Media  Global Economy  2017.01.11

What will happen to the Trans-Pacific Partnership free trade deal (TPP) after ratification by the Japanese Diet?

The article was originally posted on Webronza on December 14, 2016

No possible change in Trump's decision

President-elect Donald Trump's announcement that he will withdraw the United States (U.S.) from the Trans-Pacific Partnership (TPP) has made it difficult to put the TPP into force. Prime Minister Shinzo Abe has said that he will persuade Trump through the Japanese Diet's ratification of the TPP, but it is obvious that this is not possible from remarks made by Trump during the presidential election and recent actions.

What boosted Trump to the presidency was job creation. Immigration control by building a wall along the border with Mexico and the trade policy reviews for withdrawing from the TPP and renegotiating the North American Free Trade Agreement (NAFTA), which Trump promised during the presidential election, are for securing and promoting jobs.

After winning the election, he has not only announced U.S. withdrawal from the TPP, but also praised a company that canceled moving its plant to Mexico and nominated an opponent of environmental regulations who has sued the Environmental Protection Agency to head the Agency in an attempt to review environmental regulations that are restricting corporate activities and killing jobs. All of these are for securing jobs.

No matter how much Prime Minister Abe and the Japanese Ambassador to the United States stress TPP's economic and geopolitical importance using reason, Trump will turn a deaf ear to it. Should he do otherwise, he would be betraying his supporters and end up destroying his own support base.

Rational persuasion and dialogue do not work -- The United States has changed

There are Japanese economists who still say that Trump will change his mind because he is a businessman, but they seem not to understand what is actually happening in the United States.

In the presidential election, many Americans supported the argument against free trade put forth by Bernie Sanders and Trump. To this, the famous international economist Dr. Alan Deardorff, who is professor at University of Michigan and also my university professor, lamented that the public no longer seek the advice of experts like him. Society has become one in which rational persuasion and dialogue do not work on issues, including racial discrimination.

During the presidential election, Hillary Clinton's use of personal email during her tenure as Secretary of State became a major issue. In contrast, Trump gathered the support of many people despite criticisms over his affairs and gaffes that included a string of scandals with women, tax return issues, and verbal abuse based on groundless facts such as presidential election fraud, which may have immediately ended the political career of any ordinary politician.

Seen in this light, the United States is no longer "the United States of America" but has become "the Divided States of America."

Regarding Trump, even the famous political analyst Amy Walter despairs that she has no idea what Trump will do, since he will be an unconventional president making unconventional claims.

Trump tweeted criticism at Boeing for making him pay as much as four billion dollars (460 billion yen) for Air Force One. This remark, it is said, was made in anger over the criticism made by Boeing's CEO on Trump's trade policies in the Chicago Tribune.

It is unpredictable for what reason one will draw ire from Trump and be subject to his attack. If Prime Minister Abe should come right out and criticize Trump's trade and employment policies, he also may draw Trump's ire.

Is the TPP without U.S. participation meaningless?

Prime Minister Abe has said at the Diet session and on other occasions that the TPP would be meaningless without U.S. participation. The TPP without the United States in comparison with the TPP with the United States will naturally createless benefit as long as the free-trade bloc is reduced. However, it definitely does not mean it is meaningless.

First of all, on an economic scale, if the TPP with the United States is considered as 100, the TPP without the United States has a value of 40. The latter not being zero is worth implementing.

Furthermore, the free-trade bloc of the TPP with the participation of relatively big countries, such as Canada, Australia and Mexico, is more attractive to Japan than the Free Trade Agreements (FTAs) concluded with the individual countries of Mexico and Australia. If the TPP without U.S. participation were meaningless, the Japan-Australia FTA, which Prime Minister Abe promoted, would be much more meaningless.

In addition, many countries and regions, such as South Korea, the Philippines, Thailand, Indonesia and Taiwan, are indicating their interest in joining the TPP. The TPP has potential for expansion.

Moreover, the high-standard rules achieved by the TPP deal, such as the creation of regulations in areas of state-owned enterprises, trade and environment, trade and labor, etc. that the WTO had not focused on until now and further exploration of WTO rules in areas of services, intellectual property rights, etc., will serve as a useful reference for many mega-FTAs and even in WTO negotiations in the future. Has the Japanese government not been advocating that the great significance of the TPP is the development of high-standard rules? Even without the United States, new rules in the TPP deal will be retained. Why do government officials entice Prime Minister Abe to say that the TPP without the United States is meaningless?

The accumulation and co-existence of several bilateral FTAs leads to the development of numerous rules and regulations. The famous international economist Jagdish Bhagwati has criticized this phenomenon, calling it the "spaghetti bowl effect."

Mega-FTAs bring about the advantage of having rules and regulations unified among many of the participating countries. Even without U.S. participation, the TPP will be able to ease the spaghetti bowl effect with the participation of so many countries.

