Media  Global Economy  2013.05.13

PM Abe announces participation in the TPP negotiations; what are future prospects?

English translated version of "Business Prospect" on NHK Radio Channel 1 on March 19, 2013

1. Japanese Prime Minister Shinzo Abe announced on March 15 that Japan will join the TPP negotiations. How do you see this announcement?

I cannot help but feel that Japan has taken too much time to make this decision. Taking into account the current schedule to conclude negotiations this October and US domestic procedures for approving a new entrant's participation, Japan can actually sit down at the negotiation table in July at the earliest or in September at the latest. In the latter case, Japan merely joins the final session of negotiations. In such case, it would not be easy for Japan to have its requests incorporated into the final agreement. Nonetheless, participating in negotiations before they conclude is better than after because if Japan had to participate in the concluded agreement as a new member country, each of the signatory countries could request Japan to accept many conditions, such as tariff elimination and service trade liberalization, etc. Actually, the US automobile industry and some US Congressional members have argued that Japan's participation must be approved after the agreement is concluded. Comparing these two scenarios, it would undoubtedly be better for Japan to join negotiations before they conclude. Japan announced its participation very close to the deadline. But we can appreciate the recent announcement within the context of Japan engaging in rule-setting for new trade and investment in the Asia-Pacific region.

2. At the same time, the Japanese government has estimated that participating in the TPP agreement may push Japan's GDP up by 3.2 trillion yen (0.66%), while it may also result in a decrease in domestic agricultural, forestry and fishery production by 3 trillion yen. This would cause particularly catastrophic damage to rice production with a reduction of 1.01 trillion yen. How do you assess this?

First of all, this estimate was made based on a provisional estimate of nothing but the potential effects of tariff elimination on all relevant products. Neither the effects of trade facilitation, liberalizing service and investment or eliminating non-tariff barriers is counted since they are not easily measured. So the actual effect on GDP may be bigger than the estimated one.

Second, the Liberal Democratic Party of Japan (LDP) is arguing for exception to be made for (i.e. maintain tariffs on) 5 agricultural products, including rice, wheat, beef, dairy products, sugar, etc. If this were achieved, the effect on GDP could be greater than estimated because the TPP agreement would have no negative effect on these products. On the contrary, since the US and Japan seem to have agreed that US import duties on Japanese automobiles would not be abolished while, in return, Japan would maintain tariffs on agricultural products, Japan's exports to the US market would not increase and the effect on GDP would be less than estimated. Thus, the estimate is not consistent with claims made by the government and LDP, nor the reality of negotiations.

Third, this estimate overestimates the effect on rice. The government has enforced cartel policy in Japan for more than 40 years to maintain high rice prices by reducing supply through the rice paddy reduction program. However, it would be impossible to maintain the price cartel if import duties on rice were abolished, resulting in the flow of cheaper rice into Japan from overseas. This means that the rice paddy reduction program would inevitably be abolished if the tariff on rice were eliminated. In my provisional calculations, abolishing the rice paddy reduction program would reduce the price of rice to around 8,000 yen per bale (i.e. 60 kilograms), meaning that the price of domestic rice would be cheaper than that of rice imported from China or California, which is about 9,000 yen at the moment. In other words, by means of eliminating tariffs on rice, the rice paddy reduction program would be abolished, the price of domestic rice would decrease, the importation of rice would vanish, and thus the impact on domestic rice farmers would be limited to a decline in the price of domestic rice. Meanwhile, abolishing the rice paddy reduction program would also have the positive effect of increasing domestic rice production.

Finally, abolishing the rice paddy reduction program could have a positive impact. The Japanese government takes on a financial burden of 500 billion yen annually to maintain the rice paddy reduction program. In addition, the program increases the price of domestic rice, which is paid by Japanese consumers in the amount of 600 billion yen. In total, Japanese citizens pay more than 1 trillion yen both as taxpayers and consumers. Abolishing the rice paddy reduction program could remove the economic burden on citizens, which would have the same effect as a tax cut of 1 trillion yen. This effect has not been calculated into the recently published estimated impact of the TPP agreement. The words "national interest" have been swirling around the TPP issue in recent days. If you are really thinking about national interest you must abolish these policies and programs to take advantage of participating in the TPP agreement. This will do more to serve national interest.

3. How do you see the future prospects of Japan participating in the TPP negotiations?

Japan's participation in the TPP negotiations must be accepted by the member countries already participating in negotiations. I am concerned about the LDP's resolution that it will not hesitate to withdraw from negotiations if these 5 agricultural products are not excluded from tariff elimination. The US wants to exclude sugar and dairy products from tariff elimination, but this exclusion concerns only sugar imports from Australia and dairy product imports from New Zealand. For other countries the US will eliminate tariffs on these products. This is not the same as Japan demanding to make exceptions on so many products for all member countries of the TPP agreement. Furthermore, even the US demand has encountered strong opposition from Australia and New Zealand.

As for the trade benefits targeted by the member countries, the US wants to expand exports of rice, wheat, beef and pork, Australia wants to increase exports of wheat, beef, sugar and dairy products, New Zealand wants to increase exports of dairy products, and Vietnam wants to see an increase in rice exports. These are exactly the same products which the LDP has requested to exclude from tariff elimination. It is a clear conflict of interest as Japan does not want to import these products and other member countries want to export them.

Japan's demand to make many exceptions is contradictory to the philosophy of the TPP agreement, under which member countries intend to establish a high-standard free-trade agreement with a high degree of liberalization. Furthermore, even though the Japanese government would accept an agreement to make as few exceptions as possible, the ruling party or the Parliament might not ratify the agreement. If the member countries of the TPP negotiations could foresee such a situation, they might not approve Japan's participation from the start. Thus, it may not be easy for Japan to join negotiations. I would say that with its resolution the LDP has set a very high hurdle for Japan's participation. There would thus be a lot of twists and turns in Japan even after announcing its participation.

From the beginning, even though tariffs would be eliminated and the price of agricultural products would decrease, farmers would not be affected at all if they were financially supported by direct government subsidies as in the US and EU. Then nation's economic burden would not change because the burden on consumers due to high prices would be replaced by government financial support. I have serious doubts about what rights and interests the agricultural industry intends to protect by sticking strongly to higher prices despite the fact that farmers would not suffer at all.

(This article was translated from the Japanese transcript of Mr. Yamashita's speech in the "Business Prospect" session of the radio program "First in the Morning News" broadcast by NHK Radio Channel1 on March 19, 2013.)