Negotiations TPP TPP talks quietly enter the final stages

Nippon.com | 2014.06.19

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TPP talks quietly enter the final stages

Yoshizaki Tatsuhiko

Secrecy has been the general rule for negotiations on the Trans-Pacific Partnership, but information is gradually coming out as the talks approach the homestretch. Participating countries can no longer afford to keep everything behind closed doors once the talks reach a stage that requires domestic coordination toward market liberalization. Japan, too, appears to be easing itself into that task.

Japan’s Growing Sophistication in the Trade Talks

There is, of course, no guarantee that a final agreement is near on the Trans-Pacific Partnership. The countries engaged in negotiations on this broad trade liberalization scheme failed to reach a consensus at the TPP ministerial meeting held in Singapore on May 19–20, 2014, and they are now working to smooth out disagreements ahead of the meeting of chief negotiators in July.

In view of the US midterm elections slated for November 4, President Barack Obama is probably hoping to wrap up the talks by this summer. If the negotiations are headed nowhere, it would be more sensible to begin damage control at an early stage. As far as can be inferred from US Trade Representative Michael Froman’s renewed vigor in his approach to the trade talks, there still is ample possibility of achieving an agreement.

Looking back, Japan’s participation in the TPP talks had been on the table since the days when the Democratic Party of Japan was in power, but efforts to make it happen were delayed for various reasons. Japan finally got the green light at the Japan-US summit in February 2013, after the current Abe Shinzō administration was launched, and it officially joined the negotiations in July 2013. In other words, Japan’s “TPP experience” began less than a year ago. Nonetheless, the experience gained since then has changed the history of Japanese trade negotiations. My personal impression is that Japan has matured considerably.

In the following, I provide an overview of the TPP negotiations as they enter the final stages.

A Delicate Japan-US Situation

One of the central questions regarding the TPP negotiations is whether Japan and the United States will be able to arrive at an agreement on the lowering of tariffs.

Prime Minister Abe and President Obama stood in stark contrast with each other at the bilateral summit meeting held in Tokyo in April, the former being on a solid political footing and the latter on shakier ground. The Abe administration’s relatively healthy approval rating has hardly budged since March, despite the consumption tax raise in April. Meanwhile, President Obama’s ratings have been lingering below 50% due to his responses to the Syria conflict in 2013 and the ongoing Ukraine crisis, as well as to missteps in the rollout of the “ObamaCare” healthcare reforms. This allowed Prime Minister Abe to make bold compromises in the TPP talks, whereas President Obama had little political leeway.

The Obama administration finds itself at a disadvantage particularly because it has not received TPA, or trade promotion authority, from Congress. Since the American Constitution gives Congress the power to conclude treaties, Congress must delegate its authority to the executive branch of government for trade negotiations. Within Congress, however, the Republican Party views the trade talks positively, while many members of Obama’s own Democratic Party are against them. With the midterm elections coming up, getting Congress to approve executive TPA is thought to be next to impossible.

The TPP and TPA pose a chicken-and-egg situation for Washington. Congress needs to pass TPA to bring the TPP negotiations to fruition, but the Obama administration must win favorable terms in the TPP to pull TPA legislation through Congress. Simply put, the administration cannot make Congress happy unless it can report on the excellent terms that it has coaxed out of Japan.

So when President Obama visited Japan, Washington presented demands that it could hardly expect Japan to approve, such as the removal of tariffs on beef and pork and the relaxation of automotive safety standards for US-made vehicles on the Japanese market. In the absence of TPA, though, Congress could overturn any agreement that the two sides manage to finalize, making Japan reluctant to make drastic concessions. The Obama administration, for its part, could be told by lawmakers and lobbyist groups to “go and win better terms” no sooner than it brings back an agreement with Japan.

The upshot is that both Tokyo and Washington have had no choice but to continue negotiating behind closed doors while keeping expectations as low as they can afford. The discrepancy between the postsummit joint announcement that no agreement was reached and the headlines by some news agencies that a “substantial agreement” had been forged is a telling sign of the delicacy of the situation.

Domino Effect of the Japan-Australia EPA

Japan was able to take a strong stance in the summit because it had already concluded an economic partnership agreement with Australia on April 7. Its greatest concern had been that the United States would decide to shut it out of the TPP negotiations, but the game changed when it agreed on tariff cuts with Australia. The tariff on Australian frozen beef will go down 8 points from the current 38.5% in 2015, benefiting Australia before any other country. (In 18 years the tariff is to be lowered to 19.5%, where it will stay.)

This must have gotten other countries in the TPP negotiations thinking: “Why dwell on eliminating tariffs on agricultural produce? We should keep Japan at the negotiating table and secure terms as good as Australia’s, or better.” A dynamic shift peculiar to multilateral negotiations is taking place. Thanks to Australia’s having stolen a march on the others, the other countries are now rallying around Japan.

