A Shift from Passive to Proactive Protector of a Rules-based Open Trading System

Shujiro Urata (Professor, Waseda University)
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*Series: Trajectory of Heisei, way forward to Reiwa (No.9)

  • Japan changed from a passive to proactive participant in the formation of regional frameworks
  • After US withdrawal from TPP, Japan led the TPP11 negotiation to reach an agreement successfully
  • Japan needs to become a leader in protecting a rules-based open trading system by contributing to the WTO reform.

Economic Situation at the Beginning of Heisei

 The Heisei era began in the midst of a changing economic environment both inside and outside of Japan. The Japanese economy was at the peak of a bubble economy, which began in the latter half of the 1980s. In the bubble economy, the economic boom seemed to last indefinitely, but it soon collapsed. The Japanese economy entered into a long period of low growth.
 As for the external economic environment, the world was experiencing globalization and regionalization. Technological progress and deregulation in transportation and communication services as well as liberalization of trade and investment policies promoted the international flow of goods and services. While globalization advanced, regionalization intensified in three regions-- East Asia, North America, and Europe--as the benefits of agglomeration were realized.
 On trade policy fronts, things were not going well. Japan and the United States were involved in trade frictions, while the Uruguay Round of multilateral trade negotiation under the General Agreement on Tariffs and Trade (GATT) went into a deadlock. There were, however, some signs of change in trade policies.

Establishment of APEC

 The first notable international economic event for Japan in Heisei was the establishment of the Asia-Pacific Economic Cooperation (APEC) in December 1989. Australia and Japan played a key role in its establishment. After a long period of gestation, APEC was launched with twelve countries including Japan, Australia, Canada, New Zealand, South Korea, the United States and six members of the Association of Southeast Asian Nations (ASEAN). A main motivation behind APEC was to keep the trade environment open in the Asia-Pacific, as trade frictions involving Asia-Pacific countries were becoming severe. Two factors external to the Asia-Pacific pushed these countries to promote regional cooperation. One was intensified moves toward united Europe and the other was a stalemate in the Uruguay Round.
 APEC contributed to maintaining an open trade and investment environment in the Asia-Pacific, culminating its role in 1994 by setting the Bogor Goal of establishing free and open trade and investment environment by 2010 for developed members and by 2020 for developing members, and to promoting economic cooperation. APEC is a flexible regional framework by adopting voluntary and non-binding principles. APEC has been joined by new members to have 21 members at present. APEC contributed to the conclusion of the Uruguay Round negotiations, which led to the establishment of the World Trade Organization (WTO) in 1995.

Advent of FTA Boom

 The 1990s is the period when free trade agreements (FTAs) began to increase rapidly. An FTA is a preferential trade agreement, under which trade between and among FTA members becomes free by mutually eliminating import tariffs. One important reason behind rapid expansion of FTAs was the stalemate in the Uruguay Round. Faced with this situation, countries eager to expand exports to achieve economic growth opted for trade liberalization with like-minded countries. East Asia was slow in establishing FTAs, compared to other regions. Japan, China, and South Korea were particularly hesitant about FTAs. For Japan and South Korea, adhering to the multilateral trading framework under the GATT and later the WTO was considered important for export expansion, while for China joining the WTO was most important trade policy agenda.
 The end of the 1990s saw a change in the attitude of Japan and South Korea toward FTAs. Faced with difficult economic situation caused by the Asian Financial Crisis (AFC), East Asian countries including South Korea and Japan realized the importance of regional economic cooperation. FTAs became an important and effective policy for regional economic cooperation. In addition, the rapid expansion of FTAs in other parts of the world led to discrimination of Japan and other East Asian countries in the global market, making them realize the need for FTAs.
 In the 21st century, among East Asian countries, Japan, South Korea, and Singapore became active in FTAs. Japan's first FTA was with Singapore in 2002, followed by FTAs with Mexico, Malaysia, and other East Asian countries in bilateral form. Japan was a passive participant in FTA in that it was approached by other countries. Japan changed to a proactive participant when Japan approached ASEAN for an FTA. This move was a response to China's approach to ASEAN.
 China changed the patterns of FTAs in East Asia from bilateral to plurilateral forms. After successfully joining the WTO in 2001 to obtain an access to the world market, China approached ASEAN members as a group to establish a plurilateral FTA rather than bilateral FTAs individually. China-ASEAN FTA was enacted in 2005. China's surprise move to form a plurilateral FTA with ASEAN triggered a series of FTAs with ASEAN by Japan, South Korea, India, and Australia-New Zealand separately. By 2010 five ASEAN+1 FTAs, each with these countries had been established.

