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Thursday, April 11, 2019
How Japan Became the Adult at the Trade Table
While Washington withdraws from multilateral deals, Tokyo has been uncharacteristically leading efforts to save them.
Shinzo Abe speaks at his party's headquarters in Oct. 2017 (Behrouz Mehri/AFP/Getty Images
Throughout their history, the Japanese have been uncomfortable with free trade—and resentful of U.S. efforts to promote it on their shores. Indeed, the United States has been trying to pull Japan into the world at least since the mid-19th century, when President Millard Fillmore sent gunboats—the Japanese called them “black ships”—into Tokyo Bay, demanding open ports.
Japan’s first response to these U.S. market-opening initiatives was to forswear its feudal isolation, swiftly build an industrialized economy, and launch a war of aggression in the Pacific, creating a short-lived but savage military empire that Tokyo euphemistically called the “Greater East Asia Co-Prosperity Sphere.” After that effort ended badly, the Japanese waged war again, this time with trade as a weapon (as many U.S. diplomats described it). They created the fearsome “Japan Inc.” of decades past, keeping many foreign products and services out while getting rich by dumping cheaply priced product abroad, especially in the United States. Only slowly, under unrelenting U.S. gaiatsu (foreign pressure), did Tokyo begin to discard its isolationist and protectionist trade practices.
Today, however, it’s clear something dramatic has changed in the relationship. With the United States and Japan planning to sit down this month for yet another iteration of trade talks, Tokyo is now generally taking the lead in pushing for more open markets, and Washington is retreating into isolation. Under President Donald Trump, the United States is abjuring the very multilateral system it had the largest hand in building—and which it once dragged Tokyo into—while Japan is becoming one of the system’s main champions.
In a crowning historical irony, Japan is again trying to build a kind of co-prosperity sphere in East Asia without the United States—but a real one this time, with open and fair trade rules, designed around preserving what’s left of the Trans-Pacific Partnership (TPP) that Trump tried to junk in 2017.
Moreover, Japan is being credited with playing the leading role in preserving the main body of what many experts call a state-of-the-art multilateral trade agreement—indeed perhaps the future of the global trading system—at a time when Trump, who proudly calls himself “Tariff Man,” appears to be trying to turn back the clock nearly three centuries to the antiquated mercantilist thinking that preceded Adam Smith.
Tokyo is also very consciously keeping the TPP open for a post-Trump Washington to rejoin, much as the Western Europeans are doing with the Iran nuclear deal and the Paris climate pact, from which Trump also abruptly withdrew.
Other major U.S. trading partners are full of praise for Tokyo’s leading role—not least of which is Canada, which gives a lot of credit to Japan for saving the heart of the TPP. “I can truly say the Japanese position, attitude, and support for the rule-based multilateral trading system and fair trade has been exemplary and very important,” James Carr, Canada’s international trade minister, told Foreign Policy in an interview. By contrast, dealing with the Trump administration “can be difficult, and it can be unpredictable,” Carr said.
Carr noted that since the TPP’s swiftly negotiated successor—the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)—was signed in Chile in March 2018, Canada’s exports to participating countries have surged on the strength of several tariff cuts. By January of this year, Canadian exports to Japan had increased 20.8 percent. His relationships with his Japanese counterparts, Carr said, “have been nothing but positive and aligned.”
All in all, it has been a remarkable evolution of Japanese attitudes toward trade. “The outcome on the CPTPP is something no one would have predicted if you looked at where Japan was only five to seven years ago,” said Wendy Cutler, a longtime senior U.S. trade negotiator and now vice president of the Asia Society Policy Institute. “There was a lot of domestic opposition to TPP at first in Japan.
… The notion that not only did they join but then once we exited they led the other countries to a successful conclusion is something no one could have expected.”
Matthew Goodman, a former U.S. Treasury Department official in Japan and a senior vice president for the Center for Strategic and International Studies in Washington, said Tokyo has changed its approach because it knows that Japan needs to boost productivity to deal with an aging and shrinking population, and it has a far more enlightened bureaucracy that recognizes Japanese companies are truly globalized and depend on the rules and norms of a multilateral trading system.
“They’re more dependent on global supply chains underpinned by a set of
rules and norms that, for want of a better word, are the Western
preferred rules and norms—ones that the U.S. used to champion,” he said.
“Some things have really changed that have forced Japan to step in and in a way it might not have otherwise.”
Above all, the economic and geopolitical challenge from neighboring China has forced Japan’s hand, Goodman and other experts said. Tokyo can’t afford a new wave of protectionism with Beijing breaking so many free-trade rules on its own. Thus, Japan is also taking a lead role in reforming the World Trade Organization (WTO) ahead of Tokyo’s first chairmanship of the G-20 summit in June.
That could be a key factor, along with the CPTPP, in forcing Beijing to open up and observe rules against government subsidization of industry and protecting intellectual property—perhaps more than anything Trump does in his ongoing bilateral talks with Beijing.
