Why the Trans-Pacific Partnership is important to the US and Japan

Thomas J. Donohue

Speaking before the American Chamber of Commerce in Japan (ACCJ) in Tokyo yesterday, Thomas J. Donohue, President and CEO of the US Chamber of Commerce, called for a swift conclusion to the Trans-Pacific Partnership (TPP) negotiations. In addition to substantially boosting US exports and creating thousands of American jobs Donohue said TPP had the potential to strengthen US commercial, strategic and geopolitical ties across Asia provided the high standards of the innovative trade agreement remain uncompromised. It also held out the promise to help reform the economies of member countries. To put those assertions into perspective, Beacon Reports explains why TPP is so important to the US and Japan.

TPP is a proposed regional free trade agreement (FTA) involving 12 nations that account for nearly 40 percent of global GDP and about one-third of world trade. It aims to expand market access by removing all tariffs and restrictions on traded goods and services between member countries.

The TPP FTA is being heralded as ’21 Century’, in the sense that it places high-level disciplines on standards, intellectual property, the safety of the environment, competition policy, government procurement and state-owned enterprises. While the outcome might not be everything negotiators hope for, if it happens − and there are encouraging signs that it will − TPP will represent a major accomplishment in international trade liberalization.

In addition to TPP’s ongoing multilateral discussions, member countries are also engaged in bilateral negotiations to eliminate non-tariff measures (NTMs). Wide-ranging issues, including corporate governance, are being discussed within the NTM parallel talks. Both sets of discussions are scheduled to conclude when TPP is finalized.

TPP started out as a commercial and ideological concept under the Bush Administration in 2008, when the US joined in the talks. In addition to increased US exports, the Administration was interested in spreading its variety of standards and regulations that drives the world’s economy. Founding member’s Brunei, Chile, New Zealand and Singapore earlier had formed TPP in 2005.

Many more countries in the Asia-Pacific region became interested in TPP around the time China started throwing its weight around over territorial issues. Some of those countries, Malaysia for instance, wanted to make certain the US was economically tied to the region, to try to balance China’s increasing assertiveness.

By October 2012, 11 members had joined the talks. The new members included Australia, Peru, Vietnam, Malaysia, Mexico and Canada. China was not among them, but holds ‘observer’ status. She and other countries will be able to accede to the agreement, once it is finalized and put into effect. (That’s another reason TPP is being called a ’21 Century’ agreement. FTAs typically lack an accession clause.)

Wider attempts to liberalize trade had previously floundered at the World Trade Organization in 2008 under the Doha Round. In September 2012, the Economist Magazine proclaimed the WTO’s ‘all or nothing’ trade liberalization grand-bargain, involving 159 member countries including the US, Russia and China, ‘dead.’

Believing smaller regional agreements were a more practical way forward, the US signed trade agreements with South Korea, Columbia and Panama − even during the Doha Round. The US’s FTA with South Korea, for instance, became effective earlier this year. That agreement will eliminate 95% of all tariffs between the two countries within 5 years. Individually, agreements like these have a limited impact on global trade liberalization. Those promoting free trade eventually hope to bundle them into a resurrected WTO grand-bargain.

TPP in December 2012 would not have yielded significant economic benefits to the US, as the economies of most member countries were small. Also, the US already had bilateral FTAs with many of them. To increase US exports, the US needed a big Asian economy to join the negotiations. Japan fit that bill.

Some people believe the US persuaded Japan to join TPP not to increase trade, but rather as part of the Obama Administration’s China containment policy − the ‘Asian pivot.’ Whatever the reality, TPP’s far-reaching market access measures, which include disciplines on state-owned enterprises, would probably have been rejected by China anyway. Japan’s entry into TPP was far easier to negotiate. Its ideology is already more or less aligned with the US. Both countries are democracies, each follows rule of law, and neither has high import barriers outside of agriculture, automotive and a handful of other sensitive sectors. Were Japan, the world’s third largest economy, to join the negotiations, TPP could make a big impact on trade liberalization. In short, the US wanted Japan to join TPP.

Japan too wanted ‘in’ on TPP. It’s economy had been stuck in a rut for the past 15 years. Its GDP growth rate had declined faster and farther than those of other advanced nations:

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The truth is that Japan needs to find ways to grow its economy. Larry Greenwood, who co-chairs the ACCJ’s US-Japan Regional Leadership Committee along with Thomas Clark, told Beacon Reports that TPP is a ‘big deal’ for Japan. “Her population is shrinking. The country needs to integrate with Asia to grow their economy. Japan sees its growth in Asia as being an important part of their future. Regional integration is key,” says Greenwood.

The timing of Japan’s accession to the talks could not have been better. LDP pro-reform leaders needed to find a way to leverage domestic, structural reforms which form the third arrow of Abenomics, Prime Minister Abe’s growth strategy. TPP was just the ticket.

Abe boldly committed Japan to joining TPP even before the Upper House elections of July 21st, 2013. Now, with the electorate firmly behind him and a three-year tenure to implement his policies, TPP has gained substantial momentum.

Those reflecting Japan’s corporate interests are also engaged. The Keidanren and the Japan Chamber of Commerce and Industry (JCCI) which respectively represent the interests of big and mid-sized Japanese firms, are supportive of TPP. The ACCJ’s Tom Clark says, “They are looking at the fact that sustainable growth is likely to depend on opening Asian markets to Japanese exports, as the demographics of Japan do not support robust growth domestically − and TPP will be an important tool to do that.”

The Administration still needs to dance around sensitive issues. Rice, wheat, beef and sugar are heavily protected markets here. According to Greenwood, government officials are no longer only saying they’re going to ‘protect’ Japanese agriculture. “They are now saying they’re going to ‘advance it’ as well.”

Insurance is also a sensitive topic. US insurance firms have been clamoring for greater access to Japanese insurance markets, where Japan Post, one of the world’s largest state-owned enterprises, has enjoyed an uneven competitive playing field. But Greenwood reports the Administration has changed its protective stance on Japan Post since the LDP assumed power. That will make reaching agreement in the talks easier.

Vested interests in the US have been more vocal. There, the US automotive lobby has been pushing for disciplines on currency manipulation as part of the talks. 60 senators and 230 members from the House of Representatives are currently in support of that idea. US car manufacturers are wary of increased competition from Japan, especially since the yen has weakened.

TPP, of course, is not just about the US vs. Japan. All 12 members of TPP have something that they are asking somebody else for. “It’s horse-trading, with complicated multilateral and bilateral talks going on at the same time,” says Greenwood. “It only ends when everyone is satisfied that they’ve got enough.”

Those involved are racing to lock in reforms and to finish talks before the end of this year. Chris Clague, a former trade policy analyst who now covers global macro issues for the Economist Intelligence Unit, told Beacon Reports the 31st December deadline is unlikely to be achieved. “That will be a trade negotiation miracle, considering that Japan just joined the negotiations in July,” said Clague. More realistically, he thinks TPP won’t be finalized until the middle of next year. Thereafter, resolutions reached by member countries need to pass through their respective legislatures. That will take even more time.

One stumbling block could come from Capitol Hill. Congress has yet to approve trade promotion authority, which would allow TPP to be fast-tracked in a thumbs-up, thumbs-down vote. Quips Clague, “If they can’t get trade promotion authority, the bill will get marked-up in Congress. Every single interest group is going to complain that they didn’t get exactly the right deal that they wanted. It will be a mess.”

That probably won’t happen. “If the US were to reject TPP after having begged Japan to come in,” argues Clague, “it might damage the bilateral relationship.” The reverse, he says, is also true. “Were Japan to back out of the negotiations because they were asked to make too many concessions, or should the Diet fail to pass the legislation, that would be disastrous for the bilateral relationship.”

It would also set back progress on trade liberalization for some time to come. “TPP and US FTA agreements are the only game in town in international trade,” says Clague.

That’s why Beacon Reports is optimistic that TPP is going to happen.

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