By Michelle Tan, BASC Research Assistant
On Feburary 26, 2011, the Japanese government started a series of forums nationwide to gain widespread support for possible Japanese participation in the Trans-Pacific Partnership Agreement (TPP). The TPP is a multilateral free trade agreement that aims to integrate the economies of the Asia-Pacific region. There are nine current negotiating countries (Brunei, Chile, New Zealand, Singapore, Australia, Malaysia, Peru, the United States, and Vietnam) and they have set a target for settlement of negotiations by the next APEC summit in November 2011. Japan’s government plans to make its decision about whether to join the TPP negotiations by June this year and to work out measures for the economic reforms needed to join the pact. The TPP is very comprehensive, requiring members to reduce all tariffs in ten years. As a result, there has been much domestic opposition to Japan’s plans to join the TPP, which has led to a wider debate and discussion about the path of economic development Japan needs to take in order to remain competitive.
Japanese Prime Minister Naoto Kan has strongly advocated joining talks on the TPP to promote trade liberalization. First, agreeing to the trade agreement is essential to ensuring that Japanese companies are not at a disadvantage to their Chinese and South Korean competitors in terms of export competitiveness. South Korea has already signed free trade agreements (FTAs) with the United States and the European Union, and is engaged in FTA talks with Australia. In comparison, Japan does not have bilateral agreements with any of these major trading partners. Additionally, joining the TPP is a key way to force fundamental change in Japan and make it open up its markets. According to the stated goals of the TPP, Japan will have to loosen up its restrictive environment for mergers, acquisitions, and private equity while promoting better corporate governance. She will also have to open government procurement to foreign firms, and remove barriers to foreign investment. The removal of trade barriers will lead to increased competition from increased imports, resulting in more innovation and a more efficient allocation of resources. Economic liberalization might well provide the crucial jumpstart Japan’s lagging economy needs. China recently overtook Japan to become the largest economy in Asia.
On the other hand, opposition to the TPP is very strong, especially in agriculture. Farmers fear that joining the TPP will cause an influx of cheap agricultural imports into Japan. Japan currently has extremely high tariffs on certain food items, including 38.5% tariffs on beef, 360% tariffs on butter and 788% tariffs on foreign rice imports. In particular, Japanese rice farmers are notoriously inefficient, with only 1% of all rice farmers making at least half their income from rice. The balance of their income comes from heavy subsidies and transfer payments from the government. Yet, at the same time, these rice farmers who make up less than 3% of the population have disproportionate political sway to block Japan’s TPP bid because of how parliamentary representation is apportioned.
However, unlike what is believed by some, pursuing TPP membership and encouraging a vibrant agricultural sector are not mutually exclusive. The European Union and South Korea are both carrying out fundamental agricultural reforms, anticipating the impact that regional market integration and liberalization will have on the agricultural sector. Similarly, Japan can seek to boost the productivity and competitiveness of its farmers such that the removal of tariff protection will not affect them adversely.
All in all, the discussion about the TPP has spurred the Japanese to start questioning long-held views about the structure of their economy. Japan now stands at a crossroad. Its decision about whether or not to join the TPP is an important decision about the future direction of its economy. Does Japan want an open and dynamic economy or an economic structure that no longer seems to meet her needs?