“I think China is fundamentally challenging the liberal order on which Japan’s security and prosperity has rested,” Goodman said. “Japan always played defense before. … The TPP effort by Japan was really out of character.”
Cutler added: “What is happening is that the U.S. is retreating from its leadership role in the WTO and other countries, including Japan, are trying to fill that void, either by leading or also forming coalitions with other countries.” Ironically enough—considering that Japan effectively wrote the book on how to subsidize and protect domestic business in its earlier decades—Tokyo is pushing for tougher WTO restrictions on this practice.
After Trump announced he was pulling out of the 12-nation TPP pact in early 2017, calling his predecessor Barack Obama’s handiwork a “horrible deal,” Japan’s initial response along with most other participating nations was to say that the TPP couldn’t work without Washington. But Prime Minister Shinzo Abe, who had campaigned on an economic reform platform called “Abenomics,” later changed his mind. He swiftly took the initiative to salvage what he could as the leader of the second-largest TPP economy. In defiance of Japan’s politically powerful and protected industries such as agriculture, Abe pushed a renegotiated “TPP-11” through the Japanese parliament, just as he had the earlier TPP pact. He also left open a future U.S. return to the deal by deactivating—but not cancelling—some 20 U.S.-demanded TPP provisions mostly involving highly technical protections of patents and rights and terms for litigating investor disputes.
In a speech to the parliament shortly before the revised TPP pact was approved, Abe said that he personally would become the “standard-bearer” in promoting multilateral trade in the region, despite efforts by Trump to return U.S.-Japan relations to the hostile bilateral disputes of the 1980s.
“The Japanese were the anchor essentially, though they had support from Australia and New Zealand,” said Jeffrey Schott of the Peterson Institute for International Economics.
Some longtime Japan observers, mindful that Tokyo has rarely taken any kind of global leadership role since World War II, are skeptical about how long the country’s new enthusiasm for pushing the envelope on multilateral free trade will persist. “I still ask myself if it’s sustainable,” Goodman said. “This is a unique situation with a unique Japanese prime minister who puts a premium on the U.S.-Japan alliance, ensuring that the U.S. and Japan are shaping the order in Asia and not China. It’s not clear to me that a future prime minister is going to have that same strategic perspective and political courage.”
Yet it’s going to be hard for Japan to move in reverse. The opening of Japan has been a gradual process by which the once all powerful ministry mandarins in Tokyo—who for decades sought to balance U.S. demands for open trade against the need for socially stabilizing measures like so-called lifetime employment—have found themselves outpaced and outflanked by globalized Japanese corporate giants like Toyota, Mitsubishi, and Sony. A generation ago, for example, Japan’s formidable Finance Ministry squelched most attempts by Japanese banks and securities firms to compete globally (also slowing down asset securitization, which helped Japan somewhat in the 2008 financial crisis). Today, the ministry’s offshoot, the Financial Services Agency, “is the most progressive regulator in the world, bar none,” Goodman said.
More recently, Tokyo was jolted when South Korea negotiated free trade agreements with the United States and European Union, giving Seoul the economic edge; Tokyo also recognized that the Doha round of global talks by WTO members was going nowhere. “They recognized they needed to do something drastic,” Cutler said.
Underlying the TPP was a fundamental recognition that around the world—and especially in the manufacturing-intensive Pacific region—trade was no longer simply a country-to-country issue. Corporate supply chains are increasingly complex; the content of any given product now runs through many countries.
“It made more sense to do a regional deal because that’s the way business was conducted,” said Cutler, who also noted that with the TPP Washington only needed one congressional vote whereas, under Trump’s approach, “you’re setting yourself up for a whole slew of congressional votes, and as we’re seeing with the USMCA, none of them are easy.” (The U.S.-Mexico-Canada Agreement, Trump’s successor to NAFTA, has run into heavy resistance on Capitol Hill.)
And while Trump derided the TPP, even his trade representative, Robert Lighthizer, has acknowledged that U.S. negotiators adapted many of its innovations—mainly those related to digital and intellectual property, patent protections, currency manipulation, labor standards, and environmental rules—to create the USMCA. The TPP is “state of the art because the U.S. used the TPP negotiations as a negotiating laboratory,” Schott said. “The modernized part of the revised NAFTA is essentially TPP with more bells and whistles, which are already being implemented by Canada and Mexico.”
Despite Trump’s recalcitrance on free trade—which flies in the face of nearly every U.S. president’s approach since 1945—Goodman and other experts on U.S.-Japan trade say Washington at least can claim some credit for its past role in pulling Japan into the world. And for giving it the motivation to lead now.
“Some things have really changed that have forced Japan to step in and in a way it might not have otherwise.”
Above all, the economic and geopolitical challenge from neighboring China has forced Japan’s hand, Goodman and other experts said. Tokyo can’t afford a new wave of protectionism with Beijing breaking so many free-trade rules on its own. Thus, Japan is also taking a lead role in reforming the World Trade Organization (WTO) ahead of Tokyo’s first chairmanship of the G-20 summit in June.
