Strategic Choice of Japan Free Trade Area--China-Japan-ROK FTA or TPP

By Ni Yueju

?

Strategic Choice of Japan Free Trade Area--China-Japan-ROK FTA or TPP

By Ni Yueju

World Economic and Political Studies China Academy of Social Sciences

I. The Issue is Raised

After World War II, Japan has long pursued the foreign trade strategy with trade to reestablish the country, having brought huge economic benefits to Japan. As of the end of the 20thcentury, Japan is the world's only developed country that does not participate in any regional and bilateral free trade agreements (FTA). A report issued by Japan Economic Planning Agency identifies a negative attitude on the regional integration.1

Following the World FTA Networks expansion, Japan starts to pay attention to FTA and gradually has developed a set of FTA strategy from multilateralism to selective bilateralism. The main reasons are as follows.

First, difficulties of World Trade Organization (WTO) in the new round of negotiations lead to worries by Japan over multilateral trade institutional prospects. Many people in Japan have argued that for promoting trade liberalization, WTO is not necessarily the best stage.

Second, After the Asian financial crisis, the changed attitude of China has brought to Japan the impacts and challenges. The outbreak of the Asian financial crisis in 1997 led countries in East Asia to increasingly recognize the significance of economic cooperation within the region. On November 25, 2000 in Singapore at the Fourth China-ASEAN leadership meeting, China proposed the establishment of China-ASEAN Free Trade Area and the following year at the Fifth China-ASEAN leadership meeting, the two sides agreed to complete the FTA within 10 years. China's move exerts a great impact on Japan, and Japan has lagged behind China in its free trade with Southeast Asia.2

Third, the changed attitude of the United States boosts Japan's trade policy shift. Since 10+3 leaders meeting reached a consensus on the establishment of an East Asia Free Trade Area in 2000, President Clinton even personally recommended to Singapore the establishment of a FTA and soon conducted bilateral negotiations. The U.S. changed attitude ensures Japan to throw away the burdens and vigorously implements its FTA strategy

This shows that Japan's trade strategy has both the role of the domino effect and geopolitical considerations. In the early 20thcentury, Japan initiated the establishment of Japan-ASEAN free trade area, and Koizumi Envisioning3. On May 12, 2002, the Economy and Finance Advisory Meeting with Prime Minister Koizumi as the Chairman formally proposed the strategy of Japan's economic revitalization4, clearly putting forward to sign free trade agreement to adapt to the new situation of rapid development of the globalization. In June 2002, the Commerce White Paper 2002 proposed a free trade program to strengthen economic integration in East Asia and in October the same year the Japanese Foreign Ministry officially announced Japan's FTA strategy.

Since January 2002 signed with Singapore the first bilateral FTA (EPA5), Japan has significantly accelerated its steps to sign FTA. By July 2012, the bilateral FTAs signed by Japan with 13 countries and regions of Singapore, Malaysia, Mexico, Chile, Thailand, Brunei, Indonesia, ASEAN, the Philippines, Vietnam, Switzerland, India and Peru have entered into force; negotiations of the bilateral FTAs with South Korea, Mongolia, Gulf Cooperation Council and Australia are under way; preparatory negotiations with the European Union (EU) has been completed; negotiations with Canada, China and South Korea have begun and participation in negotiations on TPP is decided.6

Despite late start, Japan's FTA processes are significant, the number of its FTA is more than that of China and South Korea (9 by China and 8 by South Korea by July 2012). But as far as coverage7is concerned, Japan lags behind other countries as shown in Table 1.

Table 1. The FTA coverage of major economies and regions

Note: 1. EFTA refers to the European Free Trade Association, EEA to European Economic Area, CAN to Andean Community, NAFTA to the North America Free Trade Area, DR-CAFTA to FTA signed by the Dominican Republic and the Central American countries. 2. The coverage rate is calculated based on 2011 trade statistics. 3. Source: calculated based on trade statistics of various countries.

Previous studies on FTA are more concentrated on the welfare effects in economic sense, and take the regional trade agreements decision-making as the best strategic choice made by governments for the pursuit of national welfare maximization.8But from the coverage rate of Table 1, the economic well-being achieved through FTA by Japan is limited. In fact, FTA is far beyond the sphere of economics. Superficially, FTA takes trade liberalization as direct targets, but in fact the national interest considerations and international political interactions are the main reasons for FTA.

