Japanese economy free trade and TPP

JAPANESE ECONOMY – FREE TRADE AND TPP Japanese Economy: Free Trade and TPP ＮＧＵＹＥＮ ＤＵＹ 経済学部、経済学科 JAPANESE ECONOMY – FREE TRADE AND TPP TABLE OF CONTENTS I Introduction II The economic context of Japan 1 Overview Japan momentum to enter bilateral agreements III Vietnam and Japan trade relations Main economic partnership agreement between Vietnam and Japan 1.1 Japan-Vietnam Economic Partnership Agreement (VJEPA) 1.2 Trans-Pacific Partnership (TPP) Changing tendency in trade cooperation between Vietnam and Japan 2.1 Vietnamese exports to Japan 2.2 Vietnamese imports from Japan 2.3 Foreign Direct Investment (FDI) from Japan to Vietnam IV Conclusion LIST OF TABLES Table 1: GDP and inflation of Japan from 2014 to 2019 Table 2: Ten countries with highest investment in Vietnam in 2016 LIST OF FIGURES Figure 1: Japan’s real interest rate from 1990 to 2016 Figure 2: United States Dolllar (USD) exchange rate angainst Japanese Yen (JPY) Figure 3: Export trends from Vietnam to China, Japan, and Korea Figure 4: Vietnam’s export products to Japan Figure 5: Import trends from China, Japan, and Korea to Vietnam Figure 6: Vietnam’s import products from Japan JAPANESE ECONOMY – FREE TRADE AND TPP ABBREVIATIONS CPI: Consumer Price Index CPTPP: Comprehensive and Progressive Trans-Pacific Partnership EPA: Economic Partnership Agreement FDI: Foreign Direct Investment FTA: Free Trade Agreements GDP: Gross Domestic Product JPY: Japanese Yen ODA: Official Development Assistance USD: United States Dollar VJEPA: Vietnam-Japan Economic Partnership Agreement JAPANESE ECONOMY – FREE TRADE AND TPP I Introduction Japan’s engagement in free trade agreements (FTAs) and the effectiveness of its official development assistance (ODA) in supporting foreign direct investment (FDI) have partly led to its standing as the third largest economy in the world Since 2000, Japan has ranked as one of the biggest trading partner and provider of ODA and FDI to Vietnam The purpose of this paper is to investigate the economy of Japan in terms of free trade with the implication of trade relation with Vietnam In this context, the first part presents the overview of Japan economy and the rise of bilateral agreements between Japan and Southeast Asian countries, especially Vietnam The following part analyzes the current partnership between Japan and Vietnam through two FTAs, namely the Japan-Vietnam Economic Partnership Agreement (VJEPA) and the Trans-Pacific Partnership (TPP), and their effects on the economic performance of both countries The results show that the relationship between Japan and Vietnam is flourishing and on the way to achieve a comprehensive and strategic partnership II The economic context of Japan Overview In terms of GDP under Prime Minister Shinzo Abe, Table shows that GDP of Japan in 2017 was $4872.1 billion, which is 1.9 times higher than that of the UK This value is estimated to be on the rise, amounting to $5362.2 billion in 2019 As for CPI, according to Kyodo (2018), the recent increase in the core CPI is mainly affected by electricity and gasoline prices and less by oil prices in 2018 Regarding inflation, after a sharp drop to -0.1% in 2016 due to the rise in Japanese yen, inflation in Japan is estimated to climb slightly to 1.1% in this year, but it is still hard to reach the 2% target set by Bank of Japan (BOJ) (Bloomberg, 2018) Table 1: GDP and inflation of Japan from 2014 to 2019 Main indicator 2014 2015 2016 2017 2018* 2019* 4850.4 4395.0 4949.3 4872.1 5167.1 5362.2 Inflation (CPI) 99.2 100.0 99.9 100.2* 100.8 101.9 Inflation (%) 2.8 0.8 -0.1 0.5 1.1 1.1 GDP (billions USD) Note: (*) Estimated data Source: International Monetary Fund, World Economic Outlook Database, April 2018 JAPANESE ECONOMY – FREE TRADE AND TPP In terms of interest rate, according to Demary & Huther (2015), it is the low equilibrium real interest rate that results in low inflation since it makes the central bank’s policy rate nearly on the lower bound of zero, which limits monetary policy to taking effects In the case of Japan, its real interest rate has been quite low, or even negative over the past few years, which explains BOJ’s incapability to achieve the 2% inflation target Figure 1: Japan’s real interest rate from 1990 to 2016 Considering Japanese exchange rate, the country adopts floating regime, in which the price of JPY is decided by market forces Figure shows that USD/JPY exchange rate has witnessed lots of fluctuations recently and followed a downward trend Mackenzie (2018) posited that the rise in the JPY is due to investors’ avoidance of dollar-based projects and turning to Japanese ones This trend, however, poses a threat to exporters in Japan because they may lose some foreign revenues and reduce their production, which potentially harms Japanese economic performance due to its sensitiveness and dependence on export markets for natural and labor resources JAPANESE ECONOMY – FREE TRADE AND TPP Figure 2: United States Dolllar (USD) exchange rate angainst Japanese Yen (JPY) Japan momentum to enter bilateral agreements The economic relationship between Japan and Southeast Asia is considered to be hierarchically interdependent (Bernard and Ravenhill, 1995), in which the former plays a crucial role in the rapid development of Southeast Asia via ODA and FDI Japan benefits from exporting old technologies to East Asian countries, which starts to manufacture low-tech products and moves up to more sophisticated one for export