Japan And The TPP: Cost-Benefit Analysis

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Following Prime Minister Abe Shinzo’s announcement at a press conference in Tokyo on 15 March 2013 about Japan’s readiness to take part in the Trans-Pacific Partnership (TPP) and his decision to notify Japan’s intentions to the TPP counties, Japan and the US concluded preparatory negotiations over Japan’s entry into the talks on 5 April 2013. The joint statement that was signed allows the US to maintain tariffs on Japanese autos for the time being.

Currently, the US imposes a 25 percent levy on imported trucks from Japan and a 2.5 percent charge on cars. As per the joint statement, it was agreed by both sides that the tariffs will be maintained for the longest period of time permissible under the TPP framework. This condition, it was felt, should be effectively better than that allowed under the free-trade agreement between the US and South Korea.

While the TPP negotiations are on, Japan and the US agreed to launch bilateral talks to lower nontariff barriers in such areas as insurance, investment, intellectual property rights, government procurements, food safety, and animal and plant health standards. The agreement of 5 April 2013 clears a major obstacle for Japan’s accession to the multilateral trade liberalization talks, as Tokyo requires the approval of all 11 TPP member countries, including the US, to take part.

Having cleared the first hurdle, the path is now open for the Obama administration to notify the Congress of its decision to permit Japan’s entry into the TPP talks, which in principle aims to abolish all tariffs among member states. It will take 90 days for Congress to make a decision about whether to approve the move. This means that Abe’s government would not be able to participate in the free-trade discussions until July at the earliest. The timing of Abe’s move on the TPP is significant because elections to the Upper House are due in July 2013 and Abe’s response to the electorate about Japan’s participation in the TPP will remain ambivalent and this will minimize risk of annoying the farm sector as this sector is afraid of facing the adverse impact.

But Abe is not shy of articulating his views that Japan’s entry into the TPP will serve Japan’s national interest and by participating in the negotiations, Abe hopes to lead Japan for a leading role in the TPP discussions. Abe is convinced that Japan’s participation in the trade talks will help strengthen Japan’s ties with democratic countries in the free-market system, most notably the US, and thereby well serve Japan’s national interests, including security.

What does it imply for Japan in the immediate context? Most likely, Japan will pay dearly to win US approval to join the TPP process by swallowing many of America’s demands during the negotiations. This is because unlike the protections for the US auto industry, no specific steps for protecting Japan’s agriculture sector were included in the joint statement. Tokyo also pledged to level the playing field for US insurance companies so that they can compete against rival “kampo” life insurance products offered by the government-backed Japan Post Insurance Co. It is a different matter that the government will not approve any new kampo products for at least several years to ensure that “fair competition conditions” are achieved. However, this announcement is seen as a concession to US demands in preparatory talks about Japan’s entry to the TPP talks.

The main concerns of the US about Japan’s participation are how to protect the US automobile industry and help US insurers expand their business in Japan. During Abe’s visit to the US in February, he and Obama released a joint statement saying “certain manufactured products” are “trade sensitivities” for the US. Though Abe administration is frantically trying to protect the domestic farm sector, particularly rice, dairy, sugar, wheat, beef and pork products, the agreement of 5 April recognized that agricultural products are sensitive for Japan. Japan’s transport ministry hopes to expand the auto import quota to 5,000 units per model a year from 2,000 under simplified procedures.

Of the 11 TPP member countries, Canada, Australia, New Zealand and Peru have yet to approve Japan’s participation in the talks. Japan however expects the four countries to soon give the green light. Vietnam, Malaysia, Brunei, Singapore, Chile and Mexico have already declared their intention to accept Japan into the negotiations. The final framework of the TPP is likely to be finalized and an agreement inked by the end of 2013. In view of less time available, Abe announced on 15 March Japan’s intention to join the negotiations and to begin lobbying the 11 members for their approval.

Japan has already obtained the support of Mexico. The visiting Mexican President Enrique Pena Nieto expressed his support for Japan’s participation in the TPP free-trade talks 8 April in Tokyo, in a joint statement that he signed with Abe to further expand the bilateral relationship between the two countries. Mexico is the seventh country to express support for Japan’s participation in the TPP talks. For Japan to join, all the 11 member countries need to approve Japan’s bid for membership.
Is TPP risky for Japan?

While the TPP is a major topic of discussion in Japan these days, it is not the case in the US. Few Americans even know about it or understand it. Like in Japan, the Obama administration is absorbed with other issues such as jobs and security. President Obama is saddled with calls for protection and “no exception to completely free trade” rule demand. His priority seems to be clinching a trade agreement with the European Union. The deal, titled the Trans-Atlantic Free Trade Agreement (TAFTA), would represent about 40 percent of global domestic product. It is relatively uncomplicated compared with other free trade deals like the North American Free Trade Agreement (NAFTA) and the TPP because the US and EU have comparatively similar economies. The US exports three times more to the EU than it does to China.

