TPP and Japanese Exports

2019/02/18

On December 30, 2018, the TPP agreement between 11 countries (hereinafter referred to as CPTPP) finally came into effect. The TPP negotiations sparked much debate and interest within Japan, even being called the "opening of the country in the Heisei era." While 15 Economic Partnership Agreements (EPAs) have entered into force to date, this is likely the first time a trade agreement has garnered such significant attention. What kind of impact will the CPTPP, which was sometimes said to even threaten the destruction of the Japanese economy, have in the future?

While Japan's interests in the field of tariffs were concentrated in the agricultural sector, such as the so-called "five sensitive items," I would like to focus here on the manufacturing industry, which accounts for the majority of Japan's exports, and consider the impact on those exports. To state the conclusion first, due to the existence of existing EPAs, the impact of the CPTPP on Japanese manufacturing exports is expected to be surprisingly small. Despite the intense debate that took place, it may feel like an anticlimax.

First, it is necessary to understand how exporting companies generally choose tariff rates. Normally, in trade between nations, a tariff rate called the Most-Favored-Nation (MFN) rate is used. However, in trade with EPA partner countries, the "right" is granted to use a tariff rate lower than the MFN rate, as stipulated within the EPA agreement. To utilize EPA tariff rates, exporting companies must satisfy rules of origin and obtain certificates of origin, and these processes involve a certain administrative burden. Therefore, the EPA tariff rate will only be selected when sufficient profit can be obtained by using it. For companies that cannot obtain sufficient profit because the EPA rate is not significantly lower than the MFN rate or because the export volume is small, the MFN rate will likely continue to be used even for exports to EPA partner countries.

Furthermore, it is important to note that there is not necessarily only one available EPA tariff rate. For example, among the CPTPP member countries, the only ones with which Japan has not yet concluded an EPA are Canada and New Zealand. Since Japan has concluded bilateral or regional EPAs with the other countries, EPA tariff rates are already available for trade with those nations. Even if a company chooses an EPA rate over the MFN rate, if the CPTPP does not offer a lower EPA rate than the existing EPA, the existing EPA rate will likely continue to be used as before.

In particular, EPAs that entered into force earlier tend to offer lower EPA tariff rates. Tariff reduction methods under EPAs include those where elimination occurs immediately upon entry into force and those where reduction and elimination occur gradually over several years. In the former case, tariffs will have already been eliminated under the existing EPA, and in the latter case, the tariff rate of the EPA that entered into force earlier will be at a lower level.

Additionally, when EPA tariff rates are the same, the rate of the EPA that entered into force earlier tends to be used. This is related to the aforementioned compliance with rules of origin and certificates of origin. Companies accustomed to complying with an existing EPA will not go out of their way to use a new EPA if the tariff rates are the same. This trend is also evident in trade with ASEAN countries, with which Japan has concluded both bilateral and regional EPAs. In fact, for exports to Japan, almost all countries primarily use bilateral EPA tariff rates; the only exception is Vietnam, where the regional EPA entered into force before the bilateral EPA, and thus the regional EPA is used more frequently.

Therefore, excluding trade with Canada and New Zealand, it is crucial for the CPTPP to offer rates lower than existing EPA rates for trade to be conducted using CPTPP rates. However, now that many years have passed since the existing EPAs entered into force, cases where the CPTPP offers a lower rate are rare, such as some automobiles in Mexico or some automobiles and auto parts in Peru and Vietnam. For these reasons, it is expected that, except for a few cases, very few transactions will be conducted using CPTPP rates. This is not because the content of the CPTPP is poor, but rather the effect of existing EPAs and the result of rational decision-making by companies.

However, even if the CPTPP offers tariff rates similar to existing EPAs, the possibility remains that the CPTPP will be selected. Rules of origin that exported goods must satisfy are determined by item and by agreement, but in some cases, the rules of origin established by the CPTPP may be easier to satisfy. Furthermore, the CPTPP allows companies to create their own certificates of origin rather than using a third-party institution (self-certification system). If a company, such as a large corporation, has a sufficient internal system in place, it can reduce the burden of origin certification, which may lead to the selection of the CPTPP. I would like to keep a close eye on the utilization status of the CPTPP in the future to see the extent of these effects.