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#5233, 9 February 2017
 
US Exit from the TPP: Opportunities and Alternatives for Japan
Chandrali Sarkar
Research Intern, CRP, IPCS
 

US President Donald Trump sounded the death knell for the Trans-Pacific Partnership (TPP) by signing an executive order withdrawing the country from the Partnership. This scenario is viewed as a setback not just for the TPP but also as preventing the Japanese economy from accomplishing the targets set as per the 'third arrow' of Japanese Prime Minister Shinzo Abe’s 'Abenomics'. Given the turn of circumstances, what alternatives does Japan have? Could Abe turn the situation around to Japan's benefit?

Significance of the TPP for Japan
The TPP has been significant for Japan for three key reasons: enhancing the Japanese economy; promoting Japan-US understanding over the reduction of import tariffs; and balancing China’s economic expansion in the Asia-Pacific region.

Japan has had the misfortune of a deflationary crisis for the past two decades. 'Abenomics', the economic policy announced by Abe in December 2012 in the hope of restoring inflation within the Japanese economy, entails ‘three arrows': fiscal stimulus; monetary easing; and structural reforms. Opening up the Japanese market for free trade and structural reforms within the agricultural and non-agricultural sectors seems to be the plausible solution towards achieving Abe’s target of two per cent inflation of the GDP from its current deflationary trend. The US' participation in the TPP would have not only enhanced Japan-US economic relations but would have also provided Japan with a larger market base for increasing its exports. With the US' withdrawal from the TPP, this is no-longer a credible prospect, compelling Japan to explore ways to salvage the intended benefits of the TPP.

The TPP, which was originally a trade negotiation between 12 signatories, accounts for almost 40 per cent of the global trade. Japan and the US would have collectively enjoyed 60 per cent of the total benefits arising from this deal. However, without the US, the TPP is likely to lose approximately 250 million consumers. This creates an irreplaceable vacuum of consumer base that neither Japan nor the other signatories of the TPP can fill. Moreover, the fall of the TPP makes way for the ASEAN led Regional Comprehensive Economic Partnership (RCEP). The RCEP has the potential to become a significant trade agreement in the Asia-Pacific region. The US' withdrawal from the TPP robs the Partnership of its strategic significance, i.e. balancing China’s ascendency in the Asia- Pacific region. In the absence of the US, China becomes a powerful economy in the Asia-Pacific region, occupying a position that calls the shots.

Alternatives to the TPP
Although Abe would prefer a US presence within the TPP, it will not cause much harm if he chooses to speculate the feasibility of the TPP without the US and deal with Washington separately; and more so now that deal is dead and the US seems more inclined to develop bilateral ties. Recently, Abe embarked on a four-nation trip to Malaysia, the Philippines, Indonesia and Vietnam to secure participation within the TPP. However, to Abe’s dismay, Trump has said "I see Abe’s visit being more about finding a follow-through, a replacement for TPP."

Under such circumstances, Abe feels compelled to make statements in favour of establishing bilateral deals with the US. Abe and Trump are scheduled to meet in the US in February 2017, and both seek progress on bilateral trade negotiations. However, under a bilateral treaty, Japan is likely to lose out on the equal foothold that it would have otherwise enjoyed in the TPP framework.

Therefore, Japan is now warming up to the RCEP. Alternatively, it might choose to invest in developing its EPAs or bilateral trade negotiations with countries like Singapore, Mexico, Indonesia, Vietnam, the Philippines, Brunei, Chile, Thailand, Switzerland, and India, and with groupings like the ASEAN. It could be highly advantageous for Japan to expand the EPAs into multilateral trade agreements. An EPA can have a very broad scope and can also include most of the TPP signatories, thereby giving Japan the required platform to begin its own version of trans-pacific trade negotiations; and also giving the country access to vital markets across the world.

Looking Ahead
Working via a pre-existing negotiation framework - like the EPAs - would not only save time but also result in an active shift of the Japanese foreign policy. This means Japan would get the chance to ‘initiate’ multilateral trade talks instead of participating in just one. A separate US-Japan bilateral treaty might give Japan the required room to develop its own economic strategy within the Asia- Pacific, which it may use as leverage to create a balance of power situation vis-à-vis a rising China as well as develop the domestic economy.

Although the US withdrawal drastically changes Japan’s circumstances in the Asia-Pacific region, this could also herald new opportunities that Japan could exploit to its advantage. Significantly, dealing with the eastern block and the western block separately could be beneficial because Japan might get the opportunity to actively construct it foreign policy without being directed by the vision of any foreign power. Finally, if Japan could devise its own version of trade agreements, it could shift from a reactive foreign policy approach to a proactive one.

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