There is a fear in some quarter of the US that TPP negotiations would undermine NAFTA passed by the US Congress in 1993, and a cornerstone of North American trade policy. Clyde Prestowitz, the trade negotiator under President Ronald Reagan, warns that the TPP would result in a loss of 200,000 jobs in the US, and a million jobs in the Caribbean nations that have a similar free trade agreement with the US. The culprit: TPP member Vietnam with its low textile production costs.

Some US critics call the TPP plan “NAFTA on steroids.” New Balance, for example, which produces its shoes in the US, says that Vietnam would take away the jobs from Americans. America’s biotech industry is determined that any agreement must have strict “data-exclusivity” protection for biotechnology and biopharmaceutical drugs.

The primary principle of the TPP was based on classic textbook free trade theory. It aims to achieve completely zero tariffs, binding member countries to nonnegotiable clause. That approach has changed dramatically over the last several months. No wonder, the joint statement issued in Washington on 22 February during Abe’s visit categorically said because both countries have bilateral trade sensitivities, Japan “is not required to make a prior commitment to unilaterally eliminate all tariffs upon joining the TPP negotiations,” and “the final outcome will be determined during the negotiations.”

Even while the US-led TPP leapfrogs, the perceived US concession to Japan to original members Brunei, Chile, New Zealand and Singapore confuses more than clarifies. Even Australia seems to have problem about relaxation of strict adherence to a completely tariff free agreement. It is perplexing for the original members to understand the US stance since it joined later and quickly assumed the leadership role. It espoused a hard core complete free trade policy until recently, when TAFTA emerged as the focal point. Under the circumstance, it is difficult to conceive of any quick finalization of the TPP as the negotiating protocol is undergoing change to allow some exceptions for sensitive products.

How does the US accommodate Japan’s concerns? As it transpired from Abe’s March 15 announcement, he took quick action on TPP following his meeting with Obama in 22 February. On 27 February, the Liberal Democratic Party Policy Research Council and Research Commission on Foreign Affairs and Economic Partnership released the “Resolution on Japan’s Participation in the Negotiations of Trans-Pacific Partnership,” which calls for a careful approach toward Japan’s participation.

The document is a strong demand for the government to identify and protect national interests and to present clear strategies to do so. Tariffs on products of agriculture, forestry and fisheries were identified. The resolution states: “Sensitive products of agriculture, forestry and fisheries, such as rice, wheat and barley, beef, dairy products, and sugar, must be excluded from negotiation or subject to renegotiation for the purpose of maintaining their sustainable domestic production.”

Much howsoever Abe may articulate of protecting national interests, rushing into being a TPP partner may hurt the farm sector. Aligning itself with selected group of Asia-Pacific nations, as seems to be the case with the US, will displease other trade and FTA partners. The bigger question is the future of the Doha Development Agenda of multilateral trade negotiations that has been ongoing since 2001. “Entering into either giant regional free trade agreement will inevitably undermine the global, multilateral trading system as Japan, the U.S. and the EU have all benefited from the World Trade Organization.”

Why is then the US leaning heavily on Japan to be a signatory? It is not that the US is keen on Japan’s entry into the TPP framework because it would benefit the Japanese people but because Japan helps the US position as its “self-anointed role as world manager and defender”. Should Japan then remain free and in control of its own destiny? In an interconnected world economy, even that is difficult for Japan.

The question that begs an answer is: should Japan succumb to the US pressure and sign on to the TPP? Can Japan have the will power “to take advantage of what actually is an opportunity to take a strong leadership position in the region rather than acting like a pawn in this great chess game”? Can Japan afford to expose its agriculture and compromise its long held food security policy?

Agriculture is the real game player. The tough position in the LDP resolution regarding the TPP is the correct one because it is inconceivable that Japan loses what little remains of its food security. If there is significant reduction in tariffs on the commodities listed, Japan’s food self-sufficiency rate would be in danger of plunging from the current incredibly low 39 percent to about 13 percent. Japan’s entry into the TPP would mean that as much as 87 per cent of the food would be imported and therefore the impact on the agriculture industry will be huge. But Prime Minister Abe feels that Japan can simply solve the food security issue by restructuring its way into great economies of scale allowing it to compete in commodities in which it enjoys competitive advantages. The bottom line is that due to geography and lack of natural resources, the cost of production in nearly all agricultural commodities and the food-marketing chain will still leave it in a very high production cost position and this cannot be overcome regardless of how much the government initiates restructuring and subsidies. If in the event of Japan’s agricultural sector is strangulated because of TPP compliance, Japan risks being a food trade prisoner and given China being an agricultural superpower, it would facilitate China to emerge a major food supplier to Japan.

Two related issues here are worth-mentioning: Notwithstanding the fact that the cost of rice production in Japan is six times greater than in China, China can still not match in agricultural knowledge with the Japanese. The problem of “trade prisoner risk” will still remain as there would be potential of disruptions in securing specialized commodities even from other countries specializing in those products. The biggest problem will arise if a producing country suddenly becomes bellicose with the other and halts food shipments or shuts off exports due to production problems. Abe simply cannot ignore this aspect and work strongly to implement the LDP resolution on national interests by backing the country’s multifunctional agriculture based on a system of small and medium-size farms.

In voicing the sentiment of the farm sector, a group of university professors urged the government not to take part in negotiations on the TPP, saying the country may not be able to protect its national interests. The group submitted to Prime Minister Abe, as well as farm Minister Yoshimasa Hayashi, a petition against Japan’s participation in the negotiations and signed by over 800 members of the country’s academic community. According to Satoshi Daigo, a professor emeritus at the University of Tokyo, and Keio University’s Masaru Kaneko, Japan’s planned participation in the TPP framework may not only harm farming but also alter the medical system and food safety standards. According to them, although the US and Japan have concluded their preparatory talks for Japan’s participation, there is no guarantee that Japan can win “sanctuaries,” or exceptions to the TPP’s general goal of eliminating tariffs, through the bilateral dialogue. Though Obama assured Abe during his summit talks in February that joining the TPP talks will not require Japan to commit to completely end all tariffs, the truism is that Obama cannot guarantee exceptions for products deemed sensitive to Japan if such protections violate US laws. As mentioned earlier, Tokyo agreed to allow the US to retain the tariffs it imposes on automobiles and trucks imported from Japan effectively in exchange for the tariffs Japan imposes on sensitive agricultural produce.

Though it is too early to assess the impact of the TPP on Japan, it appears Abe has taken a huge gamble. How far he will be able to protect Japan’s national interests remains unclear but from hindsight it appears Japan will lose far more than it will gain, at least initially, from joining the TPP free trade deal. Though the US will maintain a 2.5 per cent tariff on cars and 25 per cent tariff on trucks for imports from Japan for the maximum period allowed under the TPP, the agreement announced on April 12 by the US did not specify when the tariffs will be scrapped. Though Japan hopes that they will be removed in about 10 years, it could take far longer.

The government argument is that the primary advantage for Japan to join the TPP is the prospect of tariff-free vehicle exports to 11 other prospective members, particularly the US. Japanese companies annually pay 470 billion yen ($4.8 billion) in export duties to the 11 countries and automobiles account for half the amount. Though Abe told a select group of Cabinet ministers on 12 April that his decision to join the TPP is “based on a farsighted policy” and that he has to fight to protect the country’s national interests, it remains unclear how he will ensure to protect the country’s domestic agricultural market with high tariffs and thereby achieve his aims.

As regards the insurance sector, Japan will not approve an application to introduce new products from Japan Post Insurance Co. for the time being. The company is a subsidiary of Japan Post Holdings Co., which is wholly owned by the government. The US has expressed concerns about Japan Post Insurance, with a nationwide network of branches, expanding into new areas on the back of government credibility. Japan Post Insurance has been preparing to underwrite cancer insurance policies and also considering handling medical insurance policies. In Japan, American Family Life Assurance, known as Aflac, controls 70 percent of the cancer insurance market. Aflac and MetLife Alico, another US insurance company, together account for 30 percent of the medical insurance market. Though the 12 April agreement said Japan and the US will continue discussions on insurance, as well as automobiles, in parallel with TPP negotiations, there are possibilities that the US could demand further concessions from Japan on these issues in future discussions. As it transpires, Abe is walking a tight rope and his stance on the TPP may have an impact on the future of the LDP. If the TPP proves to be beneficial to Japan as thought, Abe’s place in history shall have a special mention. If not, Abe will be consigned to history as one who bartered the country’s interests away for his own personal gains.

Dr. Rajaram Panda

Dr. Rajaram Panda, a leading expert from India on East Asia with focus on Japan and the Koreas, was formerly Senior Fellow at the Institute for Defence Studies and Analyses, and is currently Visiting Faculty at the Centre for Japanese, Korean and Northeast Asian Studies, School of Language, Literature & Culture Studies, Jawaharlal Nehru University, New Delhi.

E-mail: [email protected]

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2 thoughts on “Japan And The TPP: Cost-Benefit Analysis”

  1. I would like congratulate Rajram Panda for excellent article on Japan and TTP. He has dealt with inner contradiction of TTP and the dilemma of Japan by the taking the US stance on the issue. As TTP unfolds the problems would mount. The member countries will take recourse. It is indeed a good article.

    Prof. T.P.Bhat

  2. Mr. Panda’s essay is generally very strong and well-informed, but his conclusion–that Japan will be a major “loser” from participating in the TPP–is not persuasive. It is important to recall that the main outcome of Japan’s joining the TPP is the establishment, in effect, of a Japan-US Free Trade Area, and such an FTA from Japan’s perspective is a major boon to the Japanese economy.

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