Japan s Entry into the Trans-Pacific Partnership: Domestic Priorities and Regional Dynamics

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1 co m mentary Japan s Entry into the Trans-Pacific Partnership: Domestic Priorities and Regional Dynamics BY AURELIA GEORGE MULGAN Published: July 12, 2013 In less than three months after taking office, Prime Minister Shinzo Abe announced that Japan would join the Trans-Pacific Partnership (TPP) negotiations. Compared with the delay and indecision of the previous administrations under the Democratic Party of Japan (DPJ), this was lighting speed. What made it all the more surprising was the negative stance of Abe s Liberal Democratic Party (LDP) on the TPP in its election manifesto, which stated that it would oppose participating in the TPP negotiations as long as they were premised on tariff abolition without exceptions. This was a revised version of an initially more positive statement that We will support participating in the TPP negotiations as long as they are not premised on tariff abolition without exceptions. 1 The switch was made in order to win over farmers and agricultural organizations in the election, and the strong stand against the TPP and its principle of eliminating all 1 Tokushū TPP e jijitsujō no kyōtei sanka, Abe shushō no ōkina kake (TPP ketsudan) [Feature: Virtual Participation in the TPP Agreement, Prime Minister Abe s Big Bet (TPP Decision)], Gendai Business (Mainichi Forum), April 22, 2013, tariffs contributed to the restoration of the party s electoral support base in rural areas. Not surprisingly, many farmers and agricultural cooperative leaders felt betrayed by the later turnaround in government policy. The Central Role of Abenomics Prime Minister Abe s decisive leadership on the TPP issue is a direct reflection of the central importance he and his government place on restoring growth to the Japanese economy under the rubric of Abenomics. As Abe told President Obama in February, the revival of the Japanese economy is significant for both Japan AURELIA GEORGE MULGAN is Professor in the School of Humanities and Social Sciences, University of New South Wales, Canberra. She is the author of a number of books and articles on Japanese politics, political economy, and international relations, and has published in journals such as Foreign Affairs, the Washington Quarterly, and World Policy Journal. Her forthcoming book is The Last Shadow Shogun: Ozawa Ichiro and the Paradox of Old and New Politics.

2 and the U.S. and also for the world. 2 Certainly it is important for Japan to remain an economic power in Asia. In his role as cheerleader for the Japanese economy, Abe has articulated a multi-pronged economic growth strategy in which trade liberalization and the pursuit of free trade agreements, including the TPP, are core ingredients. Furthermore, he has in place a strong line-up of pro-tpp government and party executives in Toshimitsu Motegi, minister of economy, trade, and industry; Yoshimasa Hayashi, minister of agriculture, forestry, and fisheries; and Masahiko Komura, vice-president of the LDP. Abe accepts that the key to his administration s success and continuing public popularity is maintaining strong prospects for economic growth. While a slowdown in the Japanese economy might make the TPP even more of an economic imperative, the prime minister would find it more politically difficult to deliver on his trade strategy if economic difficulties undermined public support for his administration. Since the TPP announcement on March 15, the government has moved ahead with a series of important trade initiatives, participating in the first round of talks on a trilateral free trade agreement (FTA) with China and South Korea in March, the beginning of serious bilateral talks on a Japan-EU economic partnership agreement in April, and inaugural negotiations on the proposed Regional Comprehensive Economic Partnership (RCEP) in May. Signing on to these agreements will have positive growth effects on the Japanese economy both by increasing trade volume and foreign direct investment to Japan, and by improving the production and investment environment for Japanese manufacturers production networks in East Asia. Japan recognizes that it is at the center of economicpartnership negotiations involving Asia, Europe, and the Pacific Rim, and is therefore in a position where it can work on all of them simultaneously. By conducting negotiations on different trade agreements in parallel, 2 Press Conference by Prime Minister Shinzo Abe during His Visit to the United States of America, Prime Minister of Japan and His Cabinet, February 22, 2013, Japan s trade strategy is potentially facilitated by being able to leverage gains in one agreement to facilitate the same gains in another. In particular, the Abe administration sees the TPP as a pace-setter for the RCEP, hoping Abe accepts that the key to to leverage gains from the TPP his administration s success as a high-level and continuing public agreement to popularity is maintaining achieve abolition of restrictions strong prospects for on investment economic growth. a n d t a r i f f s on industrial exports to RCEP countries. Gains can be either offensive, securing increased access to particular markets in other countries, or defensive, maintaining particular restrictions in Japan s own markets. This idea is captured in the rhetoric of protecting what we need to protect and taking the offensive where we should take the offensive, which the Abe administration has inserted into its manifesto for the upcoming Upper House election in order to reassure vulnerable sectors, such as agriculture, in advance of trade negotiations. However, Japan s trade posture has traditionally been strongly defensive, and the current pro-active pursuit of FTAs does not automatically signal a new willingness to concede to external pressure for liberalization of domestic markets. Present indications are that Japan s trade negotiating posture at the international level and how it manages the transition to trade liberalization at the domestic level will follow the approach adopted in previous decades, focusing on: 1. Negotiating exceptions to the elimination of protective tariffs 2. Mitigating the impact of trade liberalization 3. Offering specific bilateral concessions to the United States 2

