WESLEYAN COLLEGE

For Better or For Worse

Japanese Participation in the Transatlantic Trade Agreement
Jessica Noelle Haynes
Spring 2013

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Abstract
Japan has recently joined the Transpacific Trade Agreement talks, which has sparked a flood of
both opposition and support from politicians and citizens in the United States and Japan. The
main source of concern is the possibility that the Japanese agricultural sector and the American
automotive industry will be destroyed by opening up to free trade. However, though both of
these sectors will inevitably suffer due to the productive advantage of the opposing country, the
long term benefits of signing onto the free trade agreement would most likely outweigh the
temporary loss in jobs and productivity. The United States agricultural industry would expand
due to the introduction of Japanese demand, and would enjoy higher prices than the current US
domestic rates. The Japanese automotive industry, on the other hand, would likely see lower
prices due to external economies of scale, but this loss in producer surplus would be overcome
by an increase in sales.

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Over the past several years, the United States, along with Canada, Mexico, and a handful
of other Pacific Rim nations, has been attempting to construct a new free trade agreement in
order to open up American-Asian economic cooperation in the wake of the considerable
weakening of the European Union. This agreement the Transpacific Trade Agreement has
been on the table long enough to attract the attention of economic heavy-hitters, such as the
export-heavy Malaysia and even the generally-aloof Australia, but the second-largest economy in
Asia was always markedly absent from the talks (Better late than never, 2013). Absent, that is,
until just two months ago, when Shinzo Abe, the Prime Minister of Japan, came forward to
announce that he would be moving forward on the plan to involve his nation in the coming round
of TTP discussions (Better late than never, 2013). While American politicians have openly
praised Abes decision which strays drastically from the historical trend of Japanese economic
isolationism the Prime Minister has received mixed reactions from the citizens of his own
country, as well as the common citizens of the United States. Without a doubt, the addition of
Japan to this international agreement would bring great economic clout to the Pacific Rim, as the
island nation currently boasts the worlds third largest economy, behind only the United States
and China (Bergmann, 2013). However, the potential implications of opening up to an integrated
market that joins together the United States and Japan has both farmers and manufacturers in
both countries wringing their hands. Would the new integrated market destroy too much of the
economic structure that is already in place, or would it benefit both consumers and the countries
economies in ways that have not been as heavily considered? At the heart of the matter is the allimportant dilemma: should Japan officially sign onto the Transpacific Partnership as a full

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participant, or should the worlds third largest economy stand firm in its current protectionist
measures?
The majority of the opposition stems from the anxiety of Japanese farmers and American
automotive companies, due to the fear that imports from the other country will dominate
domestic markets if the two countries were to open up to free trade with one another. Japan
boasts many of the worlds most famous automotive companies, such as Honda, Suzuki, and
Toyota, while the United States exports agricultural products all across the world while
attempting to boost production through the use of extensive government subsidies to farmers.
However, despite each country being heavily predisposed to one industry, both countries are
currently producing both agricultural and automotive goods for their domestic markets, which,
some would argue, is an inefficient waste of resources (Farming in Japan, 2013). There is a
possibility that, upon opening up to free trade, both the United States and Japan would revert to
producing goods that they are more fit to producing, therefore reducing or potentially eliminating
the agricultural and automotive intra-industry trade currently going on between them. Due to this
possibility, Prime Minister Abe has expressed to President Obama in several discussions since
March that he and his constituents wish to keep open the possibility of maintaining some
Japanese tariffs, despite Japans proposed joining of the TTP (Better late than never, 2013).
Though the longevity of these tariffs are, in no way, guaranteed, this openness to a continuation
of domestic industry protection has many American politicians concerned that other member
states who have already signed onto the agreement would opt to protect their domestic markets
in the future as well, therefore rendering the foundation of this free trade agreement
completely moot (Better late than never, 2013). At the same time, though, Japans wishes alone
cannot be blamed for endangering the nations future role in the agreement, as American

