Japan Institute for National Fundamentals

March 23, 2012

Participation in the Trans-Pacific Partnership initiative will provide the chance to refresh the stagnant atmosphere of Japanese society and to revive the Japanese economy. Until now, Japan has passively accepted rules laid down by the international community, without actively contributing to rule-setting. This time around, participation in TPP negotiations could give Japan the opportunity to exercise leadership in setting international rules for the first time.

Japan’s announcement of an intention to enter TPP negotiations prompted Canada, Mexico, the Philippines and Papua New Guinea to express their wish to join the initiative, too, preparing the ground for the creation of an economic area accounting for around 40% of the global gross domestic product (GDP). It is obvious that even China can no longer afford to sit on its hands as the effort to promote trade liberalization gains momentum.

Japan’s postwar prosperity would have been impossible without the benefits of trade liberalization. For Japan to attain further economic development, we must create a fair and free economic area in the Asia-Pacific region. If Japan and the United States closely cooperate with each other on both economic and national security fronts, it will lead to sound development of the Asia-Pacific region. It will also make China think twice before ignoring international rules. The TPP is a strategic and landmark initiative that will serve these purposes.

Now is the time to discuss forward-looking strategies for reviving the Japanese industry as a whole, including manufacturing and agriculture. All of us Japanese must look beyond the issue of whether or not to join the TPP and work together for the cause of promoting Japan’s national interest.

【Proposals】

　
【Specifics of the Proposals】

1. Expand exports to and investments in foreign markets by joining the TPP and lay the foundation for the revival and sustainable growth of the Japanese economy.

The Japanese economy has continued to stagnate for the past two decades, and there is still no prospect for it to get out of the rut anytime soon. The weakness of the Japanese economy is evident from economic growth statistics, which show that between 1995 and 2010, Japan’s real GDP grew at an annual average rate of less than 1%.

Whereas Japan accounted for 9.2% of the global exports and 6.3% of the global imports in 1988, the Japanese shares fell to 4.9% and 4.6% , respectively, in 2008. According to statistics published by the World Bank, Japan’s trade dependence (expressed as the ratio of the value of trade to GDP) in 2009 was only 22.32%, the fourth lowest figure among the 178 countries surveyed, underscoring the rapid decline of Japan’s presence in the global economy.

Put simply, the cause of “Japan’s two lost decades” is a lack of overall demand. Japan has been in a state of demand shortage for the past two decades, leading to general price drops, and as a result, the country has remained trapped in prolonged deflation. Japan’s “demand gap,” which refers to the difference between the country’s actual demand and potential supply capacity, was minus 3.5% (meaning a considerable demand shortage) in the July-September quarter of 2011, and this gap was worth \15 trillion (in nominal terms) on an annualized basis, according to data compiled by the Cabinet Office.

Japan’s share of the global market has fallen because of the country’s rapidly aging population and the rise of emerging economies. Moreover, the Japanese economy has been battered by the Great East Japan Earthquake. Selling goods and making investments in the domestic market alone would not be sufficient for Japan to regain economic strength and maintain prosperity.

What Japan needs to do amid the declining domestic demand is to take advantage of overseas economic growth by strengthening partnership with growth economies around the world through the opening-up of the domestic market and the expansion of links with foreign markets. In short, regaining the ground lost in global competition over the past two decades is the path to the revival of the Japanese economy. The TPP will give Japan the chance to do that.

The TPP will provide a robust framework for Japan to achieve economic revival by expanding trade with Asia-Pacific countries that have strong growth potential. The TPP is intended not only to abolish tariffs but also to set common rules in a broad range of fields related to trade and investment. Participation in TPP negotiations will create a golden opportunity for Japan to push ahead with domestic reform.

