Washington’s withdrawal from the Trans-Pacific Partnership in January 2017 left the pact unfinished and without leadership as it was still at its fledgling stage. However, Tokyo intended to pursue the trade pact despite the US withdrawal in order to complement the “third arrow” of its Abenomics strategy, which is centered on promoting structural economic reforms in Japan.
Japan has therefore taken up the leadership role to complete the pact with the remaining 11 members, which signed the subsequent Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in March.
What are the costs and benefits of Japan’s joining and ratifying the CPTPP?
The Stolper-Samuelson Theorem states that a rise in the relative price of a good will lead to a rise in the return to that factor that is used most intensively in the production of the good, and conversely, to a fall in the return to the other factors not used intensively. Thus the CPTPP would naturally trigger a fall in the relative price of agricultural goods in Japan, and hurt farmers by decreasing their return.
For example, according to the 2015 Eurasia Group report “The Transpacific Partnership: Sizing Up the Stakes – A Political Update,” Japan’s wheat producers would suffer a nearly 40% hit in 2025, while rice and other farm products would suffer a 4-5% hit out of the agricultural industry’s 4,700-billion yen (US$41.7 billion) value.
In addition, negotiation and domestic conflicts arising from dealing with the losers of a free-trade agreement can also incur significant costs. Politically, the CPTPP carried the risk of failure in that if it were not ratified, it would undermine confidence among domestic and foreign businesses, investors, and consumers in Japan. The failure would have signaled the Japanese government’s inability to continue to make progress on structural reforms that promote competitiveness and innovation, eroding the credibility of the Japanese economy as a whole.
The CPTPP is expected to increase Japan’s gross domestic product by 2% by 2025 because trade enables countries to allocate resources efficiently by specializing in goods in which they have comparative advantages. Specifically, Japanese autos will propel a $21.5-billion value-added increase and drive a 24% boost from 500 million units in exports in 2015.
Long-term, there are also intangible economic benefits, such as increased transparency and predictability for Japanese companies doing business in foreign countries and acceleration in momentum behind other trade pacts.
Politically, Japan could also use the CPTPP as a way to address geopolitical issues in Asia, such as the rise of China, by improving its ties with member countries in defense and security relations.
Last, the benefits are not just limited to the political and economic realms. According to functionalist and neo-functionalist theory, economic integration and cooperation can create positive spillover effects, providing incentives for further integration in other sectors. Economic integration initiated by signing the CPTPP could be useful in establishing similar institutions to the European Union for political cooperation in the Asia-Pacific region.
In March, the CPTPP was signed by 11 Asia-Pacific countries – Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Most of the original TPP text remains intact, and two-thirds of the CPTPP’s 30 chapters are identical to the TPP.
Japan ratified the CPTPP in July, following Mexico, and Singapore also ratified it two weeks later. Most of the other countries are also expected to ratify the pact before the end of the year.
Recommendations for the future
Despite the apparent short-term costs incurred by the losers under the CPTPP, the long-term economic and political benefits outweigh the costs by far. Thus Japan has ratified the CPTPP, and now Japan’s best strategy is to implement domestic policies, such as providing subsidies and retraining opportunities for the losers under the trade pact, so as to minimize the harms and reap the benefits.
Internationally, Japan could try to increase the total size of the CPTPP by luring in Indonesia and South Korea to fill the vacuum created by the US withdrawal, which would incentivize other countries to finalize the pact as the economy of scale becomes larger.
Already, negotiators from the 11 signatories of the CPTPP agreed on July 19 to start accession talks with potential new members next year, when the trade pact goes into effect. At the same time, Japan could also soften its stance on several currently suspended clauses, such as protection of intellectual property and allowing investors to sue governments, so that Southeast Asia countries that are hesitant to participate would be more likely to join the CPTPP in the future.
Japan has filled the leadership role quite well since 2017, and with increased size and a higher number of countries participating in this mega-sized pact, the US could ultimately come back to the negotiation table as well.
This policy memo was updated from a previous cost-benefit analysis on Joon’s Blog.