U.S. pushing ahead with trans-Pacific trade negotiations,early resolution unlikely
Dec. 26, 2011
Kengo Tahara
Economist
Japan Center for Economic Research

While the so-called Doha round, the global trade negotiations of the World
Trade Organization, is at an impasse, the United States and others are pushing
forward with regional trade talks, hoping to conclude with a Trans-PacificPartnership (TPP). This would be a multilateral arrangement for freer trade
among Asia-Pacific partners. The represents an expansion of P4: The
economic partnership agreement signed between Brunei Darussalam, Chile,
New Zealand, and Singapore. The TPP now has nine countries at the table, theoriginal four now joined by the U.S., Australia, Vietnam, Malaysia, Peru.
Actually, the U.S. has participated in these talks since 2008 but now is prepared
to officially sign on (if talks are successful). Just before the APEC summit lastNovember, Japan’s Prime Minister Noda expressed interest in joining the talks,
and Canada and Mexico followed suit. Thus, 4 is now on the edge of becoming
9, and it could quickly escalate to 12.
With the economy moving along at a snail’s pace, with stubbornly highunemployment even three years after the financial crisis, the U.S. is counting
on export growth to push economic activity on to a faster track. Indeed,President Obama pledged in 2010 to double U.S. exports in five years. He isafter all a committed free trade promoter. But he has had to shift stance a little
to keep his supporters (especially in the labor movement) on board whileaccommodating the republican opposition, to the extent feasible. The result of
his support, however shifted, finally allowed long-stalled Free TradeAgreements with South Korea, Colombia, and Panama to win congressional
ratification this October. With those agreements finally in hand, the focus isturning to TPP as a “21st century trade deal.”
Of course, 2012 is an election year. The twin issues of trade and jobs are very
likely to receive prominent attention in this coming political campaign. As withJapan and some other countries, there is a strong anti-free trade sentiment.
The issue is usually reduced to opposing free trade and thereby protecting jobs.
Support usually is reduced to backing free trade as a potential job booster down
the road. In the U.S., with respect to TPP, the unions are lining up against it, ascould be expected. So are some industry groups. The sugar industry for

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example, enjoys special treatment in the former FTAs (Free Trade Agreementswith Australia, or with Peru). The sugar processors fear losing their special
status and protection. Please understand, sugar is a big issue in Louisiana andsome parts of Florida. It is not a big issue most anywhere else. In other words, if
TPP fails, it is unlikely to fail over sugar. In fact, some budget proposals to deal
with chronic deficits have targeted sugar subsidies. Trade deal can besweetened by other means.
Many in U.S. who engage in beef production and processing, eagerly welcome
Japan to the negotiation table, hoping to limit, reduce, even eliminate
agricultural protection, which limit their ability to keep on the open market. Automakers? That shoe is on the other foot. In terms of GDP, the contribution ofauto makers greatly outweighs beef production and processing. Thus, autos,
not sugar or beef, hold the key to the U.S. negotiating stand. However, the U.S.
auto market is now very integrated between domestic name plate producers
and transplant producers. Thus the auto market is not totally in lock stepagainst Japanese participation in these trade talks. Put simply, while auto
executives in Detroit are strongly opposed, executives of Toyota of Kentucky, orHonda of Ohio are shall we say, less opposed. Still to this day, the U.S.
imposes a 2.5 percent tariff on passenger cars and 25 percent on light trucks(known as the “chicken tax” since it was introduced in retaliation for Europe’s
tariffs on American chickens in 1963), while Japan now imposes no tariffs onimported cars. As the Wall Street Journal puts it, U.S. (name plate) auto makers
fear that lowering the tariffs will let Japanese name plate vehicles increase
market share. In the U.S.-Korea FTA, domestic name-plate producers
succeeded in keeping the 2.5 percent tariff in place until the fifth year, and the
25% “chicken tax” until the eighth year before they are eliminated. Perhaps,some similar arrangement can overcome auto opposition to TPP.
U.S. beef industry in general welcomes Japan’s joining because they anticipate
more market access to Japan, which currently imposes 38.5 percent tariffs andunder-20-month limit on cattle age for the safety reason after BSE (or mad-cowdisease) cases in the U.S. Many in the industry insist that Japan adopt theinternational safety guideline and relax the restriction. But recently they seem tohave toned down their requests to Japan, probably because they do not want toprevent Japan’s joining at all by demanding too much and giving rise tocontroversies in Japan.
TPP is an agreement not just on tariffs but to make it easier to do business ineach other’s country. It covers many areas like government procurement,