By expanding trade with countries, mainly in Southeast Asia and Latin America, with which it has concluded free trade agreements (FTAs) and economic partnership agreements (EPAs), Japan can expect to benefit from their economic growth (the total value of the FTA and EPA partners’ expected economic growth over the next five years is estimated at nearly US$3 trillion). If Japan expands trade with the United States, Australia, New Zealand and Canada through participation in the TPP, it will be given the chance to also benefit from the growth of those economies, which is estimated to be worth nearly US$4 trillion. The total value of expected economic growth of these existing and potential free trade pact partners, at US$7 trillion, is equivalent to around 30% of the value of the global GDP growth in nominal terms expected over the next five years. In addition, if all of the five countries that announced their intention to participate in the TPP negotiations at the APEC summit in November 2011 ― Japan, Canada, Mexico, the Philippines and Papua New Guinea ― go on to join the TPP, it will create a huge economic area accounting for around 40% of the global GDP. Thus, participation in the TPP will increase Japan’s ability to achieve economic revival.

Given its relatively low tariff rates, Japan could prove to be the greatest beneficiary of the TPP if other TPP members lower their tariff rates. Moreover, it is obvious that China can no longer afford to sit on its hands as the effort to promote trade liberalization gains momentum.

In addition to expanded trade, increased investment ties with overseas economies are highly likely to lead to economic growth. Since 2005, a substantial portion of Japan’s current account surplus has been generated through investment, interest and other non-trade income (mainly earnings from securities investment and direct investment). However, Japan’s return on foreign direct investment in 2010, at 4.6%, was far lower than 8.9% for the United States and 7.5% for the United Kingdom and was the lowest among the Group of Seven major countries. Besides, Japan ranked only eighth in terms of both the value of such non-trade income received and the balance of foreign direct investment, although it is the third largest economy in terms of GDP.

These data indicate that Japan has not fully taken advantage of overseas economic growth compared with other developed countries. The TPP will provide a framework for Japan to create a virtuous circle of increasing direct investment in emerging economies leading to domestic job creation and rising wages.

If Japan is to take advantage of overseas economic growth in the form of trade and investment income and use increased income efficiently to achieve sustainable economic growth, the country needs to further expand trade. The Japanese government’s annual economic and fiscal report for fiscal 2011 (compiled by the Cabinet Office) pointed out that raising trade openness would contribute to a rise in the productivity of the whole economy and that FTAs and the TPP would be effective means to raise trade openness. As a medium- to long-term benefit of FTAs and the TPP, Japan will be given a broader range of import options as a result of the lowering of trade barriers, which will encourage redistribution of resources through competition, thereby improving productivity and advancing consumer interests.

In East Asia, a closely-knit network of supply chains has already been created across national borders and companies are vigorously conducting cross-border activities. When trade was the centerpiece of economic relationship, trade liberalization was the top priority. However, when non-trade ties have also grown strong, it is critically important to promote liberalization in the fields of service and investment, increase the protection of intellectual property rights and develop effective competition policies.

In that sense, it will be important for Japan to exercise leadership in setting international rules to pursue Japan’s national interest under framework of the TPP, which calls for a high degree of liberalization, if it is to maintain its influence over the planned creation of a huge economic area in the Asia-Pacific region in the near future. By participating in the TPP, Japan should exercise leadership in strengthening economic links within East Asia. That will be the way to achieve economic revival in line with Japan’s national interest.

　
2. The TPP will provide a golden opportunity for Japan to take part in the building of a global economic order with an eye to future creation of the Free Trade Area of Asia-Pacific (FTAAP), so participation in this partnership initiative is essential to Japan’s national interest. Strengthen the Japan-U.S. alliance and regain a leadership position in Asia through the process of having international rules entrenched in the market economy.

The maneuvering over the TPP should be regarded as part of an international power game in which countries seek to advance their national interest and exercise initiative with an eye to future creation of the FTAAP. Which means that Japan should manage its international trade strategy while keeping in mind that the ultimate goal is the creation of and participation in the FTAAP.

At the APEC summit held in Yokohama in 2010, the roadmap toward the creation of the FTAAP was set forth, and it was confirmed that the FTAAP should be pursued as a comprehensive free trade pact by building on the ongoing regional initiatives, including the ASEAN＋3 (ASEAN plus Japan, China and South Korea), ASEAN＋6 (ASEAN plus Japan, China, South Korea, India, Australia and New Zealand) and the TPP. If all APEC members participate in the TPP in the future, that will mean the creation of the FTAAP. In short, expanding the TPP will be the most practical way to create the FTAAP. Therefore, participating in the TPP and exercising leadership through involvement in the setting of common rules for East Asia from the beginning is essential to Japan’s national interest. Japan must not let this opportunity slip away.

