Transformation Through Trade Agreements

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Last week Tokyo was all abuzz about trade. Protesters were demonstrating in front of the Diet, talk show debates raged about the perils and prospects of joining the Trans-Pacific Partnership (TPP), and everyone waited to see what the relatively new Prime Minister, Yoshihiko Noda, would decide to do.

One might ask why the decision to join the nine current participants in those talks should be so momentous. After all, Japan is already a major trading nation, with one of the world's largest and most sophisticated economies.

But Japan has been economically stagnant for decades. After a prolonged period of rapid growth, Japan in the 1980s looked as though it would be so successful as to force a Western rethink of how economies should be organized. Then the bubble burst and Japan sank into a prolonged and agonizing era of tepid growth and misfortune (most notably the triple disaster of earthquake, tsunami, and nuclear failure on March 11 of this year). Japan lurked in the economic shadows and became a cautionary tale about liquidity traps and failed stimulus programs.

The structural rigidities and distortionary policies that were mere annoyances in periods of rapid growth became less tolerable during the prolonged slump. Japan's budgetary situation slipped out of control, with debt reaching roughly 200 percent of GDP. Its thoughts of trade reform were hindered by an economically small but politically potent agricultural sector. Whereas Japan traded in volume, it stood out from fellow OECD countries for its low level of foreign direct investment. Yet attempts at economic reform were hindered by sclerotic politics

The TPP thus took on a large symbolic importance. It represented modernization and reform. It presented Japan with a choice: it could participate, agree to restructure itself, and help shape the rules of Asia-Pacific trade in the process, or it could sit idly by as neighboring nations left Japan on the sidelines. Perhaps because of this symbolic importance, the debate within Japan became heated to the point of exaggeration. Opponents argued that all of Japanese agriculture would promptly be wiped out (note, this is a sector in which the average Japanese farmer is over 65 years old, so a little phase-in period might do a lot). The Japan Medical Association warned that the TPP endangered Japan's health care system. Political coalition members argued that Prime Minister Noda's administration would fall if it agreed to join the TPP (a threat made more plausible by the frequency with which Japanese administrations have fallen lately - 6 prime ministers in the last five years).

The idea that free trade agreements can play a large instrumental role in reforming a society is not new, but it is more commonly applied to developing nations that try to win credibility and attract foreign investment. This was largely Mexico's motive in joining NAFTA. Peru and Colombia sought FTAs with the United States for the same reason. Japan is at the other end of the development spectrum, but has its own history of using foreign pressure to effect domestic change (it even has a term for this: gaiatsu).

One of the oddities of the Japanese debate over whether to accept the invitation to join the TPP is that no such invitation has been issued. While the TPP nations have described openness to new members as one of the agreement's defining characteristics, the other such characteristic is the agreement's high standard for liberalization. There has been substantial concern that Japan's reluctance to liberalize and its prowess at avoiding politically awkward commitments in such negotiations would serve to degrade the ambition of the new, expanded agreement. Perhaps, the thinking went, it would be better to establish a high bar in Japan's absence, then invite the country to join as soon as it felt ready to clear it.

At the end of last week and into the weekend, Japan and the United States began a cautious dance over Japan's potential admission into the talks. First, on the eve of his departure for the APEC meetings in Hawaii, Prime Minister Noda announced his intention to begin discussions about joining the TPP. The declaration was distinctly more hesitant than a full-throated pledge of commitment, but it was very reminiscent of President Obama's conversion to TPP in November 2009, when he only pledged "to engage" on the topic.

In Hawaii, President Obama reportedly sounded out PM Noda on the depth of his commitment. He carefully noted that Japan's move "could provide an historic opportunity" (emphasis added). When the White House issued a statement proclaiming itself satisfied with the extent of Japan's resolve, the Japanese challenged that characterization as overstating their position. Clearly this is still a work in progress.

For the United States, the critical role that the TPP could play in Japanese politics and economic reform raises the stakes. President Obama has made the TPP the centerpiece of his trade policy, but it has nowhere near the significance in U.S. debates that it has in Japan.

There is a danger of a disconnect. In its domestic preoccupation with partisan rifts, commercial quibbles, or haggling over environmental policy, the United States may lose sight of the extent to which its leadership in the Asia-Pacific is at stake. If the negotiations were to go awry, it would be one thing to shun a country and leave it facing 2.5 percent auto tariffs; it would be another to shun a country and leave it with an antiquated and decaying system that it is unable to reform.

The Japanese are trying to cast their lot with the United States. It's a responsibility the United States must take seriously.

American Enterprise Institute Resident Scholar Philip I. Levy has worked on international economic issues at the State Department and for the President's Council of Economic Advisers.  He also taught economics at Yale University. 

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