The U.S. and Japan agreed to terms last week allowing Japan to join talks on the Trans-Pacific Partnership, another step toward creating the world’s most important free-trade initiative. The emerging pact has far-reaching implications for domestic policy in Japan and elsewhere, and could offer a new approach to global as well as regional trade liberalization.

Japan’s participation would widen the TPP to 12 members, accounting for 40 percent of global gross domestic product. The Japanese economy is bigger than all the other non-U.S. members combined. By taking part, Japan is making a commitment to long-overdue domestic economic change. Supply-side reform is one of the “three arrows” Prime Minister Shinzo Abe has promised will revive Japan’s stagnant economy (the others are monetary stimulus and fiscal expansion). In the long term, it’s the one that matters most -- and it’s the one that the TPP can provide.

Abe deserves much credit for pressing this part of his program so determinedly. Special interests, especially farming, have supported protectionism in Japan for years. (Rice farmers are shielded by tariffs approaching 800 percent.) The TPP will mobilize Japan’s manufacturing exporters, which will gain directly from the deal, as a countervailing political force.

Farmer Resistance

According to the government’s estimate, annual farm and marine production might decline by 3 trillion yen ($30.3 billion) under the TPP, though other sectors would expand more than twice as much, raising aggregate GDP by 3.2 trillion yen. That’s probably an underestimate, because the benefits would build over time. One independent study puts Japan’s potential gain at more than $100 billion a year (2 percent of GDP) by 2025.

The proposed agreement matters at least as much for its ambition as for its breadth. Sensitive sectors such as agriculture will (inevitably) end up retaining some of their protections -- but they haven’t been excluded from the agenda at the outset, which is notable in itself. The aim is to go deeper than existing regional trade pacts and forge agreements on competition policy, public procurement, state-owned enterprises, foreign investment and intellectual property.

A bonus is that such a deal could revive the moribund World Trade Organization by offering a template for a new phase of liberalization that could be extended worldwide. Or, failing that, an outward-looking TPP could gradually take in more members across the Asia-Pacific region and beyond. That dynamic has been part of the effort from the start. The talks began as an initiative of just four countries -- Brunei, Chile, New Zealand and Singapore -- then expanded in stages to today’s presumed 12. South Korea is considering joining, and the addition of Japan may push Indonesia, the Philippines and Thailand to think about it, too.

This could be the new model: instead of periodic fits and starts of reform through the WTO, a steady process of “competitive liberalization” for which expanding groups of like-minded trade-reformers provide the core. With the Doha Round stalled, and protectionism on the rise in many countries because of high unemployment and slow growth, it’s well worth trying a new strategy.

Japan’s participation isn’t quite a done deal. All the TPP members have to agree to it -- but last week’s bilateral agreement with the U.S. clears the way. The four countries that haven’t yet said yes (Australia, Canada, New Zealand and Peru) aren’t expected to block the move. The U.S. Congress will get 90 days to review the terms. There’s some skepticism on Capitol Hill about Japan’s intentions, but probably not enough to alter the outcome.

The TPP is gathering momentum, and that’s good news for Japan, the U.S. and the world economy.

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