II. Theoretical Framework for Analysis

(I) Understanding from the economic perspective

According to the regional economic integration, regional trade agreements reached can bring to the parties involved traditional benefits such as producing net trade creation or trade diversion9, increasing returns to giants, enhancing competition in the market, stimulating increase in investment10, and promoting economic growth. Then, under what conditions can regional trade blocs produce net trade effect (i.e. trade creation effect should be greater than the trade diversion effect)? Generally, in case of other conditions remain unchanged, the bigger the number of members and market size, the greater the net income; the higher the original tariff level, the larger the trade creation effect and the smaller the trade diversion effect; the smaller the proportion of trade between the original member countries, the greater the likelihood of the benefits increase; the greater the difference of unit production cost of each member, the more obvious trade creation effect; the closer the location and the smaller the transportation costs, the greater the increase in welfare.

(II) Understanding from the perspective of political economics

In addition to the traditional benefit considerations, selecting FTA partner countries should also consider certain non-traditional benefits, such as the coordination of government policy, enhancing trading capabilities, exporting the concept of democracy, implementing a country's global and regional strategies, resolving disputes, strengthening security, and determining domestic reform direction, etc.

Richard Baldwin uses domino effect theory11of regionalism to explain the reasons for popular FTA in the late 20thcentury. Some countries are unwilling to join the regional trade agreements, but the enormous pressure of regional trade groups make them do so, similar to the domino effect,

Geographical factors are essential elements generating a significant impact on a country's development and national economic behavior. Therefore, establishment of FTA helps to alleviate and eliminate national sovereignty disputes and territorial disputes, to increase mutual trust and upgrade influence of member states in international affairs.

III. Comparing Benefits Gained Between Japan's Participation in China-Japan- ROK FTA and TPP

As early as November 2002 at the meeting of leaders of China, Japan and South Korea, Premier Zhu Rongji proposed the establishment of China-Japan-ROK FTA to Japan and ROK leaders, then, agreed to expand joint research by NGOs. Until after the outbreak of the international financial crisis in 2009, the leaders of the three countries decided to further strengthen trilateral cooperation to advance the process of the Tripartite FTA and had exchange of views on the issue. In January 2010, China-Japan-ROK Joint Research Committee was established and in December 2011, the joint research project was completed and announced to start the negotiations during the same year.

While China, Japan and South Korea actively push the FTA tripartite negotiations, the United States states to join the TPP with a high-profile and with this breakthrough in attempt to establish a US-led Asia-Pacific cooperation system and to avoid being excluded from the framework of East Asia integration12. This U.S. move makes the originally unknown P-413very attractive, and Peru, Vietnam, and Australia immediately followed suit so the P-4 completed its shift to P-8, showing a trend of growing participants in the Asia-Pacific region.14

Whether to join China-Japan-ROK FTA or TPP, this paper attempts to make observations on Japan's choice from two perspectives of traditional benefits and non-traditional benefits.

(I) A reading from the perspective of traditional benefits

As mentioned above, the main factors affecting traditional benefits of a country involved in FTA include the number of members, market size, original tariff level, trade volume and comparative advantages. The following is a comparative study of traditional benefits of Japan under the framework of FTA and TPP.

(A) Comparison between economy scale and trade scale

Judging from the number of participating countries and economies scale, TPP has obvious advantages. See from Table 2, the TPP participating countries are 4 times that of China-Japan-ROK FTA, while its GDP, total exports and imports amounts to 188%, 132% and 169% of China, Japan and South Korea respectively. But, it is worth noting that, of TPP huge economies scale, Japan and the United States occupy a large proportion as shown in Table 2. Thus, although all states have equal rights to participate in the negotiations, yet, in fact, the future negotiations will be mainly led by the American and Japanese interests.15

Looking at the trade volume with Japan, China’s and South Korea's total import and export trade with Japan are higher than that of TPP other11trading partners with Japan. The export volume of China and South Korea to Japan accounts for 32.2% of Japan's total imports, their import volume from Japan accounts for 29.5% of total export volume, and the proportion of TPP other 11 members is 31.4% and 29.1%. In the category of countries, be it imports or exports, China is Japan's largest trading partner, accounting for nearly a quarter of Japan's total imports and exports. In terms of exports to Japan, the United States, Australia and South Korea are ranked second, third and fourth respectively, while in terms of imports from Japan, the United States and South Korea are the second and third place respectively.16Undoubtedly, China-Japan-ROK FTA is unmatchable to TPP in terms of participating numbers and economy scale, but China-Japan-ROK FTA is better than TPP in terms of trade with Japan.

