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New Dynamics in U.S. Global Trade Strategy? A Reinvigorated Japan and the Trans-Pacific Partnership

Roundtable

July 11, 2013


Japan’s entrance as the twelfth member of the Trans-Pacific Partnership (TPP) marks a critical inflection point in the ongoing negotiations to create a free trade agreement (FTA) that spans the Asia-Pacific region. For the United States and other TPP members, Japan’s participation significantly increases the economic impact of any future deal—and the stakes for reaching a final agreement.

To explore the ongoing TPP negotiations and the broader U.S. trade strategy in the Asia-Pacific as part of its ongoing research on trade and economic policy, the National Bureau of Asian Research (NBR) convened a small group of senior policy experts on July 11, 2013, for a roundtable event in Washington, D.C. The event was supported by the Japan-U.S. Friendship Commission as part of an overall initiative to provide members of Congress and their staff with context on the importance of the U.S.-Japan relationship.

With the event held just days before the start of the eighteenth round of TPP negotiations in Malaysia—Japan’s first round in the negotiations—discussion focused largely on issues surrounding the country’s participation in the TPP and the implications for the United States, Japan, and the future of regional economic integration in the Asia-Pacific.

The briefing featured presentations from trade experts Jeffrey J. Schott, a senior fellow at the Peterson Institute for International Economics, and Mireya Solís, the Philip Knight Chair in Japan Studies and a senior fellow at the Brookings Center for Northeast Asian Policy Studies and an associate professor at American University. Solís argued that the TPP has re-energized Japan’s entire trade strategy and is being used to promote much-needed economic reforms within Japan. Schott argued that Japan’s inclusion has made the TPP negotiations more complicated but also more likely to succeed, as many countries see the tremendous value of signing onto a trade agreement that includes Japan as a member.

WHAT IS THE TPP?

The Trans-Pacific Partnership is a proposed multilateral trade agreement between twelve Asia-Pacific countries. The agreement aims to deepen regional economic integration in the Asia-Pacific, create jobs, and foster closer trade and investment ties. The twelve TPP members are Australia, Brunei, Chile, Canada, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam.

WHY DOES THE TPP MATTER FOR THE UNITED STATES?

With the stalling of the Doha Round of negotiations in the WTO, high hopes have been set on the TPP as a key vehicle for spurring deeper global trade liberalization through regional trade integration. For the United States, the TPP serves both economic and strategic purposes. As economic growth slows throughout industrialized countries, economists have recognized that much of the world’s current GDP growth is being generated in the Asia-Pacific. While the United States has long-standing commercial ties in the region, U.S. businesses risk losing out on future trade and investment opportunities should the United States become locked out of Asia’s emerging trade architecture. This architecture features a number of ongoing and overlapping bilateral and multilateral trade negotiations, including the TPP, the ASEAN-led Regional Comprehensive Economic Partnership, and the trilateral China-Japan-Korea trade talks. By joining the TPP, the United States will ensure that it maintains a robust trade and investment relationship with one of the most dynamic regions of the world.

On the strategic front, the TPP serves a number of U.S. diplomatic interests. The agreement represents the economic dimension of the U.S. “pivot” or rebalancing strategy toward Asia—an Obama administration policy initiative that aims to shift the United States’ foreign policy focus toward the Asia-Pacific, in recognition of the region’s growing strategic importance and changing geopolitical dynamics. Through its participation in the TPP negotiations, the United States seeks to reassure its partners and allies of its commitment to maintaining a peaceful and prosperous Asia-Pacific.

Finally, the TPP is viewed as a vehicle for establishing international standards on new and emerging “21st century” trade issues, such as e-commerce, investor-state dispute settlement, trade in intermediate goods, and rules on state-owned enterprises. While many of these issues have been addressed in recent bilateral FTAs, including the 2012 Korea-U.S. Free Trade Agreement (KORUS FTA), they have not yet been incorporated into a regional trade agreement. Thus, U.S. negotiators hope that the TPP will serve as a template for how future trade agreements within and beyond Asia can address such issues.

THE TPP NEGOTIATIONS: PROGRESS AND STICKING POINTS

Although TPP countries share a common vision for deeper regional economic integration, the twelve members differ greatly in market size, levels of development, and governance structures. Thus, it is not surprising that they have divergent interests on many trade and investment issues. For this reason, finding a winning deal—one that each TPP member can ultimately ratify—is a complex challenge for negotiators.

