【No.6】March 2012

Why Choose the TPP?
-A Consideration of th e Issues from the P erspectiv e of th e Sy st e mo f In t e rn at i o na l Tr ad e -Motoshige Itoh
President, National Institute for Research Advancement (NIRA)
Professor, Graduate School of Economics,The University of Tokyo

What form will trade negotiations take in the 21st century?
The second half of the 20th century saw profound growth in the world economy as a result of theliberalization of trade. At the center of this process were the General Agreement on Tariffs and Trade(GATT) and its successor, the World Trade Organization (WTO).
The WTO is an excellent system. Its great strength is its multilateral framework, incorporating most of
the world’s nations. The most-favored nation principle, which demands non-discriminatory treatment fromall member nations, has played a significant role in extending the benefits of trade liberalization
negotiations to the entire world. Under the WTO system, the tariff rates of advanced manufacturing nations
have dropped to extremely low levels. Emerging nations have also opened their markets in order to realize
economic growth.
However, with the advent of the 21st century, the limits of the WTO’s functions have become
increasingly apparent. The Doha Round, marked by conflict between the opinions of developed andemerging nations and the subsequent stalling of negotiations, stands as a symbol of these limits. With morenations participating and more comprehensive liberalization being pursued, it is unavoidable thatnegotiations will face difficulties.
This is not to imply, of course, that the WTO has declined in importance. WTO rules have made it
impossible for nations to implement self-serving trade policies. WTO rules forbid the illicit raising of tariffs
and the restriction of trade by illegal methods. Most nations respect these rules. In addition, when tradeissues result in bilateral conflicts, the WTO plays the role of arbitrator. This conflict arbitration function
seems to be becoming increasingly important.
It goes without saying that Japan should support the WTO. It will also be essential to step up efforts inthe Doha Round, which as indicated currently faces difficulties, in order to reach consensus. But it is clearthat the fate of the future world trade system cannot be entrusted to the WTO alone. We need a mechanism
to complement the WTO.
The successive conclusion of free trade agreements (FTA) and economic partnership agreements (EPA)
across the globe over the past 20 years forms the background to these changes (Figure 1). The advantage ofthese agreements is that they enable neighboring nations with strong economic relationships to progress
rapidly in liberalizing trade. In addition, such arrangements have promised to enable the realization ofdeeper integration by expanding negotiations to incorporate more extensive liberalization and thecoordination of domestic systems rather than merely liberalizing border measures through the scrapping oftariffs. Using a rather rough formulation, we might say that the WTO is a system which excels in realizing abroad but shallow liberalization between large numbers of nations, while FTA and EPA excel in therealization of narrow but deep liberalization between specific nations and regions.

Figure 1

Number of global FTA/EPA

The number of FTA/EPA going into effect increased rapidly from the 1990s onwards.

1958 European Union (EU)(Treaty of Rome: Former EEC)
1992 ASEAN Free Trade Agreement (AFTA)
1994 North American Free Trade Agreement (NAFTA)
2002 Japan-Singapore EPA (Japan’s first)(Note) As of June 1, 2011.
(Source) Formulated based on the 2011 JETRO Global trade andInvestment Report (Original materials sourced from WTO website).

As we proceed into the 21st century, nations are being forced to seek deeper integration by mutually
pursuing more extensive liberalization. This trend will expand within the WTO framework with regional
economic cooperation as the impetus. It is quite possible that the maximal exploitation of thecomplementarity between the two approaches discussed above (broad but shallow liberalization and narrow
but extensive liberalization) will be the defining characteristic of 21st century trade liberalization
negotiations.

2What is the background to the TPP?

Some commentators point to the concern that the advancement of regional economic cooperation will do
nothing but increase the degree of connection between specific nations and regions, leading to theformation of economic blocs. However, at present there is no need for this concern.
The formation of economic blocs during the global Depression of the 1930s saw specific nations andregions (the U.S., the British bloc, the French bloc, etc.) erecting high tariff barriers and forming mutually
exclusive economic zones. Today’s developing trend of regional cooperation is clearly entirely different
from this process of formation of economic blocs. Under the WTO, tariffs are kept low, and it is notpossible to significantly increase tariffs in relation to specific regions, as occurred in the 1930s. In addition,
almost 200 FTA and EPA have been concluded between specific countries and regions, and regional
economic cooperation is proceeding on the basis of overlapping agreements between nations. Thesearrangements are not forming bloc economies which will divide regions.
Borrowing the phrasing coined by Colombia University’s Jagdish Bhagwati, it is important that
arrangements for regional economic cooperation act not as stumbling blocks which impede global
liberalization, but rather as building blocks promoting liberalization. Up to the present, the regional
economic cooperation arrangements being advanced around the world have functioned as building blocks.
What should attract our attention within this process is the fact that regional economic cooperation is
evolving from bilateral agreements to multilateral agreements incorporating more nations (Figure 2).
Looking at the Asia-Pacific region, frameworks such as ASEAN plus Japana, China, and Korea and theTrans-Pacific Strategic Economic Partnership Agreement (TPP) exemplify this trend. While neither have
yet been realized, it is important that an impetus towards this type of wide-area regional economic
cooperation has developed. It is essential that Japan’s trade strategy take regional trends of this kind into
close consideration.
In relation to the TPP, a former senior U.S. official is said to have commented that the U.S. sought todemonstrate its level of commitment to the Asia-Pacific region through its active involvement in theagreement negotiations. The Asia-Pacific region is becoming increasingly important to the U.S., and thisfact is manifested in the nation’s initiatives in relation to the TPP. It does not need to be pointed out that thepresence of China is the key to the U.S.’s political, economic and security strategies in the Asia-Pacific.
The present brief discussion will not take Japan’s security situation into consideration, but it can beindicated that the way the TPP should be approached is an extremely important issue for Japan’s diplomatic
strategy.

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Figure 2

Frameworks for wide-area economic partnership in the Asia-Pacific region

Regional economic cooperation is expanding from bilateral to multilateral agreements.

(Note) Of the ASEAN member nations, Myanmar, Cambodia and Laos are
not members of APEC.
(Source) Formulated based on Ministry of Economy, Trade and Industry materials.

Intention to participate in the TPP will encourage economic cooperation
between Japan, China and Korea

Amid the discussions as to whether or not Japan should participate in the TPP negotiations, it has beenstressed that the nation should push ahead with the realization of an ASEAN plus Japan, China, and Korea
agreement rather than the TPP. The logic runs that in the future Japan’s trade volume will increase withneighboring countries such as China rather than with the U.S.; participation in the U.S.-led TPP will resultin a lack of progress in negotiations between Japana, China, and Korea, and will thus be disadvantageousfor Japan.

4However, the view that if either the TPP or a China-Japan-Korea agreement is chosen, then the otheropportunity will be lost represents a misreading of the actualities of trade policy. As became clear following
Japan’s announcement that it would participate in TPP negotiations, the nation’s signaling of its intentionsin this direction boosted the motivation of China and Korea with respect to Japan-China-Korea
negotiations.
For more than 10 years, Japan, China, and Korea have sought some path towards the conclusion of an
economic partnership agreement. Under the Obuchi Cabinet, at the instruction of the leaders of the threenations, a research project concerning the enhancement of economic cooperation and the realization of an
EPA, led by think tanks in each nation, was commenced from 2001. NIRA was responsible for the researchon the Japanese side. The fact that a project of this type was continued was of great significance, but
unfortunately it did not develop into a fully-fledged research project with the participation of government
personnel. Almost 10 years have now passed. We may assume that reasons exist on each side of theJapan-China-Korea triangle to explain the fact that no progress has been made in proceeding to the stage ofnegotiations. It is possible that Japan’s announcement of its intention to participate in the TPP negotiations
has effected a significant change in this situation1.

