Global Trade | 28 May 2018
Japan’s critical leadership role on free and fair trade
by Shin Ito
On March 8, 2018, in Santiago, Chile, 11 Asia-Pacific countries signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which is a new trade agreement suspending the application of certain provisions set out in previous negotiations on the Trans-Pacific Partnership (TPP). The CPTPP, which accounts for 13.5 percent of the global economy and covers 500 million people, is a mega free-trade zone in the Asia-Pacific region.
Ironically, on the same day as the CPTPP was signed, the United States—which had formerly led the TPP negotiations but withdrew after President Donald Trump took office—decided to impose a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports, though it granted temporary exemptions to some countries (but not Japan) and postponed a final decision to June 1, 2018. In addition, President Trump signed a memorandum on March 22 directing the US trade representative to consider a range of actions to respond to China’s policies and practices involving the unfair and harmful acquisition of US technology, and on April 3, the United States announced that 1,300 Chinese goods would be targeted for a 25 percent tariff under Section 301. China on April 4 unveiled its plans to impose a new tariff on 106 US products, escalating the trade dispute between the two nations. Many countries could soon face the consequences of an increasingly protectionist world. The CPTPP will prove significant in countering this trend.
Significance of the CPTPP
Why is the CPTPP important? We need to consider the significance of the CPTPP from an economic and social perspective.
The CPTPP not only realizes high levels of liberalization but also sets high-standard trade and investment rules, which will improve the corporate business environment and contribute to the development of a seamless supply chain in the Asia-Pacific region. For instance, common rules of origin and customs procedures are applied in the CPTPP countries, which reduce costs and improve efficiency. Increasing trade and investment would also create new employment opportunities and promote innovation, which would help strengthen economic growth in the region and in the world. Once the CPTPP (also known as the TPP11, meaning the original parties to the negotiation minus the United States) goes into effect, it should generate an additional $147 billion in global income, according to an analysis by the Peterson Institute for International Economics (PIIE).
PIIE also estimates that together the TPP12 (which would include the United States), a bilateral US-Japan Free Trade Agreement (FTA), and the Regional Comprehensive Economic Partnership (RCEP), another multilateral trade negotiation that includes China, would generate an additional $492 billion, $120 billion, and $286 billion in global gross domestic product (GDP), respectively. The PIIE study concludes that larger regional and higher-quality free trade agreements would generate greater benefits than bilateral arrangements and less rigorous ones.
The CPTPP also protects and enforces labor rights and promotes high levels of environmental protection through obligating the CPTPP countries to adopt the International Labor Organization (ILO) Declaration and multilateral environmental agreements. These clauses contribute to ensure a level playing field and promote sound competition among corporations in the CPTPP countries. Corporations also are encouraged to commit to Corporate Social Responsibility (CSR) norms in labor and environmental areas detailed in the CPTPP.
From CPTPP to FTAAP?
The CPTPP countries are currently proceeding through their domestic ratification procedures, and the agreement is expected to come into effect in 2019 at the earliest. After the CTPP’s passage, realizing the Free Trade Area of the Asia-Pacific (FTAAP) is the next step for encouraging like-minded countries with interest in the CPTPP to enter it.
The United States announced the concept of the FTAAP at the Asia-Pacific Economic Cooperation (APEC) Economic Leaders’ Meeting in Hanoi, Vietnam, in 2006. The APEC member economies subsequently agreed to take concrete steps toward realization of the FTAAP at the 2010 APEC meeting in Yokohama, Japan, and reaffirmed the commitment to realize the FTAAP at the most recent APEC summit in Da Nang, Vietnam, in 2017. There are three schools of thought for developing a possible FTAAP agreement: (1) reaching an agreement by building on the TPP framework; (2) alternatively, building on the RCEP framework; or (3) using a compromise of both the TPP and RCEP frameworks. However, the best path forward is obvious considering the above economic and social significance of the CPTPP.
The US Position
The United States has not technically withdrawn from the FTAAP vision based on the APEC declaration. The Trump administration should recognize that entering the CPTPP is the best way to enhance Asia-Pacific market access, as well as develop free and fair trade and improve the investment environment in Asia-Pacific region. For example, in terms of market access under the CPTPP, Japan committed to gradually reduce the tariff rate on imported beef from 38.5 percent to 9 percent over 16 years; but since US beef will continue to face a 38.5 percent tariff, US beef exporters will be at a competitive disadvantage against CPTPP signatories like Australia. Furthermore, the CPTPP guarantees protection and liberalization of investment (for example, prohibiting performance requirements such as local content requirements or technology transfer requirements) and prohibits preferential treatment for state-owned enterprises. Applying these rules to the Asia-Pacific region would prove particularly helpful in combating China’s unfair practices, which is a priority for the Trump administration.
Although President Trump prefers bilateral FTAs with trading partners, as he indicated clearly during his recent summit meeting with Prime Minister Shinzo Abe of Japan, each bilateral agreement can potentially establish different rules, and a lack of common standards and rules makes it difficult for businesses to streamline supply chains in the Asia-Pacific region. If the United States remains outside of the TPP framework, China could try to increase its influence in the Asia Pacific by championing the RCEP framework or, more likely, leveraging its investments in infrastructure development via the Belt and Road Initiative and the Asian Infrastructure Investment Bank in an effort to shape the regional economic order.
Japan’s Leadership Role
Based on President Trump’s recent comments during a joint press conference with Prime Minister Abe, it is unlikely that the United States will come back to the TPP in the near term. The two leaders agreed at the recent summit to launch a dialogue on bilateral trade issues, though Prime Minister Abe stated that TPP is still optimal from Japan’s point of view. There could still be a way to reintegrate the United States into that regional economic framework, though the timeline for such a process is uncertain.
Through the new bilateral dialogue, Japan should continue emphasizing the significance of the TPP and encouraging the United States to reenter the negotiations. At the same time, Japan should realize the CPTPP and the Japan-EU FTA (negotiations concluded in December 2017) as soon as possible. US exporters would be left in a disadvantaged position relative to CPTPP and EU members in several Asian markets including Japan, an important reminder about the economic benefits of trade liberalization, which could lead to strengthening calls for reentering the TPP in the United States. Thus, Japan should play its leadership role strategically in international trade, and when the United States comes back to the TPP, both Japan and the United States should help realize the FTAAP vision.