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13:21 10 March 2017

FOCUS: TPP's demise weighs on Japan firms' growth as Asia trade talks slow

By Hidetoshi Takada
TOKYO, March 10, Kyodo

The demise of the Trans-Pacific Partnership is slowing momentum for Asian economic integration, threatening to undermine the growth potential of Japanese manufacturers.

Japanese auto, electronics and machinery makers have been making forays into Asia aggressively in the past few decades, attracted by the rise in the middle class that has followed economic growth in the region.

Asia has become the biggest profit-generating overseas market for Japanese companies and is expected to continue to drive their growth.

However, Japanese firms, like other global companies, recently lost a major growth opportunity with the U.S. exit from the TPP ending hopes for creation of one of the world's biggest free trade blocs in the Asia-Pacific region.

What's worse, they could lose out on another potential growth driver -- a mega free trade framework in Asia called the Regional Comprehensive Economic Partnership.

In Kobe, western Japan, the 16-member RCEP met for five days through March 3 in its first gathering since U.S. President Donald Trump pulled the plug on the U.S.-led TPP in January.

But the forum -- comprising the 10-member Association of Southeast Asian Nations, Australia, China, India, Japan, New Zealand and South Korea -- achieved no breakthroughs.

If the RCEP fails to set up a highly liberalized trade framework like the TPP, "that would have a negative impact on (Japanese manufacturers)," Kazushi Shimizu, a professor at Kyushu University, said.

Japanese manufacturers made a combined net profit of 3.15 trillion yen ($27.7 billion), or 76.7 percent of their total overseas profits, in Asia in the year to March 2015, according to data from the Ministry of Economy, Trade and Industry.

Their aggregated profit in the region more than doubled since the year to March 2006, far outperforming a 13 percent fall in North America during the same period.

Capitalizing on bilateral or smaller regional free trade deals within Asian countries, Japanese companies have made the region a key manufacturing base.

Japanese companies have already built supply chains in Asia widely and a lot of parts "come and go across the borders," Kyushu University's Shimizu said.

According to the latest survey by the Japan External Trade Organization, a government-backed export promotion body, Japanese companies in the Asia-Pacific region source 92.1 percent of their materials and parts from Japan, China and ASEAN.

Toyota Motor Corp., for example, has established a strategic supply chain and production system in the ASEAN region for assembling light trucks for emerging markets, making full use of the ASEAN Free Trade Agreement launched in 1993.

Under the system, the Japanese auto giant supplies key components such as engines and transmissions from and to plants in ASEAN countries.

Thailand has become a major car manufacturing base in the region in line with Toyota's growth there, gaining the moniker of the "Detroit of Asia."

The RCEP, which covers 30 percent of the global economy, could help lead Japanese manufacturers to another growth stage if it can establish as free a trade scheme as the TPP had promised.

The RCEP has been expected to lead economic integration in Asia and become a base to create an even larger regional free trade bloc called the Free Trade Area of the Asia Pacific.

The high-standard trade liberalization envisioned by the 12-member TPP had posed a challenge for non-participating countries in the Asia-Pacific region, pushing them towards achieving ambitious goals in the RCEP to stay competitive.

But with the U.S. pullout, that pressure appears to be off, and that is likely to frustrate manufacturers in Asia, including Japanese makers, Asian trade experts said.

The TPP was meant to be "a catalyst for quicker transformation in the Asia-Pacific and ASEAN, driven by the U.S.," said Pushpanathan Sundram, a former deputy secretary general for the ASEAN Economic Community at the ASEAN Secretariat.

"With the pressure off now, countries will be going back to lowest denominator actions" for trade deals such as the RCEP.

RCEP-participating countries have so far reached agreement only in the two fields of economic technology cooperation and contribution to smaller companies with major energizing economies - China and India -- relatively reluctant about opening up their markets through drastic tariff reduction.

"The TPP, which had been able to move (forward) the trade in services and investment...would have been perfect to enhance ambition in (the) RCEP," the former ASEAN Secretariat senior official Sundram said.

==Kyodo

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