The chain reaction that occurs in trade negotiations

No matter what period we might care to examine, a certain type of chain reaction can be seen to occur intrade negotiations. During the Uruguay Round of the GATT negotiations, from the latter half of the 1980s
through the first half of the 1990s, conflict between the U.S. and the EU regarding agricultural issues
needlessly extended the negotiation period. Taking this situation into consideration, the U.S. acted toconclude the North American Free Trade Agreement (NAFTA) with its neighbors Canada and Mexico.
Without relying on the interminably protracted GATT negotiations, the U.S. transferred its attention toregional economic cooperation with neighboring countries involving a considerable volume of trade andinvestment. This move on the part of the U.S. inspired a sense of crisis in the EU camp (weakening of
GATT?), with the result that the two sides eventually reached a compromise, and the Uruguay Round wasconcluded. In other words, a chain reaction occurred in which the impetus provided by NAFTA pushedahead the Uruguay Round negotiations.
Japan should proceed with both the TPP and ASEAN plus China, Japan and Korea. In doing so, it would
bring the goal of the realization of a free trade zone in the Asia-Pacific region more clearly into focus.
In actuality, it would be most realistic for Japan’s trade policy to proceed simultaneously on four levels.
These are: 1) Multilateral frameworks such as the WTO; 2) Wide-area Economic Partnership Agreements(TPP and ASEAN plus Japan, China, and Korea, ASEAN+6, adding India, Australia and New Zealand,etc.); 3) Bilateral Economic Partnership Agreements (Japan-Korea, Japan-EU, etc.); and 4) Liberalization
implemented unilaterally by Japan. Liberalization at all of these levels is important, and all four should be5exploited strategically. The potential for chain reactions between the four levels should also be given
attention (Figure 3).
One government official responsible for trade has commented that Japan’s announcement of its intention
to participate in the TPP negotiations resulted in a change in the attitude of the EU. The EU is alsopresumably able to read the flow of the chain reactions in trade negotiations. It is to be hoped that thissituation will provide impetus to economic partnership negotiations between Japan and the EU.
Intense negotiations are in the offing in relation to the TPP. It is possible that the U.S. or another nation
will make demands which appear unreasonable to Japan. Proceeding effectively with negotiations of thistype will demand a level of flexibility on the part of Japan’s negotiators which enables them to play theJapan-China-Korea card. The same canbe said of negotiations with the EU.

Figure 3 The four levels of trade policy

Proceeding simultaneously in parallel is realistic.
①WTO

Conclusion of Doha Round, implementation,etc.

Japan-China-Korea

ASEAN+3, ASEAN+6③Bilateral economic
partnership agreements

Japan-Korea,
Japan-Australia, etc.

Deeper economic integration/ Economic revitalization②Wide-area economic
partnership agreements

Asia-Pacific free trade area
（ FTAAP)

TPP

Japan-EU.etc.

④Autonomous liberalization

Relaxation of regulations, harmonizationof systems, etc.

Japan cannot choose to turn its back on the TPP

It is necessary to turn the question as to what meaning participation in the TPP negotiations will have forJapan around and to consider how Japan’s involvement will affect the TPP.
It goes without saying that the participation or non-participation of a major economic power like Japan
will result in a significant change in the character of the TPP. This is because the TPP will function as a
powerful impetus to the development of regional economic cooperation in the Asia-Pacific region. Rather
than the creation of a framework for economic cooperation in which the U.S. has the overwhelming share,
the participation of Japan in the negotiations as a regional economic power creates the potential for an

6expanded framework for cooperation across the Asia-Pacific. Since Japan announced its intention toparticipate in the negotiations, Canada and Mexico have also announced their desire to participate. The
number of nations seeking to participate may even increase in future.
Both the TPP and ASEAN plus Japan, China, and Korea are nothing more than processes towards theformation of larger frameworks for economic cooperation, in these cases taking in the entire Asia-Pacificregion. It remains unclear as to whether the TPP will ultimately succeed, but in the background we candiscern a significant trend towards the creation of a more comprehensive framework for cooperation in theregion. There is absolutely no reason for Japan to isolate itself from this trend. In fact, Japan must be more
active in its participation – the nation cannot choose to turn its back on the TPP.

Towards an open Japan

Voices opposing Japan’s participation in the TPP are being raised in the agricultural sector and in somecorners of the healthcare sector. This stems from the fear that the TPP will result in change to the systems
presently in place in Japan. Opponents of market liberalization will always exist, no matter what the
specific target. Conflicts of opinion are unavoidable. What is important is that discussions concerning
agricultural and healthcare issues are based on accurate data and adequate analysis.
Unfortunately, however, what we have seen thus far in discussions concerning agricultural issues inrelation to the TPP is emotional arguments based neither on accurate data nor adequate analysis. As
Professor Shinichi Shogenji of Nagoya University’s Graduate School of Bioagricultural Sciences pointed
out in my discussion with him as part of the NIRA Dialogue Series2, the real threat in terms of rice imports
to Japan is China. The capacity of the U.S. and Australia, both actual participants in the TPP negotiations,to export rice is restricted by limited water resources and quality issues.
Estimates of the effects of liberalization of rice imports on Japan’s rice-growing industry issued by the
Ministry of Agriculture, Forestry and Fisheries3 have provided an important foundation for the argumentsof opponents of the nation’s participation in the TPP. These estimates assume the possibility of influxes ofhigh volumes of cheap rice from countries including China. Yet even as they brandish these figures,
representatives of Japan’s agricultural sector urge action towards the realization of economic cooperation
between Japan, China, and Korea rather than participation in the TPP. If the issue of rice is important, it isprecisely economic cooperation with China that the opponents of the TPP should be concerned about.
However, the Ministry figures have not been used to bolster any arguments of this type.
Rather than something which will destroy Japan’s agriculture and healthcare industries, the TPP should
be considered a means of creating strong agriculture and healthcare sectors which correspond to theinterests of Japanese citizens. As is clear to many of those citizens, simply maintaining these industries intheir current form will not ensure a positive outlook for the nation’s future. For 20 years since the collapseof its economic bubble, Japan has feared change and avoided reform. This has led us to the situation today,