Table 2. Comparison between FTA participating members and TPP Negotiating members

Note: 1. the population and imports and exports total are data in 2010, and GDP data in 2011.

2. Country with * mark agrees to participate in negotiations but not yet confirmed by the current 9 members.

Resources: Calculated in line with IMF and WTO data.

(B) Comparison of tariff levels

Welfare impacts of FTA member states are not only associated with the volume of trade between them and related more with tariffs levels. The higher the level of tariff among the members prior to the formation of a free trade area, the greater the opportunities for trade creation, and the less the opportunities for trade diversion for non-member countries.

Both China and South Korea do not only have a large amount of trade with Japan, and their tariff levels are higher than the TPP negotiating countries. Viewing from a simple arithmetic tariff average, an average tariff of China and South Korea is about 10.4% while that of TPP other 11 countries is only 4.8%.17

In view of tariff rates of Japan's three largest trading partners, China, the United States and South Korea imposed on Japan, the tariff rates of China and South Korea on imports from Japan is much higher than that of the United States, the agricultural and non-agricultural tax exemption coverage is much lower than that of the United States, which shows that, after the establishment of a FTA, China and South Korea have a larger room to cut tariffs on Japan goods while a much smaller leeway on that of the United States. (see Table 3)

Table 3. Comparing import tariffs from Japan by China, the ROK and the U.S.A

Data sources: WTO website, http://www.stat.wto.org/TariffProfiles.

(C) Economic effect comparison

Regarding potential economic effects generated by China-Japan-ROK FTA, some scholars conducted simulation analysis by applying computable CGE Model and GTAP Model. The data derived from the models is different but conclusion is basically the same, i.e. China-Japan-ROK FTA will promote the tripartite trade expansion, and stimulate their national economic growth.18Economic effects of China-Japan-ROK FTA by applying GTAP Model are predicted that Japan can receive increased benefits worth US$ 20.3 billion, real GDP increases by 0.41% (see Table 4). The joint research finding by government, industry and institute of China-Japan-ROK FTA shows that, through the establishment of China-Japan-ROK FTA, China's GDP will grow by 1.1-2.9%, Japan by 0.1-0.5% while South Korea will get the biggest growth, up to 2.5-3.1%.19

Japan’s Cabinet Office and ministries have made different judgments on impacts of TPP on the Japanese economy. Mr. Kawasaki Kenichi of the Economic and Social Research Institute of Cabinet Office argues that if Japan joins TPP and reduces tariffs to zero, its real GDP will increase by 0.48-0.65%; if Japan does not join TPP, its real GDP will decrease by 0.13%.20

Table 4. Macro-economic effects of China-Japan-ROK FTA

Data source: China-Japan-ROK FTA, Japan Economic Review, 2008, p28.

Estimated results of economic effects of joining TPP by Cabinet Office of Japan is that if in a period of 10 years, Japan's economic well-being will grow by 2.4 trillion to 3.2 trillion yen (about US$30.77-41.03 billion), less than 0.1% of GDP annually once tariffs are completely eliminated.21Estimated results by Ministry of Economy and Industry are that if Japan neither joins TPP, nor reaches economic partnership agreements with the EU and China, then, Japan's actual growth rate of GDP is 1.53% by 2020, lower than the benchmark figures. That will lead Japan to reduce 0.81 million jobs, GDP decrease by 10.5 trillion yen.22

Agricultural issues have been considered the main obstacles affecting Japan to conclude FTA, and many Japanese argue that once Japan joins TPP, its agriculture will suffer a devastating blow.23An estimated results by the Ministry of Agriculture, Forestry and Fisheries of Japan are that Japan's agricultural output will be reduced by 7.9 trillion yen (or about US$101.3 billion) and the agricultural sector will loose 3.5 million jobs.24