Will negotiations for the TPP without U.S. participation take time?

The Japanese government officials in charge of the TPP seem to be arguing that it will take some time to renegotiate the TPP because the balance of different interests that have been accommodated by the TPP would be disrupted by the withdrawal of the United States.

They say, for example, that Vietnam had accepted the regulations on state-owned enterprises in expectation of increased exports of textile products to the United States, but if the United States were to withdraw, Vietnam would probably not agree to comply with the regulations on state-owned enterprises under the new TPP without U.S. participation.

Is this true?

In the first place, we do not know how Vietnam will respond, since such a proposition has not been made to participating countries. It is only a counterargument based on speculation. A similar proposition has been also made by the Mexican minister in charge of the TPP. It seems that Mexico considers the TPP deal without U.S. participation to be easily reachable with a redraft of part of the provisions for effectuation.

Moreover, has the Japanese agricultural industry swallowed the concessions to open its market access to agricultural commodities in exchange for the future removal of auto tariffs in the United States? The agricultural industry is not concerned with the interests of the automobile industry. The agricultural industry conceded only because it thought that the outcome of the market access negotiations was acceptable. It did not concede in consideration of auto tariffs. On the contrary, if agriculture were to be sacrificed on behalf of the automobile industry, as government officials imply, wouldn't farmers be enraged?

In each country, persons from the various individual fields have negotiated considering the interest of their own field, regardless of others' interests, and have accepted the results of the negotiations. Should the United States leave the TPP, there is no problem with the deal as it is now. The Japanese agricultural industry would be happier without the import quota set for U.S. rice.

Last year, when I visited Vietnam, Vietnamese government officials said that the TPP was necessary to push forward reforms of state-owned enterprises. They had not in any way unwillingly accepted the regulations of the TPP. Vietnam also exempts many fields from the regulations of state-owned enterprises, protecting the areas the country should protect.

The TPP without U.S. participation is a tool to bring the United States back into the fold.

If the TPP without U.S. participation is put into force, Australia and New Zealand will pay only 9% tariff on beef exports to Japan; whereas the United States will have to pay 38.5% tariff. In the Japanese market, the United States will eventually lose its share of beef to Australia and other countries, pork to Canada, wheat to Canada and Australia, and dairy products to Australia and New Zealand. Similar situations will occur in other TPP member countries.

If this happens, the U.S. agricultural industry will start to panic. Trump may not be persuaded only by the conceptual advantage of free trade, but if jobs were to be lost as a result of withdrawal from the TPP, he may change his mind. After Trump's retirement from presidency, the United States will for certain bid for membership in the new TPP deal. The new TPP will put the United States in a position of having no choice but to join the deal.

In other words, the TPP without U.S. participation is a tool to incorporate the United States. Seeing that the United States will eventually have to return to the TPP, the above-mentioned two criticisms are redundant.

Prime Minister Abe's inconsistent responses to Diet questions

Prime Minister Abe remarks that if Japan-EU FTA is concluded, the United States will be disadvantaged in the export of dairy products to Japan, and that Trump may change his mind. Isn't this very similar to what I have been arguing about the United States becoming disadvantaged in the export of many agricultural products to the Japanese market?

In dairy products, the United States faces stronger competition from Australia and New Zealand than the EU. Also, in other products such as beef, pork and wheat, other TPP member countries are far greater threats to the United States than the EU. There is no doubt that the new TPP without U.S. participation would have greater effect than the Japan-EU FTA in making the United States change its decision to withdraw from the TPP.

Additionally, there are worries over other remarks made by Prime Minister Abe.

The Japan-EU FTA is currently under negotiation. The person in charge at the EU says that his/her counterpart at the Ministry of Agriculture, Forestry and Fisheries of Japan maintains a stern attitude to tariffs on agricultural products. Amid such situation, Prime Minister Abe has been answering questions at the Diet based on Japanese tariff concessions on dairy products. Since the EU's items of interest are soft cheeses such as Camembert on which tariffs had been maintained in the TPP, the Prime Minister has himself hinted to the tariff concession still under negotiations. Wouldn't this be an own goal or a timely error given by Japan to the EU?

Why has the government official in charge put forward such a ridiculous argument to Prime Minister Abe?

The government official in charge had to have the TPP passed in any way possible once it was sought for ratification by the Diet. The development of the idea of a new TPP without U.S. participation would have made it difficult to resist the argument that there would be no need at the moment to ratify the TPP with the United States. Consequently, the official in charge, in desperation, came up with the reason that the TPP is meaningless without the United States and that negotiations for a new TPP would require time.

However, the TPP was approved by the Diet. The Japanese government can now examine the future of the TPP without being concerned about responses to Diet questions. Prime Minister Abe demonstrates flexibility in changing his remarks, as seen in his decision on consumption tax.

I hope the Japanese government will carefully consider the plan for a new TPP without the United States.

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on December 14, 2016.)