Abe Wants to Be the Last Free Trade Samurai

Tokyo's ready to pick up the banner of the TPP abandoned by Trump -- if China lets it.

TOKYO, JAPAN - DECEMBER 30: Vendor try to sell his goods as japanese people prepare to celebrate the New Year at Yameyoko-cho and Uechu, the most famous and the oldest New Year Tokyo Markets, in Tokyo, Japan on December 30, 2015. (Photo by David Mareuil/Anadolu Agency/Getty Images)
TOKYO, JAPAN - DECEMBER 30: Vendor try to sell his goods as japanese people prepare to celebrate the New Year at Yameyoko-cho and Uechu, the most famous and the oldest New Year Tokyo Markets, in Tokyo, Japan on December 30, 2015. (Photo by David Mareuil/Anadolu Agency/Getty Images)

In an apparent exercise in futility, Japan’s parliament last month formally ratified the Trans-Pacific Partnership (TPP) free trade agreement, even though the ardent opposition of U.S. President-elect Donald Trump has, in the words of Japanese Prime Minister Shinzo Abe, made the 12-nation pact “meaningless.” Trump’s promise to discard the carefully crafted deal has left its erstwhile partner nations flat-footed, having wasted more than six years of negotiations.

But in Trump’s chaos, Abe sees opportunity. With Trump’s leanings toward protectionism, the Japanese prime minister is now in a position to pick up the reins in helping to promote trade among the increasingly interwoven economies of Asia.

“The upshot of Trump shifting America to a more protectionist policy is not that Japan follows him but that Japan leads the opposition to that movement,” Gerald Curtis, professor emeritus at Columbia University, said in a briefing to foreign media in Japan in late November.

Japan has so far avoided speaking explicitly about striking out on its own, hoping instead that traditionally free-trader Republicans will somehow persuade Trump to change his mind.

“It’s very important for us, as a country, to show ideal rules that we believe the world should aim for,” Abe told parliament before the final vote. “It will also positively impact the U.S., which is now in a transition.”

Japan is a somewhat unexpected standard-bearer for free trade. Throughout its economic boom in the 1970s and 1980s (before the sudden collapse of the “bubble economy” in 1990), it was widely attacked for having protectionist trade barriers, including straightforward high tariff levels and a myriad of technical requirements and administrative hurdles that other nations decried as trade barriers in disguise. This included numerous disputes over automobiles and agricultural products and a long, acrimonious battle in the 1990s over the mobile phone market that pitted Japan against the now-defunct Motorola. Even with some easing measures, tariffs are still high in many areas, especially for food imports. In what must be the world record for import levies, the tariff rate for foreign rice is currently set at 788 percent.

So why does Japan want to willingly slash its own tariffs and upset a farm constituency that has been at the center of keeping Abe’s Liberal Democratic Party in power for most of the past 50 years? As Nobel laureate Bob Dylan has said: “The times, they are a-changin’.

Agriculture is now just 1 percent of Japan’s GDP, and the number of farmers has fallen by more than 60 percent since 1985. With more solid support in urban areas and two-thirds control of both houses in parliament, Abe can afford to safely jettison his former friends.

Most importantly, cutting through the myriad of red tape in agriculture and elsewhere is a critical part of the economic program he has proudly dubbed “Abenomics.” The program, built around easy money from the central bank, a heavy dollop of government spending, and attempts at structural reform, has been less successful than hoped. There has been some positive elements in pushing up nominal growth in the economy, now forecast by the Bank of Japan at 2.5 percent for next year, and modest signs of wage inflation to help employees feel more willing to spend — but not the miracles Abe promised.

TPP gives the government the handy excuse it now needs to take unpopular reform measures meant to give a new push to the Abenomics program. Blaming outsiders for such “un-Japanese” actions is a popular political maneuver that even gets a special name: gai-atsu.

“This is a classic case of gai-atsu,” said Martin Schulz, a senior research fellow at the Fujitsu Research Institute in Tokyo. “Domestic negotiations for corporate and agricultural reforms were always linked to the needs of TPP. If there is no TPP, those negotiations would have to be set on a new basis, and this would result in further delays for the Abenomics structural reform plans.”

