The Trans-Pacific Partnership Dividend

Despite uncertainty in America, GR Japan’s Makoto Kumei says Japan remains committed to full implementation of the Trans-Pacific Partnership

The TPP is more than a trade deal. As well as tariff reductions, implementation stands to change rule-making on intellectual property rights, the environment, labor standards, digital trade, competition policy, state-owned enterprises, and investor-state dispute settlement. The TPP’s supporters say it would boost the business and investment environment in the Asia-Pacific region, while improving labor standards, and that it would also influence standards for future deals around the world.

The Japanese government thus sees implementation of the TPP as a major potential boost to the third arrow of Abenomics – structural reform – and is looking to sell the reforms as part of a wider international plan to help it overcome domestic resistance.

So despite deepening controversy in the US over the TPP, the Japanese government continues to see it as a key element of Prime Minister Abe’s growth strategy, estimating that it will boost real GDP by approximately ¥14 trillion (US$ 137 billion), or 2.6 percent, and create 800,000 jobs.

The geopolitical impact of the TPP is also potentially significant. The Obama administration has positioned the TPP as part of its “Pivot to Asia” – vital to maintain US influence in Asia-Pacific and bolster the US-Japan alliance. Some claim that it would constrain China’s ability to use its economic power to influence political developments in the region – it would, for example, reduce advantages enjoyed by state-owned enterprises throughout the region – an issue that has dogged Japan’s trade relations with China.

For smaller economies, the TPP raises the regulatory bar but promises access to the world’s first and third-largest economies. It has thus drawn interest from outside the 12 signatories, including South Korea, Taiwan and the Philippines. There has even been discussion about future membership from China.

According to Peter Petri and Michael Plummer of the Peterson Institute, the greatest benefits for the 12 original signatories will come from the removal of non-tariff barriers on trade in goods. Tariff reductions account, they say, for just 12 percent of the TPP’s value. For Japan, though, almost half of the gains expected will arise from the removal of non-tariff barriers on services and the impact on foreign direct investment (FDI) – Japan is predicted to be both among the largest recipients of inward FDI and one of the largest sources of outward FDI. The elimination of tariffs will nevertheless be significant for some Japanese sectors, including textiles and agriculture.

In a speech just after agreement was reached, Prime Minister Abe emphasized new export opportunities for Japanese companies (especially small and medium-sized enterprises) under the TPP, and highlighted the potential for exports of media content, agricultural, forestry and fisheries products, and infrastructure.

Despite the mention of agricultural exports, the attention of Japan’s farmers – who still punch above their weight politically – is on the impact of cheaper imports. When Japan entered the TPP negotiations, the agricultural lobby secured a guarantee that five key agricultural products – rice, beef and pork, wheat, sugar and dairy – would be sacrosanct. Although high tariffs on rice will stay, Japan was forced in the negotiations to double its quotas for Australian and US rice. Japan also agreed that tariffs on many beef and pork products would be reduced or phased out (subject to safeguards if imports rise too fast). In total, the immediate tariff elimination ratio on agricultural products is 51 percent on 2,328 products, with plans to eventually eliminate tariffs on 81 percent of those products.

Ever since the TPP agreement was reached, the debate in Japan has been dominated by discussion of how farmers can be compensated for these concessions. Despite eye-watering sums already offered by the government, there are competing calls from farmers, opposition and rank-and-file members of the ruling coalition for even more subsidies on even more generous terms. US analysis suggests that in some agricultural sectors, the Japanese subsidies already proposed are so large that they will undo 100 percent of the gains negotiated by the US.

Deal or no deal?

Whatever the potential impacts of the TPP, they can only be realized if the deal enters into force. This can happen in one of two ways – either two months after all 12 countries sign the agreement, or when at least six of the 12 countries, representing 85 percent of the total GDP of the original 12  – ratify the agreement within two years. Given the size of the Japanese and US economies – together they represent 80 percent of the TPP’s GDP; neither condition can be met unless both the US and Japan ratify.

Japan is likely to enact the required legislation this fall, leaving US ratification as the biggest hurdle. Congress cannot debate the TPP before the presidential election in November, leaving President Barack Obama just two months to push through a deal before stepping down in January 2017. However, in the US, many issues remain over content too, notably the concerns of the US pharmaceutical sector.

Hillary Clinton has made statements supporting the TPP in the past but now says she does not support it “in its current form”. Donald Trump has never supported the TPP and has said that if he wins, he would back out of the deal completely. Despite these questions, expect a major boost for the TPP in the form of Japanese ratification in the upcoming extraordinary Diet session.


Screenshot 2016-09-05 14.30.03This article appeared in an eight page special report produced in association with GR Japan. Click here to download the report