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representatives have also pushed to allow some of the United States tariffs to remain in place
against Japan in the event of the island nations TTP participation (Defend Japans interests,
2013). As one might have guessed, the United States wishes to keep its automotive tariffs in
place against Japan, while Japan wishes to keep a myriad of agricultural tariffs, including those
against rice, sugar, and beef (Farming in Japan, 2013).
If Japan and the United States decide to be cautious in their trade agreement with one
another, the administrations of these two nations could very well chose to enter the TPP, but
keep the two sets of tariffs mentioned above in place against one another. While this would,
regrettably, taint the Transpacific Trade Agreement and keep the Pacific Rim nations from
participating in truly free trade, the most obvious argument to keeping these tariffs in place is the
restructuring of both countries economies that would occur if all domestic sectors were to open.
The United States, which is the third largest country in the world by area, has an incredible
advantage over Japan in the agricultural sector due to both its abundance of land and large
variance in climate. The states in the Midwestern region of the United States are famous for their
high production levels of grains and cereals which earned this region the nickname
Breadbasket while the Deep South is particularly productive in fruits. Rice, usually thought
of as a solely Asian product, is grown in large amounts in the Western states, most notably
California. On top of this, the United States specializes in the raising of livestock because of the
ample amount of open plains available for grazing. Japan, on the other hand, has a landmass that
is similar to the size of the state of California, which, of course, limits the country in its potential
for both the raising of both crops and livestock (Japan). In fact, due to the lack of farmable land
which is worsened by the fact that about 70% of Japans landmass is covered in dense forest
domestic agricultural goods are in relatively short supply, with only the domestic rice sector

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meeting the countrys needs (Japan). However, I would venture to say that the domestic rice
market is only strong due to the astronomical tariff rates that are placed on imported rice: the
mark-up on foreign rice is an unthinkable 778% (Farming in Japan, 2013). If these charges were
not in place, domestic consumers would undoubtedly turn to purchasing imported rice, which
would be a massive blow to the Japanese agricultural industry. In fact, because of the relatively
low yield and extremely high prices of input in Japan, the cleavage between the raw cost of
foreign imports and domestic agricultural goods is likely to be dramatic enough to cripple the
Japanese farming industry in a free trade system (Japan).
An integrated rice market is likely to operate under conditions that are very close to
perfect competition: that is, there will be many buyers and many sellers each individual farm
selling a product that is largely homogenous. Because of these conditions, if Japanese rice
producers were to mark up their prices by even the slightest margins in order to cover for their
higher input costs they would lose all of their potential consumers, who would chose to buy
their rice from the United States instead.
Demand of Japanese Rice in Integrated Market

Price
Quantity Demanded

Quantity

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The new world price that would reign supreme in this market would be below the terribly
inflated Japanese domestic price, and would be above the current US domestic price, due to an
increase in supply in the Japanese market and an increase in demand in the US market.

US and Japanese Domestic Rice Prices before Free Trade

Price
Japanese Supply

World Demand

US Supply

Japanese
Domestic Price

World Supply

World Price
US Domestic
Price
US Demand

Japanese Demand
Quantity

Therefore, the only choices for Japanese rice producers would be to sell their goods at the new
world price and potentially suffer tremendous losses, or mark up their prices and lose all their
customers. In this situation, it appears to be a lose-lose case for Japanese rice producers, who
would most likely end up going out of business. On the flip side, however, Japanese consumers
would benefit greatly due to the drastic drop in rice prices in their home country. This increase in
buying power would stimulate Japanese consumerism, as the vast amounts of money that they
were previously spending on domestic rice could be used in other sectors to buy different goods.
Additionally, American rice producers would benefit due to both increased demand as they

