The TPP Needs Japan

Peter A. Petri
Brandeis University
Senior Fellow at the East-West Center
Member of the US Asia Pacific Council

This article appeared in Nihon Keizai Shimbun, November 8, 2010 (in Japanese)

The intense debate in the Democratic Party of Japan—on whether Japan should join the Trans-Pacific Partnership (TPP) trade negotiations, an initiative spanning nine countries on both sides of the Pacific, including the United States—has far-reaching implications not just for Japan but for the region and the world.

Many of us in the United States would warmly welcome a positive Japanese decision. By joining the TPP effort, Japan would reenergize the vision of a truly integrated Asia-Pacific economy, as proposed by the leaders of the Asia Pacific Economic Cooperation (APEC) forum in Bogor, Indonesia in 1994.

That beautiful, historic vision remains compelling: it’s hard to imagine a peaceful, prosperous world without a vibrant Asia-Pacific economy at its center. Yet, as leaders gather in Yokohama for the APEC summit this month, economic cooperation in the Pacific is more troubled than it has been for years.

Why the TPP is urgent

It’s easy to understand the source of the tensions: the global financial crisis and shifting economic power among developed and emerging economies are creating new political and economic frictions.

An integrated Asia-Pacific economy benefits all economies in the region, and every country in the region has a large stake in containing the divisions. A good way to begin is to refocus attention on the Bogor vision and to develop stronger mechanisms for cooperation. That’s what Japanese leadership on the TPP could help to do.

Japan’s own economy is also at stake. Other countries have moved ahead of Japan on trade agreements. As Figure 1 shows, only 17 percent of Japanese trade is covered by existing trade agreements. By contrast, Korea has negotiated trade agreements not only in Asia, but also with the United States and the European Union.

The TPP agreement would double the share of Japanese trade under trade agreements, to around 35 percent. As the TPP expands into a 21-member Free Trade Area of the Asia Pacific (FTAAP) over time, that share would double again. The strategy would promote Japanese trade and economic growth, and reduce the risks Japan faces from trade friction and protectionism.

The TPP would also stimulate freer trade worldwide. The Doha Round is at an impasse and international trade, the major growth engine of recent decades, is under siege. The TPP would create new incentives for countries everywhere to work harder on global and other regional initiatives.

The TPP snowball

How would the TPP chart this path? The TPP builds on a 2005 trade agreement by four small countries, Brunei, Chile, New Zealand and Singapore. All were members of APEC and already quite open. What they really wanted was to initiate progress toward an APEC-wide agreement.

Their strategy began to pay off in 2008 when Australia, Peru, the United States and Vietnam expressed interest in joining the group and forming an eight-member TPP. This August, Malaysia became the ninth potential member.

By joining the negotiations, Japan could start a “snowball” that leads to much wider membership. After Japan, three more countries—Canada, Korea and Mexico, all with close ties to existing members—would likely join immediately or in a near-future phase.

And with 13 economies on board, the goal of engaging all 21 members of APEC (see Figure 1) would be within reach. In 2006, APEC leaders identified the FTAAP as their long-term objective and later asked their officials to find “pathways to the FTAAP.” By joining the TPP project, Japan could provide evidence that a speedy pathway exists.

The TPP promises to be much more than a conventional free trade agreement. The negotiators are working on a “21st century agreement,” addressing issues such as technology, services, standards and trade facilitation, and capacity building in less developed countries. By participating early, Japan could leave its own imprint on this innovative project.

Keeping China engaged

China, the world’s second largest economy, has been quiet about the TPP, neither criticizing it nor expressing an interest in joining it now. To be sure, some people inside and outside China will probably see a TPP agreement without China as an effort to isolate it.

That would be the wrong strategy and the wrong interpretation. The facts are—as many Chinese economists recognize—that China is not yet ready to agree to new, strict trade rules, and its participation would needlessly complicate the negotiation and passage of such an agreement.

But Asia-Pacific economic integration cannot be complete without China. China has benefited enormously from international economic integration and hopefully it will also see value in joining the TPP too. When China does join—ideally in years, not decades—it would likely become the agreement’s single largest beneficiary.

In the meantime, everything possible must be done to minimize suspicion about the TPP. The agreement should aim to reduce trade tensions and uncertainty, and that requires a commitment to an open, comprehensive trading system in the end.

One way to reduce suspicion is to maintain transparency and ample communication with future members. Another is to include a welcoming accession clause in the agreement that will permit new members to join easily when they are ready. A third is to set standards that are high, but not so high as to be unattainable by Asia’s emerging economies.

It is a very good sign that the nine countries already involved in the negotiations have arranged to brief potential members, including Japan as well as Canada, China and the Philippines, in Yokohama later this month.

Japan and the TPP

Of course, Japan should not start the TPP snowball just for the sake of partners—there must be direct Japanese gains. In fact the gains are likely to be significant—the Japanese cabinet office estimates benefits of around 3 trillion yen per year. Preliminary estimates by my colleagues and me suggest even larger gains, assuming eventual progress toward the FTAAP.

The economic logic behind these calculations is clear. The industries of a highly advanced economy such as Japan’s depend on good relationships with low-wage suppliers, high-income markets and complex international production chains. The “21st century” TPP would strengthen exactly such linkages with Asia and the Americas.

It is worrying that the debate in Japan appears to be focusing instead on how the agreement might affect sensitive traditional products, mostly in agriculture. Those of us abroad cannot judge the politics of this issue, but we can nevertheless hope that solutions will be found.

Some solutions will emerge in the negotiations—it should be possible to combine far-reaching liberalization with some political exceptions. (Academics have long argued in the U.S. that some flexibility will be necessary to make the agreement move forward rapidly.)

Other solutions will have to be found inside each country. Some producers will be hurt by change, and especially so if slow economic growth continues. They should be generously supported.

Yet the vast majority of Japanese people will benefit. Japan and the United States must adjust to the changing economic landscape by building the industries of the future. Those include industries in which Japan excels, such as biotechnology, information technology and the drivers of the low-carbon economy.

The gains from cooperation should kick in well before these industries mature. A renewed commitment to Asia-Pacific integration will boost confidence and investment in the region, helping to complete the recovery from the global crisis.

Japan is making headway in tense and difficult times, against huge challenges. Japanese officials have worked hard to make the Yokohama APEC meetings successful, and have already generated important new ideas for a regional growth strategy. Decisive action on the TPP would be a final “game changing” step forward—for Japan and the world.

Peter A. Petri

Peter A. Petri is the Carl J. Shapiro Professor of International Finance at the Brandeis International Business School and a Senior Fellow at the East-West Center in Honolulu. He has been a visiting professor at Keio University in Tokyo and Fudan University in Shanghai.

Appeared in Nihon Keizai Shimbun, November 8, 2010 (in Japanese)