7with the nation’s sense of impasse increasing. Japan has no path open to it other than to rebuild its
agricultural and healthcare sectors in a more desirable form, with market liberalization as the preconditionof success.
NIRA itself has conducted research on issues of Japan’s food and healthcare industries from a variety ofperspectives, and has made policy proposals in these areas. I would like NIRA to continue in its research onthese subjects. Issues of food and healthcare are important issues for all citizens. Precisely because of this,rather than entrusting discussions to a limited number of experts, what is essential is a transparent
discussion process which has the power to convince the public.
The arguments over Japan’s agricultural and healthcare sectors which have been triggered by the TPP
provide us with a tremendous opportunity to engage in discussions of the issues at the level of ordinary
citizens. In order to flourish as a resource-poor nation, Japan must open itself to other nations. Now is thetime to enhance the nation’s domestic systems, based on a correct understanding of the realities of the 21st
century global economy.

Notes
1. The potential for an FTA between Japan, China and Korea has been under consideration by a Joint Study
Committee made up of representatives of industry, academia and government since May 2010. With theissue of Japan’s participation in the TPP negotiations, the nations involved rapidly developed proactive
attitudes, and a joint declaration urging the commencement of negotiations was issued in December 2011.
The possibility of reaching an agreement to commence negotiations at the 2012 Trilateral Summit between
the nations is rumored.
2. TPP mondai to nihon no nogyo (“The Issue of the TPP and Japan’s Agricultural Industry”), NIRA Dialogue
Series No. 68 (January 2012) (http://www.nira.or.jp/pdf/taidan68.pdf) (In Japanese).
3. Hokatsuteki keizai renkei ni kansuru shiryo (Norin suisansho no shisan） (“Documentation concerning
Comprehensive Economic Partnership -Estimation”) Ministry of Agriculture, Forestry and Fisheries,(October 27. 2011), (http://www.maff.go.jp/j/kokusai/renkei/fta_kanren/sisan.html) (In Japanese) .

Profile of Motoshige Itoh:
President, National Institute for Research Advancement (NIRA), 2006 – present.
Professor, Graduate School of Economics,The University of Tokyo, 1996 – present.
Holds a B.A. in Economics from the University of Tokyo and a Ph.D. in Economics from the University ofRochester. Rochester, N.Y.
Member of various government committees organized by the Ministry of International Trade and Industry,
the Ministry of Finance, the Cabinet Office, and others.

8What’s NIRA?

The National Institute for Research Advancement (NIRA) is anindependent, private-sector research institute which defines urgent
policy issues and formulates bold and timely policy proposals, seeking tocontribute to the revitalization and further development of Japanesesociety and the Japanese economy.
Utilizing a network of scholars, researchers, and specialists in a wide
range of subjects, NIRA works for the public benefit from a fair andneutral perspective, attempting to reinvigorate policy debate andcontribute to the process of policy formation in Japan. The institutefocuses on domestic social and economic policy, international relations,and regional issues in Japan as its principal areas of research.
Established in 1974 as a government-authorized independent
research institution, NIRA became an incorporated foundation in 2007,
and since February 2011 has been recognized as a Public Interest
Incorporated Foundation.

National Institute for Research Advancement (NIRA)
4-20-3 Ebisu, Shibuya-ku, Tokyo 150-6034, Japan(URL:http://www.nira.or.jp/english/)
For more information： info@nira.or.jp
Tel +81-3-5448-1735

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Copyright Ⓒ 2012 by National Institute for Research Advancement

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