Analysis of Economic Impact of the Trans-Pacific Partnership Agreement

Masahiko Tsutsumi*

Cabinet Office and Cabinet Secretariat, Japan

The Global EPAs Research Conference “The Economic Impacts of New Generation Trade Agreements”16-17 January 2017

National Graduate Institute for Policy Studies (GRIPS), Tokyo

[ Provisional translation ]

*Views expressed here are those of the author and do not necessarily reflect those of the Cabinet Office or the Cabinet Secretariat of Japan.

1. Analytical framework of economic impact of the TPP

The government of Japan provided a report on the potential economic impact of the TPP

based on the agreement in October 2015.

GTAP data version 9.0 and its standard model was used for an indicative simulation.

However, any numerical simulations can capture just a part of implications in the

agreement, which was consisted of 30 chapters including tariffs, market access issues,

and various rules.

Therefore, this analysis took into account a potential gains from a exogenous tariff

reduction and trade facilitation, boosted by endogenous growth mechanisms within a

simulation model.

2

Fig. 1 Transition dynamics ignited by the TPP

GDP level

yearEffective date

Old potential growth path

Transition by the TPP

New potential growth path

GDP Gains

Tariff reductions, trade facilitation, and regulatory reform

s

＋

Domestic m

easures in TPP participants

Reduction

in price gap

=cost

savings for business

Trade

volume

Real income

Productivity

Demand

Wages

Supply

Labor supply

Saving and investment

③

①

③①

②

③

②

Improvement of investment environment through the TPP→facilitate formulation and expansion of the global value chain within the region, which in

turn promote production and further investment.

2. Assumed exogenous shocks and growth mechanisms

Two exogenous shocks brought by the TPP should promote growth. One is a tariff

reduction, and the other is trade facilitation.

Endogenous growth mechanisms embedded in the model are 1) capital stock

accumulated by further investment, 2) productivity levels lifted by higher trade

exposure, and 3) labor supply encouraged by a hike in real wages. Last two mechanisms

are not incorporated in the official simulation in 2013.

3

Fig. 2 Dynamic mechanisms incorporated in the simulation model

Ministry of Agriculture, Forestry and Fisheries conducted a detailed analysis of agricultural,

forestry and fishery products to estimate changes in production volume and values, by taking into

account the effect of complex trade measures agreed in the agreement. The results of MAFF

assessment are input exogenously into the GTAP model simulation.

Agricultural products（19）: Rice, wheat, barley, sugar, starch crops, beef, pork, milk dairy products, small red beans, kidney beans, ground-nuts, tubers

of konnyaku, tea, tomatoes for processing, citrus, apples, pineapple, poultry, birds’ egg

Forestry and fishery products(14）:Plywood etc., horse mackerel, mackerel, sardine, scallop, cod, squid and dried squid, tunas, salmon and trout, kelp,

nori, eel, wakame, hijiki

While the price decline will be caused by tariff reduction/elimination, production and farming family income

will be continuously secured by domestic measures such as enhancement of competitiveness by both cost

reduction and quality improvement and farm income stabilization. As a result, domestic production will be

maintained.

Results

Agricultural, forestry and fisheries production value decline: about 130–210 billion yenImpact on the food self-sufficiency rate (base year: FY2014):

39% in calories, 64% in production value↓ Reflecting the assessment

39% in calories, 64% in production value

Method

Covered Products: 19 agricultural and 14 forestry and fishery products, selected by the criteria that tariff rates are 10% or above,and that domestic production value levels exceed 1 billion yen.

Estimation method: Taking into account the content of agreement in October 2015, and corresponding policy measures listed inthe “comprehensive policy principles related to the TPP” decided in November 2015. More concretely,

1) each product is divided into the import-competing group and the non-competing group2) prices are in principle assumed as follows;

(1) prices of domestic products in the import-competing group are assumed to decrease by the size of tariff reduction or half that size.(2) prices of domestic products in the non-competing group are assumed to decrease by half the rate of the price decrease of (1).

3) the effects of policy measures mentioned above are taken into account in the consideration of domestic productionvolumes.

3. Evaluation of the impact on agriculture, forestry and fisheries industries

4

private

consumption,

1.59

investment,

0.57

government

consumption,

0.43

export, 0.60

import, -0.61

GDP, 2.59

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Net GDP changes by the TPP

(%)

5

Real GDP will increase by 2.6% if transition by the TPP is fully achieved. 2.6% of

GDP amounts about 14 trillion yen (FY 2014 base). Labor supply will increase by

1.3%, which is equivalent to 0.8 million people (FY 2014 base).

