Japan’s Dilemma On The Trans-Pacific Partnership – Analysis

By K.V. Kesavan and Kartikeya Khanna

As signatories of the North American Free Trade Agreement, it comes as no surprise that Canada and Mexico have been allowed to enter talks on negotiating the terms of the Trans-Pacific Partnership (TPP). This leaves Japan as the only prospective member which has not yet been formally inducted into the negotiations, the next round of which is taking place this week.

Although Prime Minister Yoshihiko Noda had expressed a desire to join what has been hailed as a 21st century multilateral trade agreement, his beleaguered government is facing immense domestic pressure in the lead up to what is set to be a difficult election period. First there will be the intra-party presidential election where Noda may face tough competition from some of his rivals, following which he will have to contest the general election for the House of Representatives. Noda must also formulate a new energy policy for Japan towards reducing dependence on nuclear energy, following the Fukushima tragedy last year. His government is also dealing with the resurgence of maritime territorial disputes with both South Korea and China. Thus it is unsurprising that Noda has declared that no decision will be made on Japan’s role with the TPP, and that joining the negotiation process before 2012 has become unrealistic, knowing that either decision on the TPP could adversely affect his and the DPJ’s electoral prospects.

Amongst the opposition, the Liberal Democratic Party has advocated an anti-TPP stance. LDP already has the majority in the upper house, and a victory in the election would not serve well for Japan’s position on the TPP. Osaka Mayor Toru Hashimoto’s new political party, the Osaka Ishin no Kai, favours the TPP and has refused to form a coalition with former DPJ member Ichiro Ozawa’s People’s Life First party many of whose members are from rural districts and oppose Japan’s involvement in the agreement.

Multilateral trade agreements can often be difficult to negotiate, with a range of political and economic systems acting as a barrier to assimilation. Similar economies will see each other as rivals and competitors for the same markets, and differing economic structures such as privatised ones in Singapore, as opposed to state controlled ones in Vietnam, could prove to be difficult to integrate. Japan has a modern economy, but it still has certain sectors that are not fully liberalised. The TPP aims to achieve a high level of liberalisation of trade among member economies through the elimination of trade barriers such as tariffs, customs and import duties. This extent of liberalisation has both negative and positive consequences for Japan.

The government is facing resistance from the agricultural sector which is a heavily protected part of the Japanese economy with an 800% tariff on imported rice. The sector possesses a powerful lobby and along with the related fisheries and forestry sectors has complained that enabling international competition will ruin the domestic market. They have also managed to rope in the housewives and consumer associations who argue that this change will compromise domestic regulations and food safety standards.

However some pro-trade liberal economists in Japan argue that international competition is exactly what Japan’s ageing agricultural sector needs to initiate land reforms to allow farmers to sell idle land to larger scale operations in order to boost productivity. They also argue that the opening up of the agricultural sector would diversify Japan’s food supply.

Masahiro Kawai, the CEO of the Asian Development Bank Institute, believes that Japan can profit from developing an industry out of its healthcare sector, since its medical institutions have very high standards and already attract ‘medical tourists’. However Japan’s medical associations oppose the introduction of market fundamentalism into medical services because they fear the collapse of the public health insurance system. Another study conducted in America shows that the removal of the 2.5% tariff on Japanese vehicle exports could cause an increase by more than 100,000 units or 2.2 billion $ annually for Japan’s automobile sector.

The opening up of markets such as Mexico, Peru and Chile to Japanese exports too is seen to be a factor promoting the agreement. The most resounding argument in favour of the TPP is the fact that it is seen as a pioneering economic agreement and, although it is still under construction, it may go on to shape the trade rules for the world in the future. Additional studies have shown that missing out on the TPP would imply that Japan would lag behind in capitalizing on a market expected to grow by about $7.7 trillion.

Economically, the benefits of membership in the TPP seem to outweigh the costs, but there is an underlying geopolitical issue that has important consequences. Japan’s long term strategic ally, the United States of America, is the dominant player in the partnership, although its president has long favoured a multilateral approach towards trade, many believe that it is pushing its economic principles onto other member states. However, certain economists have asserted that being a major economic power, Japan would have enough clout in the negotiation procedure to look out for its own interests; more importantly is the impact the TPP will have on Japan’s economic relationship with China.

China and Japan share a deep economic relationship and although its military modernisation has generated anxiety in Japan, China is the destination of more than 20% of all Japanese exports. Japan is also a key source of Foreign Direct Investment into China. Though the United States has always maintained that the TPP is open to China, the extent of liberalization it proposes would greatly compromise China’s ideological identity. Thus the partnership serves to compete with China’s economic interests rather than be complimentary.

Ideally Japan needs to achieve a balance in its economic relationships by pursuing multi-lateral agreements with its immediate neighbours as well as the US led TPP, playing the critical role of a much needed fulcrum in the region. As America competes to offset Chinese influence in Pacific Asia, Japan must be the bridge between its long-term strategic partner and its largest economic partner. It is amidst this precarious geo-political situation that PM Noda has stalled the decision, knowing that he cannot afford to antagonise either the US or China. Noda is also aware that a decision of this scale cannot be made by a government whose popular support is diminishing and facing the emergence of a new political force whose popularity is rising.

(Prof. K.V. Kesavan is a Distinguished Fellow and Kartikeya Khanna a Research Intern at Observer Research Foundation)