The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP11, without the United States) took effect on December 30, 2018, while the Japan-European Union Economic Partnership Agreement (EPA) was also ratified by the legislatures of the two parties and will go into effect in February 2019. Then, a Japan-led, two-pronged free trade pattern will take shape, which is expected to counterbalance United States trade protectionism.
In terms of economic size, the GDP of TPP11 and Japan-EU EPA stood at $11.38 trillion and $24.84 trillion, respectively, with the combined amount accounting for about 40% of the global total. And in terms of trade, Japan’s trade with TPP11 countries and the EU accounted for 14% and 12% of its total trade. It's obvious that the development of the two trade circles offers enormous business opportunities for Japanese companies.
Amid global trade tensions initiated by the United States, particularly escalating trade friction between China and the United States, the two trade circles play the role of preventing any excessive spread of trade protectionism, but their inherent functions in promoting trade and creating business opportunities are significantly weakened.
First, TPP11, with the exit of the United States, could hardly achieve the anticipated result. Due to “suspended provisions”, declining quality and diluted functions, TPP11 will have a weakened regional influence. The withdrawal of the United States from TPP meant the absence of an economy valued at $20.41 trillion, accounting for 60% of TPP11’s total size, and meant that the proportion of TPP11’s economy to the global total dropped from 40% to 13.2%. The high-standard market access, border measures, and high-quality domestic procedures, which used to be strongly advocated by Japan and the United States, were watered down and could no longer dominate and reshape the global economic order. The FTA model, with extensive geographical distribution, lost its leading player with the exit of the United States, and could not form a region of origin. Under such circumstances, its functions in promoting trade were greatly reduced, and it could not play a dominant role in the order in the Asia-Pacific region.
Second, the fact that the Japan-EU EPA dodged non-tariff barriers and reached limited concessions on trade tariffs resulted in a lowered standard for the deal among the developed nations, and the EPA therefore is no more than a diluted free trade agreement. The EU has its unique directives on trade and investment, including quality accreditation, safety standards, fuel standards, and accounting systems, which are different from that of the United States. During the Japan-EU negotiations, the EU hoped to adopt the EU directives and urged Japan to reduce non-tariff barriers and broaden the scope of market access. After President Donald Trump started global trade tensions and friction, Japan and the EU had to sacrifice high standards and high quality for faster conclusion of the EPA, hoping to reach a framework deal before bilateral negotiations with the United States and to form a new front for negotiations with the United States. The battle for a united front from FTA talks had become a prelude to the fight for leadership in the global economic order among Japan, the United States, and the EU. In order to win, however, the two sides raced to lower the standards for deals, chose to ignore the functions of such framework pacts, and were therefore vulnerable to pressure from the high-standard rules of the United States.
Third, the excessively long time-frame for tariff abolishment in some sectors and industries weakened the attraction of the two Japan-dominated framework pacts. For instance, it would take 16 years for Japan to lower beef import tariff rates from 38.5% to 9%, and 10-13 years for tariff rates for auto exports to Vietnam to drop from 70% to zero. It would also take eight years for Japan’s wine import tariffs to drop to zero from 15% (or 125 Japanese yen per liter); and for auto exports to Canada, tariffs would drop to zero from 6.1% only from the sixth year. Agriculture and automobiles are the two important industries in Japan’s FTA talks. Agricultural protection is one of the significant tasks for Japan in its FTA talks with other economies, and this is also one of the reasons why the coverage of zero tariffs could not meet the standards of the developed nations. The WTO exception clauses stipulate that developed nations, in conducting FTA talks, must apply zero tariffs to all trade sectors, while developing nations could have some reservations. In both TPP11 and Japan-EU EPA framework agreements, Japan failed to satisfy the WTO standards. The low-standard and low-quality framework agreements could hardly dominate regional cooperation, let alone international order.
The United States and Japan, as planned, are expected to hold trade talks from January 2019. The United States had explicitly indicated that it would not accept the TPP standards in the agricultural sector. The United States may continue to apply the USMCA (United States-Mexico-Canada Agreement) approach, and demand Japan accept the exchange rate clause, quantity goals or even the poison pill clauses. It’s apparent that the low-standard and low-quality TPP11 and Japan-EU EPA could hardly resist offensives from the United States.
China and the United States are the largest export markets for Japan. If Japan wants to counterbalance the United States in terms of trade, it would be mission impossible if it does not seek strategic cooperation with China. After the financial crisis, the ASEAN and China, Japan and South Korea (10+3) model has become the main channel for East Asian regional cooperation. Trade among China, Japan, and South Korea has exceeded China-United States trade, and trade between China and ASEAN is also nearing the trade value between China and the United States. China and the ASEAN have become the largest destinations of Japan’s foreign direct investment. In East Asia, the economy, industry, trade, and investment structures have undergone unprecedented and historic changes. China has made the most international patent applications in the world for seven consecutive years, and the population of China, India, and ASEAN now accounts for 45% of the global total. So, in the future, it’s not a question whether or not East Asia should join the Japan-dominated TPP11, but a question of whether and how Japan could return to the path of cooperation with East Asia.