An increase in GDP generated by the transition to new growth path is not a

temporary increase in demand but a permanent increase in supply capacity and

income. Expansion in trade and investment by the TPP boosts productivity growth,

followed by an additional labor supply and capital stock accumulation, and realizes

truly strong economy.

4. Results

Fig. 3 Changes in GDP and contributions by demand components

Changes in real GDP

:+2.59%（+13.6 trillion yen）*real GDP in FY 2014 was 524.7

trillion yen

Changes in labor supply

:+1.25%（+795 thousand

people)*Labor force in FY2014 was 65.93

million and people engaged in

work was 63.60 million

(note) GDP growth would be by 0.34%(+1.8 trillion yen) if only a change in tariffs are considered.

This is almost comparable figures with those simulated in 2013 by the government (+0.66%,

+3.2 trillion yen) when tariffs are fully abolished).

＜Appendix 1. Exogenous changes in the simulation＞

1. Tariff reduction

Based on the agreement in October 2015 (c.f. pre-entry simulation in 2013

assumed to abolish all tariffs among participating countries.)

Exclude effects from existing EPAs, e.g. Japan - Australia. As a result,

Japanese tariff reduction for imports from participants and from the world as

a whole will be -2.1% and -0.6% respectively.

2. Trade facilitation and NTBs reduction

The TPP includes additional measures to facilitate trade, which is beyond the

EPAs and WTO agreement, e.g. prior instruction, and quick pickup for

express cargo. The TPP also improves access to E-commerce and conditions

for a temporary visit of business persons, which would reduce trade related

costs in general.

To capture a possible impact from such measures, exogenous improvement in

trade is calculated by assuming a partial convergence of LPI (logistic

performance index by the world bank) levels of member countries to the best

performing country, i.e. Singapore. The import price of Japan, Malaysia, and

Vietnam will fall by 2.3%, 6.3%, and 13.5% respectively.

Note that the TPP agreement contains more pro-growth items such as

improvement in market access and liberalization of the government

procurement, which are not quantified for this simulation.

6

＜Appendix 2. Endogenous growth mechanisms＞

7

(3) capital accumulationReal income growth (2.6%)⇒real investment growth (2.9%)

⇒ capital accumulation(2.9%)

(remarks) by definition

(1) TFP Ex-ante trade/GDP ratio (28.8%)→ Ex-post trade/GDP ratio (29.2%)

：1.2%⇒1.2%×0.15⇒ factor augmenting technological changes (0.2%)(note)

TECIMB(r) =aoreg(r)-0.15*(IMPSH(r)*viwreg(r)+EXPSH(r)*vxwreg(r)-vgdp(r));(remarks) see Fig. 4

(2) labor supplyEx-ante real wages (100)→ Ex-

post real wages (101.56)

⇒1.56%×0.8⇒changes in

labor supply(1.25%)

(remarks) labor supply elasticity to

wage is assumed 0.8 based on empirical

research results.

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

2.00 2.50 3.00 3.50 4.00 4.50 5.00 5.50 6.00 6.50

ln（Trade exposure=(export+import)/GDP, %）:3=20%, 4.5=90%

ln（TFP level (100= 2005 US): 4=54.6%

Fig. 4 Trade exposure and TFP level

ln(TFP)= 7.20 + 0.15 * ln(trade exposure) - 0.41 * ln(population)

(26.31) (6.34) (-13.30)

R2=0.79, data: 1980 - 2011, 109 countries (3,103)

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

-4.00 -2.00 0.00 2.00 4.00 6.00

ln（Investment openness)＝inward FDI stock/GDP, %）:0=1%. 2=8%

ln（TFP level (100= 2005 US)) 4=54.6%

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1. Sensitivity

By halving the elasticity of labor supply to wages (from 0.8 to 0.4), changes in GDP

and labor supply are +1.94% and +0.62% respectively.

2. Impact of existing EPAs

Including the impact of existing EPAs (e.g. Japan - Australia) will boost GDP up to

3.84% (about 20 trillion yen).

3. Potential impact of inward FDI

The statistical relationship between FDI stock/GDP and productivity (TFP) suggests

that a 1% hike in the ratio will generate a 3% increase in TFP (equivalent to GDP).

