trade policy brief
Comprehensive free trade agreements: which benefits for Japan?
January 2020
he Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is T expected to lift Japan’s real income USD 490 per worker, by 2030. The EU-Japan Economic Partnership Agreement (EPA) is expected to raise real income in Japan between USD 160 per worker and USD 330 per worker over the same period. eyond existing arrangements, if G20 economies were to undertake ambitious and B comprehensive reforms across tariffs, non-tariff measures restricting goods trade, and barriers to trade in services, the estimated gains far outweigh the sum of individual actions - exceeding 6% of Japan’s GDP.
What’s the issue? With the recent entry into force of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Japan Economic Partnership Agreement (EPA), Japan has established itself as a truly global player in opening new economic opportunities at home and abroad. As a Party in both of these agreements, Japan benefits from much improved market access – for both imports and exports – across a country grouping with a combined GDP of more than 27 trillion USD, which accounts for more than 30% of world GDP. And these numbers will nearly double when Japan and the United States implement their new trade agreement. The CPTPP has already begun to cut tariffs across a significant number of tariff lines and will, over 15 years, eliminate them across 99% of all tariff lines. The ‘behind the border’ commitments are potentially even more important, encompassing regulatory restrictions on goods, services, and investment, as well as beginning to address labour and environmental issues, amongst others. Under the EPA, the EU will eventually eliminate tariffs covering 99% of products and Japan 94% of its tariff lines; many of these cuts have already been implemented. Taken together, commitments made under these two partnership arrangements will benefit Japanese consumers and businesses by reducing unnecessary costs that can often be imposed on them by both border and ‘behind the border’ trade restrictions. While it is too early to assess, definitively, the actual impacts of the CPTPP and the EPA on their parties (as well as on non-signatory countries and firms), anecdotal evidence and early data indicate steady trade flows between the partners. www.oecd.org/trade
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What benefits should Japan expect from these recent trade agreements? Benefits to consumers come from lower prices for imports and, over time, for domestic products. The lower prices increase purchasing power, raise real income, and boost demand. Consumers also benefit from having more varieties on offer. Less than one year after entry into force of the initial commitments made under these arrangements, Japan is importing more goods which are available at lower cost to Japanese consumers. Firms in Japan are expected to benefit from increased market access abroad, and subsequently higher exports. More exports create more production, and this potentially lifts both firm profits and wages. But the greatest source of benefit to firms comes from reducing barriers to trade in internationally fragmented value chains: the more frictionless the trade of parts and pieces, the lower the cost of organizing those supply chains. Tariffs are important in that regard, but even more so is the reduction of unnecessary trade costs related to non-tariff measures (NTMs) affecting goods and to regulations that impede services and investment flows. Full implementation of the CPTPP and the EPA is expected to raise real income in Japan by as much as USD 490 and USD 330 per worker, respectively.
How important are comprehensive free trade agreements? OECD analysis also shows that the more countries that participate in efforts to reduce trade costs, on a comprehensive basis, the greater the shared benefits: @OECDtrade
Comprehensive free trade agreements: which benefits for Japan? The estimated GDP impact of comprehensive trade policy liberalisation %
Tariff
NTM's Goods
NTM's Services
Combined liberalisation
15 13 11 9 7 5 3 1 -1
Source: OECD (2019).
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Wider participation provides more market opportunities and lessens the inevitable trade diversion effects that arise with preferential trade agreements. Smaller economies, as well as larger ones, benefit from trade integration as it provides them with more opportunities to specialize in contributions to production networks.
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OECD estimates that reducing unnecessary trade costs associated with NTMs in goods across G20 members would be expected to increase global trade by 5.5% among G20 members and 4% worldwide.
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Japan ranks among the top beneficiaries in this scenario, with both exports and imports expanding by almost 8%. More fluid trade in intermediate products in motor vehicle and electronic equipment value chains is an important driver of overall export growth; Japanese exports of higher value food products for final consumption would also be expected to increase.
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Eliminating unnecessary trade costs on goods across G20 members could increase GDP in Japan by 0.9%, more than three times the gain in Japan expected from eliminating tariffs across the G20.
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Additional gains could be realized if G20 countries would reduce their barriers to services trade, for example by moving to the average level among economies in the European Economic Area (EEA). For Japan, this opening up of services markets would increase GDP by a further 0.8%.
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Comprehensive reforms - reducing trade costs associated with NTMs across both goods and services, along with the removal of the last remnants of tariffs - would be expected to increase trade by over 20% among G20 economies. The increased trade flows have a direct impact on the competitiveness and efficiency of every economy, raising production, GDP and worker’s incomes.
www.oecd.org/trade
tad.contact@oecd.org
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Comprehensive and ambitious trade policy reforms - acting simultaneously across tariffs, goods and services regulations - lead to gains that far outweigh the sum of individual actions. Japan would be expected to be a major beneficiary, with an increase in GDP of 6%.
Further reading • European Commission Directorate-General for Trade (2018), THE ECONOMIC IMPACT OF THE EU-JAPAN ECONOMIC PARTNERSHIP AGREEMENT, https://trade.ec.europa.eu/docl ib/ docs/2018/july/ tradoc_157115.pdf • Felbermayr, G., F. Kimura, T. Okubo & M. Steininger (2019), ‘Quantifying the EU-Japan Economic Partnership Agreement’, Journal of the Japanese and International Economies, forthcoming. https:// www.eurasiareview.com/25022019-theeu-japan-economic-partnership-agreementand-the-revitalisation-of-internationaleconomic-liberal-order-analysis • OECD (2018), “Market Opening, Growth and Employment”, OECD Trade Policy Papers, No. 214, OECD Publishing, Paris, https://doi. org/10.1787/8a34ce38- en • OECD (2019), Trade Policy and the Global Economy – Synopsis: The Case for Comprehensive Trade Policy Reform https:// issuu.com/oecd.publishing/docs/oecd-tradescenario-5-synopsis • Petri and Plummer (2019), China should join the new Trans-Pacific Partnership, Policy brief 19-1, Peterson Institute for International Economics. https://piie. com/system/files/documents/pb191.pdf
@OECDtrade