It is decided that TPP from inception applies higher standards than WTO, implementing zero tariff on 99% of goods including agricultural and industrial products, and keeping only very few exceptional. Judging from the degree of liberalization of trade in goods, it is clear that TPP is far beyond WTO and the various existing FTA. Secondly, the breadth and depth of trade in services and market access are much more advanced than the Doha agenda. At the same time, TPP requires implementing more rigorous and fair intellectual property rights, labor and environmental standards than the Doha agenda.25Therefore, Japan's participation in the TPP negotiations means greater challenges to Japan. Japanese scholars have made some studies on the likely impacts incubated by Japan's participation in the negotiations of TPP 21 areas, see Table 5.26It can be seen from the table that elimination of tariffs allows some benefits for Japanese consumers and producers, but agriculture sector will be affected, the negotiations in other areas will bring Japan some convenience and benefits, but also likely to bring more challenges, for example, many existing Japan laws and regulations must be appropriately adjusted, etc.

Table 5. The 21 areas of the negotiations: the advantages and disadvantages of Japan

Data sources: Kawai Masahiro, “Japan and TPP”.

Up to now, the debate on whether to join TPP or not is still going on in Japan, and the Japanese Government hopes through its complete estimation27to persuade people to quell domestic controversy from all walks of life.

As the above-mentioned, simply from the perspective of traditional benefits, the participation in FTA will bring better benefits to Japan than the participation in TPP. The research results reached by Japanese scholars are basically the same with this judgment.

(II) A reading from the perspective of non-traditional benefits

The multilateral trade system promoted by WTO has enabled many countries to lower trade and investment barriers down. Therefore, the potential space for obtaining the liberalized trade and investment benefits through participating in FTA gets smaller and smaller. Japan values more the non-traditional benefits in its participation in FTA.

(A) Comparison between security guarantee

Theories of international politics and economics argue that the market logic forces entrepreneurs to carry out economic activities in the most efficient place, while the state logic is to implement control to maximize sovereign rights and economic benefits.29

Japan has three criteria in choosing FTA partner countries: economic criteria, political and diplomatic criteria and the possibility of realization.30The so-called political and diplomatic criteria expects, through the establishment of FTA, not only to deepen the economic relations between member states, but also to build political trust.

From a geopolitical perspective, it seems a real regional order never appears in Northeast Asia after the Cold War. The Korean Peninsula issue, historical issue and territorial dispute are the hard political problems. The biggest obstacle to establish China-Japan-ROK FTA is the security problem. If this problem is not solved, it is difficult to establish the economic community in the true sense of the words.

Japan’s diplomacy is anchored on the Japan-U.S. Alliance. Japan’s enthusiasm in joining the TPP is related more to its own considerations for national security strategy rather than to the pressure of the United States of America. Keeping a certain distance from Asia while getting closer again to the United States can not only repair cracks caused by the relocation of Futenma base, but can also rely on the United States to increase its weight to balance China, South Korea and Russia.31It can be said that the Japanese Government’s position on TPP is linked with strengthening the U.S.-Japan Alliance politically.32Some Japanese scholars argue that TPP provides great opportunities for Japan to strengthen relations with the United States.33So for Japan, participating in TPP has not only economic significance, but also great political significance, and is a key link of strengthening the Japan-U.S. relations.34

Reading from the security interests, Japan is more inclined to participate in TPP rather than China-Japan-ROK FTA.

(B) Comparison of dominance benefits

The so-called dominance benefits are benefits obtained from the leading position. As it is known that there is always a leading county or countries in a regional cooperation, for example the United States in the NAFTA, France and Germany in the European Union. But, in East Asia, China's economic rise makes Japan lose its Asia No.1 status, which objectively has become an important factor hindering the East Asia integration process35and also the China-Japan-ROK FTA process.

Japanese Prime Minister Noda Kahiko stated, at APEC summit held in Hawaii on November 11, 2011, that Japan hoped to play a leading role36in the structuring process. In fact, supporters of TPP argue that once it is agreed, it may become the main channel to Asia-Pacific FTA, and multi-lateral standards for WTO, and Japan’s participation can make its voice heard in formulating important rules for the region.37

In terms of dominance benefits, Japan’s participation in TPP can get more than in China-Japan-ROK FTA.