In recent years, as Japan has been preoccupied with domestic political and fiscal affairs, it has lagged behind China and South Korea in exercising leadership and influence. Let us emphasize the importance for Japan’s future peace and prosperity of creating a free and open economic area in the Asia-Pacific region. Close Japan-U.S. cooperation on both economic and national security fronts and joint efforts to build a robust economic and trade framework will be essential to the sound development of the Asia-Pacific region. That will also counterbalance the rapid rise of China. In addition to taking back initiative in the Asia-Pacific region, Japan must also regain a leadership role in global economic and trade matters. Participation in the TPP could be a concrete, strategic step to do that.

If the FTAAP is to be launched as a highly effective initiative, it is essential to urge China to open its market as substantially as the TPP would ask for. However, China’s trade and investment rules remain opaque and the country is reluctant to open its market wider. Japan’s participation in the TPP will be the key to increasing the effectiveness of the TPP, an initiative which is intended in part to integrate China into the framework of international rules. Japan’s GDP is worth US$5.4 trillion (in 2010) and the value of its trade is US$1.4 trillion (in 2010; the combined amount of exports and imports). In light of these figures, it is evident that the importance of the TPP will dramatically change depending on whether or not Japan joins it.

Participation by Japan will create a free trade area accounting for 36% of the global GDP, strengthen the Japan-U.S. economic ties and ensure that Japan and the United States will exercise leadership in setting highly transparent rules. Japan’s announcement of an intention to enter TPP negotiations prompted Canada, Mexico, the Philippines and Papua New Guinea to express their wish to join the initiative, too, preparing the ground for the creation of a huge economic area accounting for around 40% of the global gross domestic product (GDP).

It is obvious that the United States needs Japan’s support in order to implement its China policy in an effective manner. If the two countries work together to counterbalance the rise of China, it will increase the importance of Japan as a partner. We must recognize that participation in the TPP will increase Japan’s bargaining power in its relationship with the United States and help to restore Japanese leadership and influence in Asia and the world.

　
3. Negotiations critical to national interest must be backed by the weight of wide public support. Promote debate on forward-looking strategies that will revive the Japanese industry as a whole, including manufacturing and agriculture.

What we must keep in mind when considering whether or not Japan should participate in the TPP is that all member countries, including Japan and the United States, would be required to revise some domestic economic policies and carry out structural reforms. It is in no way only Japan that will be required to make concessions or carry out reforms.

The most difficult part of TPP negotiations will probably be related to a comprehensive free trade pact that covers all of goods, service and agriculture. While Japan has already concluded EPAs with 16 countries, it has not yet signed such a comprehensive pact because of its lack of openness in the agricultural sector. All countries impose tariffs on farm products to protect domestic agriculture. However, the simple average rate of tariffs imposed by Japan on farm products (excluding the tariff rates for rice and other items for which there were no records of imports as of 1996), at 21.0% and the trade-weighted average rate, at 12.5%, are higher than the corresponding average rates for the United States, 4.7% and 4.1%, and the rates for the EU, 13.5% and 9.8%. Besides, whereas Japan applies tariff rates of 200% or higher to 101 items and rates of 100% or more to 125 items, the United States and the EU apply such prohibitively high tariff rates to only a handful of items. The various non-tariff trade barriers adopted by Japan also pose a problem.

The question we should ask is whether Japan’s farm protection measures have actually strengthened Japanese agriculture sufficiently to enable it to achieve sustainable growth in the face of free competition. Regrettably, the answer to that question is “no.” In recent years, Japanese agriculture has continued to decline.

