A 20th century deal for the 21st century

Since Japanese Prime Minister Abe’s recent visit to the White House there has been a lot of double talk both in Tokyo and in Washington about the proposed Trans Pacific Partnership Free Trade Agreement (TPP) and Japan’s possible entrance into its negotiation.

From the beginning of the TPP negotiation process , the Obama administration has emphasized that, if completed, this deal would be a so called 21st Century free trade agreement. This rubric is meant to imply that it would be a thoroughly free market deal with none of the fudges and exclusions that have marked virtually all previous free trade agreements. None of that this time, said the White House. This , the administration has insisted, will be a gold plated model of what future free trade deals should look like. In particular, for starters, the administration insisted that all participants in the talks agree up front that no sectors of the economy be excluded from the liberalization negotiations and that all participants be prepared to agree to remove all tariffs.

The reason for the emphasis on a very high level of free trade purity is the growing doubt on the part of the U.S. Congress and the American public in general that these free trade deals actually result in the opening of foreign markets to exports of U.S. goods and services. In many previous instances, such as the recently concluded U.S.-Korea Free Trade Agreement, predictions that the deals would result in surging U.S. exports and a reduction in the U.S. trade deficit have turned out to be not only wrong, but essentially the opposite of what as actually occurred. U.S. imports have surged in response to further opening of U.S. markets, but despite apparent opening abroad, U.S. exports have lagged and the U.S. trade deficit has gotten larger.

So there is great skepticism in the Congress about rosy White House forecasts for further free trade deals. And it has been to overcome this skepticism that the Obama team has been insisting that the TPP is going to be the gold standard for free trade.

But the problem has been, that the present proposed membership of the TPP is not so impressive. Some have called it "The United States and nine dwarfs" referring to the fact that aside from the United States, the other countries (Canada, Mexico, Peru, Chile, New Zealand, Australia, Brunei, Singapore, Malaysia, and Vietnam) all have small economies. To make the TPP meaningful, Washington has been hoping to get Japan and possibly Korea involved. Conversely, in Tokyo, there has been concern that if Japan is not involved, it will be disadvantaged in its trade in Asia and also may lose a chance to obtain closer security relations with the United States as well.

But, there is a problem. Japan’s agricultural sector is very strongly protected behind tariffs that reach as high as 700 percent. And, the agriculture lobby is extremely powerful politically. It does not want Japan to join the TPP. Unfortunately, Prime Minister Abe’s party is heavily dependent on the agriculture lobby and its votes.

So a formula has been developed to get around this problem. Japan has been saying that there is no need to commit to full removal of tariffs ahead of negotiations because that is what the negotiations are supposed to be about. Thus Japan can join the negotiations and test what kind of a deal might be concluded and then decide if it wants to continue of not depending on how much it might have to reduce protection.

It seems that Washington has bought into this formulation in its effort to get Japan into the talks and to make the deal a serious deal by having another major economy as a party to it. But in doing so, the White House is inevitably signaling that, in fact, the deal won’t be gold plated. There will likely  be some exclusion or some fudge that will allow some level of continued protection in so called sensitive sectors.

If so, we’ll be looking at an old style 20th century kind of deal for the 21st century.