (as defined under GATT article 24) to facilitate the trade in goods or "economic integration" (as defined under GATS article 5) in the trade in services. In the case of EPAs, various other elements such as investment liberalization and the protection of intellectual property rights (IPR) are also included.

Many countries around the world, including Japan, are members of the World Trade Organization (WTO) and thus, in principle, are obliged to treat goods and services from other WTO members on a non-discriminatory basis. However, as an exception to the principle of non-discrimination, WTO members are allowed to give preferential treatment to specific members by forming a free-trade area or entering into economic integration. Needless to say, the easy granting of exceptions would undermine the WTO fundamental principle of non-discrimination and thus the WTO imposes strict requirements in allowing its members to form a free-trade area or enter into an economic-integration arrangement.

The most important requirement imposed when forming a free-trade area is the elimination of tariffs on "substantially all the trade" of the members forming such an area (and a similar requirement applies to those entering into an economic-integration arrangement). Though not explicitly defined, the term "substantially all" is generally understood to mean "90% or more" and "all of the major areas" of the trade between the members forming a free-trade area. All bilateral EPAs that Japan has concluded to date are considered to be compliant with this agreement. In this regard, the TPP and a Japan-EU EPA, for which negotiations are expected to begin in 2011, are no different. However, unlike in the case of the existing EPAs of Japan, Asia-Pacific countries negotiating to update the TPP are geared to the lofty goal of achieving regional integration through the elimination of tariffs on all items in principle. This means that Japan's participation in the TPP hinges on whether or not it is ready to share this goal.

However, some reservations are needed here. The relevant provisions of the WTO agreements call for the elimination of tariffs on substantially all trade, not immediately, but within 10 years. And so long as tariffs on substantially all trade are eliminated within 10 years, the elimination of tariffs on other items may be postponed beyond the 10-year period. The choice of items upon which the tariffs will be eliminated immediately or those to which a 10-year grace period will be applied is subject to negotiation.

In the case of the Australia-United States FTA, which took effect in 2005, sugar and dairy products were excluded from tariff elimination and an 18-year grace period was granted for beef. In the relationship between the U.S. and Australia, the U.S. is protective of agricultural products. Also, in the course of TPP negotiations, the U.S. reportedly proposed to maintain this framework between the U.S. and Australia. This eloquently illustrates just how much reality differs from the slogan of tariff elimination. Thus, the question is whether or not and to what extent the Japanese government will be able to develop realistic solutions under the slogan of "elimination of tariffs on all items." In order to enable Japan to seek out such solutions, it is crucial to join the ongoing TPP negotiations.

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Conventionally, Japan has predicated its conclusion of an EPA on the premise that liberalization under the EPA is to be limited to the extent that the resulting impact is manageable without implementing additional budgetary measures. Back in 1995 when Japan joined the WTO, more than 6 trillion yen in government funds was funneled to rural farming areas in the name of helping domestic farmers to get over the impact of partial liberalization of Japan's rice market as agreed to in the Uruguay Round trade talks. The aforementioned premise for EPA conclusions has been in effort of not repeating this. Thus, Japan's existing EPAs provide for liberalization only to the extent compatible with this premise, and the EPA negotiations with Australia, which would not accept such limited liberalization, remain stalled.

However, Japan cannot afford to be left behind. With the WTO multilateral trade talks bogged down with no end in sight, regional trade agreements such as EPAs are now playing a key role in promoting the liberalization and rule setting of global trade. Keeping to the status quo is a prescription for decline. Japan would be left outside the global production and distribution network of companies, which in turn would accelerate the shift of manufacturing bases from Japan to overseas locations and result in a decline of Japan as an investment destination.