The current dismal state of agriculture is evidence of the high price Japan has paid for its ineffectual farm protection measures. The ratio of farmers aged 65 or older has risen to about 60%, up from around 10% in 1960, while the ratio of part-time farmers who derive most of their income from non-agricultural jobs has climbed to around 70%, up from some 30%. The area size of abandoned cultivated land has tripled from the 1985 level to approximately 390,000 hectares. The food self-sufficiency ratio declined from 73% in 1965 to 40% in 2009. As the rice price in Japan has been kept at a high level because of the high tariff rate of 778%, the ratio of full-time farmers among rice growers is less than 40%, compared with 80% and 90% among vegetable growers and dairy farmers. Production adjustments made with no regard for market price have resulted in a distorted situation: even while the government is promoting cutbacks on rice acreage, surplus rice continues to be produced. In the meantime, Japan depends on exports for some 90% of its wheat supply.

After the change of government from the Liberal Democratic Party (LDP) to the Democratic Party of Japan (DPJ), the DPJ government has maintained the policy of reducing rice acreage and is cutting back more sharply. At the same time, it is strengthening protection by introducing a compensation program that hands out cash to all rice farmers willing to reduce acreage, without distinguishing between full-time and part-time farmers. If production adjustments through acreage reduction are discontinued and farmland is concentrated into the hands of full-time farmers, it will be possible to lower the rice price to the level of standard international prices. A lower rice price will also help to expand domestic demand. Japan must scrap the current farm protection policy that is distorting the structure of its agricultural industry in favor of a new policy that will expand production scales, promote new entry and raise productivity by introducing new technologies. Instead of protecting farmers by maintaining prices at a certain level through production adjustment, Japan should strengthen agriculture and turn it into an export industry by introducing a subsidy scheme that makes direct payments to full-time farmers, as the United States and the EU have done. Little additional cost will arise if the current compensation program for rice acreage reduction is replaced with the direct payment subsidy scheme. A new agricultural policy like this will help to foster full-time farmers on whose shoulders the future of Japanese agriculture can rest.

We should not expect Japan alone to be granted special exemption in agriculture or any other sector if it joins the TPP. However, trade pacts usually allow a certain degree of flexibility as to the timing of the implementation of agreed liberalization measures. In the case of the TPP, some countries could be granted a transition period of as long as 10 years. A transition period of 10 years would be sufficient for Japan to carry out structural reform of its agricultural industry. If Japan could not carry out the reform during that period, the prospects for Japan’s agricultural industry would be gloomy. It is obvious that Japan’s foot-dragging over market liberalization due to agricultural issues has made it difficult for the country to adapt its economy as a whole to the trend of trade liberalization. Participation in the TPP will in no way ruin Japanese agriculture. Rather, it will be the key to loosening the grip of vested interests, normalizing the agricultural product market and reviving the Japanese economy.

If we are to open up our country, we must set ourselves to carry out domestic reforms. To revive not only agriculture but also many other industries, we must improve their productivity and turn them into growth industries. Japan must join TPP and use it as a springboard to carry out reforms that prepare the country to endure the onslaught of free competition. That process will inevitably be accompanied with pains. However, if we fail to pave the way for future growth, the Japanese economy will remain stuck in the state of stagnation and lose the chance to achieve revival. Expanding trade with and investment in Asian countries with strong growth potential should be the centerpiece of efforts to revive Japan. We must find out how best to divide the pains of reform among the Japanese people and seek to join the TPP with a willingness to be bold in carrying out reform while making sure to be careful where necessary.

The key is political leadership in forging national consensus. The government needs to fully explain the fundamentals and significance of the TPP to the Japanese people. Besides, the government should make it clear what changes the TPP will bring to Japan and set forth a hopeful vision of what kind of country Japan should aim to become.

The TPP will give Japan the chance to advance its national interest in all fields, whether in agriculture, food safety, infrastructure system exports, services or telecommunications. National debate should be conducted, across the boundaries of the political, business, academic and media worlds, on how to advance Japan’s national interest in each field. Such national debate will help to strengthen Japan’s bargaining power in the international community.

Now is the time for all of us Japanese to look beyond the issue of over whether or not to join the TPP and work together to advance Japan’s national interest.