Japan and The U.S. Take Different Roads on Trade

By Daniel Sneider : Lecturer in East Asian Studies at Stanford University
March 07,2018
Daniel Sneider
Lecturer in East Asian Studies at Stanford University

Daniel Sneider is a lecturer in East Asian Studies at Stanford University and currently in Tokyo as a Visiting Fellow at the Canon Institute for Global Studies.
 

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(Photo by Jonathan Ernst/Reuters)

This week Japan and the United States split dramatically from each other, opening up the most visible gap in the long-time alliance since the Nixon shocks of the early 1970s. While the U.S. careened into trade war, preparing to impose steep tariffs on steel and aluminum, Japan gathered together the representatives of 11 nations in Chile to sign a new multilateral trade agreement, the Trans Pacific Partnership.

For American trade experts who spent their lives pushing Japan to open its markets and championing free trade, there is a profound irony to this reversal of roles.

“I’m hugely surprised and impressed by Japan’s economic diplomacy over the past year,” Matthew Goodman, a former senior State Department and White House official and head of international economic policy at the Center for Strategic and International Studies.

“If you had told me when I first arrived in Japan 35 years ago this month that one day Japan would be leading on trade and the US following behind, I would have said you were spending too much time in your local izakaya.”

Japanese officials who are leading the TPP negotiations embrace this new role. “Simply put, Japan’s role is to maintain and develop the rules-based, liberal multilateral system built after World War 2, until the US comes to its senses and reverts to the traditional US trade policy,” head TPP negotiator Kazuo Umemoto told me.

For Japan, the TPP is also a strategic weapon against China’s efforts to create a mercantilist trading system based on closed markets and stealing of technology and intellectual property. “This would be a best way to counter China’s predator-like trade policy,” argues Umemoto.

This potentially dramatic divergence between Japan and the U.S. has left many experts wondering where we are headed. Could Japan and the U.S. end up in their own trade war? Or will President Trump reverse course and rejoin the TPP?

“We are all in new territory given the U.S. abdication of leadership on trade liberalization and the Trump's administration hostility to the multilateral trading system,” says Mireya Solis, an expert on Japan’s foreign economic policy and a senior fellow at the Brookings Institution in Washington.

“In rescuing the TPP and finalizing the Free Trade Agreement with the European Union, Japan has delivered mega trade agreements that carry a very different meaning from when the negotiations started.”

The TPP and EU agreements are both a counter to U.S. protectionism and Chinese mercantilism, says Solis. “They make a stand in favor of open markets, tariff elimination exercises, and codification of rules at a time when there is grave concern over the direction of the two largest economies in the world.”

There are other voices in the U.S. these days, however, and some of them are well entrenched in the White House where Trump has long held such views of trade, going back to the 1980s.

“The economic nationalists in the White House are ascendant,” says Solis. “The U.S. has opted for unilateralism (eschewing multilateralism), and the measures selected are clearly protectionist.” White House trade policy official Peter Navarro, after some months of taking a low profile, is now pushing his agenda in public, confident that he has the backing of the President.

“The Trump administration means what it has been saying about attacking what it sees as ‘unfair’ trade and trade arrangements that it believes are disadvantageous to U.S. based production and U.S. workers,” says Clyde Prestowitz, a former trade negotiator and critic of free trade policies. “I would expect more steps in the direction of trying to right what are seen as trade wrongs.”

Prestowitz has written widely on Japan, based on his experience as a trade negotiator here. He does not share the rosy view of Japan’s new bid for leadership.

“I don’t really see Japan as having a leading role in international trade policy,” he told me. Prime Minister Abe’s embrace of TPP was mainly motivated by the desire to use it as tool to reform Japanese agriculture and to counter China, Prestowitz believes.

“Japan’s economy is again growing in large part by dint of exports. Its economy is much more open than in the old days, but it still is not an open economy in the Anglo-American meaning of the term. So, I don’t really see Japan as a meaningful champion of the so called ‘liberal global order.’”

The Abe government’s decision to keep the TPP alive, after the shock of Trump’s withdrawal in the first hours of his administration, was based in part on the hope that the U.S. would eventually return to the agreement.

The new version of the agreement specifically reserves some key parts of the old agreement relating to protection of intellectual property and investment rules that were mainly sought by the U.S. The idea was to give the U.S. an incentive to return to the deal and also to prevent it from being a “free rider” on the TPP-11, from gaining the benefits of the deal without joining it.

There were some signs that the Japanese calculation might be justified when Trump suddenly talked about joining the TPP if he could negotiate better terms.

Trump made those comments in a speech at the World Economic Forum in Davos in January, surprising even his senior advisors. But as the recent moves toward tariffs on metals make clear, the only thing that is certain about trade policy under Trump is chaos. All experts I talked to agreed that a move to rejoin the TPP by the U.S. is now very difficult to pull off.

“The overture on TPP 11 from the Trump administration was never credible,” says Solis. “They are demanding a "better deal" for the U.S. I cannot identify ANY country that wants to negotiate with this U.S. administration given its misguided priority of attempting to reduce trade deficits in goods with trade agreements, and how they treat existing or negotiated trade agreements as disposable.”

Japanese officials reluctantly agree with this assessment. “We do not sense that this administration is very serious about the TPP,” says Umemoto. “Practically speaking, there would have to be very difficult and time-consuming negotiations if the US were to try to change the TPP. No country seems to have an appetite for such negotiations.”

“I think there is little chance that the administration will seriously try to rejoin TPP,” agrees Prestowitz. “Right now, the agriculture interests are pressing because they see themselves losing out to the Aussies and Canadians in the Japanese market. But don’t forget that Ford, Chrysler, and the UAW (United Auto Workers union) never wanted TPP because it would have reduced tariffs on incoming cars, and especially trucks from Japan.

The gain in U.S. agricultural exports couldn’t come close to matching the value of the potential rise in U.S. auto imports from Japan. Moreover, other U.S. industries fear that a TPP would essentially turn Vietnam into another China in terms of exploding exports to the U.S.

That opposition would make a strong reappearance if it looked like Trump was serious about reentering the TPP negotiations. But, hey, no one knows Trump’s mind except maybe Trump, and I’m not convinced that even he does.”

The uncertainty about where Trump’s mind will go should worry the Japanese government. For now, Japan has escaped criticism for its trade surplus with the U.S. in part because Trump likes Abe and also because of Japan’s geo-political role regarding North Korea and China.

“But Japan is on the radar,” warns Solis, as we saw in a recent report criticizing Japan’s non-tariff barriers on autos. Japan has already suffered due to the withdrawal from the TPP and the tariffs, such as the ones being discussed on metals, will also affect Japan. If the negotiations on the North American Free Trade Agreement fail, it will have a huge impact on Japanese firms that have set up factories in Mexico and Canada based on that agreement.

No matter what, Japan will be caught in the crossfire. What will happen to the U.S.-Japan relationship if these trade wars escalate? It will not mean the end of the alliance – the security dimension remains paramount and strong, and Abe is locked into a policy that emphasizes the security threats to Japan.

But this will stress the Abe-Trump relationship and make it much more difficult for the Prime Minister to keep Trump on his good side. Given the chaotic and unpredictable nature of Trump, if he decides that Abe is no longer his ‘good friend,’ it may bring us back to the days of the tensions of the 1980s. The crucial difference is that the roles are reversed, a reality that still has many shaking their heads.