Trilateral Forum Tokyo

April 2012

Paper Series
Japan, the Trans-Pacific Partnership, and the United States
by Bruce Stokes
Earlier this year, at Tokyos crowded eight-story Yaesu Book Center, book shoppers could choose between a whole table full of books about the Trans-Pacific Partnership (TPP), a trade and investment agreement under negotiation between nine Pacific nations, including the United States, but not Japan. The Tokyo governments desire to join the TPP talks has sparked a divisive debate in Japan. And most of the books on display at Yaesu, including a number of best sellers, oppose TPP either because of the alleged threat it poses to Japans rice farmers or out of pure nationalistic resentment against anything promoted by the United States. Back in Washington, TPP has also become a topic of growing interest. In the first week of January, a session on the trade negotiation held at the Center for Strategic and International Studies (CSIS), a Washington think tank, drew several hundred people. In opening the event, CSIS president John Hamre quipped that a year before, he would have been lucky to attract 50 participants! lower non-tariff trade barriers. The trade agreement has been under discussion since the latter days of the Bush administration and U.S. President Barack Obama has pledged to wrap up the negotiations by December 2012. Congressional passage of the Colombia, Korea, and Panama free trade agreements in 2011 and the continuing stalemate of the Doha Round of multilateral trade talks has made TPP just about the only trade game in Washington. And the Obama administration intends to make TPP its principal trade legacy. The Japanese governments decision in November 2011 to consider joining the negotiation has dramatically raised U.S. stakes in the deal: economically, politically, and strategically. It could nearly quadruple the commercial payoff, which is a siren song to U.S. farmers and many U.S. corporations. Yet it has also galvanized fierce opposition from the U.S. auto industry, imperiling Congressional approval of any agreement. Strategically, Tokyos engagement with Washington on TPP could help offset some of the tensions that have emerged over Japans inability to resolve U.S. military base issues on Okinawa. And, most important,

Summary: The Trans-Pacific Partnership (TPP) is a wideranging trade initiative that is intended not only to eliminate tariffs but also to offer greater protection for intellectual property and to lower non-tariff trade barriers. The Japanese governments decision in November 2011 to consider joining the negotiation has dramatically raised U.S. stakes in the deal. And the Tokyo governments desire to join the TPP talks has sparked a divisive debate in Japan. Japans participation in TPP is threatened by still unresolved divisive issues: rice, autos, and the electoral fortunes of the Japanese government. But some Japanese accommodation on autos may be needed if TPP is to get past the U.S. Congress. In the end, whether Japan is in or out of TPP will come down to politics in both Washington and Tokyo.

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TPP is a wide-ranging trade initiative that is intended not only to eliminate tariffs but also to offer greater protection for intellectual property and to