3 Exceptions to Tariff Eliminations: A Hard Line in TPP Negotiations First and foremost, emphasis will be placed on negotiating exceptions to tariff abolition. Japan is showing no signs of softening its long-held, hard-line stance on this point. In fact, demanding exceptions to trade liberalization for sensitive items, particularly agricultural commodities, has been an enduring feature of Japan s negotiating posture throughout the rounds of trade negotiation for the World Trade Organization and before that the General Agreement on Tariffs and Trade as well as in bilateral and regional trade negotiations to date. The LDP s 2012 election manifesto drove home the point again, and the joint statement coming out of the February summit in Washington nominally endorsed it by implying that tariff exceptions were possible under the TPP and acknowledging bilateral trade sensitivities, such as certain agricultural products for Japan. 3 Achieving this level of understanding from the U.S. side, particularly the recognition of sensitivities in the agricultural sector, was an important precondition for Abe to take the next step and announce Japan s participation in the TPP talks. Abe s successful promotion of the exceptions principle is already having a subtle impact on domestic politics in the lead-up to Japan s entry into the TPP negotiations in July. It has shifted the focus away from fundamental reforms needed to strengthen the international competitiveness of domestic industries, such as agriculture, and on to the exceptions that the government will seek. Public opinion polls show that, 3 Yamada Atsushi, TPP to iu gaikō haiboku: Mamorenakatta nōgyō no seiiki [Diplomatic Defeat in the Form of the TPP: The Sanctuaries in Agriculture That Could Not Be Protected], Diamond Online, April 25, 2013, articles/-/ while there is now a clear majority in favor of Japan participating in the TPP, an even bigger majority wants agricultural products such as rice exempted from trade liberalization. The LDP faction originally organized to oppose Japan s entry into the TPP (the group that demands immediate withdrawal from TPP participation ), which includes more than 60% of LDP Diet members, has changed its description to the group that will protect the national interest in the TPP negotiations, thus shifting the target of its policy concerns to the negotiation of conditions. The LDP has also repeatedly asserted that it will protect exceptions in order to pacify the party s support from organizations opposed to the TPP, such as agricultural cooperatives, while the administration has reassured the farm sector that exceptions will be sought for five key items (rice, wheat, beef, dairy products, and sweetening crops), which Japan has a long history of protecting. First and foremost, emphasis will be placed on negotiating exceptions to tariff abolition. Japan is showing no signs of softening its long-held, hardline stance on this point. The timing of Japan s entry into the TPP talks, just two days after the July 21 election, makes Japan s negotiating posture an important policy focus in the election campaign. The LDP s draft manifesto for the election specifies the five key items as exceptions to tariff abolition, and they are now listed as a top priority in the LDP s J-File, its more detailed policy agenda. The Abe government is particularly mindful of farm votes in single-member rural electorates, which will be the key to securing a majority of seats in the Upper House and, therefore, to the viability of its future legislative and policy programs, including those targeting economic growth and trade. Conversely, if the Abe administration secures its desired majority, the caution mandated in the pre-election period may be replaced by a more protrade position. In that event, it is possible that not all commodities previously treated as exceptions to 3

4 trade liberalization will continue to be so, despite assurances offered by LDP agricultural executives that they are prepared to withdraw from the negotiations if they cannot protect key exceptions. The Ministry of Foreign Affairs has acknowledged that the focus is now partly on how long a grace period Japan can secure before it has to abolish tariffs on key items, while the Ministry of Agriculture, Forestry, and Fisheries has begun to concentrate on the prospect of rebuilding agriculture during this grace period. Because the TPP embraces the principle of abolishing all tariffs within ten years and includes strong agricultural exporting countries such as the United States, Australia, and New Zealand, Japan will find it extremely difficult to secure exemptions for all key items. A more flexible and accommodating approach will prevent Japan s negotiating position on agriculture from becoming an obstacle to progress in trade talks, as is historically the case. Mitigating the Impact of Trade Liberalization The second major aspect of Japan s negotiating posture will be side-payments offered to domestic agricultural producers (so-called countermeasures ) in order to mitigate the impact of trade liberalization, thus facilitating Japan s entry into free trade agreements. The Abe government has already promised to expand income subsidies paid directly to farmers and to double farm incomes in the next ten years. However, one calculation shows that if tariffs on the five key items are abolished, the government will need 2 trillion yen ($20 billion) annually just to subsidize rice farmers. The Abe administration may also seek to compensate farmers through conventional pork-barrel measures. Indeed, this strategy has already been liberally used in advance of anticipated trade negotiations, leading to a huge increase in government spending on land improvement. Few other effective measures for strengthening Japan s agricultural industry in preparation for increased international competition have been taken or are proposed. Abe s recently announced agricultural strategy avoided any painful reforms and focused on measures providing more financial assistance to the sector. These were designed to deliver a political message to farmers and lower the domestic political costs of the decision to join the TPP negotiations. The question for the farmers and agricultural cooperatives is whether they will believe the government s claims that agriculture will not be sacrificed in order to reach agreements in international trade negotiations and thus risk being betrayed again after the Upper House election. Once Japan joins the TPP negotiations and faces market-opening demands from other participating countries, particularly the United States, it is possible that the imperative not to be excluded from the final agreement will override domestic political concerns, just as it did in the Uruguay Round Agreement on Agriculture in On the other hand, Minister Hayashi has publicly asserted the importance of Japan carefully going through each stage of the negotiations and not buckling no matter what the other participants say, based on our strong negotiating power. 4 He also advocates using the U.S. desire for Japan to join the TPP as a bargaining chip. The bilateral focus on automobiles and insurance will continue, but tough negotiations can be expected in areas where the LDP has adopted a strongly defensive stance. The final outcome may, therefore, depend on the willingness of other countries in the TPP negotiations to negotiate trade-offs with Japan or allow the Abe government some wriggle room on sensitive items in order to bring Japan on board the final agreement. 4 Hayashi Yoshimasa, Nōrin suisan daijin, TPP o kataru Seme no nōrin suisangyō no tenkai ni mukete [MAFF minister talks about the TPP in working toward developing agricultural, forestry, and fishery industries on the offensive ], Chūō Kōron, 128, no. 5 (2013): 79. 4