During the July roundtable, discussants argued that the TPP negotiations have made significant progress over the past year but that many outstanding issues remain as the negotiations enter their final phase. During his presentation, Schott observed that one important sign of progress is that the TPP has grown from an FTA between four countries—Brunei, Chile, New Zealand, and Singapore—to the supra-regional trade negotiation that it is today, encompassing twelve member countries, including the TPP’s newest member, Japan.

TPP negotiators have set an ambitious target deadline of reaching an agreement by the end of 2013. Although most of the technical issues of the agreement have already been discussed, Schott noted that many hurdles remain in traditional trade areas such as market access for rice, dairy, textiles and apparel, and footwear, as well as in nontraditional areas such as financial services, investor-state dispute settlement, and subsidies to state-owned enterprises. Schott explained: “In order to cut a deal, you have to narrow the sticking points to a relatively short list so that at the political level some trade-offs can be made and a deal can be put together.... Well the short list of sticking points is still too long.”

One participant suggested that some of the toughest issues to resolve could actually be between the United States and Vietnam over a short supply list for textiles and apparel, subsidies to state-owned enterprises, and labor standards. However, Schott argued that the negotiations could be concluded in the first half of 2014 if the leaders at the APEC Summit in October 2013 provide clear guidance about where progress must be made in the talks. “I think that is an ambitious, but doable path,” Schott said. Yet other participants noted that many of the most intractable issues in the negotiations are still open, and Japan’s recent participation could further delay progress in the talks.

JAPAN’S ENTRANCE TO THE TPP: A BOLD PLAY FOR ABE

Japanese prime minister Shinzo Abe surprised many observers when he announced in March 2013 that Japan would join the TPP talks. The country’s turbulent political environment and deeply entrenched vested interests, including within the politically powerful rice industry, have prevented progress during trade negotiations in the past. Given the mature stage of the TPP talks and Japan’s complex political environment, many analysts have expressed doubt that Japan would be able to accept the difficult economic restructuring required under the TPP.

Despite this, Prime Minister Abe believes that the TPP can play an important role in his larger agenda for domestic economic reform, nicknamed “Abenomics.” While reform has eluded Japanese leaders for decades, a number of challenges, including Japan’s aging population and energy insecurity in the aftermath of the Fukushima crisis, have made domestic reform all the more imperative. Given his high favorability rating in domestic polls, analysts suggest that Abe may be the first Japanese leader in recent history with the political power to take on vested interests and pursue a dramatic economic reform agenda.

For Japan, progress toward economic liberalization has already begun. During the consultation phase of Japan’s bid for participation in the TPP, President Obama and Prime Minister Abe agreed to a U.S.-Japan bilateral deal on motor vehicles, which must be completed before the TPP is finished. The two leaders also agreed to a separate deal on non-tariff barriers, including technical barriers to trade, which also must be completed before the TPP enters into force.

Even more surprising to some was the timing of Japan’s entrance into the TPP talks—on the eve of Japan’s July 2013 Upper House elections—which was a politically risky moment for Abe to announce unpopular domestic reforms. Despite this, Abe’s Liberal Democratic Party (LDP) gained an astonishing 76 seats, giving the LDP party a dominant position in both houses of the Japanese parliament. Yet while some have viewed the LDP’s sweeping electoral success as a referendum on Abe and his economic reform agenda, Solís and Schott cautioned that the LDP remains deeply divided on the TPP and that many members will be reluctant to compromise on tariffs over five categories of products: rice, wheat, beef/pork, sugar, and dairy. Schott added that, at the end of the TPP talks, Japan will likely agree to substantially reduce—but perhaps not eliminate—restrictions protecting most of these sensitive products.

A REINVIGORATED TRADE STRATEGY FOR JAPAN

Despite the political challenges ahead for Japan, Solís spoke optimistically about the new direction Japan is taking. “For the first time we’re actually contemplating the possibility that Japan can use its trade agreements to leverage domestic reform,” she said, suggesting that the TPP could provide the necessary external pressure to overcome domestic opposition to economic liberalization.