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Japans involvement would make TPP a much more credible hedge against Chinese influence in East Asia, providing the economic pillar for the Obama administrations new pivot toward Asia in its military and diplomatic policy. More broadly, for both nations, TPP is a pivotal link in a broader set of bilateral and regional trade deals that may soon integrate the worlds biggest economies. Japan is on the verge of beginning free trade area negotiations with the European Union. The United States is considering similar talks with the EU. And TPP, if Japan joins, would essentially be a free trade area negotiation between Tokyo and Washington within the context of a regional deal. Over the next decade, the geometry of world trade could change dramatically. The United States, the European Union, and Japan could effectively be one large marketplace. But Tokyos participation in TPP is essential to that happening. TPP is at the nexus of foreign policy and economic state craft, observed Matthew Goodman, until recently a member of the National Security Council in the Obama White House. Officials in Tokyo agree. This negotiation is not only a trade negotiation, but a high level strategic dialogue, said a senior Japanese government official. We would like to make TPP a symbol of a new global partnership between the United States and Japan. But Tokyos principle rationale for joining TPP is economic. After two decades of anemic growth, the economy needs a jolt. Moreover, there is a recognition that the TPP train may be leaving the station and Japan wants to be on board. From our point of view, said a senior Japanese government official, it is important to join before there is substantial agreement. We want to join in the rule making process. Yet more than two decades after the bitter trade wars between Japan and the United States, Japans participation in TPP is threatened by the same, still unresolved, divisive issues: rice, autos, and the electoral fortunes of the Japanese government. Moreover, Tokyo and Washington have differing perspectives on Chinas relationship with TPP. Japanese officials see TPP as a building block toward a broader Asian trade agreement that would one day include China. U.S. officials pay lip service to that long-term goal, but privately say they never expect Beijing to be party to the high-standard TPP agreement they envision. Thus, the forthcoming decision on Japanese participation in TPP has profound implications for U.S.-Japan trade, for U.S. diplomatic relations with Japan, for the United States future posture in East Asia, and for the architecture of global trade. The United States Rationale The United States has been and always will be a Pacific nation, said Michael Froman, deputy national security adviser for international economic affairs, at the January CSIS function. So Washingtons interest in a deeper trade and investment relationship with Asia, particularly with Japan, should come as no surprise. In fact, 51 percent of Americans now see Asia as more important to U.S. national interests than Europe, including roughly seven-in-ten Americans born after the Vietnam War, according to the 2011 German Marshall Funds Transatlantic Trends survey.1 And Americans have good reason to believe this. A TPP including Japan is much more commercially attractive to the United States than a deal that excludes Tokyo. A study by Japans Research Institute of Economy, Trade, and Industry (RIETI) estimates that the trade agreement would boost the U.S. economy by 0.11 percent, with Japan accounting for about 70 percent of that benefit. While this economic lift might appear insignificant, the benefits would be roughly equivalent to the projected payoff from the now moribund Doha Round of multilateral trade negotiations. This may be why, of the 113 comments received by the U.S. government on the issue of Japan entering TPP, 100 were supportive, only 8 were opposed, and 5 indifferent. From a political perspective, which is critical because one day Congress would have to approve U.S. participation in TPP, much of the advantage would be reaped by key sectors of the U.S. economy. The influential beef industry, for example, hopes TPP will boost its exports to Japan by up to $1 billion a year. The U.S. business community hopes that a successfully negotiated TPP can be the precursor of a single, regional market in the Asia Pacific, explains Calman Cohen, president of the Emergency Committee for American Trade in Washington, DC. Such a development would be more
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likely if the TPP currently under negotiation leads to Japan signing on. Meanwhile, Washington sees tactical benefits from including Tokyo in this new free trade area. The White House hopes to use the accord, particularly Japans participation, to counter Beijings efforts to further ensnare East Asia in its economic web. A deal with strong disciplines on state-owned enterprises and restraints on the forced transfer of technology would effectively outlaw practices associated with Chinese state capitalism, creating new norms in East Asia more compatible with U.S.-style capitalism. In addition, Japan will soon open free trade deliberations with the European Union and with China and South Korea. The Obama administration wants to ensure that, at least in the short run, U.S. exporters and investors have better access to the Japanese market than those competitors. Japans Rationale Japans economic rationale for joining TPP is compelling. The Japanese economy is smaller today than it was a decade ago, thanks to persistent deflation. The population is expected to shrink by 30 percent over the next two generations. The yen has been quite strong, curbing exports, which have long been a major driver of the economy. There is widespread concern about the hollowing out of domestic industry. And in 2011, the country ran its first trade deficit in 31 years. Japan should use this opportunity to revitalize this economy, said Shujiro Urata, a professor of economics at Waseda University in Tokyo. The RIETI study suggests TPP would boost Japans real GDP by 0.67 percent, more than triple the potential benefits Japan could expect from the Doha Round and nearly six times the benefit that would accrue to the United States from TPP. Particular Japanese industries could benefit greatly. In 2010, Japans automakers paid $1.7 billion in tariffs to ship vehicles to TPP countries. TPP would eliminate this tax. If Japan doesnt join TPP, Tokyo worries that more and more of its firms will increasingly choose to manufacture their products abroad. In fact, Jesper Koll, a managing director of J.P. Morgan in Tokyo, estimates that by 2014, three-quarters of Japanese name plate automobiles will be made outside of Japan. TPP is one way to stem that tide. Japanese carmakers also resent the fact that, thanks to the U.S.-Korea free trade agreement, Hyundai now has better access to the U.S. market than Toyota or Nissan. And they fear that if the United States is in TPP and Japan is not, Ford and GM will reap the profits from burgeoning southeast Asian markets such as Vietnam. The business community here is fully aware that if Japan does not join TPP, said Koll, it will confirm Japans status as a has-been. To reverse the countrys fortunes, said Tadashi Okamura, the former chairman of Toshiba Corp. and now chairman of the Japan Chamber of Commerce and Industry, Tokyo needs to use TPP to internationalize Japans small and medium-sized industry and to make Japan a more attractive site for foreign investment. That will require drastic domestic reforms. We hope that TPP will trigger domestic structural reforms, said Takatoshi Ito, an economics professor at the University of Tokyo. The most formidable change would be an overhaul of Japans agricultural sector. The country has a plethora of small, unproductive rice farms cultivated by part-time, aging farmers protected by a 778 percent tariff on imported rice. By Kolls estimate, they are 40 percent less productive than California rice farmers. All this has to change say Japanese supporters of TPP. There is no future for agriculture without reform, said Ito. But, said Koll, if Japan could just boost its agricultural productivity to the level of Italy, it would run a trade surplus in agriculture. This is because TPP would also eliminate other nations tariffs on agricultural products, potentially benefiting Japan if it transformed itself into a producer of valued-added farm products, such as high quality rice. Japanese rice already sells at a premium in the burgeoning Chinese market. This is a harbinger of what could come if the Japanese agricultural sector is reformed, claim TPP advocates. But Japans long-cosseted farm lobby has a vested interest in the status quo. It is depending on its political influence, which is derived from the disproportionate representation of rural constituencies in the Japanese Diet, to block TPP, which it fears will open the Japanese agricultural market to devastating foreign competition.

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There is a compromise that can be struck, predicted Ito. In 2005, the United States demanded that sugar be excluded from its free trade agreement with Australia. And South Korea exempted rice from its recent trade agreement with the United States. U.S. trade officials contend that all products must be on the table in the TPP negotiation, including rice. In part, this is because the Obama administration will need the support of U.S. farm interests anxious to sell more in Japan to counter Detroits fierce resistance to Japans participation in agreement. At the same time, Japan is already the largest export market for U.S. rice. U.S. rice exporters may eventually calculate that giving Vietnam and other TPP members better access to the Japanese market might actually threaten the U.S. market share, convincing the Obama administration to be more willing to accept some continued protection for the Japanese rice market. The Auto Dilemna The Big Three U.S. automakers Ford, General Motors, and Chrysler support TPP. But they draw the line at admitting Japan. The U.S. trade imbalance with Japan explains why. In 2010, Japan shipped 1.5 million cars and light trucks to the United States. The Japanese imported 14,000 such vehicles from the United States. As a result, autos now account for two-thirds of the U.S. trade deficit with Japan, up from only half in 1995. And TPP would eventually eliminate the 2.5 percent U.S. auto tariff. This cost saving accorded imported Japanese cars may not seem like much, but it is equal to Detroits profit margin on some small cars. Japan, on the other hand, has no auto tariff. So TPP offers the Big Three no immediate new market access. And Detroit contends that the deal will do little to dismantle non-tariff trade barriers, such as Tokyos currency manipulation and cozy relations between government and industry, which effectively deny Americans a bigger share of the Japanese market. The Japanese auto industry grew up behind a web of protection, said one U.S. auto executive. Now, as their economy slows and population declines and they are plagued with overcapacity in the auto sector, they want increased access to other nations through TPP to maintain the Japan Inc. model. Japanese automakers counter that the Big Threes lack of success in Japan is due to a lack of effort. They note that between 1996 and 2011, the number of U.S. auto dealerships in Japan fell from 620 to 160, while the number of European dealerships rose from 755 to 1,302. This explains, say the Japanese, why European automakers have 4.6 percent of the Japanese market and U.S. automakers only 0.3 percent. Washington and Tokyo have dueled for decades over whether the Japanese auto market is closed or open. And neither side is likely to convince the other. Nevertheless, the Big Three were able to hold up approval of the Korea free trade agreement for years. So some Japanese accommodation on autos may be needed if TPP is to get past the U.S. Congress. The Politics In the end, whether Japan is in or out of TPP will come down to politics in both Washington and Tokyo. The trade deal is currently not a matter of public debate in the United States. But critics have begun to raise questions about the agreement. There is no way this deal could serve as a meaningful template for creating a truly integrated 21st century free trade area around the Pacific rim, said Clyde Prestowitz, president of the Washington-based Economic Strategy Institute. There may be benefits for U.S. companies seeking to invest and produce in Asia, but is that in the American national interest? Opponents are particularly concerned about TPPs deregulatory objective. It is all about giving investors the right to evade regulatory requirements, said Lori Wallach, director of Public Citizens Global Trade Watch. But the visceral public distrust of Japan that once existed in the United States seems over. In the 1980s and 1990s, U.S.Japan trade relations were quite troubled. In February 1992, 31 percent of Americans saw Japan as a threat, according to the Pew Research Center. Today, only 1 percent say Japan is a threat to the United States. Moreover, 60 percent of Americans now think increased trade with Japan would be good for the United States.

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The political debate in Japan over TPP is already quite heated. Major Tokyo media largely favor the deal, but even TPP proponents agree that nearly all the local media outside the capital oppose it. The public is generally supportive, although largely in the dark. Polls taken after Prime Minister Yoshihiko Noda expressed interest in participating in TPP showed that roughly half the population backed membership, with only a quarter to a third of the population opposed. But fourin-five people complained that the government had yet to provide them with sufficient information about the trade agreement. TPP opponents are also casting the choice in nationalistic terms. I can understand why the United States wants this, said Eisuke Sakakibara, who as vice minister of finance, crossed swords repeatedly with the United States in the early 1990s. They think they rule the world. But I see no reason for the Japanese government to jump into this. There is nothing that important that we request the United States to change, so its not a negotiation, its a U.S. demand. And using external pressure to change our system is a very old fashioned idea. We are a mature country now. It could also antagonize China, which is not to Japans advantage now. He added, I do not think the United States would object if we do not participate. Implications for the U.S.-Japan Alliance Nationalist objections to TPP have turned consideration of a trade agreement into a test of the U.S.-Japan alliance. The debate is not about high standards, said Ito, but rather are we friends of the United States or friends of China and Asia?. From a geopolitical viewpoint, U.S. officials clearly see Japans participation in TPP as the key element in constructing a new Asian economic and strategic architecture that acts both as a hedge against Chinese dominance of the region while more deeply and self-evidently imbedding the United States in Asia. Washington is adamant that TPP is not a thinly-veiled China containment strategy. But the United States is simultaneously repositioning U.S. troops to Australia and ships to Singapore and possibly the Philippines. And it has recently acted to disconnect TPP from its long-standing Okinawa basing dispute with Japan. These U.S. military redeployments coupled with Washingtons strategic desire to include Japan in TPP may not be classic containment. But, to use a basketball analogy, the Chinese cant help but think that Washington is shifting from man-to-man defense based in South Korea and Japan to a zone defense stretching from northeast Asia to the south Pacific. Japanese officials are keenly aware that their countrys participation in TPP is a means of reinvigorating the U.S.Japan alliance, while ensuring that Japan continues to be the United States most important ally in Asia as the Obama administration pivots toward the region. At the same time, Japanese critics of TPP argue that the country has other options. The ASEAN plus 6 grouping does not include the United States. And it does not promise the kind of market integration envisioned in TPP. But it would tie Japan to a vibrant region and require far fewer internal economic reforms. Similarly, TPP opponents point to future free trade talks with China and South Korea as an alternative to closer ties with the United States. In the end, the strategic implications of Japan failing to participate in TPP may be even greater than the consequences of the countrys participation. The U.S.-Japan alliance will certainly continue, whether Tokyo joins TPP or not. The benefit to the United States of Japan serving as a giant U.S. aircraft carrier parked off the Asian coast ensure close Japanese-U.S. security ties. And both Washington and Tokyo have a mutual interest in continuing to work together to deal with North Korea. But a Japanese decision to not become a member of TPP would only reinforce U.S. doubts about Japans reliability as a partner in helping shape the economic and strategic future of East Asia. And that cannot help but have a long-term corrosive effect on the relationship. Coming to Closure While Japan ponders joining TPP, negotiations among the current nine members continue. Japan is not a participant in these sessions. But Japanese officials are currently conducting informal discussions with their counterparts from each of the TPP countries to better understand what has already transpired in the talks, to identify the benefits to Japan of joining TPP, and to recognize problem areas that will be the focus of negotiation if and when Japan does join.

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But Japans participation is hostage to calendars in Tokyo and Washington that may be out of synch. The ruling Democratic Party of Japan is currently locked in a battle with the opposition Liberal Democratic Party that may force an early election. If the government stumbles, said Yoichi Funabashi, the former editor of the Asahi Shimbun, one of Japans leading newspapers, we will see one to two more years of political confusion. And if Japan has not formally joined the TPP deliberations before that point, its participation could be in limbo indefinitely. The calendar is further complicated by the fact that the Obama administration needs to give Congress a 90-day notice before formally including Japan in the TPP process. That clock has not started running yet, as the U.S. Trade Representatives office consults with U.S. business and labor to scope out support and opposition. If a Japanese election is called before that 90-day window expires, some in Congress may want to delay engaging with Japan until Tokyo sorts out its politics. From the beginning, said Susan Schwab, who launched TPP as U.S. Trade Representative under George W. Bush, we really wanted Japan in. But the Japanese are the only ones who can make that decision. But the consequences of that decision to join TPP or to stay out will have widespread and long-lasting implications. First and foremost, it represents an unparalleled opportunity for Japan to reform its domestic economy and to spur productivity and growth, creating jobs. Japanese participation would greatly enhance the commercial benefits of the deal for everyone, increasing the likelihood that Canada, Mexico, and South Korea will one day join TPP as well. Geo-politically, Tokyos involvement would present a united front vis--vis China, further limiting Beijings economic and strategic influence in East Asia. Japans association with TPP and thus the United States, in conjunction with a possible Japanese free trade area with the European Union and similar new commercial ties between the United States and Europe would also usher in a whole new era in global economic integration, with widespread potential benefits. Thus Japans decision of whether or not to join TPP is consequential for Japan, for Asia, for its relationship with the United States and for the world.
About the Author
Bruce Stokes is a senior transatlantic fellow at the German Marshall Fund. He is a contributing editor for National Journal. He has written for Foreign Policy, Foreign Affairs, The Financial Times, The New York Times, The Washington Post, and the International Herald Tribune, and is the author or co-author of numerous books and reports, including GMFs 2009 Transatlantic Trends Survey. Mr. Stokes is a graduate of Georgetown Universitys School of Foreign Service and Johns Hopkins Universitys School for Advanced International Studies.

About the Trilateral Forum Tokyo

Trilateral Forum Tokyo is a joint initiative organized by the German Marshall Fund of the United States (GMF) and the Tokyo Foundation. This new forum will address crosscutting issues such as the crisis of democratic governance, global financial instability, security dynamics in Asia and beyond, energy sustainability, innovation and competitiveness, and disaster relief. By bringing together leading policymakers, academics, journalists, and business leaders from the United States, Europe, and Japan, the forum will create a new network of cooperation for an era of flux.

About GMF
The German Marshall Fund of the United States (GMF) is a nonpartisan American public policy and grantmaking institution dedicated to promoting better understanding and cooperation between North America and Europe on transatlantic and global issues. GMF does this by supporting individuals and institutions working in the transatlantic sphere, by convening leaders and members of the policy and business communities, by contributing research and analysis on transatlantic topics, and by providing exchange opportunities to foster renewed commitment to the transatlantic relationship. In addition, GMF supports a number of initiatives to strengthen democracies. Founded in 1972 through a gift from Germany as a permanent memorial to Marshall Plan assistance, GMF maintains a strong presence on both sides of the Atlantic. In addition to its headquarters in Washington, DC, GMF has seven offices in Europe: Berlin, Paris, Brussels, Belgrade, Ankara, Bucharest, and Warsaw. GMF also has smaller representations in Bratislava, Turin, and Stockholm.