Photo by Hsuanya Tsai licensed under CC by 2.0
The Trump administration’s decision to withdraw from the Trans-Pacific Partnership (TPP) trade agreement could have serious implications for U.S.-Japan economic relations and the process of economic integration in the Asia-Pacific region. TPP was promoted as a significant multilateral agreement in economic and strategic terms, but its future is now uncertain.
Japan and the other 10 parties to TPP must now consider the way forward for TPP absent the United States. Given the current political realities in the United States, the crucial question is whether to create an alternative to TPP or ratify it among the remaining 11 parties. An analysis of the benefits of a so-called TPP 11 and the potential leadership role for Japan in that process suggests the latter.
The Implications of U.S. Withdrawal
The U.S. withdrawal from TPP might be the first fulfilled campaign pledge of President Donald Trump as detailed in the Presidential memorandum dated on January 23, 2017, and the letter issued by the Office of the U.S. Trade Representative (USTR) on January 30, 2017. Given that Article 30.5 (Entry into Force) of the TPP agreement requires ratification by more than six signatory countries, which account for at least 85 percent of the combined gross domestic product (GDP) of the original signatories, it is generally recognized that TPP would not be effective without the United States (which accounted for 60 percent of GDP among the original signatories). But is it possible to exclude the United States from the GDP calculations or revise Article 30.5? This depends on the legal implications of both the Presidential memorandum and the letter from USTR.
According to observations by Professor Tsuyoshi Kawase of Sophia University, the legal meanings of the memorandum and the letter are different. The memorandum said “…to withdraw the United States as a signatory to the Trans-Pacific Partnership (TPP), to permanently withdraw the United States from TPP negotiations,…” which very clearly declared that the United States abandoned its status as one of the original signatories to TPP. However, the USTR letter was vague, stating that “…the United States does not intend to become a party to the Trans-Pacific Partnership Agreement. Accordingly, the United States has no legal obligations arising from its signature.…” The USTR letter didn’t mention the status and rights of the original signatory and just proclaimed the United States would not proceed with the ratification process. Professor Kawase argued that since the USTR letter is an official document sent to the TPP Depositary, in contrast to the memorandum, the United States still reserves its status and rights as an original signatory and should therefore be included in GDP calculations, including any effort to revise Article 30.5.
Regardless of how one interprets those documents, it seems clear that the Trump administration has no desire to ratify TPP; in fact, Vice President Mike Pence declared TPP a “thing of the past” during his recent trip to Japan for a bilateral economic dialogue. In addition, the United States wasn’t listed as a member of the Joint Statement issued by TPP partners after a high-level meeting in Chile in March. Indeed, the USTR letter didn’t inherit the radical expression in the Presidential memorandum. But if it is needed, the remaining 11 parties can seek options, for example issuing a letter to clarify the legal aspects of the U.S. withdrawal from TPP.
The Benefit of TPP 11
Needless to say, access to the U.S. market was one of the most attractive factors for the TPP signatory countries. But to what extent would the benefits be reduced absent the United States?
Economic Perspective: Among the TPP members, only Japan, New Zealand, Malaysia, Vietnam, and Brunei do not have a bilateral free trade agreement with the United States. This means the trade relationship between the rest of the members and the United States won’t be affected in terms of basic tariff reduction and simplification of trade procedures even if TPP 11 is realized. Furthermore, the average U.S. tariff on imported goods is merely 2.71 percent (most favored nation, weighted mean, all products). According to a scenario calculated by Dr. Kenichi Kawasaki, consulting fellow at the Research Institute of Economy, Trade and Industry (RIETI), the effect of TPP 11 in terms of a real GDP increase among all TPP signatories is 1.14 percent, which is not significantly lower than the original tally of 1.88 percent. Indeed, the effect of tariff reduction would decrease for Japan (0.24 percent to 0.07 percent), Malaysia (0.91 percent to 0.24 percent), and especially Vietnam (6.79 percent to 1.10 percent), which suffers from relatively high tariffs on apparel and shoes. They would, however, still be able to enjoy significant economic benefits from the reduction of nontariff barriers (NTB) under TPP 11 (Japan 1.13 percent to 1.04 percent, Malaysia 22.57 percent to 20.41 percent, and Vietnam 10.90 percent to 9.29 percent). The interesting and ironic result is that TPP 11 would be more beneficial than the original TPP for Australia, Chile, and Brunei because their exported goods would be more competitive than U.S. goods in the TPP markets. The moral of this story would be that (1) NTBs are a more significant trade issue than tariffs under the current trade system; (2) the reduction of NTBs is more effective for countries other than the United States; and (3) the reduction of NTBs will promote domestic structural reform and economic growth in developing countries such as Malaysia and Vietnam.
Strategic Perspective: If TPP 11 could maintain high-standard trade rules in areas such as e-commerce, labor, environment, state-owned enterprises, and government procurement, it would arguably have an impact on a competing platform for trade liberalization in the Asia-Pacific region, the Regional Comprehensive Economical Partnership (RCEP), and ultimately the shared goal of a larger Free Trade Area of the Asia-Pacific (FTAAP). In addition, implementation of TPP 11 would restore the confidence of other interested parties, including South Korea, Indonesia, Taiwan, Thailand, and the Philippines, which had expressed interest in joining TPP but shifted in favor of bilateral or other plurilateral agreements after the U.S. decision to withdraw. In order to maximize the leverage of TPP’s open architecture, the TPP 11 should be realized as soon as possible. Further, one of TPP’s most important strategic objectives is to diversify destination countries for exports. As the table below shows, 7 of the original 12 TPP parties depend mostly on China for their export sales, anywhere from 17 to 31 percent. Given that the Chinese economy has apparently entered a “middle-speed growth” stage, the diversification of export destination countries is an urgent strategic issue. TPP 11 would also provide a good chance for Canada and Mexico to diversify exports from the United States to other Asian countries given uncertainties about the future of the North American Free Trade Agreement (NAFTA).
The Role of Japan
Among the remaining 11 TPP signatories, Australia and New Zealand are the most interested in achieving TPP 11, while Vietnam has stopped its TPP ratification procedures. The rest of the members have not denied the possibility of TPP 11 but are very cautious or even suspicious about the prospect. For example, Prime Minister Lee Hsien Loong of Singapore mentioned that Singapore would sign TPP 11 if a consensus is reached, but he also noted he was not sure whether that would happen because it would not be easy for Japan in particular, which made painful concessions in negotiations with the United States. What should Japan do under such circumstances?
The importance of Japan’s leadership role is increasing not only because of its economic size—it is the second-largest TPP economy after the United States—but also because the Shinzo Abe government has made efforts to develop close ties with the Trump administration. Other TPP members might still find it awkward to move forward with TPP 11 for fear of frustrating the Trump administration. But it is important to note that Prime Minister Abe succeeded in issuing a joint statement with President Trump in February 2017 stating that Japan would continue “to advance regional progress on the basis of existing initiatives.” The Abe government also passed TPP-related legislation uncompromisingly despite concerns about the impact of U.S. withdrawal. The other TPP signatories might be expecting Prime Minister Abe either to convince Trump of the merits of TPP or press forward with TPP 11.
The Abe administration also has other responsibilities to realize the TPP, even in the form of TPP 11. In terms of the budget, the administration has already passed legislation authorizing JPY1.35 trillion (US$12.1 billion) for TPP-related policy since 2015, including JPY480 billion (US$4.3 billion) for the “Materialization of Strong Economics through TPP” and JPY193 billion (US$1.7 billion) for a “TPP Promotion Program.” Prime Minister Abe argued that these budgets should be implemented even though TPP hasn’t entered into effect yet, but that is a difficult case to make domestically.
In terms of strategy, Prime Minister Abe made TPP a main pillar of the so-called third arrow of his Abenomics growth strategy and advocated aggressive structural reform in that context. If the Abe administration can’t implement TPP, the administration will be forced to develop an alternative policy to accomplish the structural reform objectives of Abenomics. The Abe administration also set a goal to achieve a 70 percent free trade agreement (FTA) coverage ratio by 2018. As mentioned earlier, TPP 11 should have a domino effect, which would promote other FTA negotiations including RCEP, FTAAP, and a Japan-European Union FTA. Though TPP 11 itself would not increase Japan’s FTA coverage ratio instantly, it would certainly provide a boost. The bottom line is that TPP 11 could urge the United States to return to TPP, which would ultimately fulfill the original pledge Prime Minister Abe made to demonstrate joint leadership with the United States on regional trade.
There are some options presented by experts to move forward with TPP 11, but the most important factor to materialize TPP 11 is political will, especially the will to protest the recent rise in protectionism. The remaining TPP member countries should proceed with an agreement that benefits the Asia-Pacific region economically and strategically. TPP 11 is the most effective way to encourage the United States to remain an active participant in the region’s economic future.
Kensuke Abe was a CSIS Japan Chair visiting fellow from Marubeni Corporation from May 2016 to April 2017.
Japan Chair Platform is published by the Office of the Japan Chair at the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2017 by the Center for Strategic and International Studies. All rights reserved.