The story is similar with industry groups in the United States. US beef, for instance, is in fierce competition with Aussie beef in Japan. If the TPP talks were to come to a deadlock at this point, Aussie beef will most definitely win an edge in the Japanese market. For the American beef industry, then, the overriding imperative is to finalize the talks as soon as possible and get Japan to agree to terms on a par with or better than those Australia enjoys.

Meanwhile, the Australian government must have thought along these lines: It will take over a year to conclude the TPP talks. The immediate task is to gain practical benefits and expand Australia’s share of the Japanese market; later work can focus on on medium- and long-term tariff cuts in the TPP negotiations.

This type of phenomenon, in which a free trade agreement or EPA between two countries exerts pressure on other countries and accelerates the overall negotiations, is known as the FTA domino effect. (Below I collectively refer to individually negotiated comprehensive trade agreements, including FTAs and EPAs, as FTAs.) In past FTA negotiations Japan has been careful, to put it in positive terms, or timid and lacking in speed, in negative terms. Of late, however, a domino effect is emerging and aiding Japan in its negotiations.

When the international FTA boom began around 2000, many negative assessments were heard, such as that trade negotiations should be conducted multilaterally or that multiple FTAs would complicate the rules and bring about a tangled “spaghetti bowl” of trade terms to deal with. Yet today, as many as 252 FTAs are in effect worldwide, and “mega-FTAs” consisting of multiple FTAs are coming into being. [1] The general trend has been for politics to slow down negotiations, while business interests propel them forward.

Although the Japanese government initially embarked on FTA negotiations with a hesitant step, today it is simultaneously engaged in talks on four mega-FTAs: the Japan-EU EPA, Regional Comprehensive Economic Partnership, and China-Japan-Korea FTA, in addition to the TPP. This is a sea change.

The TPP in Continuous Evolution

Because trade negotiations highlight the tangible benefits to be gained by each country, things tend to be framed in win-lose terms. The original purpose of the TPP, though, is to create a free-trade area in the Asia-Pacific region, the global center of growth, in place of the stalled Doha Round of multilateral talks among members of the World Trade Organization.

The TPP began in 2006 as an FTA among four countries: Brunei, Chile, New Zealand, and Singapore. Known as the P4, these countries were early players in the global FTA race, each having small economies and no domestic industries that needed safeguarding. Thus, the main focus of this precursor to the TPP was to seek a high level of trade liberalization among the early group members. But the small scale of their economies meant that they could not expect much in the way of economic effects. Rather, the P4 was more political in intent, built on the hope that larger countries would join in later.

The situation changed completely after the United States announced its TPP participation in 2009 and nine-country talks began in 2010. The start of somewhat forceful negotiations under US leadership may have been disappointing to the P4 states, but, in the light of the original aim of “start small, grow big,” it may also have been just the scenario that they had hoped for.

Mexico, Canada, and Japan have subsequently joined the negotiations. South Korea has also expressed interest in taking part. It is important to note here that the TPP is flexible in structure, capable of changing its substance as participants increase.

If we think of the early stages of the TPP by the P4 countries as phase one and the negotiations after US participation as phase two, the TPP talks after Japan’s formal entry in 2013 may be seen as phase three.

The second phase of the TPP consisted of rulemaking by the United States and other Pacific Rim countries. With the addition of Japan, however, the TPP has come to include the world’s largest and third-largest economies. The greater economic scale and cultural diversity represented therein adds conviction to the rules being laid down. The 12 current participants include 3 of the G7 countries, Canada among them. The 4 remaining G7 countries will likely be able to accept whatever rules are decided on in the TPP talks.

China in the Future Picture

Should the TPP negotiations produce an agreement, there then awaits the process of ratification by the legislature of each country. This probably will not go smoothly, particularly in the US Congress.

Meanwhile, the TPP framework will continue on to the next phase. South Korea has expressed its desire to join, and TPP members will eventually want to get China on board.

China, while wary of US leadership in international rulemaking, is hastening domestic reforms, such as the launch of its Shanghai free trade zone. At the same time, it is also eyeing the Regional Comprehensive Economic Partnership, in which it is joined by the ASEAN member states along with Australia, India, Japan, New Zealand, and South Korea. [2] If the TPP trade talks are aiming for depth, then RCEP, encompassing as it does 16 countries and 3.4 billion people, is a framework that seeks breadth. Beijing’s current official take is that the TPP and RCEP do not conflict with each other.

The inclusion of China will make the TPP a framework encompassing the world’s top three economic powerhouses. It would then have the potential to become a new framework of international rules to substantially replace the WTO. Although it may be a bit early to say, this could well be a viable future scenario once agreement on the TPP is reached.

(Originally published in Japanese on June 6, 2014.)