Media  Global Economy  2018.05.14

It's possible to have both a US return to the TPP and a Japan-US Free Trade Agreement: Saving Japanese agriculture through free trade

The article was originally posted on Webronza on April 25, 2018

Trump's statements stray off course

It has been reported that on the 12th of this month, six days before meeting with Prime Minister Shinzo Abe of Japan, President Trump instructed Director of the National Economic Council Lawrence Kudlow and Trade Representative Robert Lighthizer to consider returning to the TPP if its conditions were favorable to the United States. Trump himself revealed this in a meeting with members of congress and governors from agricultural states.

Even during an interview with a television broadcaster during the World Economic Forum in Davos in January of this year, Mr. Trump mentioned (prefaced with a warning that the interviewer was likely to be surprised by what followed) a return to the TPP, but in his official address to the Forum he touched only on bilateral or multilateral negotiations that would be mutually beneficial with countries participating in the TPP and did not mention a return to the TPP. The statement made on the 12th of this month can be described as going into the subject in greater depth.

However, in a press conference held after the meeting between the leaders of Japan and the US on the 18th, Mr. Trump indicated his thinking that a bilateral deal with Japan would be more effective for drawing out results that would be in the best interests of the US (since it could put pressure on Japan, which is in a weaker position in terms of national security and other aspects), noting, "I don't want to go back into TPP, but if they offered us a deal that I can't refuse, on behalf of the United States, I would do it. But I like bilateral."

While Mr. Trump's statements seem inconsistent, the Trump administration's posture toward the TPP seems relatively stable to me, compared to the frequent cases in which core members of the administration immediately deny statements from Mr. Trump for which no transcripts are available, for example with regard to the US response to Syria. At the very least, I believe that the importance of the TPP within the administration has increased compared to the time immediately after Mr. Trump took office, when the decision was made to withdraw from the TPP.

The background are the manifestation of fears that US agricultural produce could be driven out of the Japanese market if TPP11 were to take effect along with the fact that China, in response to increased tariffs on steel and increased tariffs on China blamed on insufficient protections as well as violations of intellectual property rights, is preparing to raise tariffs targeting agricultural produce such as pork and soybeans.

Rural votes cannot be ignored in the run-up to the midterm elections

In the midterm elections in November of this year, US voters will vote for one-third of Senators and all members of the House of Representatives.

Of the 34 Senate seats up for reelection, only eight currently are held by Trump's majority Republican Party, and four of those are from agricultural states. However, the Republicans' current majority is only 51--resulting in a margin of just one seat. While the party has one extra vote in the form of the vote cast by the Vice President in the event of a tie, even so if the Democrats were to capture two seats the Republicans would lose their Senate majority.

The situation is even more severe in the House of Representatives. Currently, the Republicans hold 237 seats and the Democrats 193, with five seats vacant. While the Republicans have a 44-seat advantage, if the Democrats were to increase their number of seats by 25, they would capture the majority.

While dissatisfaction with Mr. Trump increases among women, the sudden announcement by the 48-year-old Speaker of the House of Representatives, Paul Ryan to had been considered as the potential President, of his resignation from politics and other factors have led to a leadership vacuum in the Republican Party as the midterm elections approach.

Even more important is the fact that while the Democratic Party's advantage is concentrated on America's east and west coasts, in Eastern regions such as New England and Pacific Coast states such as California, the Republican Party has secured many congressional seats in central regions where agriculture is relatively more important. If rural votes were to desert the Republicans in these regions, then clearly the party would lose its majority.

Thinking of the midterm elections, Mr. Trump has instructed his Secretary of Agriculture to implement relief measures in response to the inevitable loss of produce markets in Japan with the enactment of TPP11 and retaliatory measures by China targeting US agricultural produce.

However, these measures impose a fiscal burden. From the perspective of agriculture, it would be better to avoid a trade war. The agriculture industry has called for trade over aid.

The TPP's target is China

To get China, which has grown to be a presence that threatens the US, to reduce its overproduction of steel and comply with protections of intellectual property rights, it would be more effective to take leadership on adoption of rules for global trade and investment through participation in multilateral agreements and ask China to conform to those than to apply bilateral pressure.