Fig. 5 Inward FDI stocks in TPP members

＜Appendix 3. Miscellaneous notes＞

Member % Member %

USA 21.2 Singapore 252.4

Japan 3.8 Chili 66.8

Canada 34.7 Peru 26.4

Australia 40.7 New Zealand 47.8

Mexico 28.5 Vietnam 47.5

Malaysia 38.0 Brunei 28.0

(remark) average from 2007-2011, cited

from Penn World Table.

ln(TFP)=+7.20+0.12*ln(investment openness (-5))-0.38*ln(population)

(23.80)(20.30) (-11.29)

R2=0.87, data: 1980 - 2011, 109 countries(2,497)

Fig. 6 Inward FDI stocks and TFP level

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The analysis aimed at showing not only a simulation result but also the

importance of further actions taken by public and private bodies to lift

our economy to a new growth path by exploring mechanisms how the

TPP would boost growth.

Expanding trade and investment should boost productivity. Higher

productivity is a basis of higher wages which then stimulate labor supply.

In addition, efficiency gains through lowering tariffs and NTBs also

stimulate trade and investment further. The Japanese economy will be

able to continue to grow through favorable interactions among

productivity, investment and labor supply.

To activate interactive mechanisms above, the government has decided to

implement related measures to the TPP listed in the “comprehensive

policy principles related to the TPP”, which is a pillar of the growth

strategy.

5. The TPP as a pillar of the grand growth strategy

For more detailed account of this issue, please visit http://www.cas.go.jp/jp/tpp/kouka/

1-1：Creation of new promising markets

１．“10 STRATEGIC PUBLIC-PRIVATE JOINT PROJECTS” toward GDP 600 trillion yen

①Realize the 4th Industrial Revolution (e.g. IoT, Big Data, A.I., Robots) 【Creation of added value: 30 trillion yen (by 2020)】

・ Employment, corporate profits at

historically high level

・ However, actions of private companies

(investments, wage hikes etc.) still lack force

“3 challenges”, to accelerate corporate actions, in the context of the virtuous cycle of economy in motion

①Stimulate potential demand and create/expand new promising markets to raise GDP to 600 trillion yen

(“10 Strategic public-private joint projects”）②Enhance drastically productivity to overcome decreasing population and workforce shortage

③Enhance capabilities of individuals to facilitate transformation of the industrial structure

New mechanism for regulatory reforms

- Identify necessary regulatory

reforms, by adopting a back-

casting approach, based on

interim targets set by examining

future industrial structure

- Reduce regulatory and

administrative costs, from the

perspectives of business

operators (new method to

tackle in an integrated

manner regulatory reforms,

simplification of

administrative procedures,

utilization of IT)

Data utilization projectsSupports for SMEs

- Target of tripling investments by private companies in universities and public research institutions (PRI) by 2025

₋ Establish at least 5 strategic research centers of world-level (universities and PRIs) , attracting domestic and foreign talented researches etc.

₋ Establish a venture creation platform, inviting advisors from private sector (providing supports from the stage of finding promising technology seeds in regions, to the stage of fostering ventures to attack international market)

₋ Create inter-ministerial headquarters for R & D and commercialization on A.I. technologies (Council for strategy on A.I. technologies)

Promotion of innovation

₋ Introduce programming education as a compulsory subject in elementary /secondary education (from 2020), Introduce individualized education by using IT according to the degree of understanding of individuals, Reinforce mathematical and IT education in higher education, Develop top level human resources skillful in IT

₋ Introduce “Green card system for highly skilled foreign professionals”, according to which requirement for period of stay to receive permanent residency would be the shortest in the world.

₋ Create “Council for Promotion of Human Resources Development to respond to the 4th Industrial Revolution”

Human resources with challenger’s spirit

Establish “Public-Private Council for the 4th Industrial Revolution” as headquarters of the government

（replace the function of “Public-private sector dialogue for investments in the future”）- 3 bodies placed under the newly established council, “Council for Strategy on A.I. Technology”, ”Council for Promotion of

Human Resources Development to respond to the 4th Industrial Revolution”, “Robot Revolution Realization Council”- Identify priority areas for Japan, Formulate “Strategies for each priority area”, Accelerate regulatory reforms, R&D,

provision of funds as well as human resources development etc.

Establishment of “Control tower “ function

Individual healthcare service, Utilization of nursing care robots-Utilize personal data related to health-Utilize robots, sensors to nursing care

※Realize a society where people can feel affluence by producing new values and services through the 4th industrial revolution (Society 5.0)

Smart factory

Preventive maintenance through sensors in the production line

No inventory stock in the whole supply chain,

Prompt tailor-made

production

- Promotion of sharing economy, reinforcement of measures against cyber threats etc.

