by Adam S. Posen, Peterson Institute for International Economics
Published in the Nikkei Asian Review. Reposted with permisssion.
April 18, 2014
It is time at last for Japan to play its agricultural card. Right now, we are coming to a critical juncture in the pre–Trans-Pacific Partnership (TPP) bilateral negotiations between Japan and the United States. Without substantial movement on agricultural protection by Japan, the United States will not be able to move forward with the TPP in the near term. This is an opportunity that Japan will not get again. It is an opportunity that is key to both Japan's economic well-being and its security. It is time for Shinzo Abe's government to make the deal.
Right now there are bilateral negotiations between the US and Japanese governments over the precursor to the TPP. If the two countries can agree, they could form a solid bloc, as well as an enormous joint market, which will set the dominant tone in TPP talks for all further negotiations multilaterally. This bloc between Japan and the United States, and implicitly with Canada and Mexico, would advance high standards of intellectual property rights, environment, health and safety, and limits on unfair state subsidies to competition. All of this is in the interest of Japan and other advanced economies.
Analysis by Peter Petri for the Peterson Institute for International Economics forecasts that Japan would gain $85 billion in additional national income by 2020 were it to join the TPP as it currently stands. If, as is likely, the combination of Japan and the United States successfully bringing the TPP forward entices either South Korea or China to join the TPP at a later date—and therefore on terms Japan and the United States would have largely set—Japan's income gain stands to double and could reach as much as $230 billion by 2025. This is a huge sum and is actually the largest gain of any participant in the TPP, according to Institute projections. Other analysts have concluded similar numbers.
Leverage for Japan
Unfortunately, the US-Japan bilateral precursor to the TPP is now stalled. While Japan and the United States have reached mutual accommodation on the supposedly sensitive sectors of autos and insurance, among other issues, there remains a deadlock over agriculture, particularly over pork and dairy restrictions in Japan. There also is in the background the concern that the US Congress has not passed Trade Promotion Authority for President Barack Obama. This means there is concern about the United States being able to carry through on the deal.
A Japanese agreement with the United States to liberalize Japan's agriculture market would solve both of these problems at once. First, obviously, it would remove the one outstanding point that Japan and the United States do not have easy agreement on heading into the TPP negotiations with the other 10 participating countries. Second, it would present the US government, including the Congress, with a deal too good to turn down. It would give Abe leverage against Obama during the president's upcoming visit for a personal commitment to see the TPP agreement through Congress in return for Japan making the deal.
The deal, it must be understood, is probably not going to sacrifice all safeguards on rice, but would require a path toward near-zero tariffs for all other Japanese agricultural goods. The US government rightly sees that as necessary to maintain the high quality of agreement for the TPP in other areas of mutual benefit to the United States and Japan when confronting tariffs of other negotiating countries.
The majority of Japanese citizens know that the current agriculture protections in Japan essentially constitute theft of their hard-earned income. They pay outrageous prices for home grown and foreign foodstuffs, even though they could easily import quality goods at a fraction of those prices. Moreover, if Japanese people would continue to prefer paying a premium for homegrown products, there is nothing that these reductions in tariffs would do to prevent that. Japanese consumers who wish to have only Japanese pork or milk could pay a premium for that in the stores as a matter of free choice. Similar things go on with US-labeled products or organic-labeled products in US supermarkets.
Furthermore, if the goal is simply to protect Japanese farmers' way of life, the Japanese government can save a lot of money by directly subsidizing farmers with a small tax and avoid the tariff that is so costly to the average Japanese person. There is nothing good economically about the current policy.
Some will claim that the Japanese government need not agree to this agricultural reform proposal from the United States as a précis to the TPP, because either the United States is not really going to go through with the TPP, or that if the Obama administration really wants the TPP, putting it off a while will not hurt anything.
These are profoundly misguided ideas. Again, Japan stands to gain more in absolute and relative terms from a TPP deal than the United States does, by a large margin. But the deal on the table will lose critical momentum if Japan and the United States cannot present a united front right now.
An agreement made in time for Obama and Abe's upcoming meeting would be a framework that would allow Abe to say to Obama, "I have delivered, so must you." It would allow the president and prime minister to tie the economic relationship to the national security relationship, as only they can, thereby reinforcing the TPP deal and its benefits. Leaving it to a later date for lower-level negotiators would lose that advantage.
Make no mistake, as with all of Abenomics—but even more so—the TPP deal is about creating a stable Pacific security arrangement for Japan as much as it is about increasing Japanese income. The proposed partnership aligns a variety of countries along the Pacific, including such critical and potential allies such as the Philippines, Singapore, and Vietnam. It helps them stabilize their own economies. It helps them orient toward Japan and the United States as a unit. It helps them see the benefits of staying transpacific oriented and emphasizing relationships with advanced democracies.
If China decides to develop peacefully within its internationally agreed borders, as I both hope and expect it will, it will feel compelled to join the TPP. This, as I mentioned, would be to Japan's benefit immediately because it would help build in rules and practices protecting Japanese investment and exports to China. It also would rapidly double the gains to Japan from the TPP agreement. Were China to mistakenly pursue a more aggressive approach to its neighbors, in the interim, it probably would not join the TPP, but then the TPP would still be a bulwark reinforcing against any unfortunate Chinese bullying or economic attacks.
Don't Lose Momentum
Making the TPP deal happen at a bilateral US-Japan level with a commitment between Abe and Obama is the only way to assure this project proceeds in all its dimensions and to bring the other TPP negotiating countries along. Absent the necessary agricultural accommodation by Japan, this opportunity will be missed. It is likely China will take advantage of the resultant pause to push its own far lower standard Regional Comprehensive Economic Partnership (RCEP) Asian trade deal. More importantly, doubt will gain traction in the other TPP member countries about US conviction to carry a trade deal forward as well as about the US-Japan relationship and their own need to lower tariffs.
In January at the annual meeting of the World Economic Forum in Davos, Switzerland, Abe gave a widely praised speech in which he described himself as the diamond-tipped drill bit prepared to go through the special interests in Japan to release the true strengths of the Japanese economy. It would be a shame to see the mandate and excitement behind Abe's hard-nosed drilling be lined up only to have the drill bit stop after going just a few centimeters deep.
The most obvious next layer for Japanese reform remains its exceptionally backward and protected agricultural sector. Making a deal with the United States on the TPP bilaterally to allow the trade pact to go forward requires real reform of Japanese agriculture in Japan's own interest. A completed TPP will pay that back tenfold directly in economic terms and abundantly in security terms. But to seize this opportunity, Abe must make the deal with Obama now. It should not be allowed to slip away because of the hardened special interest of Japanese agriculture. Abe has both the mandate and the reason to drill right through that now.
Book: Understanding the Trans-Pacific Partnership January 2013