Fran O'Sullivan: Crunch time if Japan wants to stop slide

Japan needs to wake up and join the Trans Pacific-Partnership or it will find itself left even further behind as other major Asian competitors "eat its lunch".

That's the loud message being sent Japan's way by a bevy of international political leaders, including Prime Minister John Key, and influential Asia Pacific opinion-makers.

And it's one that the latest Japanese Prime Minister, Naoto Kan, hears loud and clear.

But Kan will need to exhibit extraordinary political courage to get enough domestic political backing lined up in time for him to tell the 21 Asia Pacific leaders in Yokohama in two weeks for the Asia-Pacific Economic Co-operation (Apec) meeting that Japan definitely wants in to the partnership to bolster its international competitiveness.

So far, the signs are promising.

In Tokyo last week Economics Minister Banri Kaieda and Foreign Minister Seiji Maehara said Japan should initiate the process to join the TPP.

Both believe Japan needs to get serious about opening its markets or its competitiveness will dwindle.

The strong yen has put Japanese manufacturers under pressure to make high-value added products to stay competitive.

But they then find themselves up against high tariff walls, particularly elsewhere in Asia, which means their chances of selling products competitively overseas are lessened.

China's competitive threat is obvious. In a paper to last week's meeting of the Pacific Economic Co-operation Council (PECC) in Tokyo, Professor Motoshige Itoh presented compelling research which indicated China's GDP could be three times larger than Japan's by 2020.

For a country which was until this year still the world's second largest economic powerhouse, such results ought to pose a wake-up call.

Itoh indicated the Japanese Prime Minister was well aware Japan would consign itself to a secondary status if it did not take action.

But the powerful Japanese agriculture lobby continues to exert considerable sway, arguing that Japan's basic food security would be threatened if it comes into the TPP as a fully-fledged partner.

Within Asia, the TPP talks are generally now seen as a US-led initiative. But they grew out of the Pacific Four agreement originally negotiated between New Zealand, Singapore, Brunei and Chile in 2005.

The US, Peru, Australia and Vietnam later joined the negotiations which they saw as providing a "path-finder" to what would ultimately be a Free Trade Area of the Asia Pacific.

Malaysia was recently accepted into the TPP negotiations (Canada was refused as it was not ready to put all aspects of its trade on the table). South Korea is playing a watching game.

Under the institutional arrangements for the TPP any of the 21 Apec members can join.

But the differing economic development levels achieved by the various Asia Pacific nations suggest that unless the original parties stay true to the plan for a high-quality comprehensive agreement, politics will play as big a role as economic factors when it gets down to the hard yards.

For the US, the TPP offers a platform to be involved with the Asia region, rather than be marginalised by the East Asian integration process.

But while the US is anxious to play a major role in the Asia Pacific region, the rhetoric coming out of Asia suggests Asian countries see the future role for the US is of a major partner, not the major leader.

In reality, the US cannot afford to find itself marginalised from the developments in the world's fastest growing economic region, particularly if President Barack Obama wants to achieve his target of doubling American exports within five years and creating an additional two million jobs.

The US is a relative laggard when it comes to negotiating free trade agreements (outside of Nafta) which do not have a strong strategic imperative.

It is opposed to a proposal by Australia, New Zealand and Singapore to basically "multi-lateralise" the TPP to replace existing FTAs between the respective negotiating countries.

TPP envisages elimination of tariffs on all items in principle - but there would inevitably be major phase-out periods for key industries such as agriculture in Japan's case.

But while Japan has been seen as a relative incalcitrant on the trade liberalisation front, the US still needs to underline its position by settling its outstanding FTAs.

PECC secretary-general Eduardo Pedrosa reckons if the United States ratifies the free trade agreement with South Korea (Korus), "that would spur Japan to get to the negotiating table".

The alacrity with which South Korea is pursing trade deals ought to be a lesson to Japan. It recently signed a landmark free trade deal with the European Union - the first Asian county to sign a deal with the European bloc.

In Japan's case it is still talking about an economic partnership agreement with the EU. But it has made no real progress.

The upshot, according to Japanese estimates, is Japan's major manufacturers stand to lose US$3 billion ($3.9 billion) exports (cars, home appliances, electronics) to the EU.

The Japanese Cabinet Office is now stressing the overwhelming benefits to Japan of taking part in the TPP.

It estimates participation would bolster Japan's real gross domestic product by 2.5 trillion to 3.4 trillion a year, pushing up growth by 0.48 to 0.65 per cent a year. These estimates include the impact on agriculture.

The economy ministry says failing to liberalise trade would slash Japan's exports by 8.6 trillion and production by 20.7 trillion in 2020.

New Zealand's policy-makers hope if Japan does resolve to join TPP, our food and beverage exporters will benefit through the gradual liberalisation of the Japanese agriculture sector.

But it is unlikely Japan will go down that route without giving compensatory support for its farmers, which are a vocal electoral lobby. Particularly as the Japanese farm industry predicts if all tariffs were lifted, Japan's food self-sufficiency would fall from 40 per cent to 12 per cent as cheaper rices floods into the country.

For Japan it is crunch time.

Its Prime Minister clearly believes the country will sink if it does not form trade agreements with other major countries.

The economic imperative is obvious. But so too the political imperative of ensuring that Japan, which is a strong democracy, remains highly involved in the Asia Pacific region.