TPP and Japan in the Global Economy

2019/02/18

The "Comprehensive and Progressive Agreement for Trans-Pacific Partnership" (CPTPP, hereafter TPP11) entered into force on December 30, 2018. This created a free trade area with a population of approximately 500 million people, a combined Gross Domestic Product (GDP) of about $10 trillion, and a total trade volume of about $5 trillion.

Originally, an agreement among 12 countries, including the United States, was reached in October 2015 and signed in February 2016. However, immediately after taking office, U.S. President Trump issued a presidential memorandum on January 23, 2017, to withdraw from the TPP as promised, and the U.S. left the agreement. Since the conditions for entry into force required ratification by at least six countries representing at least 85% of the combined GDP of the original 12 signatories, it was thought that the TPP's entry into force would be impossible following the U.S. withdrawal.

However, Japan subsequently worked tirelessly to establish the TPP11 without the United States. Japan persuaded developing nations like Malaysia and Vietnam, who felt the TPP's significance would be halved without the U.S., as well as Canada and Mexico, who prioritized the renegotiation of NAFTA (North American Free Trade Agreement). This led to a narrow agreement in November 2017, resulting in the TPP11 that has now entered into force.

As the Trump administration's protectionist trade policies become a reality one after another, Japan has received high praise from outside the TPP region for its active economic diplomacy in bringing the TPP11 together. Particularly in the final stages of negotiations after July 2017, three out of four Senior Officials' Meetings (Chief Negotiator level) were hosted by Japan in locations such as Hakone, and Japan's unprecedented leadership drew significant attention.

The TPP11 itself is a compact agreement consisting of only seven articles. However, Article 1 incorporates the provisions of the TPP agreed upon by the 12 countries, making this agreement the legal instrument that breathes life into the original TPP.

Article 2 stipulates the "Suspension of the Application of Certain Provisions," providing for the temporary "freezing" of 22 items that the U.S. had strongly insisted upon in the original TPP. Half of these 22 items relate to intellectual property rights, including the data protection period for biologics (8 years) which was of great interest to the U.S., and parts of the Investor-State Dispute Settlement (ISDS) mechanism. These have been "shelved," so to speak, so they can be applied as-is should the U.S. return to the TPP.

Article 3 stipulates the "Entry into Force." Unlike the original TPP, the requirement is based solely on the number of ratifying countries, and the GDP threshold was removed. However, during the 2017 negotiation process, one country argued for keeping a GDP-based requirement: Mexico, which already had a bilateral EPA with Japan.

I had the opportunity to have lunch in Mexico City with an old acquaintance who was the Mexican Chief Negotiator and asked why Mexico was fixated on the GDP requirement. The Chief Negotiator explained, "We are concerned that Japan might prioritize a bilateral Free Trade Agreement (FTA) with the U.S. and withdraw from the TPP; we want to keep the GDP requirement to prevent that, considering Japan's large share of the total GDP."

In response, I argued, "While it is true the Trump administration is leaning toward a bilateral FTA with Japan, Japan will continue to seek the U.S.'s return to the TPP. We view the original TPP as a de facto Japan-U.S. FTA. Therefore, Japan will never withdraw from the TPP11. We should delete the GDP requirement to reduce any risk factors regarding its entry into force." At the Senior Officials' Meeting immediately following this, Mexico agreed to withdraw the GDP requirement.

Article 4 stipulates "Withdrawal," and Article 5 stipulates "Accession." Article 6 covers the "Review of this Agreement," which can be seen as a clause preparing for a potential U.S. return. Article 7 specifies that the authentic texts of the TPP11 agreement are in English, French, and Spanish.

So, what effects are expected from the TPP11? For manufactured goods, an area where Japan excels, the elimination of tariffs on nearly 100% of products is promised. Regarding investment, it prohibits host countries from forcing technology transfers as a condition for investment permits. Rules were also agreed upon for e-commerce, which is not yet regulated by the WTO (World Trade Organization), explicitly prohibiting requirements for source code transfer or access, and prohibiting requirements for localizing servers. For state-owned enterprises, providing non-commercial assistance that adversely affects the interests of other parties is also prohibited.

In this way, the TPP11 holds extremely significant meaning for the Japanese economy, which relies heavily on trade and investment. This is precisely why it is called a "21st-century high-level mega-FTA." Amidst the growing protectionist tendencies under the Trump administration, the entry into force of the TPP11 at the end of last year, followed by the Japan-EU EPA on February 1 of this year, is highly significant from the perspective of defending a free and open international trade system.