Two Months after APEC: Key Issues for Japan and TPP

By Tim Johnson

A rice farmer in Asuka, Japan. High import tariffs on agricultural products are one of several challenges to Japan's TPP entry. Source: filmmaker in japan's flickr photostream, used under a creative commons license.

At the APEC summit in Honolulu last November, Japanese Prime Minister Noda announced that “Japan will enter into consultations toward participating in the Trans-Pacific Partnership (TPP) negotiations.”

While “consultations toward participating” is hardly the firmest of commitments, the statement was hailed as “bold and historic” by U.S. officials and “remarkable, courageous and far reaching” by a former WTO chief.  Trade watchers are generous with praise because Japan’s inclusion would elevate the TPP from a modest trade agreement among the U.S. and an assortment of small and mid-sized countries to an ambitious regional deal that includes two of the world’s three largest economies. Japan is America’s 4th largest trading partner and its GDP is more than two times that of the other eight TPP partners combined. While most recent trade agreements in Asia have been limited in scope, the TPP is expected to address so-called “21st Century” issues, such as regulatory convergence, supply chains and state owned enterprises.  TPP partner countries hope that such a high-standard multilateral agreement can evolve into an APEC-wide Free Trade Area of the Asia-Pacific (FTAAP) and further trade liberalization worldwide.  Japan’s inclusion on these terms would advance this vision significantly.

The next step toward Japan’s entry into TPP negotiations consists of the ongoing bilateral consultations with each of the TPP partners.  Their bilateral consultations with the United States will carry the most weight and may pose the greatest challenges.  As the debate on the inclusion of Japan in the TPP gets underway, some key issues are taking shape:

1. Party politics in Japan:  Prime Minister Noda – Japan’s sixth leader in as many years – heads a divided DPJ and faces determined opposition from the LDP.  His announcement in Honolulu came after 50 hours of contentious and inconclusive party meetings.

Noda has simultaneously advanced a plan to address Japan’s national debt and exploding social welfare costs by raising the consumption tax from 5% to 10% by October 2015.  In response, nine Diet members left the DPJ to form a new party that will oppose the tax increase and TPP membership.  The LDP – also divided on the TPP – has refused to negotiate with the government on the consumption tax and has demanded new elections to send the issue to voters.

While Noda has been criticized for failing to articulate the TPP’s merits domestically, he deserves credit for addressing Japan’s economic malaise and its demographically-driven fiscal crisis.  Noda’s steadfastness in the face of internal dissent and opposition opportunism is impressive, but whether it is a winning political strategy remains to be seen.  New elections or a failure of Noda’s resolve could easily set back Japan’s TPP aspirations.

2. Japanese Agriculture:  Japanese agriculture enjoys heavy protection from competition.  High tariffs – most notably the 778% tariff on imported rice – have shielded farmers from pressures to modernize and consolidate their small plots to improve efficiency.

Long suffering Japanese households would be the greatest beneficiaries of liberalized trade in rice and other agricultural goods.  However, protectionist farm interests enjoy disproportional representation in the Japanese Diet, as well as the support of the Ministry of Agriculture and a large segment of the LDP.  While public opinion favors Japan’s entry into the TPP, entrenched agricultural interests may be too great to overcome.

3. Autos:  Improved market access would make TPP membership a clear win for Japanese automakers and other export-oriented manufacturers.  Advocates of TPP participation also see the agreement as an effective antidote to the hollowing out of Japan’s manufacturing base as companies increasingly move their production out of Japan due to trade barriers and an appreciated currency.

The U.S. auto industry, however, has also come out against Japan’s participation in the TPP, complaining that non-tariff barriers are the main reason Japanese car sales in the U.S. outnumber U.S. car sales in Japan by 200 to 1.  Many in Japan, however, would argue that U.S. automakers aren’t interested in selling cars to Japan, but are primarily motivated to preserve U.S. tariffs on light trucks (25%) and cars (2.5%).

After holding up the Korea-U.S. FTA for more than three years, auto industry concerns were eventually addressed by keeping current tariffs on cars and trucks in place for several years and exempting a fixed number of American automobiles from Korean regulatory specifications.  Whether similar concessions will be workable or effective in facilitating Japan’s entry into the TPP remains to be seen.  Arranging such treatment in a multilateral framework may prove to be more difficult if each TPP country begins demanding its own carve-outs.

4. Timing:  In light of these challenges, President Obama’s goal of completing the TPP agreement in 2012 is unlikely to be met if Japan is to join negotiations this year.  Even without Japan, the likelihood of Obama making a trade deal in the run-up to a presidential election is small and U.S. officials have already begun to tamp down expectations for concluding the agreement this year. One possible outcome would be for the current parties to reach a deal in 2012 or 2013 without Japan.  Japan could then come into a “TPP 2.0” a few years from now, once its domestic and bilateral issues with the U.S. have been addressed.

Regardless of the timing, Japan’s inclusion in the TPP conversation should be welcomed.  Japanese participation, however, raises the likelihood that the agreement will include significant carve-outs for autos and rice in order to achieve an agreement that accommodates the trade politics of Washington and Tokyo.

Tim Johnson is an attorney based in Washington, DC.  He was recently based in Tokyo and Singapore where he represented clients making investments across the Asia-Pacific.  He can be reached at timothynjohnson@gmail.com.

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