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would likely dominate the market between the two countries and due to the world price being
higher than the previous domestic price. American consumers would inevitably have to pay
higher rates than they did before due to increased demand of an integrated market, but these
losses would most likely be balanced out by an increase in buying power in another sector: the
automotive sector.
As a protective measure against the encroachment of cheaper automotive imports, the
United States currently has a system of relatively low tariffs in place, which charge 2.5% on cars
and 25% on trucks (Defend Japans interests, 2013). As the American automotive industry is
actually rather powerful as can be seen through the relatively low tariff rates listed above, as
well as through the fact that American vehicles are exported in large numbers I do not foresee
that all American vehicle manufacturers will go out of business in the event of a market
integration with Japan. Instead, I believe that the number of automotive manufacturers between
the United States and Japan will decrease as tends to happen when markets are integrated
with more Japanese manufacturers surviving the downsize. Japanese automotive manufacturers
often offer their cars for prices that are markedly less than those produced domestically in the
United States, so, of course, these lower prices will initially help Japanese automotive
manufacturers capture a larger share of the market when the market is integrated. However, this
case differs from the agricultural sectors case in that I believe Japanese vehicle
manufacturers do not operate solely under the limitations of traditional supply and demand
theory, but are influenced by external economies of scale. Being that Japan is such a small
nation, the automotive companies in said country are naturally very close to one another, and
can benefit by one anothers strengths in both specialized equipment and labor. On top of this,
Japans main island Honshu, which is the center of Japanese manufacturing and trade is also

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home to the nations largest port: Yokohama (Japan). Therefore, not only are all Japanese car
companies in the same general area, but they are also all extremely close to a port through which
to ship their goods across the world, which cuts down considerably on transportation costs.
Since external economies of scale tend to reduce the average cost of production as
production rates increase, the introduction of American demand into the integrated market
which would spur higher production from Japanese automotive companies would actually
reduce vehicle prices imported from Japan to a point even lower than current Japanese domestic
prices.
Japanese External Economies of Scale

Japanese
Demand

World
Demand

Price

Japanese Average Cost

Quantity

While this decrease in price could potentially harm Japanese automotive companies if their sales
were to decrease, the increase in production would most likely translate directly into more sales,
meaning this decrease would be outweighed by an increase in consumption. The lower world
price of Japanese cars would also allow more individuals in both the United States and Japan to
buy these automobiles due to an increase in purchasing power, meaning both consumers and
Japanese producers could potentially benefit from this change. Additionally, unlike the perfect

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competition of the agricultural market, the lowering of Japanese automotive prices would not
necessarily force the American automobile manufacturers to follow the new world price. Cars
are differentiated by brand, reputation, and appearance, meaning that though there would be
many buyers and sellers this market would never operate under a perfectly elastic demand
curve. The automotive market is, instead, of a monopolistic competition structure, meaning that
firms would still hold a portion of the market if their prices were higher than some of the
competition.
While Japanese farmers and American automotive companies worry for the futures of
their sectors and press for the avoidance of truly free trade between the United States and Japan,
I believe that both countries opening up to the Transpacific Trade Agreement and removing
all tariffs would be beneficial to both markets. True, as stated previously, it is very likely that
the Japanese agricultural industry would be crippled and several American car companies would
go out of business, but the benefits in the long term greatly outweigh this short-term damage.
The closing of farms and car factories will inevitably cause unemployment, but being that both
countries would likely experience economic expansion in other sectors namely, automotive in
Japan and agricultural in the United States one cannot say that work would eternally be
unavailable for these individuals. Though the economies of Japan and the United States could
suffer for a while during the restructuring of their industries, in the long term, these two countries
would find themselves operating more thoroughly under the influence of comparative advantage.
Lower prices for consumers and larger amounts of exports for producers would increase the
welfare of both countries, making full participation in the Transpacific Trade Agreement the best
option for both countries.

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10
Works Cited

Bergmann, A. (2013). Worlds largest economies. CNN Money. Retrieved from

http://money.cnn.com/news/economy/world_economies_gdp/
Better late than never. (2013, March 23). The Economist. Retrieved from
http://www.economist.com/news/asia/21574031-give-japans-new-leader-benefit-doubtfree-trade-better-late-never
Defend Japans interests in TPP talks (2013, April 28). The Japan Times. Retrieved from
http://www.japantimes.co.jp/opinion/2013/04/27/editorials/defend-japans-interests-intpp-talks/
Farming in Japan: Field work. (2013, April 13). The Economist. Retrieved from
http://www.economist.com/news/asia/21576154-fewer-bigger-plots-and-fewer-part-timefarmers-agriculture-could-compete-field-work
Japan. In Encyclopedia of the Nations. Retrieved from
http://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Japan.html
Krugman, P. R., Obstfeld, M., & Melitz, M. J. (2012). International Economics: Theory and
Policy (9th ed.). Boston, MA: Addison-Wesley.