Japan and the Trans-Pacific Partnership

April 12, 2013

The United States and Japanese governments announced today that they had reached agreement on the terms of Japan’s participation in the Trans-Pacific Partnership (TPP) following nearly 18 months of bilateral consultations. This opens the door to the world’s third-largest economy joining the regional trade negotiations as soon as this summer. In addition to the largely positive impact Japan’s participation will have on the dynamics of the TPP talks themselves, this development could give a significant boost to economic reform efforts in Japan and to U.S. strategy in the Asia-Pacific region.

Q1: What did the two governments agree to?

A1: As the required “confidence-building measures” Washington had been seeking to demonstrate Japan’s seriousness about TPP membership and to address expected Congressional concerns, Tokyo made a number of upfront commitments in two sectors that have long bedeviled bilateral trade relations: automobiles and insurance. In autos, Japan agreed to more than double the number of vehicles eligible for import under its Preferential Handling Procedure (PHP) and to accept a long, back-loaded phase-out of the existing 2.5 percent U.S. tariff on imported cars and 25 percent tariff on trucks. In insurance, Japan agreed to refrain from approving certain products for sale by Japan Post Insurance until a competitive environment with private insurers is established, which Tokyo acknowledged could take several years.

The two governments also agreed to set up two parallel sets of bilateral talks alongside the main TPP negotiations to fully resolve the auto issues, as well as to address a number of nontariff measures of longstanding concern to U.S. exporters and investors, including impediments to mergers and acquisitions in Japan, inadequate regulatory transparency, and problematic government procurement and competition policies. The outcomes from the parallel auto talks will be folded into the main TPP agreement and subject to its dispute-settlement procedures.

In an exchange of letters between Japanese ambassador to the United States Kenichiro Sasae and acting U.S. Trade Representative Demetrios Marantis, the two sides recognized each other’s “bilateral trade sensitivities:” agriculture for Japan and certain manufactured products for the United States. Japan also made a clear statement of its readiness to negotiate a high-standard and comprehensive TPP agreement and to put all products on the table for negotiation.

Q2: Why does Japan’s participation in TPP matter?

A2: With Japan, the 12 countries in TPP account for nearly 40 percent of global GDP and roughly one-third of world trade. This means that TPP can no longer be dismissed as a relatively limited undertaking between the United States and a number of smaller Asia-Pacific economies; among the world’s active trade negotiations, TPP is now clearly the largest and most significant. It also positions TPP as the leading template for future trade arrangements, including the recently announced Transatlantic Trade and Investment Partnership (TTIP).

The addition of Japan also gives momentum to TPP as the leading forum for economic integration in the Asia-Pacific region, and as the economic centerpiece of the U.S. strategy of “rebalancing” to Asia. South Korea is now likely to feel compelled to take another serious look at joining TPP, something which would not be difficult in substance (since TPP is largely modeled after the existing Korea-U.S. Free Trade Agreement, or KORUS), but which Seoul has been reluctant to do because of lingering domestic opposition to KORUS and concerns about tilting too far away from China. Thailand, the Philippines, and Taiwan have also expressed strong interest in joining TPP. All of this is likely to give pause to Indonesia and China, which have championed the other main forum for trade liberalization in Asia, the Regional Comprehensive Economic Partnership (RCEP), a grouping that includes all 18 members of the East Asia Summit except the United States and Russia.

Joining TPP is one of the key pillars of Japanese Prime Minister Shinzo Abe’s strategy to revitalize the Japanese economy, dubbed “Abenomics.” In addition to monetary and fiscal stimulus, Abe has identified structural reform of the protected and inefficient agriculture sector, of Japan’s rigid labor markets, and of its burdensome regulatory practices as essential to strong and sustained Japanese growth. Domestic resistance to these reforms is strong, and TPP is seen as the catalyst that could force the needed change.

Q3: What happens now?

A3: Armed with the “confidence-building measures” it needed from Tokyo, the Obama administration will soon notify Congress of its intention to bring Japan into the TPP negotiations, launching a 90-day consultation period. Vocal opposition from some House members—especially those representing automotive interests—is likely, but the administration is counting on support from most Republican members and enough Democrats to overcome this resistance. The other 10 countries in TPP must also approve Japan’s entry; Australia, New Zealand, and Canada have expressed some concerns but are likely to come aboard now that the United States has welcomed Japan in.

Tokyo hopes to formally join the ongoing TPP negotiations as soon as the July round, just ahead of its Upper House elections scheduled for late that month. Adding such a large and complex economy to the table will undoubtedly complicate the negotiations and could slow them down; however, Japan is familiar and likely to be comfortable with most of the rulemaking elements of the main TPP text, meaning that it is still possible that agreement on the core chapters could be reached by the deadline of the end of this year imposed by TPP leaders when they met in Phnom Penh last November.

Matthew P. Goodman is the William E. Simon Chair in Political Economy at the Center for Strategic and International Studies (CSIS) in Washington, D.C.

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