(C) Comparison of benefits for establishments

As far as a country is concerned, trade liberalization will ensure industrial sectors benefit while others suffer. Therefore, the FTA strategy of various countries is a process of readjusting interests among domestic groups, but also between the government and various industrial sectors, and establishments, etc.38

Japan Nihon Keidanren as a representation for finance, industry and business is a powerful supporter of TPP. However, Japan Agriculture Association is deadly against TPP because of the devastating effect for agriculture. Its lobby has gained 363 (more than half) congressmen support. So, this phenomenon makes the Japanese Government difficult to actively push its policy on TPP in the form of a bill.

IV Japan's Strategic Choice

In terms of traditional benefits, it can be seen that China-Japan-ROK FTA brings greater benefits to Japan than TPP. However, from the non-traditional benefits, be it from national security or dominance benefits, the benefits of participation in TPP is obviously higher than that in China-Japan-ROK FTA. To provide the agricultural sector with an opportunity to reform has become one of the important goals expected to achieve by Japan participation in TPP.39

Another important reason that Japan has long failed to adopt the bloc's strategy is that its agriculture is lack of international competitiveness and the pressure of domestic opposition to liberalization has been very strong. How to achieve the agricultural industrialization and fundamentally improve production efficiency and international competitiveness of agriculture are crucial policy issues. In addition, to ensure dominant position and voice of Japan in WTO and East Asia Free Trade Area, Japan must change as soon as possible its weak position in agricultural free trade.

In summary, it is better to have synchronization strategy. But, in view of the current island sovereignty long-term disputes among China, Japan and ROK, so China-Japan-ROK FTA is difficult to progress politically, Then, Japan is likely to choose TPP if it has to make a choice between the two.

1. Japan's Ministry of Economy, “Comprehensive National Strength Observations”, The Ministry of Economy Printing Office,1994, quoted Zhang Yun, “The role of KEIDANREN in government decision-making— Taking Japan Free Trade Agreement (NAFTA) Administrative Policy as an example”, Japanese Studies, No. 1, 2008, pp.49-59.

2. See Liu Changli, “Koizumi’s ASEAN Five-nation trip and Koizumi visioning”, Japanese Economy, No.4, 2002, p2.

3. The basic idea of “Koizumi Visioning” is to take Japan and Singapore New Era Economic Cooperation Agreement as a model to conclude a package of Economic Cooperation Agreement including the free trade area with ASEAN, and on this basis further collaborate with South Korea, China, Australia and New Zealand to establish an East Asian Community of common action and common development.

4. Japan's economic revitalization strategy is the major initiatives of the Japanese Government to revitalize the Japanese economy mainly including six aspects, i.e. human strategy, technology strategy, business operational strategy, industrial potential-tapping strategy, regional strategy and globalization strategy, known as the six strategies. The FTA strategy is an important part of its globalization strategy, aiming at adapting to the new situation of the regionalization and blocs of the world economy, on the basis of promoting the development of bilateral free trade with Singapore, ASEAN, South Korea and Thailand, etc. to push development of East Asian Free trade and advance, by free trade, domestic structural reform and industrial restructuring and further build an open market economy”, http://www.kantai.go.jp/jp/koizumiphoto/2002/06/2keizai.html.

5. According to definition of the Japanese Foreign Ministry, the Economic Partnership Agreement (EPA) refers to an agreement between two or more countries for the purpose of promoting trade and investment liberalization and facilitation, removing domestic restrictions and coordinating various economic systems and enhancing a wide range of economic relations. The main trade agreements Japan has signed and engaged in ongoing negotiations are EPA and FTA is an important element of EPA, so for case of convenience, this article uses FTA.

6. Japan External Trade Organization (JETRO), “JETRO World Trade Investment Report”, http://www.jetro.go.jp/.

7. FTA coverage rate refers to the proportion of the trade volume among the total trade volume of the signatory countries or region of FTA having entered into force.

8. Sheng Bing, “Political economics of international trade policy: theory and empirical methods,” in International Politics, No.2, 2005, p.75.

9. Jacob Winer, “Customs Union Issue” comes up with trade creation and trade diversion concept. He argues that due to elimination of tariffs between the states parties, the high-cost products imported from outside the area into the regional partners country as low-cost products, trade is “created” in the region with increasing trade volume. While, because the partner countries constitute a trade discrimination against non-members, leading to reduced imports from outside, and then import products from partner countries to shift the direction of trade, generating trade diversion. See Jacob Winer, The “Customs Union Issue”, New York, Carnegie Endowment for International Peace, 1950. .