That could be a key factor, along with the CPTPP, in forcing Beijing to open up and observe rules against government subsidization of industry and protecting intellectual property—perhaps more than anything Trump does in his ongoing bilateral talks with Beijing.
“I think China is fundamentally challenging the liberal order on which Japan’s security and prosperity has rested,” Goodman said. “Japan always played defense before. … The TPP effort by Japan was really out of character.”
Cutler added: “What is happening is that the U.S. is retreating from its leadership role in the WTO and other countries, including Japan, are trying to fill that void, either by leading or also forming coalitions with other countries.” Ironically enough—considering that Japan effectively wrote the book on how to subsidize and protect domestic business in its earlier decades—Tokyo is pushing for tougher WTO restrictions on this practice.
After Trump announced he was pulling out of the 12-nation TPP pact in early 2017, calling his predecessor Barack Obama’s handiwork a “horrible deal,” Japan’s initial response along with most other participating nations was to say that the TPP couldn’t work without Washington. But Prime Minister Shinzo Abe, who had campaigned on an economic reform platform called “Abenomics,” later changed his mind. He swiftly took the initiative to salvage what he could as the leader of the second-largest TPP economy. In defiance of Japan’s politically powerful and protected industries such as agriculture, Abe pushed a renegotiated “TPP-11” through the Japanese parliament, just as he had the earlier TPP pact. He also left open a future U.S. return to the deal by deactivating—but not cancelling—some 20 U.S.-demanded TPP provisions mostly involving highly technical protections of patents and rights and terms for litigating investor disputes.
In a speech to the parliament shortly before the revised TPP pact was approved, Abe said that he personally would become the “standard-bearer” in promoting multilateral trade in the region, despite efforts by Trump to return U.S.-Japan relations to the hostile bilateral disputes of the 1980s.
“The Japanese were the anchor essentially, though they had support from Australia and New Zealand,” said Jeffrey Schott of the Peterson Institute for International Economics.
Some longtime Japan observers, mindful that Tokyo has rarely taken any kind of global leadership role since World War II, are skeptical about how long the country’s new enthusiasm for pushing the envelope on multilateral free trade will persist. “I still ask myself if it’s sustainable,” Goodman said. “This is a unique situation with a unique Japanese prime minister who puts a premium on the U.S.-Japan alliance, ensuring that the U.S. and Japan are shaping the order in Asia and not China. It’s not clear to me that a future prime minister is going to have that same strategic perspective and political courage.”
Yet it’s going to be hard for Japan to move in reverse. The opening of Japan has been a gradual process by which the once all powerful ministry mandarins in Tokyo—who for decades sought to balance U.S. demands for open trade against the need for socially stabilizing measures like so-called lifetime employment—have found themselves outpaced and outflanked by globalized Japanese corporate giants like Toyota, Mitsubishi, and Sony. A generation ago, for example, Japan’s formidable Finance Ministry squelched most attempts by Japanese banks and securities firms to compete globally (also slowing down asset securitization, which helped Japan somewhat in the 2008 financial crisis). Today, the ministry’s offshoot, the Financial Services Agency, “is the most progressive regulator in the world, bar none,” Goodman said.
More recently, Tokyo was jolted when South Korea negotiated free trade agreements with the United States and European Union, giving Seoul the economic edge; Tokyo also recognized that the Doha round of global talks by WTO members was going nowhere. “They recognized they needed to do something drastic,” Cutler said.
Underlying the TPP was a fundamental recognition that around the world—and especially in the manufacturing-intensive Pacific region—trade was no longer simply a country-to-country issue. Corporate supply chains are increasingly complex; the content of any given product now runs through many countries.
“It made more sense to do a regional deal because that’s the way business was conducted,” said Cutler, who also noted that with the TPP Washington only needed one congressional vote whereas, under Trump’s approach, “you’re setting yourself up for a whole slew of congressional votes, and as we’re seeing with the USMCA, none of them are easy.” (The U.S.-Mexico-Canada Agreement, Trump’s successor to NAFTA, has run into heavy resistance on Capitol Hill.)
And while Trump derided the TPP, even his trade representative, Robert Lighthizer, has acknowledged that U.S. negotiators adapted many of its innovations—mainly those related to digital and intellectual property, patent protections, currency manipulation, labor standards, and environmental rules—to create the USMCA. The TPP is “state of the art because the U.S. used the TPP negotiations as a negotiating laboratory,” Schott said. “The modernized part of the revised NAFTA is essentially TPP with more bells and whistles, which are already being implemented by Canada and Mexico.”
Despite Trump’s recalcitrance on free trade—which flies in the face of nearly every U.S. president’s approach since 1945—Goodman and other experts on U.S.-Japan trade say Washington at least can claim some credit for its past role in pulling Japan into the world. And for giving it the motivation to lead now.
