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USJI Voice Vol.15

The TPP and East Asian Economic Integration ― Including the Roles of Japan and the U.S.

May 30,2016
Dr. Kazushi Shimizu
Kyushu University

Introduction

The Trans-Pacific Partnership (TPP) was finally agreed upon on October 5, 2015, and signed by all participating countries on February 4, 2016. The TPP is a mega-sized free trade agreement (FTA) involving twelve countries in the Asia Pacific region and is an extremely important FTA for the global economy, for Japan and the U.S. Furthermore, the TPP holds great importance for the East Asian economy, the world’s current growth center, and its economic integration as well. This paper will discuss the TPP and East Asian economic integration, taking into account the author’s research to date on the Association of Southeast Asian Nations (ASEAN) and East Asian economic integration.

East Asian Economic Integration

East Asian economic integration has been pulled ahead by ASEAN. Heretofore, this association has been the sole regional mechanism for cooperation in East Asia, and since its establishment in 1967, ASEAN has promoted various forms of cooperation, such as political and economic cooperation. Membership has also increased from the initial five member countries, to ten countries at present. ASEAN has promoted economic cooperation within the region since 1976, and from 1992 it began to strive to realize the ASEAN Free Trade Area (AFTA), culminating in the foundation of the ASEAN Economic Community (AEC) at the end of 2015. The AEC was put forth in 2003, in the “Declaration of ASEAN Concord II.” Its concept is to have ASEAN be a single market and production base, and it is the most advanced economic integration movement in East Asia.

ASEAN has become the leader of regional cooperation in East Asia, as seen in developments such as ASEAN+3 (countries) and ASEAN+6 (countries). In addition, five ASEAN+1 (country) FTAs with countries such as Japan, China and South Korea have been established under ASEAN leadership. On the other hand, there has been no FTA encompassing East Asia as a whole. However, changes following the global financial crisis led to ASEAN proposing the Regional Comprehensive Economic Partnership (RCEP), an FTA for all of East Asia, as will be discussed next.

Changes Following the Global Financial Crisis and the TPP and RCEP

Amidst the structural changes following the global financial crisis from 2008, the TPP began to have a greater significance and had an enormous impact on the realization of East Asian economic integration. Compared with other regions, East Asia recovered quickly from the global financial crisis. As well as being an important production base and market for intermediate goods in the current global economy, East Asia also has become a major market for final consumer goods.

Meanwhile, following the global financial crisis, the U.S. was driven to switch over from domestic demand-led growth based on excessive consumption and financial development, to exporting as the important means of achieving growth. The main target of these exports was East Asia, where growth was ongoing. Accordingly, President Barack Obama set forth a plan to double exports in January 2010, and declared that the U.S. would participate in the TPP covering Asia and the Pacific region.

The TPP was no more than an FTA among four countries, Brunei, Chili, New Zealand and Singapore when it initially came into effect as the P4 in 2006. However, it gained great importance with the participation of the U.S., Australia, Peru and Vietnam. Consequently, eight countries commenced trade negotiations in March 2010, and Malaysia also joined these talks in October of that year. The TPP movement towards establishment with the addition of the U.S., the FTA for East Asia as a whole, which had been at a standstill due to the conflict between Japan and China, also made progress. Accordingly, at the August 2011 ASEAN+6 (countries) economic ministers meeting, Japan and China offered the joint proposal to promote without distinction both the Japan- led Comprehensive Economic Partnership in East Asia (CEPEA) and the China-led East Asia Free Trade Area (EAFTA).

On the occasion of the November 2011 APEC meeting in Hawaii, Japan announced that it would begin discussions with the countries involved in TPP negotiations. At the ASEAN summit meeting held during the same month, ASEAN proposed a new ASEAN led East Asia FTA, the RCEP, along with the extension of the heretofore CEPEA and EAFTA and the ASEAN+1 (country) FTAs. Thereafter the RCEP began to move quickly with its rounds involving 16 East Asian countries, that is the 10 ASEAN countries, Japan, China, South Korea, Australia, New Zealand and India.

On March 15, 2013, Japan formally announced its participation in TPP negotiations, which had a further impact on East Asian economic integration. Thereafter, the theretofore stalled FTA negotiations quickly gained life again. In addition, on March 25, Japan and the EU declared the commencement of Economic Partnership Agreement (EPA) talks. Furthermore, in Seoul, on March 26, Japan, China and South Korea held their first discussions toward a Japan-China-Korea FTA. Also, the first RCEP round was held in May, and Japan officially participated in TPP talks at the 18th round in July, further impacting this trend.

However, in spite of the repeated TPP rounds held thereafter, no agreement was reached in 2013 or in 2014. The reason for this was that in talks between the two major TPP participants, Japan and the U.S., they refused to open their markets for agricultural products and cars, respectively. In addition, Malaysia and Vietnam disagreed with the U.S. on various issues, such as competition policy, intellectual property and the environment. Nevertheless, with the progress of Japan-U.S. consultations thereafter and the June 2015 U.S. passage of Trade Promotion Authority (TPA) legislation, also known as fast track authority, the path toward a TPP agreement opened up.

