TPP: Good for Japan, bad for America

By announcing that Japan will join the U.S. led negotiations for a Trans Pacific Free Trade Agreement, Prime Minister Shinzo Abe has taken a bold decision that is likely to produce great benefits for the land of the rising sun  – probably at the expense the United States, the land of rising deficits

In joining the talks Abe is going against the expectations of many leading Japan watchers (including this one) as well as against the wishes of his party’s strongest core supporters in the broad Japanese agricultural industry. He is also going against the wishes of much of the powerful medical and service industry lobbies. It is precisely because of this opposition that his move is so bold and revealing of perceptions that few believed Abe was capable of having.

Japan’s agricultural, medical, and service industry sectors have never been robust. Indeed, the original Japanese economic "miracle" was built on a two tier economic structure that has endured now for nearly three quarters of a century. The national export machine that conquered markets in industries like steel, autos, and semiconductors was based on massive investment in and large scale production by manufacturers for global markets. This was and is the Japan of  Toyota, Canon, and Panasonic. But the industries that are more domestic in nature – agriculture, food production, medical supplies, and service industries of all sorts – have been highly protected or never had to face intense global competition just by dint of the localized nature of their business. These sectors have always been inefficient and far less productive than the same industries in the United States and Europe. Nevertheless, because they faced no competition they made lots of money and donated a lot of that to Abe’s Liberal Democratic Party (LDP) in order to ensure that they never would face competition.

So bucking these lobbies is out of character for LDP leaders, but it’s absolutely necessary for Japan because these unproductive, uncompetitive sectors have become a huge drag on the country’s overall economy. If Abe can use the TPP talks to break up their cozy monopolies and reduce their subsidies he will have done a great service for Japan. Especially if reduction of agricultural subsidies can lead to the freeing up of land for larger size residential housing that would drive domestic demand for more goods to fill the houses.

But here’s the crazy thing. In principle, Abe and his party can reduce subsidies, tariffs, and restrictive regulations unilaterally. If such moves would be good for the Japanese economy ( and they would be), Abe doesn’t actually need a TPP negotiation to do them. Of course, I understand that the politics of the situation may make it easier for him to make the requisite moves in the context of a trade negotiation. That way he can tell his constituents that he has no choice. He has to yield to "gaiatsu" (foreign pressure) if Japan is to obtain concessions from its trading partners for its exports.

The problem is that while the TPP as presently structured holds the promise of many good things for Japan it will almost surely result in a further increase of the U.S. trade deficit and a net loss of U.S. jobs. The reason for this is two-fold. On the one hand, practices and policies like currency manipulation, investment subsidies, administrative guidance, and cartel arrangements that cause the main distortions to trade are not even on the agenda. So consider that since Abe became Prime Minister in Japan with the express objective of reducing the value of the Japanese yen, the currency has indeed fallen by more than twenty percent. This has quite naturally resulted in a surge of Japanese exports, but neither the policy nor the result will be discussed in the TPP talks. What will be discussed is tariff reductions on a range of products on which tariffs are mostly already very low. For example, U.S. tariffs on autos are 2.5 percent, obviously not very significant in comparison to a 20 percent move in exchange rates.

On the other hand, the structures and government -industry relationships of some markets make them more difficult to penetrate than others. Take the auto industry as an example. Japan has zero tariffs and on paper its markets are completely open. The United States has a 2.5 percent tariff on autos and a 25 percent tariff on some trucks. Yet the United States imports more than a third of its autos while Japan imports around 7-8 percent of its vehicles. Let’s forget about whether U.S. auto makers can compete in Japan. Let’s assume for sake of argument that they can’t. But among the most competitive auto companies in the world today is Korea’s Hyundai. It is gaining market share in all major markets and often at the expense of the Japanese producers. But Hyundai has announced that it will not even try to penetrate the Japanese market because the hidden barriers there are so high.

The TPP is not going to change the structure and deeply ingrained practices of these markets. It will make the easy to penetrate U.S. market a bit easier to penetrate and will essentially bless the currency manipulation that the export led economies use to beggar their neighbors. U.S. consumers may benefit from some price reductions but that will be outweighed by the loss of jobs and downward pressure on wages exacerbated by a larger trade deficit in the wake of the proposed TPP.

But it will be good for Japan.