10. Daya Sujiro argues that to reduce internal tariffs and trade and investment rules and regulations of FTAmember states will decrease not only transaction costs, but also make decline the economic and political risks faced by investments, and strengthen intra-regional investment, the expansion of markets and internal low tariffs will increase the attractiveness of outside countries investors to increase direct investment from outside the region.

11. Richard E. Baldwin, “A Domino Theory of Regionalism”, NBER Working Paper No. 4465, 1993, p20.

12.Gao Lan, “Development characteristics and influence of the Japan FTA strategy”, World Economics Studies, No.6, 2011, p.76.

13. Chile, New Zealand, Singapore and Brunei in July 2005 signed the Trans-Pacific Strategic Economic Partnership Agreement, These 4 founding members are also nick-named P4.

14. Liu Zhongwei, Shen Jiawen, “TPP framework”, Contemporary Asia-Pacific,No.1, 2012, p.38.

15. TPP, 2012, p.56.

16. Japan External Trade Organization (JETRO), http://www.jetro.go.jp/.

17. See WTO website, http//www.stat.wto.org/TeriffProfils.

18. Xu Mei, “Progress, Impacts and Prospects of China-Japan-ROK FTA”, Japan Studies, No.5, 2012, p.113.

19. China-Japan-ROK free trade area feasibility study results published on May 26, 2012, http://finace.jrj.com.cn.

20. Masahiro Kawai, “Japan and TPP”.

21. Ibid.

22. Ibid.

23. About the impact of TPP on agriculture in Japan, there are up to now two opposite views in Japan. One view is that participation in TPP will bring Japanese agriculture to the brink of collapse, while another view is that participation will save Japan's agriculture. For instance, Yamashita Kazuhito of Canon's Global Strategy Institute believes that Japan's agricultural protection includes the financial burden and the consumers burden, 88% of Japan's agricultural protection is borne by consumers, comparatively, this protection rate by the United States and the European Union is only 17% and 45% respectively, therefore he argues that the removal of price support burden on consumers and offer of direct payment (financial burden) to protect agriculture can reduce the burden on consumers, protect food safety and improve national welfare. see Yamashita Kazuhito, “Free Trade and Japanese Agriculture”, Agriculture and Economy, No. 5, 2011.

24. Whether to Join TPP Stirs up Japan, November 9, 2011, http://ejkeizai.j.people.com.cn.

25. Lu Jianren, " TPP impacts on China’s Asia-Pacific regional cooperation strategy and countermeasures”, August 17, 2012, http://pecc-china.org.

26. Masahiro Kawai, “Japan and TPP”.

27. According to Japan's Yomiuri Shimbun reports, Japan's trade minister made a clear statement regarding the impact of TPP on Japan economy in TV news on January 12, 2013 that the Government of Japan will make unified estimates in the summer before the Senate election, http://www.chinadaily.com.cn.

28. See Masahiro Kawai, “Japan and TPP”.

29. Cai Penghong, “The international political-economic analysis of bilateral free trade area in East Asia”, Contemporary Asia-Pacific, No.3, 2005, p.7.

30. Kanamori Toshiki, “Japan, China and South Korea Historical Problems”, http://www.dir.co.jp.

31. Chai Qingdong, “Motivation and checking factors of Japan’s participation in TPP negotiations, A Master thesis of Dongbei University of Finance and Economics, November 2011.

32. Li Xiangyang , “TPP-- a major challenge to China in its process of rising”, International Economic Review, No.2, 2012, p.5.

33. Masahiro Kawai “Japan and TPP”.

34. Maehara Seiji, “New horizontal extension in Pacific”, http://www.canon.org.

35. Li Xiangyang, “TPP-- a major challenge to China in its process of rising”, p.6.

36.Japanese Prime Minister on TPP leading Asia-Pacific economic order, November 15, 2011, http://www.enjoykorea.net/article-123820-1.html.

37. Yamazawa Itsuhira,“Japanese trade policy, FTA strategy and TPP strategy”, 2012, p279.

38. Masahiro Kawai “Japan and TPP”.

39. ibid.