- Supports for SMEs (reduction by 20% of introduction costs for smaller robots / support 10 thousands SMEs for use of IT)

FinTech

Establish FinTech eco-system utilizing open innovation

Drone

Realize Drone delivery

service in 3 years

- Data utilizing platforms across companies and organizations

Automated driving system

Automated driving on express way in 2020, 3D map information

Implementing difficult structural reforms (reforms on bedrock regulations (energy, agriculture, medical care etc.) / initiatives through National Strategic Special Zones)

Moving forward toward the elimination of “Six Handicaps to growth” (e.g. appreciation of yen, high corporate tax rate, delay in the conclusion of TPP)

“Growth Strategy 2016” toward nominal GDP 600 trillion yen (1)

10

⑩Stimulate domestic consumer sentiment through public-private sector collaboration etc.

③Overcome environment-energy constraints and expand investments

【Energy related investments: 18 trillion yen (2014FY) => 28 trillion yen 2030FY)】

₋ Promote energy efficiency activities (coverage of the Energy Efficiency Benchmark Program to 70% of all industries in 3 years, supports for SMEs), Renewable energies (maximum introduction while reducing costs by the revision of FIT)

₋ Strengthen resource security₋ Create megawatt trading market by 2017

Realize Hydrogen-based society (FCV etc.) (related investments: 1trillion yen (2030)) etc.

④Foster sport sector to become a growing industry

【Market size: 5.5 trillion yen(2015) => 15 trillion yen(2025)】

₋ Enhance attractiveness and profitability of sport facilities, Combine sports with IT, health care, tourism, fashion etc.

⑤Revitalize markets for transaction of existing houses and reform

【Market size: 11 trillion yen(2013) =>20 trillion yen(2025)】

₋ Establish an appropriate transaction and finance system for evaluating asset value etc.

⑥Enhance productivity in service industries

【Added value: 343 trillion yen (2014) => 410 trillion yen (2020)】

₋ Target to double the increase in productivity to 2%₋ New legal framework to enhance productivity in 7 sectors (e.g. accommodation,

truck transport, restaurant and take-out meals, medical care, nursing care, childcare, wholesale/retail) through property tax reduction or financial supports by regional financial institutions etc.

⑧ Promote proactive agriculture and exports

【Market size of vertical integrated (from production to sales) agriculture: 4.7 trillion yen (2013FY) => 10 trillion yen (2020FY)】

₋ Consolidate farmland, Reduce agricultural material costs, Reform the distribution of agricultural products

₋ Promote smart-agriculture (remote monitoring and automated driving tractors in 2020), Establish cooperation among industrial sectors and agricultural sector

⑨Make tourism a key industry

【consumption by foreign visitors*: 3.5 trillion (2015) => 8 trillion yen (2020) => 15 trillion yen (2030) 】

*Consumption by visitors (foreigners and Japanese): 25 trillion yen (2015) => 29 trillion yen (2020) => 37 trillion yen (2030)

₋ Reinforce tourism management in region, Develop human resources for tourism management, Improve sightseeing excursion routes, Branding of national parks, Utilize cultural properties, Reform paid holiday etc.

⑦Innovate small, medium and intermediate-sized firms

₋ Promote the provision of risk money for growing firms, based on “local benchmark”, not based on mortgage or personal guarantees, Promote IT utilization for small, medium and intermediate-sized firms etc.

②Toward a world leading health care country

【Market size: 16 trillion yen (2011) => 26 trillion yen (2020)】

₋ Promote health preservation/disease prevention services, not covered by public insurance (create 4 trillion yen market)

₋ Reduce burden on nursing care, by using robots and sensors (examine institutional measures including revision of nursing care compensation, standards of personal staffing or utilities)

₋ Support medical caret and develop innovative drugs by utilizing big data etc. (institutions in charge of safe and security-ensured management of personal medical data)

₋ Promote individualized medical care or health care services, using IoT etc. (collection, analysis and utilization of personal data on medical prescriptions / examinations)

₋ Acquire global market through international development of Japanese medical services and through contribution to international health activities etc.