It is disadvantageous not to join a free trade agreement such as the TPP. The original aims of the TPP were to establish new regulations on state-owned enterprises, a cause of overproduction of steel, and to institute protections for intellectual property at a high level.

Its hidden target was China. As the TPP expanded, China would be forced to join it. The Obama White House began TPP negotiations in order to apply a high level of trade and investment rules and discipline on China at that time. It seems that the Trump Administration has noticed this at last.

A TPP without the US will encourage the US to return to the TPP

But a more direct motive to return to the TPP is the importance of Japan's market for agricultural produce. If a TPP without the US were to be enacted before the end of the year, agricultural produce from Australia, Canada, New Zealand, and other TPP member states, which would be subject to lower tariffs, would drive American agriculture produce such as beef, pork, wheat, and dairy products out of the Japanese market. While China threatened the US with an increase in tariffs on pork, US pork exports to Japan, at 370 thousand tons, are about three times its exports of 130 thousand tons to China. To the pork industry, the Japanese market is even more important than the Chinese market.

While the Abe government argued from 2016 through March 2017 that a TPP without the US would be meaningless, I have countered that a TPP without the US is the only way to encourage the US to return to the TPP. It seems to me that things are turning out just as expected.

While this may sound strange, the fact that Japan's tariffs on agricultural produce are high has forced the US to consider returning to the TPP, by giving preferential treatment to US rivals such as Australia and Canada that would benefit from lower tariffs through participation in the TPP. Perhaps it could be said that Japan's agriculture and agricultural policies, which until now have been described as impediments to free trade, could force the US to return to free trade.

Freeing Japanese agriculture through full abolition of agricultural tariffs

While the debate in Japan is focusing on a choice between the TPP and a Japan-US Free Trade Agreement, just as the North American Free Trade Agreement (NAFTA) and the Australia-Japan Free Trade Agreement can coexist with TPP, so would there be no legal problem with the coexistence between the TPP and bilateral or multilateral free trade agreements.

Before the US withdrew from the TPP, a bilateral US -Canada free trade agreement, NAFTA, and the TPP all coexisted simultaneously. Businesses need only to choose to use whichever of these agreements is most beneficial to them. It would be possible for the US to advance negotiations on a Japan-US Free Trade Agreement at the same time it returns to the TPP.

It is possible that the motivation behind the Trump administration's inclination toward a Japan-US Free Trade Agreement is a rising recognition within the administration that it would not be easy to return to the TPP. My January WEBRONZA essay, Beware! Don't Take Trump's Bait argued that TP11 countries such as Australia and Canada might not welcome a return of the US and that it was not the US but actually countries such as Japan and Australia that have the upper hand.

Perhaps it was as a result of my January essay that the US government has noticed that the hurdles to a return to the TPP are not necessarily so low, to say nothing of the fact that it would be very difficult to make changes to the TPP agreement to benefit the United States.

Probably the US recognizes that while the TPP is important to apply pressure on China, when thinking about the Japanese market alone it would be easier to negotiate a Japan-US Free Trade Agreement than to return to the TPP.

Even the TPP negotiations did not introduce major reforms to Japan's high agricultural tariffs. The Japanese government fears a Japan-US Free Trade Agreement because of its concerns that the US would demand even greater reductions and abolition of tariffs than the TPP agreement.

While the high domestic prices of agricultural produce brought about by tariffs do enable the agricultural organizations that rely on them to thrive, they have led to the decline of Japanese agriculture by protecting inefficient part-time farmers. Agricultural policies worldwide are moving away from protection of their agricultural sectors through price stabilization, to direct payments. These are indistinguishable from the perspective of full-time farmer income. If high agricultural tariffs could be abolished through a Japan-US Free Trade Agreement and direct payments are given to full-time farmers, then Japanese agriculture could be freed from its chains and start exporting to the international market. Now is the time for free trade negotiations to save agriculture.

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on April 25, 2018.)