To be sure, it’s possible that opposition to TPP may be one of the many campaign promises dumped by Trump. But with the high level of scorn leveled at TPP by the president-elect, few people see an about-face as a possibility. Instead, it would need to be repackaged for the new administration, giving Trump a chance to claim victory and demonstrate his much-vaunted negotiating skills. Trump has said he would prefer new bilateral trade deals.

China hangs over the future of any Japanese-led trade deal. In touting TPP, U.S. President Barack Obama minced no words in calling it a way to ensure that China does not shape the new world of trade.

Indeed, although Abe may be keen to pick up the mantle of regional trade, China has its own ideas. At meetings in Beijing following Trump’s victory, the threat to free trade and globalization topped the agenda. Although Beijing distrusted TPP, which it saw — perhaps fairly — as an American-led bid to economically encircle and contain China, the country’s rulers are acutely aware that trade is the only way of sustaining the growth China needs. And with TPP potentially on its deathbed, China is pushing the Regional Comprehensive Economic Partnership (RCEP). The RCEP agreement was launched by the 10 members of the Association of Southeast Asian Nations and now also includes Australia, India, Japan, New Zealand, and South Korea — and notably excludes the United States, giving it a China versus America veneer. With China left out of the first round of any TPP implementation, Beijing has been touting the benefits of RCEP, which would include no less than one-half of the world’s population. Beijing said in late December that it would like to see a deal in place by the end of this year.

But for corporate Japan, the RCEP model focusing on traditional trade barriers is less useful. With a declining domestic workforce as the nation ages, there is less interest in building plants in Japan to export goods elsewhere. Instead, the new Japan model is to build and sell locally. This works not only in Southeast Asia with large workforces at reasonable cost but also in the United States, where Toyota makes 70 percent of the cars it sells there.

In comparison, TPP represents a much more comprehensive approach that is better suited, supporters say, to today’s global supply chain, with rules on employment standards, health, and safety. Most crucially for Japanese companies, it also offers protection for investments made in any TPP country.

“TPP is the most advanced agreement in trade and investment for Asia, covering services and investor protection, which is increasingly important for investors in Asia,” Schulz said.

But in Schulz’s view, any trade pact without either the United States or China doesn’t reach the critical mass necessary in the view of potential partners. Therefore, in the absence of a eureka moment at the White House, he predicts that work will shift for now to RCEP negotiations, with TPP a potential second step.

“Japan alone will not really work. Other Asian nations will move only if it involves China,” Schulz said.

One issue, of course, is whether China and Japan can work together given their highly contentious relationship. Although public and private positions among nations can often vary, few doubt that there was real Chinese anger when a previous Japanese government in 2012 took direct ownership of the disputed Senkaku Islands, known to China as the Diaoyu, and when Abe paid a formal visit in December 2013 to the Yasukuni Shrine that includes convicted World War II-era leaders among those enshrined.

With the recent addition of the South China Sea, political and defense relations appear strained, but the picture is somewhat different in the economic sphere, with a quiet acknowledgement from both sides that they need each other.

All this leaves the incoming Trump administration in a dilemma. As the ubiquitous iPhone demonstrates, world trade is a much more complex business than making a product in one country and exporting to another. Although the phones are assembled in China, the components come from some 200 suppliers in more than 30 other countries, according to trade media (Apple does not disclose its suppliers), with many of these producing the highest-value components. With other nations having a huge stake in the current trade flows, a trade war with China will not be a bilateral affair.

“If there is a U.S.-China economic war, it is not a war between the U.S. and China; it is a war between the U.S. and every country in East Asia because of supply chains and other inter-relationships. All of the economies in this region, including Japan’s, are very much integrated with the Chinese economy,” said Columbia’s Curtis.

If he truly steps up to the plate, Abe can try to play the role of mediator in any U.S.-China dispute — or even team up with Japan’s historic rival to fight for a cause the United States has abandoned. The thought of Beijing and Tokyo standing together to defend free trade against Washington might seem surreal — but in the great geopolitical reshuffling, it may now be a reasonable course of action.

Photo Credit: David Mareuil/Anadolu Agency/Getty Images

William Sposato is a Tokyo-based writer who has been following Japan’s economy and financial markets for more than 15 years.

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