5 Offering Bilateral Concessions to the United States Institutional Innovations to Facilitate Negotiations Thirdly, Japan s TPP negotiating strategy, as in so many previous trade negotiations, will be geared toward offering specific bilateral concessions to the United States. This is already apparent from the concessions agreed to in the prior bilateral consultations in , where Japan almost totally capitulated to the American side, and more concessions can be anticipated in the parallel negotiations between Japan and the United States that will take place alongside the full TPP negotiations. Japan has, for example, agreed to continue bilateral talks on automobiles and non-tariff barriers simultaneously with TPP talks. This means that, for Japan, the TPP negotiations will also take on aspects of negotiations for a Japan- U.S. FTA. The bilateral focus on automobiles and insurance where Japan has already made concessions in the prior consultations will continue, but tough negotiations can be expected in areas where the LDP has adopted a strongly defensive stance. These areas include exceptions for the five key agricultural items, not accepting numerical targets for manufactured products, protecting the universal healthcare system and food safety standards, not agreeing to an investorstate dispute settlement clause, and maintaining government procurement and financial services in line with Japan s unique characteristics all sacred cows from a U.S. perspective. For the Japanese government to honor its domestic political commitments and not give ground in these areas, substantial concessions in other sectors and markets would be necessary. It is likely that Japan will sacrifice offensive for defensive interests, just as it sacrificed the interests of the auto industry to protect agriculture in the prior negotiations. It is also possible that, in the multilateral TPP negotiating context, Japan will form strategic alliances with other negotiating partners to block some U.S. demands. Perhaps the biggest break with past methodologies for dealing with international trade negotiations is the Abe government s creation of a special institutional infrastructure to present a unified government trade position. A governmental headquarters for the TPP has been established, headed by the minister of state for economic revitalisation, Akira Amari, in order to facilitate the presentation of such a view. Beginning with 65 members and possibly expanding to 100, the headquarters will be in charge of international-level negotiations and domestic-level coordination between affected industries and the ruling party. Although some members of the negotiating trade position. team have been appointed from the ministries concerned, as in previous negotiations, Amari will require them to set aside their own ministry s interests in order to act as a unified team. Deputy Minister for Foreign Affairs Koji Tsuruoka, who is experienced in trade negotiations, will head up the negotiating team while Assistant Chief Cabinet Secretary Toyonari Sasaki will be in charge of domestic coordination. Perhaps the biggest break with [the] past... is the Abe government s creation of a special institutional infrastructure to present a unified government These institutional innovations are designed to support Japan s entry into the TPP and short-circuit the bureaucratic sectionalism and direct intervention by party organs that have stymied the government s tradeliberalization strategies in the past. They also provide greater autonomy from special interest pressures for the government and its trade negotiators. These new arrangements are unprecedented and underscore the extent to which the Abe administration understands that only by changing the institutional structure of trade policymaking can new policy outcomes be delivered that defeat entrenched interests. 5

6 The Way Forward? Japan now has in place a government that is committed to the pursuit of FTAs, including the TPP, as one of the pillars of its economic revival. However, this will not automatically translate into smooth trade negotiations, given domestic political obstacles and the policy protections to which the LDP has committed itself. While the Japanese government will make every attempt to construct a unified trade position, domestic-level negotiations will be problematic. This will translate into a strongly defensive position at the international level, despite the prospect of some U.Sspecific concessions. The views expressed are those of the author. The National Bureau of Asian Research would like to thank the Japan-U.S. Friendship Commission for their generous support that allows this commentary to be possible. the national bureau of asian research 1414 ne 42nd street, suite 300 seattle, wa pennsylvania avenue nw, suite 300 washington, d.c