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intellectual property issues, and so on. FTAs in general these days cover more
and more services issues in addition to goods (Fig. 1). In addition to tariffs on
goods, there exist some rules that work like a tariff on businesses by foreigncompanies including services. For instance, the rules of government
procurement in some countries stipulate that the bids by domestic companies
be virtually discounted by a certain rate, treating domestic companies in better
positions than foreign companies. And there are different kinds of non-tariffbarriers like the limit of foreign ownership of certain businesses. And tradedeals are becoming more of making unified rules among countries rather thanjust tariff negotiations.
Unifying the rule internationally has a benefit of making international
businesses easier. But unifying necessarily has the effect to reducing some ofthe difference and diversity between countries. Culture and food safety issues
are more important than tariffs and likely to be even more important as theseagreements begin to cover rules with respect to intellectual property. The issue
of intellectual property is now a rival to the issue of tariffs and it quickly is
becoming more important than tariffs.
And when it comes to rule-making, it is often a big issue domestically before it isa domestic-vs-foreign issue. Look at the Japan Post issue, which is one of thepriorities the U.S. is expecting Japan to reform. They point out that Japan Post,
which is currently owned by government, is given preferential treatment andpreventing entry of foreign financial businesses. This is not just adomestic-foreign issue, but a government-private issue. Japan Post affects not
only foreign financial businesses (potentially) operating in Japan but private
financial companies in general (both domestic and foreign). That implies thedeals are not going to be easy. But then trade deals have never been easy tobegin with, especially respect to how they impact domestic politics. And again,
the deciding issue is whether free trade enhances or reduces job growthprospects.
There seem to remain many issues to be negotiated among nine (or twelve if
Japan, Canada and Mexico join) countries. The U.S. pursues a comprehensive
agreement including many areas including services and international rules, butcountries like New Zealand and Australia are actually more ambitious in thatthey are trying to re-negotiate on the already agreed issues in the formerly
ratified FTAs, which the U.S. seems not unwilling (e.g.: sugar).

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The U.S. targets agreements in 2012, but that may be too ambitious, especially
if TPP talks expand to 12 countries. New potential trade talk partners bring newissues, requiring more time to achieve consensus and compromise. One
option would be to offer the new entrants take-it-or-leave-it offers after the ninecountries reach an agreement — assuming the nine can agree. However, newpotential partners are very unlikely to be receptive to take it or leave it. And thatmeans either a scaled down agreement among the 12 partners or extendingtalks to achieve a comprehensive deal. That entails pushing the talks into 2013.
That would have the benefit of reaching consensus after the U.S. election. Thatpotentially is a smart strategy, taking trade out of the political debate.

Kengo Tahara is an economist in Japan Center for Economic Research(JCER). He
joined JCER in 2008 after receiving a master's degree and completing the course
requirement for the doctoral program in agricultural economics from the University ofTokyo. For the last three years he specialized in business forecast for Japan'seconomy. He has worked as an economic intern at the Conference Board in U.S. sinceJune 2011.
Figure 1: The percentage of regional trade agreements which cover services% 80.080 cases
The percentage of RTAs which
cover services (right scale)

7060
504030

70.0
60.0
50.0

Regional Trade Agreement: Total

40.0

RTAs which cover services

30.0

2020.0

10

10.0
0.00
1985-89

1990-94

1995-99

2000-04

2005-09

Note: RTAs which covered only goods at the time of entry into force but covered also
services later are categorized as those including services.
Source: WTO; JETRO

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