United States & Japan Finally Exorcise Trade Ghosts

By Matthew P. Goodman

Shibuya station in Tokyo, Japan. Source: Moyan Brenn's flickr photostream, used under a creative commons license.

Shibuya station in Tokyo, Japan. Source: Moyan Brenn’s flickr photostream, used under a creative commons license.

Five U.S. congressmen take sledgehammers to a Japanese cassette player on the steps of the Capitol. The White House imposes 100 percent tariffs on a range of Japanese imports in retaliation for violations of a bilateral semiconductor agreement. Tokyo resists U.S. pressure for “managed trade.” These were typical headlines during the heat of boeki masatsu (trade friction) in the late 1980s and early 1990s. Anyone who predicted then that the United States and Japan were one day going to conclude a free trade agreement would have had his sanity questioned.

Yet that is what Tokyo and Washington have in effect just done. Trade ministers from 12 Asia-Pacific countries meeting last weekend in Atlanta initialed a historic trade agreement under the Trans-Pacific Partnership (TPP). The deal will sweep away barriers to market access and establish new rules for trade and investment among a group of countries representing 40 percent of global GDP. The United States and Japan are not only the two largest participants in the deal by far—Japan’s economy is roughly the size of the other 10 non-U.S. members combined—but also key partners in bringing TPP to fruition.

To be sure, the addition of Japan to the TPP talks in the spring of 2013 complicated the negotiations. Japan’s high tariffs and other protections for its small but politically powerful agriculture sector were legendary, and Tokyo would fight hard to preserve them. Detroit automakers were still bitter about their historical difficulty selling cars in Japan and wanted continued protection against Japanese imports into the United States. Nor were these issues fully resolved in the TPP agreement, as some agriculture and automobile restrictions are likely to remain in place for many years.

But TPP is also about rulemaking, and in this Tokyo and Washington have been vital allies. The agreement reached in Atlanta will establish new disciplines on behind-the-border policies that can distort trade and investment, including weak intellectual property protection, nontransparent regulation, and state preferences for commercial champions. Washington and Tokyo largely see eye to eye on these issues, and their collaboration in TPP pushed the other participants toward embracing higher standards.

The economic gains from TPP will be substantial. U.S. exports, particularly in areas of comparative advantage, such as agriculture and services, will get a boost from greater market access, not only in Japan but also Vietnam and other growing Asia-Pacific economies. In a 2012 study, Peter Petri of Brandeis University estimated an annual increase of $124 billion in U.S. exports in 2025 under TPP; he also showed U.S. income rising by some 0.5 percent of GDP due to increased competition and efficiency.

Japan stands to benefit even more from TPP. Petri estimated annual Japanese export gains at $175 billion and a boost to Japanese income of over 2 percent of GDP. Most important may be the dynamic effects of TPP in sparking broader structural reform in an aging Japan, giving a boost of confidence to Prime Minister Shinzo Abe’s ambitious but struggling reform program of “Abenomics.”

TPP also has enormous strategic value for both the United States and Japan. The agreement will give substance to the Obama administration’s “rebalancing” strategy toward Asia, answering critics who claim that the policy is all about military positioning. America’s Asian partners want the United States engaged in the region on all fronts, not least the economic one.

TPP will also underscore the continuing role of both Japan and the United States as leaders of the rules-based order in the Asia-Pacific region. Through their work in regional and global institutions, from the Asia-Pacific Economic Cooperation (APEC) forum to the G20, as well as their individual efforts to uphold high standards, Washington and Tokyo are widely viewed in Asia as champions of an open and fair economic system that has produced broad prosperity across the region.

Following the negotiating success in Atlanta, the Obama and Abe governments will need to persuade their legislatures to ratify a strong but admittedly imperfect TPP deal. The debate in Congress and the Diet will be noisy and fraught, but TPP is more likely than not to be approved by both bodies in the first half of next year.

Washington and Tokyo will then need to find a new organizing principle for their economic cooperation. One critical question will be how to engage more deeply with China, the region’s largest economy and main trading partner of most TPP members. Beijing may not be ready to join TPP soon, but Washington and Tokyo should start talking about how to eventually pull China and other key Asia-Pacific economies into a broader regional trade agreement. They should also build out their cooperation in other areas of international economic policy, from development finance to Internet governance, with the aim of giving China and other regional players incentives to support the open, rules-based economic order.

For now, the historic deal in Atlanta helps fulfill the promise of Article II of the U.S.-Japan Security Treaty of 1960, which called for the two allies to “seek to eliminate conflict in their international economic policies and…encourage economic collaboration between them.” By exorcising the ghosts of several decades of trade friction, TPP will help make those words meaningful at last.

This article was originally published in the Nikkei Asian Review on October 5, 2015, and is reposted here with permission.

Mr. Matthew P. Goodman is the William E. Simon Chair in Political Economy and senior adviser for Asian economics at CSIS. Follow him on twitter @MPGoodman33.

Matthew P. Goodman

Matthew P. Goodman

Matthew P. Goodman is senior vice president and William E. Simon Chair in Political Economy at CSIS, with particular emphasis on Northeast Asia.

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