The Conclusion of the TPP Agreement and the Impact on East Asia

The TPP agreement was finally concluded on October 5, 2015, at the TPP ministerial meeting held in Atlanta, Georgia, U.S. This agreement was reached about five and a half years after the inauguration of talks among eight countries in March 2010. Furthermore, on February 4, 2016, the TPP agreement was signed by participating countries in Auckland, New Zealand. The task ahead now is to have each participant ratify the TPP agreement and have it take effect.

The TPP is a mega FTA that represents approximately 40% of the world’s GDP. It involves (as participants) twelve Asia Pacific countries, including Japan and the U.S. The East Asian participants are Japan and four ASEAN countries, Singapore, Malaysia, Vietnam and Brunei.

The TPP’s distinguishing features are its high level of trade liberalization and its inclusion of new trade rules. Regarding its rate of trade liberalization, the TPP twelve-country average for the elimination of tariffs for industrial goods is 99.9% and for agricultural products is 97.1%, indicating that trade in goods has been liberalized. These are extremely high figures that have been achieved for an FTA that includes not only industrially advanced, but also developing countries. In addition, the TPP covers not only traditional trade in goods, but also includes new rules concerning trade in services, investments, electronic commerce, government procurement, state-owned enterprises, intellectual property, labor and the environment. This is the reason that the TPP is called a “21st century-type FTA.” The TPP should bring great benefits to its participating Asia and Pacific countries, including Japan and the U.S.

Through the liberalization of trade and investments and the new rules, the TPP should also have a great impact on the economy of East Asia. First of all, the TPP will contribute to the economic growth of all East Asian countries through the liberalization of trade and investments in the Asia Pacific region. Along with the TPP being an FTA between East Asian countries, for Japan, Malaysia and Vietnam it will be an FTA with the U.S., something these countries had not concluded heretofore. There are also calculations that the TPP will usher in further economic growth for participating countries. Therefore, at the present time South Korea, Taiwan, Indonesia, Thailand and the Philippines are also requesting participation in the TPP.

The second TPP impact on the economy of East Asia will be through the establishment of various trade rules for the Asia Pacific and East Asia regions, and the support provided for the economic activities of East Asian countries. The formation of rules covering, in addition to trade in goods, trade in services, investments, electronic commerce, governmental procurements, state-owned enterprises, intellectual property, etc., should provide support for the economic activities of corporations doing business in East Asia. This is because the TPP has adopted regulations that will be easy for corporations to follow, such as the FTA’s “Rules of Origin.”

Impact number three will be TPP is backing for East Asian economic integration. To date, when TPP negotiations have advanced, East Asian economic integration has also progressed; and when TPP negotiations have stalled, East Asian economic integration has also stalled. Consequently, the realization of the TPP should mean the advancement of East Asian economic integration, including the AEC and RCEP. ASEAN liberalization should make further progress and the AEC could also possibly deepen and strengthen through the adoption of TPP regulations covering “government procurement,” “state-owned enterprises,” etc., by ASEAN countries. In addition, the TPP should also exert pressure on the RCEP, whose trade liberalization target is only about 80%, to become a more qualitatively substantial FTA. For the sake of corporations as well, the realization of the economic integration of East Asia as a whole and a high quality FTA are needed in order to achieve an efficient production network in East Asia.

The TPP and Japan and the U.S.: Ratification by Japan and the U.S. Essential to TPP Effectiveness

As discussed above, the TPP is of great importance to the Asia Pacific and East Asia regions. In addition, the TPP will support East Asian economic integration. For the global economy as a whole as well, progress in global trade liberalization and trade rule creation with TPP support are vital in this day where WTO led trade liberalization and rule formation are stalled.

At present, the TPP was concluded and the agreement signed. What lies ahead is to have each participating country ratify it and have it come into effect. Japan and the U.S., whose combined GDPs account for approximately 80% of the sum total of the GDPs of the participating countries, will have overwhelming influence in the TPP. Furthermore, ratification by Japan and the U.S is essential to the TPP coming into effect. Although approval by the current session of the Japanese Diet has become difficult, Japan must approve the TPP agreement as quickly as possible. Likewise, U.S. TPP ratification is also indispensable. However, the outlook for passage of the required legislation is chaotically unclear ahead of the U.S. presidential election in November of this year. The leading candidates of even the U.S. Republican Party, which traditionally has supported free trade, have declared their opposition to the TPP. Nevertheless, the TPP must not become another ITO (International Trade Organization), which was brought to a standstill due to domestic problems in the U.S. following World War II.

It is hoped that Japan will undertake the role of advancing the TPP and RCEP and also linking the TPP and RCEP to usher in a Free Trade Area of the Asia-Pacific (FTAAP), an FTA encompassing the entire Asia-Pacific region. Japan participates in both the TPP and RCEP and is the nexus that connects the economies of the Asia-Pacific and East Asia regions. Therefore, Japan’s role is vitally important.

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