GMF - The German Marshall Fund of the United States - Strengthening Transatlantic Cooperation

This essay was originally published in the National Journal. 

TOKYO—Nostalgia for the 1980s isn’t limited to pop music and fashion these days. More than two decades after bitter trade wars between Japan and the United States over such commodities as rice and automobiles, those very same fights are threatening to derail a potentially prosperous and radically new trade relationship between the two nations.

At issue is whether Japan joins the Obama’s administration’s blueprint for 21st century trade, the Trans-Pacific Partnership. The wide-ranging agreement, which remains under negotiation, would not only eliminate tariffs but also provide greater protection for intellectual property and regulate a variety of goods and services across international borders. The would-be pact includes nine nations bordering the Pacific—among them the United States, Australia, and Vietnam—but Japan isn’t one of them. At least, not yet.

The White House covets Japan’s participation in any final accord because Tokyo’s buy-in would raise the stakes for all involved, potentially tripling the deal’s ultimate commercial payoff while providing added leverage to help check China’s dominance in the region. But before Japan can enter the talks, its government must quell domestic fears that the deal would, among other worries, decimate its agricultural sector.

Although American business interests would seem to welcome Japan’s entry, the sentiment isn’t universal. Automakers, weary of coming out on the losing end of industry battles with Japan for decades, aren’t eager to further open any international markets to the Japanese. That opposition could in turn imperil congressional approval of a final deal.

Still, supporters on both sides of the Pacific see too many mutual economic and strategic advantages to ignore. “TPP is at the nexus of foreign policy and economic statecraft,” observed Matthew Goodman, until recently a member of President Obama’s National Security Council.

Officials in Tokyo agree. “This negotiation is not only a trade negotiation but a high-level strategic dialogue,” a senior Japanese official involved in the process said. “We would like to make TPP a symbol of a new global partnership between the United States and Japan.” Representatives of the Japanese government will travel to Washington next week to sort out the obstacles to Tokyo formally joining the talks, but they’ll do so while the internal debate over their country’s economic future rages on.

“I see no reason for the Japanese government to jump into this,” said Eisuke Sakakibara, who as vice minister of finance in the late 1990s crossed swords repeatedly with the United States. “There is nothing that important that we request the United States to change, so it’s not a negotiation; it’s a U.S. demand. And TPP could antagonize China, which is not to Japan’s advantage.”

He and other opponents have been quick to cast the debate in nationalistic terms, but they might be swimming against the free- trade current. Recent polls show that half of the Japanese people back membership in the pact, with no more than a third opposed.

In the U.S., visceral public mistrust of Japan, so evident in the late 1980s and early ’90s, seems to have abated as well. Two-thirds of Americans now have a favorable view of Japan, according to the Pew Global Attitudes survey. And three in five think that increased trade with Japan would be good for the United States.

That may be partly because a deal that includes Japan is much more commercially attractive to the U.S. than one that doesn’t. A study by the Research Institute of Economy,

Trade, and Industry here estimates that the agreement would boost the American economy by 0.11 percent, with Japan accounting for about 70 percent of that increase. Although that may not sound like a lot, the benefits would exceed the projected payoff from the now-moribund Doha Round of multilateral trade negotiations. And politically influential sectors of the U.S. economy would reap much of the advantage. The beef industry, for example, believes the pact could boost its exports to Japan by up to $1 billion a year.

“The U.S. business community hopes that a successfully negotiated TPP can be the precursor of a single, regional market in the Asia Pacific,” explained Calman Cohen, president of the Emergency Committee for American Trade in Washington. “Such a development would be more likely if the TPP currently under negotiation leads to Japan signing on.”

Meanwhile, Washington also sees tactical benefits from including Tokyo in this new free-trade area. The White House hopes to use the accord, particularly Japan’s participation, to counter Beijing’s efforts to further ensnare East Asia in its economic web. A deal on state- owned enterprises and restraints on the forced transfer of technology would effectively outlaw practices among the member nations that are associated with Chinese state capitalism, creating new norms in the region more compatible with the way America does business.

In addition, Japan will soon open free- trade deliberations with the European Union and, separately, with China and South Korea. The Obama administration wants to ensure that American exporters and investors have better access to the Japanese market than those competitors.

Tokyo’s economic rationale for joining the deal is even more compelling. The Japanese economy is smaller today than it was a decade ago, thanks to persistent deflation. The population is expected to shrink by 30 percent over the next two generations. The yen has never been stronger, making exporting more difficult. The hollowing out of domestic industry is a widespread concern, and last year the country ran its first trade deficit in 31 years.

Moreover, Japanese carmakers resent the fact that, thanks to the U.S.-South Korea Free Trade Agreement, Hyundai will soon have better access to the U.S. market than Toyota and Nissan do. And they fear that if the United States is in the trans-Pacific accord and Japan is not, Ford and GM will reap the profits from burgeoning markets such as Vietnam’s. “The business community here is fully aware that if Japan does not join TPP,” said Jesper Koll, a managing director of JPMorgan Chase in Tokyo, “it will confirm Japan’s status as a has-been.”