As Solís explained, Japan currently has thirteen FTAs, but collectively these agreements cover less than 20% of the country’s total share of exports. Furthermore, each of Japan’s current FTAs fails to meet the WTO benchmark of 90% market liberalization. Solís argued that the TPP is reinvigorating Japan’s broader trade strategy: “The TPP has been really a turning point in Japan’s trade policy. It has had major repercussions—positive repercussions—for the whole portfolio of Japan’s trade initiatives.”

Now, after a decade of trade talks with limited impact, Japan is pushing forward with renewed energy on all four of its ongoing trade initiatives. Known as the “big four,” these negotiations are the TPP, the trilateral Japan-Korea-China talks, the Regional Comprehensive Economic Partnership, and the EU-Japan trade talks. Each agreement would increase Japan’s market liberalization far beyond current levels. Underscoring the importance of these trade talks, Solís noted that collectively the big four have the potential to increase Japan’s FTA coverage from 19% to 77% of Japan’s total exports (see Figure 1).


Figure 1



In addition, Solís argued that Japan’s participation in the TPP provides a powerful enticement for other non-TPP countries—such as Korea, Thailand, and Indonesia—to seek membership in the future. As both Schott and Solís observed, it is no coincidence that Korea and China have shown greater interest in the negotiations since Japan began talking seriously about participating in the trade partnership.

Schott said there is a possibility that Korea could join the TPP talks as the thirteenth member before the end of the year. Korean officials are now debating the issue internally, while also consulting with the Office of the U.S. Trade Representative. Because many of the TPP standards under negotiation are similar to those previously agreed on in the KORUS FTA, Korea’s consultation process would be less cumbersome than that of Japan. Yet Schott cautioned that the odds of getting Korea to the table this year grow longer with each passing day.

Solís noted that China has also recently changed its rhetoric on the TPP talks from skepticism and even hostility to a more neutral, interested tone. This shift reduces the perception that the TPP is a U.S.-led economic strategy aimed at containing China and instead raises the possibility that China might even consider joining the TPP at a future date.

JAPAN’S PARTICIPATION: WHY DOES IT MATTER?

Given that Japan is the world’s third-largest economy and the largest Asian economy currently in the TPP, its participation adds credibility to the TPP talks and will increase the economic significance of any final agreement. Economists estimate that Japan’s inclusion will triple the gains from the TPP. For existing members, such as Australia and New Zealand, that have had limited success in negotiating bilateral trade agreements with Japan in the past, the prospects of greater access to the Japanese market sweetens the deal.

As for the U.S. perspective, Japan’s membership in the TPP is important for economic, strategic, and tactical reasons. Japan is the United States’ second-largest trading partner outside North America, yet the United States does not have an existing FTA with Japan. Cooperation on the TPP will strengthen the U.S.-Japan trade relationship and will reinforce diplomatic ties with a key ally in the Asia-Pacific, as well as an important base for U.S. troops. On a tactical level, Japan’s participation will improve Washington’s negotiating hand in the TPP talks themselves, as U.S. and Japanese interests align in many areas. Japan will likely support U.S. rules on high-standard issues such as trade in services, intellectual property protection, and state-owned enterprises. Although Japan’s protection of its rice and automobile industries remains a source of tension between U.S. and Japanese industry, in many other areas U.S. and Japanese interests are well aligned. Furthermore, in those areas where significant disputes remain, the TPP will provide a productive channel for working through past barriers and strengthening trade relations.

CONCLUSION

As the TPP negotiations enter their final phase, many issues remain on the table and much uncertainty remains. With Japan now on board as the twelfth member, the negotiations have become more challenging but also more meaningful. For Japan, the TPP could provide the necessary external pressure to overcome a long-standing impasse against reform and help the country achieve greater economic liberalization. For the United States, Japan’s participation increases the strategic and economic benefits of the TPP and validates the partnership as a powerful vehicle for spurring economic integration in the Asia-Pacific. While the outcome of talks remains uncertain, Japan’s participation has undoubtedly raised the stakes of reaching an agreement for all TPP members.


This report was prepared by Jennifer Steffensen, an Intern for NBR's Trade, Economic, and Energy Affairs.


Jeffrey J. Schott is a senior fellow at the Peterson Institute for International Economics.



Mireya Solis is the Philip Knight Chair in Japan Studies and a senior fellow at the Brookings Center for Northeast Asian Policy Studies and an associate professor at American University.

NBR would like to thank the Japan-U.S. Friendship Commission for their generous support that allowed this roundtable discussion to take place.