According to Solis and Utara (2007), the reason for Japan’s engagement in bilateral agreements with Southeast Asia is to respond to common challenges Firstly, worries about domestic economic and financial recessions have made Japan proactively look for FTAs to further open regional markets and strengthen the gloomy economy Secondly, with bilateral deals, Japan can gain more chance for market access and ease the pressure for policy convergence Thirdly, Japan’s active EPA policy and focus on Southeast Asia can serve as a countermeasure to China’s growing influence Building an integrated relation with Vietnam will benefit to Japan since the country can take advantage of Vietnam’s natural resource potential, high demand for technological transfer, low-cost production and export platforms On Vietnamese side, it can benefit greatly from Japanese ODA and FDI Hence, closer ties between the two nations will support Vietnam-Japan comprehensive partnership strategy JAPANESE ECONOMY – FREE TRADE AND TPP III Vietnam and Japan trade relations Main economic partnership agreement between Vietnam and Japan 1.1 Japan-Vietnam Economic Partnership Agreement (VJEPA) According to MOFA 2006, during Vietnamese Prime Minister Nguyen Tan Dung’s visit to Japan, negotiations for a Japan-Vietnam Economic Partnership Agreement were formally launched on October 19, 2006 In the next two years, both countries signed the VJEPA on December 25, 2008, ironing out a legal framework for facilitating trade and investment, and strengthening bilateral economic relations VJEPA is the 10th free trade agreement of Japan with other nations and is the first agreement that Vietnam engaged in after joining the World Trade Organization (WTO) One of the primary parts of the deal is to boost the economic cooperation between the two parties in diversified fields, including agriculture, trade and investment, business environment, human resource, technological innovation and transportation (Asia News Monitor 2009) According to the Agreement, within a 10-year entry into force of the VJEPA, tariffs on 94% of Vietnam’s exported goods to Japan will be reduced or eliminated and vice versa, which opens up opportunities for Vietnam to access the massive Japan market Acknowledging the sensitive sectors and differences in the development level, VJEPA manages to create equitable benefits for each economy and helps promote the long-standing friendship and closer economic and political ties between Japan and Vietnam 1.2 Trans-Pacific Partnership (TPP) Trans-Pacific Partnership is originally a free trade agreement that creates ASEAN-centred multilateral frameworks and strengthens ties among the United State and other 11 Asia-Pacific countries The TPP was signed in February 2016 in New Zealand under the Obama administration as part of his rebalance attempt However, Trump - the new President officially withdrew the US out of TPP in January 2017 Despite the absence of the world’s largest economy, the remaining 11 nations (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam) ultimately signed the renamed Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) on March 2018 (Ministry of Foreign Affairs and Trade, n.d) JAPANESE ECONOMY – FREE TRADE AND TPP The key feature of the CPTPP is tariff exemption and further opening markets for all members In terms of tariff, the outcomes from the original TPP are preserved, which means after CPTPP’s ratification, 95% of goods between the member countries will be exempted either instantly or in accordance with the tariff schedule Specifically, Japan will lower its tariffs on agricultural products like beef whereas Vietnam will gradually remove those on automobiles Although the original TPP still remains fundamentally unchanged, the new trade pact contains major differences in some sectors such as investment, intellectual property, telecommunications, rules of origin, labor standards and others (World Bank, 2018) As for market access, the CPTPP now covers a market of approximately 500 million people, accounting for 13.5% of world gross domestic product (GDP), and other nations that have shown great interest in the deal (Alex Capri, 2017) Since CPTPP offers transparency through publishing universal standards and practices, this can release the burden of confusing and complex regulations for all traders With its rules of origin, CPTPP gives small and medium-sized enterprises (SMEs) more chance to integrate into the global value chains thanks to more domestic value added to exports, which in turn facilitates those businesses’ development In general, the CPTPP can bring significant benefits for all member countries by establishing the multilateral frameworks and institutions to remain high standard, which helps to promote trade liberalization, gain more access to other trading partners’ markets and in turn, boost welfare gains In particular, the trade pact offers Japan an obvious trade advantage to develop its leading role in CPTPP with increased economic and diplomatic power; while for Vietnam, it gives Vietnam preferential access to the third largest economy and helps the country to attract more foreign investors and create more job opportunities 2.1 Changing tendency in trade cooperation between Vietnam and Japan Vietnamese exports to Japan Since the engagement in VJEPA, export value to Japan in 2008 grew to $8,468 million, which was twice larger than that to China and five times than the export value to Korea Nevertheless, that number fell