TPP – 2

My article in The Asan Forum on TPP has received a number of comments, including T.J. Pempel’s rejoinder and a vigorous debate on the Japan Forum LISTSERV sponsored by the National Bureau of Asian Research (NBR). There have also been developments in TPP negotiations and the US Trade Promotion Authority (TPA) debate that are relevant to my argument. I consider each of these in turn.

Starting with Pempel’s piece, I do not think I have any right to complain about a rejoinder that characterizes my analysis of TPP political economy as “masterful,” and indeed I think that Pempel and I are largely on the same page. That said, we do have some differences of interpretation that deserve further exploration. Pempel makes three main points:

1. The politics of TPP and of structural reform in general in Japan are more iffy than my article suggested.

2. The Abe administration’s support of TPP is intimately tied to its nationalist agenda, and its close embrace of both TPP and the US-Japan alliance is reducing its scope for successfully pursuing other potentially profitable trade deals with neighboring economies.

3. Some aspects of TPP, including restrictions on capital controls, are likely to have a negative impact on some participating economies, and these potential negative effects should not be dismissed lightly.

With regard to (1), I certainly agree that the politics of TPP will be difficult in Japan. As Pempel rightly notes, there are a number of powerful political groups that are opposed to key TPP provisions, some of them tightly tied to the conservative basis of Abe’s power base. While he agrees that using TPP as a lever to push through structural reform improves the odds of success, he argues that it is by no means assured. I am more optimistic about the odds of TPP approval by the Diet, as long as Abe’s own political position remains unassailable (I use this term advisedly, as I see no credible rivals within the LDP, at least for the moment). Obviously, this is a judgment call; so let me summarize my reasoning briefly.

First, I think that Abe, his administration, and his economic advisors are all deeply committed to structural reform, believing that it is essential for the rejuvenation of the Japanese economy and the success of their nationalist vision. Second, I believe that our categorization of opposing forces sometimes obscures the very real cracks within them. While analysts often write about Japanese agriculture as an opposing force, in fact the bulk of the opposition comes from the inefficient rice producers (who, admittedly, are the best organized) rather than from the much more competitive vegetable and fruit producers. Financial institutions are even harder to see as monolithic. Japan Post, a government corporation, would actually be the most disadvantaged by TPP passage, along with smaller banks. Japan’s major banks, insurance companies, securities houses, and fund managers, as well as more entrepreneurial smaller funds such as in private equity, would likely benefit from TPP—if for no other reason than it would restrain postal financial services. Pharmaceuticals is another industry with divided interests. I expect that Abe will be able to force TPP through the Diet; however, the longer the wait, the weaker Abe’s political position will become, allowing for either stalling tactics or outright internal opposition to have an effect. Unfortunately, for Abe, the timing of TPP will ultimately depend on the US Congress, which must pass TPA and TPP, both of which will likely take a long time if they happen at all. As I wrote on January 31 in the NBR Japan Forum, “the US is holding Japanese structural reform hostage and doesn’t really care.”

With regard to Pempel’s second point, I too am troubled that Abe’s reformist economic agenda is coupled with a kind of revisionist nationalism that generates frictions with China and South Korea. Combined with Abe’s other foreign policy initiatives, it is plausible that the focus on TPP will slow Japan’s formal economic cooperation with Asia. I am not convinced that this is happening, however. In a recent article, Mireya Solís and Saori Katada argue that negotiations on RCEP and the trilateral China-Japan-South Korea (CJK) FTA were actually accelerated by Japan’s announcement of its intention to join TPP1. While that article may have been overtaken by events, it is hard to tell from published accounts; moreover, both the RCEP and CJK FTA negotiations seem to move in fits and starts, so it is hard to ascribe causes to specific delays. More recently, reports suggest that the long-stalled Australia-Japan FTA negotiations are moving forward again, perhaps spurred on by impatience on both sides with the slow progress of TPA in the United States.

Meanwhile, South Korea has publicly stated its desire to enter TPP, and even some Chinese economists have been calling for their government to give it another look. Of course, there is still ample opportunity for all of these initiatives to be derailed by domestic politics or international tensions over history or territory. As a political scientist, I have a secret desire (now revealed to the world) to see Japan try to jump-start RCEP as a means of getting the US Congress to debate TPA and USTR to pull back on some of its maximalist positions on capital controls, intellectual property rights (IPR), rules of origin (ROOs) for textiles, and investor-state dispute settlement. We will see if the Abe administration has the imagination to use that leverage.

With regard to Pempel’s third point, I am in full agreement. There are a number of US negotiating positions that strike me as problematic, whether because they are dangerous in and of themselves (such as the capital control provisions, as my colleague Kevin Gallagher has been arguing)1 or because they would make the agreement politically unsustainable in many countries (such as the insistence on binding dispute settlement mechanisms for environment and labor commitments). I am aware of arguments to the effect that US positions on IPR are also problematic, but I am not well enough versed on the issue to have a firm opinion. I am hopeful that many of these positions will not survive the negotiating process, as none of the non-US TPP participants seem to support them (based on publicly-stated positions and various leaks). But Pempel is certainly right to warn us that the final TPP agreement, if it is in fact achieved, may create new problems as well as expand opportunities for trade and investment.

My article was also the subject of spirited discussion on the NBR Japan Forum. Several critiques were raised. Some participants were skeptical about the projections of the magnitude of economic gains that I used. I agree that it is unwise to put too much credence in specific numbers, as they are dependent on assumptions and future events. Still, the Petri, et al., estimates give us a rough sense of magnitude and of relative gains. Economic analysis shows very little aggregate benefit in terms of GDP for the United States but significant sectoral winners and losers, which explains the contentious congressional politics. For slow-growing Japan, the TPP is likely to create significant opportunities at the aggregate level as well as for “winning” sectors. Thus, even imperfect numbers are sufficient to make the political argument.

One writer dismissed the estimates altogether, attacking the notion of structural reform as being the key to better long-term Japanese growth. Rather, he argued, Japan’s problems are macroeconomic in nature and should be addressed through Keynesian demand management policies. I disagree with that position, for reasons that would take more than my allotted space to detail. (The short version is that there is good evidence that capital is inefficiently allocated in Japan, partly due to policies that allow for protection, self-protection, or overregulation.) In any event, the critique is not really relevant to the political argument I made, which only requires that the Abe administration believe that structural reform is necessary to improve long-term growth.

Several writers expressed concern about the possibility of US IPR rules being adopted more widely. One version echoed the concerns of critics in Australia and New Zealand, who fear that US pharmaceutical firms will be able to use TPP to prevent national health systems from purchasing less expensive generic drugs. Another critique worried equally about the effect of IPR rules on digital innovation. These may well be good reasons to oppose TPP, but for the moment I remain agnostic. One reason is that I lack expertise on IPR law and economics. The other is that I strongly suspect that the United States will be forced to compromise on some of its stronger positions. Because it is so contentious, IPR is going to be one of the last chapters to be finalized (and the final “landing zone” is very broad); so I think we really do not know what will actually be included in the final agreement

Finally, several writers expressed skepticism (as did Martin Frid in his comment on the Asan Forum webpage) that TPP could be completed at all, given the gaps between participants’ positions on key issues and the reluctance of congressional Democrats in the United States to support even TPA, let alone an actual trade agreement. I am not sure that TPP is “dead,” as one writer wrote, but I agree that congressional resistance to TPA and TPP will definitely make the negotiations harder to conclude and extend them considerably. As I concluded in my initial essay, the congressional politics of TPP “do not offer guarantees for a quick resolution.” Subsequent events, including Max Baucus’ departure from the Senate and Harry Reid’s stated opposition to TPA, only make that point more strongly.

1. Mireya Solís and Saori N. Katada, “Unlikely Pivotal States in Competitive Free Trade Agreement Diffusion: The Effect of Japan’s Trans-Pacific Partnership Participation on Asia-Pacific Regional Integration,” New Political Economy, January 31, 2013.

2. Kevin P. Gallagher, Sarah Anderson, and Annamaria Viterbo, “Capital Flow Management and the Trans-Pacific Partnership Agreement,” G-24 Policy Brief no.
79, October 2013.


Richard Katz, Editor, The Oriental Economist Report

I’d like to echo most of the comments made by T.J. Pempel in last month’s rejoinder and add a few of my own. I disagree with both Bill Grimes’ logic and conclusions. Instead of providing direct evidence of the hard concessions Abe Shinzo is making to promote TPP, he puts forth two arguments based on logic.

The first is that, since the macroeconomic benefits from TPP in terms of higher growth for the whole economy are far greater for Japan than the United States, then Japan is more likely to make concessions. This argument fails in terms of both logic and evidence, which is that Abe is currently creating a roadblock to the entire TPP by protecting four tiny farm sectors. At the February Singapore meeting of Trade Ministers, representatives of several nations reportedly spent six hours grilling Japanese negotiators on Japan’s high farm tariffs. Following that meeting, Abe told the Diet, “We will never break our election pledges” to Japan’s farmers in order to attain a TPP agreement.

In terms of logic, the politics of trade is classic special interest politics, based not on the benefits to the nation as a whole, but on the balance of power of assorted anti-trade and pro-trade interests within the country. The four protected farm sectors (assuming that the United States would give Japan a pass on rice as it did Korea) amount to less than 0.25 percent of Japanese GDP and 0.2 percent of its households. Conversely, Washington is stubbornly trying to protect sugar, which amounts to just 0.03 percent of US GDP and 0.06 percent of jobs, but is important to Cuban exiles in the pivotal Electoral College state of Florida (and has political clout in other states as well).

Bill’s second argument is a kind of syllogism. His major premise: Abe is committed to “third arrow” structural reforms as pivotal to Japanese economic revival. His minor premise: TPP is indispensable to the third arrow. Conclusion: Abe is committed to TPP and will take on domestic vested interests to achieve it. Regarding the major premise, where is the evidence that Abe is dedicated to the “third arrow” in anything other than rhetoric? Even one of his own personal economic advisors, Hamada Koichi, gave him a 60-70 percent grade for the third arrow (vs. 100 percent for the “first arrow” of monetary stimulus). As Hamada put it, “Where is the beef?” Real reform requires taking on vested interests at home. It is hard to find any cases in the economic sphere where Abe has actually spent political capital and risked his approval ratings to achieve reform. He has not done so on farming (more below), energy, labor-corporate reform, or any other big issues.

For example, on electricity reform, I recently spent a couple weeks discussing the reform with assorted players. This reform will allegedly separate generation from transmission, thereby allowing lots of entrance by new players, more competition, and hence lower rates to households and firms. High electricity rates are one of the factors pushing manufacturers to produce outside of Japan. Yet, some of the would-be new entrants call the alleged separation of generation and transmission a sham because the monopolistic utilities can have a holding company that owns both parts, with a non-credible firewall. One said that the share of new entrants like his own firm may not be more than 6-8 percent. In that case, electricity rates will remain high. We saw in telecommunications and retail what real reform looks like in Japan; electricity reform is nothing like that.

The alleged farm reform that is supposed to accompany TPP, according to noted farm politics expert Aurelia George Mulgan, simply changes the form of the subsidies; maintains the monopolistic role of Japan Agriculture (JA—the politically powerful organization of farm cooperatives); and does almost nothing to create incentives for farm consolidation and agribusiness, let alone the sale of idle farmland for nonfarm uses. We have seen in South Korea what real farm reform looks like; Abe’s reform is nothing like that.

As for the “minor premise” of the syllogism, TPP’s role in Japanese growth, it all depends on how TPP is used. Is it used to break down cozy informal cartels that practice restraint of trade, hinder new entrants into industry, and thereby hurt Japanese growth? Or, is it merely a way to enhance Japanese exports and FDI? Kan Naoto talked about TPP as “the third opening of Japan.” When have we heard Abe even talk along those lines, let alone act along them? It is one thing to lower formal tariffs on dairy products from New Zealand, but if the power of JA restricts who buys and sells, how much difference will that make on the ground? Right now, due to JA’s stranglehold, it is hard for retailers on Japan’s primary island of Honshu (which includes Tokyo and Osaka) to import milk from the efficient dairy farmers in Japan’s northerly island of Hokkaido. And yet JA is exempt from Japan’s Anti-Monopoly Act. We have not heard a word about changing that exemption. Small wonder since JA is so connected to the election campaigns of Abe’s LDP. We do not know what is in the TPP’s competition chapter, but I seriously doubt Abe would agree to any provision—if they have even been proposed—that would compel Tokyo to end JA’s exemption or compel Japan’s Fair Trade Commission to act against a host of often illegal anti-competitive practices in scores of business sectors.

In general, expanded trade tends to break down domestic anti-competitive interests and thereby improve productivity growth, but this is not guaranteed. On balance, Japan is probably better off having TPP than not having it, and it might give domestic reformers some extra leverage. But the amount of benefit is highly contingent on policymakers’ reactions. Abe has shown he is not in the camp of the reformers.

In my view, Abe’s main motivation for TPP was not economic revival, but an attempt to solidify security ties with Washington. I have little doubt that, at this point, Abe still has the power to push through the Diet any tariff reductions in farming he wanted to. The “farm tribe” Diet members and farmers have nowhere else to go since the opposition parties are all weak and all pro-TPP. But winning that fight would mean spending political capital.

Now Abe has an additional reason not to make concessions. Since it appears that the United States cannot even have a vote on Trade Promotion Authority (TPA, also known as “fast track”) until after the elections, Abe has no assurance that any concessions he makes are the final concessions. In response to Abe’s resistance, the US farm lobby is now saying it may oppose TPP, or propose Japan’s exclusion, unless Abe shifts. So, an unfortunate vicious cycle between the United States and Japan may be developing. The TPP faces a genuine risk of going the way of the Doha round.