Japan's emerging role in regional free-trade talks

PHOTO: Japan's emerging role in regional free-trade talks

Early this month, leaders of the Asia-Pacific Economic Cooperation (Apec) members gathered in Indonesia's resort island of Bali to talk about integration of their economies. One of the most promising mechanisms to achieve this goal at this point is the Trans-Pacific Partnership (TPP), a free-trade agreement with 12 participants which accounts for 39 per cent of the world production and about one third of the world trade.

But high hopes for rapid progress faded when the TPP Leaders Statement noted simply that the negotiations were ''on track'' rather than ''substantively finished'' as earlier planned. One reason was the absence of US President Barack Obama. Initially scheduled to chair the meeting, Mr Obama is known to want the negotiations concluded by the end of the year.

Some TPP members also had lingering doubts. For example, Malaysian Prime Minister Najib Razak said he had ''a few areas of great concern'', and complained that some of the proposed provisions threatened ''the sovereign right of the country to make regulations and policies''.

Japanese participation

In March, Japanese Prime Minister Shinzo Abe announced that his country was going to participate in the negotiations for the TPP. Since these negotiations began in 2010, Japan was a latecomer and legitimately worried that its ability to influence the course of discussions was extremely limited. However, when Japan joined in the negotiations in July, it discovered that numerous critical and sensitive issues remained unsettled. Japan had an important mediating role, helping settle disagreements between the US and some reluctant Asean participants.

The most critical cleavages in the TPP negotiations lie between the United States demanding significant changes in areas such as intellectual property, investor- state dispute settlement, and state-owned enterprises and some reluctant Asean participants resisting such pressure. Given the lack of necessary resources and experiences of engaging in sometimes painful trade talks with the world's No. 1 superpower, it seems to have been difficult for smaller TPP members to come up with highly technical but politically tenable counter proposals to the US demands.

Japan, on the other hand, has both the experience and the political clout to engage in tough negotiations with its American friends leading to mutually acceptable settlements.

Despite some difficulties that the negotiators face, the TPP will definitely bolster economies in the region. According to Messrs Peter Petri, Michael Plummer and Fan Zhai, who have conducted quantitative assessments of different free-trade arrangements in Asia, Japan will receive 2.2 per cent income gain, or US$119.4 billion (S$148 billion), from the TPP in 2025 when fruits of liberalisation are fully exploited.

It will gain from cheaper imported goods and services, lower barriers to its exports, easier access to markets of emerging economies for Japanese business, and better protection of intellectual property rights.

The Japanese will have access to cheaper agricultural products, and Japanese exporters will be able to compete more effectively in the US market with South Korean rivals, who already enjoy the benefit of the Korea-US Free Trade Agreement (FTA).

Region-wide benefits

The benefits of the TPP are not limited to Japan. According to Messrs Petri, Plummer and Zhai, the TPP will produce the aggregate income gains of 1.1 per cent, or US$374.6 billion, for its member countries in 2025. Smaller economies such as Vietnam and Malaysia will receive the largest percentage income gains - 13.6 per cent and 6.1 per cent respectively - from preferential access to the US and Japanese markets. Larger economies will benefit most in terms of absolute income gains as well as long-term gains of enhancing their bargaining positions in the subsequent broader FTA negotiations.

Good medicine is bitter in the mouth, however. It is estimated that the TPP will reduce Japan's 11 trillion-yen (S$139 billion) agricultural and fishery production by 3 t r i l l i o n yen, assuming across-the-board and immediate elimination of all tariffs.

The National Federation of Agricultural Cooperative Association has therefore strongly objected to Japan's participation in the TPP, and the Japanese government has designated rice, wheat, beef and pork, dairy products and sugar as the ''five key items'' to be defended in the TPP negotiations.

Some observers are optimistic that Japan's concerns will ultimately be taken care of. Other important members have concerns. For instance, the US maintains 2.5 per cent and 25 per cent tariffs on Japanese cars and trucks respectively, and Vietnam imposes 83 per cent tariff on cars.

Canada looks to block the influx of dairy and poultry products from the US.

In fact, Japan and the US have already agreed that US tariffs on Japanese motor vehicles will be phased out very slowly over a long period of time. Japan is not alone in seeking exceptions to the principle of removing all tariffs.

Moreover, the Japanese agricultural sector needs fundamental reform regardless of Japan's participation in the TPP. The average age of full-time farmers has now reached 66. Farming acreage has shrunk by 25 per cent between 1960 and 2011. A massive 778 per cent tariff on rice has protected (and created) inefficient rice producers.

Fortunately, entrepreneurial farmers are on the rise in Japan. In a poll conducted by Nikkei in June and July, while 41.2 per cent of farmers were negative about Japan's participation in the TPP, 24.4 per cent were positive.

Forward-looking farming entrepreneurs actually regard Japan's TPP participation as a golden opportunity to undertake structural reforms in the agricultural sector. The Japanese government is pushing them to expand farming acreage and to continue to innovate in order to produce better products at lower costs and, hopefully, double the size of agricultural exports by 2020.

Falling real estate prices might encourage part-time farmers to concede their land to young and innovative entrepreneurs in the years to come.

Leading by example

Japan's decision to participate in the TPP seems to have produced a broader positive impact on other free-trade initiatives. Professor Fukunari Kimura of Keio University argues that the TPP negotiations have produced a ''domino effect'' in that non-TPP countries are encouraged to accelerate their own versions of FTA negotiations and/or participate in the TPP in order to avoid trade diversion.

In September, China and South Korea - both non-TPP members - agreed to liberalise import tariffs on 90 per cent of all trading items, partly to accelerate their bilateral FTA negotiations in order to cancel out negative consequences of the TPP.

Moreover, South Korea has informally expressed its interest in participating in the TPP.

If the TPP stimulates the regional trends towards deeper economic integration, its economic impact could be gigantic. Messrs Petri, Plummer and Zhai contend that the region-wide most inclusive Free Trade Area of the Asia-Pacific (FTAAP) would produce the aggregate income gains of 3.5 per cent, or US$2,052 billion, for Apec countries in 2025.

Since Japan is the only country that is a member of all the major FTA frameworks in the region - TPP, China-Japan-Korea FTA, Regional Comprehensive Economic Partnership, and FTAAP, it shoulders important responsibility of contributing positively to the creation of not only TPP but also broader high-quality FTAs in the years and decades to come.


The writer is associate professor at the National Graduate Institute for Policy Studies in Tokyo, where he is director of the Security and International Studies Programme. He is the author of North Korea's Military-Diplomatic Campaigns, 1966-2008.

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