1-1：Creation of new promising markets 1-2 : Further promotion of Local Abenomics

1-3 : Stimulation of domestic consumer sentiment

“Growth Strategy 2016” toward nominal GDP 600 trillion yen (2)

11

Introduction of new mechanism for regulatory and institutional reforms

₋ Identify necessary regulatory and institutional reforms, by adopting a back-casting approach, based on interim targets set by examining future industrial structure

₋ Reduce regulatory and administrative costs, from the perspectives of business operators (new method to tackle in an integrated manner regulatory reforms, simplification of administrative procedures, utilization of IT) etc.

Promotion of innovation and venture business₋ Target of tripling investments by private companies in universities and public research institutions (PRIs) by

2025₋ Establish at least 5 strategic research centers of world-level (universities and PRIs) , attracting domestic and

foreign talented researches.₋ Create inter-ministerial headquarters for R & D and commercialization on A.I. technologies (Council for strategy

on A.I. technologies)₋ Establish a venture creation platform, inviting advisors from private sector (providing supports from the stage of

finding promising technology seeds in regions, to the stage of fostering ventures to attack international market), Establish a venture support consortium involving governmental bodies (joint planning of policies for support, prioritization of supports

₋ Promote investments in intangible assets, R&D etc.

Development and securement of human resources who drive the economic

growth₋ Introduce programming education as a compulsory subject in elementary and secondary education (from 2020),

Introduce individualized education by using IT according to the degree of understanding of individuals, Reinforce mathematical and IT education in higher education, Develop top level human resources skillful in IT.

₋ Introduce “Green card system for highly skilled foreign professionals”, according to which requirement for period of stay to receive permanent residency would be the shortest in the world.

₋ Create “Council for Promotion of Human Resources Development to respond to the 4th industrial revolution“ etc.

Creation of employment environment and promotion of social participation of women, to

remove the constraints to growth₋ Reinforce initiatives to correct the practice of prolonged working hours₋ Promotion of social participation of women(increase in additional childcare facilities, promotion of management on

diversity) and elderly persons

５．Utilization of growing momentum for reforms

Promote leading projects for year 2020

- Implement following projects, by 2020 Tokyo Olympic and Paralympic games, to

showcase Japanese cutting-edge technologies, considering that these

technologies could continue to be in practical use after 2020 as a legacy of Tokyo

Olympic and Paralympic games

Automated driving system, Decentralized energy system, Advanced robot

technologies etc.

Utilization of National Strategic Special Zones to accelerate structural reforms- Implement remaining reforms, in two year time period (FY2016-FY2018) for acceleration of

intensive reforms etc.

2. REGULATORY AND INSTITUTIONAL REFORMS TO REALIZE

REVOLUTION IN PRODUCTIVITY

Further reinforcement of Corporate Governance- Improve the effectiveness of board of directors, promotion of constructive dialogues through

information disclosure - Provide risk money for growing firms, through vitalized financial and capital markets etc.

Further utilization of private sector resources to public services / facilities (PPP/PFI etc.)

【Projects volume: 2.4 trillion yen (FY2013-14)=> 21 trillion yen (FY2013-2022)】- Promote PPP/PFI methods including concession-type PFI etc.

3. PROMOTION OF INNOVATION / PROVISION OF HUMAN RESOUCES

WITH CHALLENGER’S SPIRITS

4. TAKING IN GROWING MARKET OUTSIDE

Support the expansion of SMEs to international markets, making the

most of TPP 【13.8 trillion yen (2013FY) => 25.2 trillion yen (2020FY)】- Provide comprehensive supports to SMEs(including intermediate sized firms),

including hands-on supports by experts, through “Consortium aiming at expansion of

exports” involving governments and private sector etc.

Expansion of the exports of infrastructure systems

【16 trillion yen (2013) => 30 trillion yen (2020)】- Engage in strategic human resources development, Promote Japanese “high quality

infrastructure investment” to become a global standard, Further accelerate the

procedures for international yen loans/overseas loans and investments, Enhance

corporation with international development banks etc.

Promotion of inward foreign direct investment to Japan

【24.4 trillion yen (2015) => 35 trillion yen (2020)】- Support local governments’ initiatives to invite foreign investments, Promote alliances,

including financial alliances, between SMEs and foreign firms, Improve drastically

business and living environment to remove obstacles to invite foreign investments

Promotion of conclusion / revision of economic partnership agreements

(EPAs), investment agreements and tax treaties

- Promote strategically and with speed negotiations of economic partnership

agreements such as Japan-EU EPA, RCEP and Japan-China-South Korea FTA

- Promote negotiations of new tax treaties and of revision of existing investments

agreements and tax treaties etc.

“Growth Strategy 2016” toward nominal GDP 600 trillion yen (3)

12