Last Friday, Japanese Prime Minister Yoshihiko Noda announced Japan will join the Trans-Pacific Partnership (TPP) talks. The TPP is a multilateral Pacific Rim free trade zone, currently comprising Chile, New Zealand, Brunei and Singapore. Japan would join the US, Australia, Malaysia, Peru and Vietnam as nations negotiating membership.
Noda’s announcement followed heated debate within his Democratic Party of Japan (DPJ) and public demonstrations against TPP membership. The TPP is popular with Japanese industry, since joining would increase total trade—an economic positive—and could also help corporations benefit from the yen’s strength. Reducing trade barriers would allow firms to leverage the yen by investing more abroad. Plus, facing lower tariffs abroad would reduce the net cost of Japanese exports, potentially offsetting some of the strong yen’s negative impact.
But farmers aren’t in favor, and many in the DPJ agree. The Ministry of Agriculture, Forestry and Fisheries claims exposing Japanese farmers to free, foreign competition will shrink GDP by ¥7.9 trillion and eliminate 3.4 million jobs. Japan’s farmers are heavily subsidized—45% of agricultural production is protected by trade barriers or subsidies, versus only 25% of Europe’s and 7% of the US’s. Exhibit 1 details the breakdown of regional agricultural tariffs.
Exhibit 1: Agricultural Product Tariffs
Source: “Global Food Markets: International Trade Policy,” US Department of Agriculture.
However, if Japan stands pat while its neighbors remove barriers to free trade, the entire country will likely find itself at a competitive disadvantage as trade shifts to countries without tariffs and other obstacles. Hence why the Ministry of Economy, Trade and Industry said not joining the TPP would cost Japan ¥10.5 trillion in lost exports in 2020. So it seems the political battle lines are drawn.
From a US perspective, Japan’s inclusion in the TPP would be a big boost. Exhibit 2 details trade between the US and current/potential TPP members, the Pacific Rim and the world in 2009. TPP countries accounted for 5.5% of the US’s total trade. Japan accounted for 5.9%.*
Exhibit 2: US Goods Traded With Trans-Pacific Partnership Countries, 2009 ($ Million)
Source: Ian F. Ferguson and Bruce Vaughan, “The Trans-Pacific Agreement,” Congressional Research Service, R40502, January 10, 2011.
In our view, the benefits of Japan’s TPP membership outweigh the arguments against (in general, we doubt the efficacy of subsidies and other means of propping up industry). For now though, it’s likely too early to assess the probability of this happening—the divisions within the DPJ could result in Noda being shown the (revolving) door—and sweeping in yet another new prime minister, who could do a policy U-turn (currying favor with farmers and protestors). It’s obviously early not only to handicap Japan’s inclusion, but whether the TPP negotiations lead to any expansion. But this is clearly a significant and interesting story to follow.
*Source: US Census Bureau.