The negotiation of TPP (Trans-Pacific Partnership) trade agreement has included 12 countries, which represent a third of world GDP. More importantly, when countries outside the partnership tend to trade with countries inside the TPP, they might have to meet a certain standard that specified in the agreement. Also, since a few more countries have shown interest to the partnership, we can expect that once the agreement is settled, more and more countries might consider joining. So the terms and policies that are currently negotiated are probably related to everyone in the world.
Based on Ricardian model and Heckscher-Olin model, the theories we learned in class, international trade will hurt some interest groups and benefit the other interest groups, but overall, the net effects will always be positive under the premise of market economy. Is this always true in the real world? We cannot ignore the impact of the actual implementation of the free trade agreement and political issues to the final outcomes.
The concerns of Japan
When Japan is considering joining the TPP, one of the critical issues is its weak agriculture industry. Currently, the tariff on rice imports in Japan is incredibly high – about 800%. The purpose is very obvious that the government of Japan is trying to protect its agricultural industry. It is not hard to predict according to Ricardian model that once the striking tariff is eliminated by the free trade agreement, there is no way for Japanese farmers to compete against foreign competitors who have huge comparative advantages. Since the agricultural production is so inefficient in Japan, people might wonder why the Japanese government does not just gives up its agriculture industry so that Japanese consumers can enjoy a much lower price on basic agricultural products, especially rice. The answer can never be found in our trade models.
Agriculture is special compared with the other industries. As the major producing activity before the industrial revolution, agriculture provides humans’ basic need, food. Getting rid of the sky-high tariff might lead to a great consumer surplus immediately with cheap agricultural products coming in, but from the political perspective, it increases the dependence of the Japanese government and the vulnerability to the international turbulence, such as economic crisis and war. To be specific, if the world price of agricultural products goes up or the free trade agreement falls apart someday because of bad political relationships, it is hard for Japanese people to rebuild its agricultural industry, which means the survival of Japanese people can be severe issue regardless of the fact that Japan is one of the most developed countries in the world.
In my opinion, keeping agricultural tariff is non-negotiable for Japan. Will TPP make an exemption for Japan in order to keep it in the partnership? They could, but we know that every country wants to get exemption in terms of the tariff or subsidies on the industries that they want to protect the most. This is why it is so hard to reach a final agreement involved with so many industries when 12 countries participate in the negotiation.
Who will benefit from TPP? The majority or the minority?
Another issue in terms of the deadlocked negotiation is the question whether the representatives of the negotiation is on behalf of the total social welfare or a small fraction of the interest parties. When economists promote free trade, they are thinking about net welfare impact to a single country or the whole world. But when it comes to the implementation, sometimes the benefit only goes towards to the minority in spite of the fact the net gain is positive. In the US, even though the negotiation is proceeding in secrets, some large companies are allowed to have their voices on US’s position because of their efforts on lobbying. So we can expect that final outcomes will at least not be too bad for these participants, but more likely in favor of them. If the free trade agreement refers to free trade on everything, then the negotiation is needless. So we can easily predict that the main topic of 13 rounds of negotiation is which trade can be “free” or what the level of “free” is. Will each country out of 12 benefit from the TPP as a whole? I am not sure. But without the participation of the public, what I do believe is that a handful of interest groups will benefit from it and the majority will not.