Emergence of Mega-regional FTAs

 The concept of a region-wide FTA or a mega-regional FTA encompassing all countries in East Asia emerged in the aftermath of the AFC. The first idea was an East Asian FTA (EAFTA) comprising of ASEAN+3 (China, Japan, and South Korea) countries in early 2000s. China was eager to take a leading role in the formation of regional economic integration in East Asia and thus led the discussions. Soon after the EAFTA discussions began, Japan proposed a Comprehensive Economic Partnership for East Asia (CEPEA) with the member countries of ASEAN+6 (ASEAN+3, India, and Australia and New Zealand). Japan's move is apparently in response to China-led EAFTA. Feasibility studies of EAFTA and CEPEA were undertaken by private sector experts separately, but no formal actions were taken until the early 2010s.
While East Asian countries were active in discussing the possible formation of region-wide FTAs, some economies belonging to APEC began to discuss the formation of a region-wide FTA in Asia-Pacific with a high level of trade liberalisation and broad issue coverage. These discussions resulted in the formation of P4, consisting of Chile, Singapore, New Zealand, and Brunei in 2006.
 In March 2008, the P4 members began negotiations on trade in financial services in order to broaden the agreement's issues coverage. In November 2009, the US joined the expanded P4 negotiations. Australia, Peru, and Viet Nam quickly followed. During this period, P4 became the Trans-Pacific Partnership (TPP). The discussions on the formulation of region-wide FTAs in East Asia sparked the US' interest in TPP, as it did not want to be kept out of East Asia.
 After the TPP negotiations began, Malaysia (2010), Canada and Mexico (2012), and Japan (2013) joined. Japan joined the negotiation after successfully overcoming strong opposition of the agricultural sector. Prime Minister Shinzo Abe skilfully formulated and implemented a TPP strategy. One good example was the establishment of the TPP Headquarters at the Cabinet Secretariat Office under Prime Minister, where a TPP team comprising of officials from various ministries was formed to formulate and implement a unified TPP negotiation strategy. This approach was effective and different from earlier FTA negotiation approaches, where officials from different ministries each pursued the strategies of their respective ministries. For Prime Minister Abe, the TPP was very important for a successful economic recovery from the long recession.
 The TPP negotiations reached an agreement in October 2015. The TPP Treaty was signed, but was not enacted because newly elected US President Donald Trump withdrew the US from the TPP in January 2017. The remaining 11 TPP members pursued TPP11 without the US. Japan led the TPP11 negotiations, which were concluded very quickly. The TPP11, formally named the Comprehensive and Progressive TPP (CPTPP), entered into force in December 2018.
 TPP negotiations provoked negotiations of other mega-regional FTAs including Japan-European Union (EU) FTA and Regional Comprehensive Economic Partnership (RCEP) with ASEAN+6 countries. Japan and the EU concluded their negotiation and the Japan-EU FTA entered into force in March 2019. RCEP was proposed by ASEAN in response to the joint proposal by China and Japan for accelerating the EAFTA and CEPEA. ASEAN's move was motivated by its concern for losing a central role in the movement towards an East Asian regional framework. RCEP is currently under negotiation.

Emergence of Protectionism and Threat of Collapse of the WTO System

 The world began witnessing growing protectionism after the Global Financial Crisis. Behind this growing protectionism was anti-globalism, which was supported by the people, who suffered from rapid expansion of globalization. Against this background, Donald Trump, who called for protectionism to protect US industries and employment, became US President in 2017. Once in office, Trump unilaterally increased tariff rates without justifiable reasons, violating WTO/GATT rules under the banner of "America First" policy.
 Since the middle of 2018, Trump has applied punitive tariffs on imports from China with an objective of stopping China's "unfair trade practices" such as the violation of intellectual property rights and forced transfer of technology from foreign firms. China retaliated by increasing tariffs on imports from the US. Application of tariffs by the US and China has escalated to become a full-blown trade war. If the US-China trade war continues, the world economy would suffer from a decline in trade and investment, which in turn would do serious damage to the world economy. Furthermore, the world trading system under the GATT/WTO, which contributed to rapid growth of the world economy in the Post WWII period, would be put at a risk of collapse. If that happened, the world economy would fall into a crisis.

Japan's International Role in Reiwa

 The biggest problem for the world economy at the beginning of Reiwa is growing protectionism, in particular the US-China trade war. Japan has to play an active and effective role in dealing with the problem, in order to maintain a rules-based open trading system, which would benefit all the countries in the world. In addition to keep making comments about the disastrous impacts of the trade war to the Leaders and policy makers of the world by reminding about the pre-WWII episode, Japan needs to make serious efforts on two fronts, both of which are related to the WTO reform. One is to make progress in on-going trade initiatives, which include mega-FTAs and plurilateral agreements, to re-establish a rules-based trading system. As for mega-FTAs, Japan needs to contribute to the conclusion of RCEP negotiation and expansion of the members of the CPTPP and Japan-EU FTA, while for plurilateral agreements Japan needs to lead the negotiations on new issues such as digital economy and investment. The other task for Japan is the reform of Dispute Settlement Mechanism in the WTO The mechanism is bound to stop functioning very soon, because the US has been blocking the appointment and reappointment of Appellate Body members. Without well-functioning Appellate Body, the WTO cannot stop protectionism. Japan needs to make necessary contributions in solving the problem by actively engaging in and leading the discussions.