sharply to $6,336 million due to the global financial crisis and Japan’s economic recessions In the year of 2015, exports to Japan were valued $14,100 million, ranked second among the three partners, after China JAPANESE ECONOMY – FREE TRADE AND TPP Figure 3: Export trends from Vietnam to China, Japan, and Korea Composition of export goods to Japan From 2010 to 2015, Vietnam mainly exported equipment, textiles, wood and metals to Japan These four popular items on average accounted for 50% of Vietnam’s exports to Japan Besides, the fastest growth rate of exports was in hides and skins, at 97% over six years Figure 4: Vietnam’s export products to Japan 2.2 Vietnamese imports from Japan As demonstrated in Figure 2, the import value from Japan was equal to $6,189 million and then increased to $14,182 million in 2015 Although the import growth rate from Japan in the 2007-2015 period was 129%, it was still quite slow compared with that from the other two mentioned partners JAPANESE ECONOMY – FREE TRADE AND TPP Figure 5: Import trends from China, Japan, and Korea to Vietnam Composition of import goods from Japan Imports from Japan during this period were mostly machinery, metals, plastic and transportation, in which the first two items averagely accounted for 63% of the total product share Whereas machinery and transportation showed a positive growth rate, the other items were in an opposite trend Figure 6: Vietnam’s import products from Japan 2.3 Foreign Direct Investment (FDI) from Japan to Vietnam According to Table 1, since 2016, Japan investment projects in Vietnam have numbered 3,292 with a total registered capital of 42,434 million USD, accounting for 14.6% of total FDI JAPANESE ECONOMY – FREE TRADE AND TPP projects and 14.4% of total FDI capital in Vietnam By the end of November 2016, Japan ranked second out of 114 counterparts that had invested in Vietnam (Foreign Investment Agency, 2017) Table 2: Ten countries with highest investment in Vietnam in 2016 Total registered capital (Mill USD) (*) TOTAL 22,594 293,700.40 Of which Korea Rep of 5,773 50,553.50 Japan 3,292 42,433.90 Singapore 1,796 38,255.40 Taiwan 2,516 31,885.50 British Virgin Islands 687 20,482.10 Hong Kong SAR (China) 1,168 17,003.10 Malaysia 543 11,966.50 China PR 1,562 10,527.60 United States 817 10,141.70 10 Thailand 445 7,799.70 Note: * Including increased capitals of licensed projects in previous years In 2016, including 4510.8 million USD of contributing capital and purchasing shares of foreign investors No Countries/Region Number of projects Source: The data of the General Statistics Office Forms of investment Among 3242 projects, Japanese investment mainly falls into 100% foreign owned capital category, with a total of 2678 projects and an investment capital of 24.17 billion USD, accounting for 82.8% of total FDI projects and 57.5% of total FDI capital investment in Vietnam The second popular form is joint ventures with 540 projects and 16.16 billion USD investment Distribution of Japan’s direct investment by sectors and industry By economic sector, Japanese FDI is primarily focused on the sector that Japan has advantages of and is now looking for foreign investment opportunities such as real estate business with 53 projects valued $1.91 billion and electricity, air and water distribution with 15 projects valued $1.28 billion The highest Japanese investment capital concentrated is in the progressing and manufacturing industry, which has 1541 projects at the total capital investment of $33.54 billion JAPANESE ECONOMY – FREE TRADE AND TPP Japanese investments’ location by region Japanese direct investments were distributed into 52 provinces across Vietnam Thanh Hoa attracted the highest capital investment of $9.7 billion for 13 projects Ha Noi ranked second with 856 projects, making up for $5.02 billion IV Conclusion Despite the disparity in the level of development between the two nations, the signing and implementation of VJEPA and TPP has opened up new markets and job opportunities as well as fostered growth and created mutual benefits for both Japan and Vietnam While Japan depends heavily on the stability of economic and natural security, Vietnam can meet its demand with the country’s extensive amount of natural resources, rare minerals, cheap labor and strategically important location As for Vietnam, the nation always regards Japan as one of the prominent factors when making foreign policy since the relationship with Japan supports Vietnam’s desire to pursue sustainable development The VJPEPA and the TPP have laid the foundation for the development of economic and trade ties between Japan and Vietnam via a comprehensive legal framework, thus driving both countries towards the goal of a strategic partnership for peace and prosperity JAPANESE ECONOMY – FREE TRADE AND TPP Reference Strategic and Activist Model? 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Trans-Pacific Partnership (CPTPP) on March 2018 (Ministry of Foreign Affairs and Trade, n.d) JAPANESE ECONOMY – FREE TRADE AND TPP The key feature of the CPTPP is tariff exemption and further opening... comprehensive partnership strategy JAPANESE ECONOMY – FREE TRADE AND TPP III Vietnam and Japan trade relations Main economic partnership agreement between Vietnam and Japan 1.1 Japan-Vietnam Economic... Vietnam’s import products from Japan JAPANESE ECONOMY – FREE TRADE AND TPP ABBREVIATIONS CPI: Consumer Price Index CPTPP: Comprehensive and Progressive Trans-Pacific Partnership EPA: