Peter A. Petri, Brandeis Univeresity

The Big Benefits of Japan’s Joining the TPP Negotiations

Peter A. Petri, Brandeis UniveresityAs part of the “third arrow” of Prime Minister Abe’s revitalization strategy, the TPP should enhance Japanese competitiveness and build confidence among investors and consumers. It would not require much government spending and could help to cement Japan’s political ties with North America and Southeast Asia.

We have developed a comprehensive economic model to evaluate the impact of the TPP agreement for all key countries, and we expect Japan’s benefits to be around ¥10 trillion or 2 percent of GDP, three times as large as the Government estimates,  ¥3 trillion, or 0.66 percent of GDP.

The Government uses a traditional economic model to calculate benefits, one that has produced significant underestimates in the past. For example, in the case of the North American Free Trade Agreement (NAFTA) among the United States, Canada and Mexico, actual increases turned out to be five times as large as those estimated with similar models. We use a newer model that accounts for new trade being generated.

How large are Japan’s likely gains?

What would explain such gains? Consider, for example, that in 2010 foreign direct investment stocks in Japan amounted to 6 percent of GDP, compared to 17 percent in the United States, 72 percent in Europe, and 22 percent in China. If the TPP becomes a high quality accord, we estimate that it would enable Japan to attract 40 percent more foreign investment than otherwise. We also estimate that it would increase exports by 11 percent, with an emphasis on sophisticated manufactured products and services. By generating more competition, the TPP would increase Japanese productivity, especially in its huge service sector. And, as explained below, greater competition would open new opportunities also in agriculture, in both domestic and foreign markets.

The reasons for the large difference between our estimates and the Japanese government’s are technical but important. The government counts only benefits associated with tariff reductions. But most tariffs are now low in Japan and other TPP economies, and the main goal of the TPP is to remove other barriers, by introducing more transparent and consistent approaches to drafting regulations, and by removing unnecessary rules, restrictions on government procurement, and special privileges offered to state-owned enterprises. The details remain to be negotiated, but markets in all TPP countries, including Japan, would become more competitive and more closely connected. The government’s estimates also exclude potential gains from increased foreign investment.

The government also uses a traditional economic model to calculate benefits, one that has produced significant underestimates in the past. For example, in the case of the North American Free Trade Agreement (NAFTA) among the United States, Canada and Mexico, actual increases turned out to be five times as large as those estimated with similar models. We use a newer model that accounts for new trade being generated.

Perhaps understandably, the government has been unusually conservative in its estimates— counting only the clearest, simplest gains. Of course, we cannot be sure of our estimates either— we would not be surprised to see results 1/3 higher or lower than our estimates—but the official figures almost certainly understate Japan’s potential gains.

Source: Newsweek Japan, Apr 2, 2013, pp 28-31 (in Japanese; scroll down 4 pages to see the English translation)