TPP and Japan in the Global Economy

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 approximately $5 trillion.

Originally, an agreement among 12 countries, including the United States, was reached in October 2015, and signing took place 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 TPP. The conditions for entry into force stipulated that at least six countries must ratify it and that the combined GDP of those six countries must represent at least 85% of the total GDP of the original 12 countries. With the U.S. withdrawal, it became impossible to meet this condition, and it was thought that the TPP would never take effect.

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

As the protectionist trade policies of the Trump administration became a reality one after another, Japan, which deployed active economic diplomacy to bring the TPP11 together, has received high praise even from outside the TPP region. Particularly in the final stages of negotiations after July 2017, three out of four Senior Officials' Meetings (at the 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 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) and parts of the Investor-State Dispute Settlement (ISDS) regarding investment, which were of strong interest to the U.S. These have been, so to speak, "shelved" so that 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, some countries argued for the inclusion of a GDP threshold. One such country was Mexico, which had already concluded a bilateral EPA with Japan.

I had the opportunity to have lunch in Mexico City with an old acquaintance who was a Mexican Chief Negotiator, and I asked why Mexico was so persistent about the GDP threshold. 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. To prevent that, we want to keep the GDP threshold, taking into account that Japan's GDP ratio is large."

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

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 the return of the United States. 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 is promised for nearly 100% of items. Regarding investment, it prohibits host countries from forcing technology transfers in exchange for investment permits. Rules were also agreed upon for e-commerce, which is not yet regulated by the WTO (World Trade Organization), and prohibitions on requirements for the transfer of or access to source code, as well as prohibitions on server localization requirements, were codified. Regarding state-owned enterprises, it is prohibited to adversely affect the interests of other parties through non-commercial assistance.

In this way, the TPP11 holds extremely important significance 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 fact that the TPP11 entered into force 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.