Given the scale and scope of economic globalization as we see it today, Japan must enhance its attractiveness and compete with other countries as a global production center. Otherwise, Japan will not be able to capture and take advantage of the growth and dynamism of the Asia-Pacific region, with the result leading to the country's downfall. Japan must break away from first-generation EPAs—those concluded without implementing impact-mitigation measures—and move toward second-generation EPAs, which will be accompanied by domestic measures to revitalize the agriculture sector (revitalization of the agriculture sector was not part of the 6 trillion yen Uruguay Round package) and designed to revive the Japanese economy. The TPP should be taken as a golden opportunity to achieve that end.

Furthermore, we must be aware that the TPP has not only economic but also political significance. The U.S., Chile, Australia, New Zealand, Vietnam, Singapore, and Malaysia have already joined the TPP negotiations, and it is said that Thailand and some other ASEAN countries are keen to follow suit. That is, many major Pan-Pacific countries that have close ties with Japan are already (or expected to be) in the negotiations.

The Asia-Pacific Economic Cooperation (APEC) forum has developed into what it is today under the initiative of Japan and Australia, bringing together Pan-Pacific economies under a single umbrella. However, predicated on a non-binding principle, the APEC by necessity remains a weakly united forum. The TPP is to bring the unity of Pan-Pacific economies to the next stage by adding a legally binding element.

APEC leaders' declaration adopted at the November 2010 summit in Yokohama, Japan included an explicit reference to the TPP for the first time, which has significant implications for Japan. More precisely, it means that Japan will drop out of the process of making a new order for the Pan-Pacific region unless it joins the TPP. This by no way can be the right choice for Japan.

It is exactly this point that we must keep in mind with regard to TPP negotiations. So far, talks about the TPP have been focused almost exclusively on liberalization. However, the TPP, which is a multilateral EPA among countries in the Pan-Pacific region, is also expected to play an important role in the setting up of rules for the region.

The function of bilateral EPAs is akin to that of a binding contract, with their roles generally confined to the facilitation of liberalization and economic cooperation between the two countries party to a particular EPA. In contrast, in the case of multilateral EPAs, rulemaking in the process of negotiations is crucially important, and all the more so when more countries are involved. As potential examples, we can readily think of new IPR rules that go beyond those under the WTO and multilateral rules for competition law, environmental protection, and labor issues that are not on the WTO agenda.

Needless to say, international rules—whatever they may be—are made to favor countries that played a leading role in the rulemaking process. Unfortunately, Japan's initiatives in the area of international rulemaking have been insufficient, as demonstrated by its focused effort to conclude bilateral EPAs. If it continues to stay out of the TPP negotiations, Japan cannot get involved in the creation of a new regional order and will be forced to abide by the rules made by other countries. Simply "gathering further information" on the TPP negotiations, as prescribed for in the government's Basic Policy on Comprehensive Economic Partnerships adopted on November 9, is nothing but meaningless.

We should be aware that joining the TPP negotiations and joining the TPP are two different things. There is no need for the government to be so naïve as to say that gathering further information is its intention at the moment. Instead, it should have declared its intention to "participate in the negotiations." The Japanese government needs to become better acquainted with the true nature of international negotiations. In this regard, too, it is imperative for Japan to quickly decide to join the negotiations without waiting for the conclusion of discussions on agricultural reform measures.

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Lastly, I would like to briefly touch on the relationship between the TPP and other regional initiatives toward EPAs under the frameworks of ASEAN+3 (Japan, China, and South Korea) and ASEAN+6 (India, New Zealand, and Australia in addition to Japan, China, and South Korea). The aforementioned APEC leaders' declaration also referred to the ASEAN+3 and ASEAN+6 initiatives. But both of those initiatives are still in a conceptual stage, absolutely different from the TPP for which negotiations are under way. Thus, Japan should first and foremost join the ongoing TPP negotiations and then, by using the TPP as leverage, seek to achieve its long-cherished goal of concluding the Comprehensive Economic Partnership in East Asia (CEPEA), an EPA covering ASEAN+6 nations.

>> The original Japanese "Keizai Kyoshitsu" column was published in the December 2, 2010 issue of the Nihon Keizai Shimbun.

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