To reverse its fortunes, according to Tadashi Okamura, the former chairman of Toshiba and now the chairman of the Japan Chamber of Commerce and Industry, Tokyo needs to use the pact to internationalize Japan’s small and medium-sized industry and to become a more attractive site for foreign investment. That would require drastic domestic reforms.

The most formidable change would involve an overhaul of the agricultural sector. Japan has a plethora of small, unproductive rice farms cultivated by part-time farmers who are protected by a 778 percent tariff on imported rice. All of this would have to go. “There is no future for agriculture without reform,” contended Takatoshi Ito, an economics professor at the University of Tokyo.

But the long-cosseted farm lobby and the government’s agriculture ministry have a vested interest in the status quo. Critics fear that opening the Japanese agricultural market to foreign competition will force a drastic restructuring and consolidation of the farm sector, with bigger, more mechanized farms growing more specialty crops. This is exactly what the advocates of the pact want, and they hope to use it to leverage such change. But the farm lobby is using its political influence to persuade rural representatives in the Japanese Diet to oppose the pact.

“There is a compromise that can be struck,” Ito argued. In 2005, the United States demanded that sugar be excluded from its free-trade agreement with Australia. South Korea exempted rice from its recent trade agreement with America. U.S. trade officials contend that all products must be on the table in the negotiations. In part, this is because the Obama administration will need the support of eager American farm interests to counter Detroit’s fierce resistance to Japan’s participation in the agreement. While the Big Three among U.S. automakers support TPP, they draw the line at admitting Japan.

The U.S. trade imbalance with Japan explains why. In 2010, Japan shipped 1.5 million cars and light trucks to the United States. The Japanese imported 14,000 such vehicles from America. As a result, autos now account for two-thirds of the trade deficit with Japan, up from only half in 1995. The pact would eventually eliminate the 2.5 percent U.S. tariff on imported cars. This cost-saving accorded to Japanese imports vehicles may not seem like much, but it is equal to Detroit’s profit margin on some small cars.

Japan, on the other hand, has no auto tariff, so the deal offers the Big Three no immediate new benefit. Detroit also asserts that the deal will do little to dismantle nontariff trade barriers, such as Tokyo’s currency manipulation and cozy relations between government and industry, which effectively deny Americans a bigger share of the Japanese market.

“The Japanese auto industry grew up behind a web of protection,” a Washington lobbyist for one of the Big Three said. “Now, as their economy slows and population declines, and they are plagued with overcapacity in the auto sector, they want increased access to other nations through TPP.”

Japanese automakers counter that the Detroit’s lack of success in Japan stems from lack of effort. They note that between 1996 and 2011, the number of American auto dealerships in Japan fell from 620 to 160, while the number of European dealerships rose from 755 to 1,302. This explains, the Japanese say, why European automakers have 4.6 percent of the Japanese market and U.S. automakers have only 0.3 percent.

Washington and Tokyo have dueled over these numbers for decades. Neither side is likely to convince the other. Nevertheless, the Big Three were able to hold up approval of the South Korea Free Trade Agreement for years. Thus, Japan may need to make some accommodation on autos if the accord is to ultimately get through Congress.

While Japan ponders, negotiations among the current nine members continue. The next session is in Melbourne, Australia, in the first week of March. The window of opportunity for Japan to come aboard is rapidly closing. “From our point of view,” the senior Japanese government official said, “it is important to join TPP before there is substantial agreement. We want to join in the rule-making process.”

But Japan’s participation is hostage to calendars in Tokyo and Washington that may be out of sync.

The ruling Democratic Party of Japan is locked in a battle with the opposition Liberal Democratic Party over a proposed increase in the domestic-consumption tax that may force a new election by June. “If the government stumbles on the consumption tax,” said Yoichi Funabashi, the former editor of the Asahi Shimbun, one of Japan’s leading newspapers, “we will see one to two more years of political confusion.” If Japan has not formally joined the TPP deliberations before that point, its participation could be in limbo indefinitely.

On the U.S. side, the calendar is further complicated because the administration needs to give Congress a 90-day notice before formally including Japan in the TPP process. The U.S. Trade Representative’s Office is still consulting with business and labor to scope out support and opposition. Yet if the White House starts that clock and a Japanese election is called before the 90 days are up, some in Congress may want to delay engaging with Japan until Tokyo sorts out its politics.

“From the beginning, we really wanted Japan in,” said Susan Schwab, who launched the trans-Pacific effort as U.S. trade representative under President George W. Bush, “But the Japanese are the only ones who can make that decision.”

Bruce Stokes is a senior transatlantic fellow at the German Marshall Fund in Washington, DC.