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Trump’s scrapping of TPP complicates Japan’s trade, growth options

by

Kyodo

U.S. President Donald Trump’s resolve to kill the Trans-Pacific Partnership trade deal has knocked out a pillar of Japan’s growth strategy, but analysts say the nation’s best chance at overcoming the setback lies in tapping into the business orientation of Trump himself.

Prime Minister Shinzo Abe’s administration has held up the boost to exports and investment promised by the TPP — which includes Japan, the United States and 10 other Pacific Rim nations but excludes China — as a key driver of Japan’s long-term growth.

While Trump eschewed explicit mention of the pact in his inaugural address Friday, the revamped trade policy section on the White House website said the new administration’s “strategy starts by withdrawing from the Trans-Pacific Partnership.”

Under its current terms, the pact is doomed without ratification by the United States, which accounts for over 60 percent of the signatories’ total GDP.

Japan completed its domestic procedures to ratify the pact hours prior to the inauguration.

Abe has signaled his government will keep appealing to the Trump administration in hope the United States will reconsider its decision to withdraw.

Japan’s first step should be to review the terms of the TPP in an attempt to bring the United States back on board, said Satoshi Osanai, senior economist at the Daiwa Institute of Research.

The TPP is not just an economic deal but a strategic achievement by Japan and the United States to put themselves — instead of China — at the forefront of regional rule-making on trade, and Japan should fight to hold on to those gains, Osanai said.

“If that fails, Japan needs to put energy into negotiating a bilateral pact with the United States, while as a second option pursuing a mega-FTA like the TPP without U.S. participation,” he said. Trump has said he is open to negotiating bilateral free trade agreements.

In a policy speech Friday, Abe listed as priorities both bringing the TPP into force and concluding negotiations on the Regional Comprehensive Economic Partnership (RCEP) — a potential mega-deal in which the largest economy is not the United States but China.

But Japan should exhaust its U.S.-inclusive trade options first before putting its weight behind RCEP or a trilateral deal with China and South Korea, Osanai said.

“These deals are less about immediate gains and more about long-term effects on Japan’s growth, and there is little clarity about the geopolitical risks that (Japanese trade) could be heavily exposed to with China at the center of its strategy,” he said.

Assuming a bilateral deal with the United States is in the cards, Japan needs to mount a charm offensive toward the Trump administration to persuade the president to drop his “outdated” view of the Japan-U.S. trade relationship, Osanai said.

“Trump seems to have some misunderstandings about the way Japan is now, likely based on memories from the asset bubble era of the 1980s, when he would have personally witnessed Japanese firms swooping in to buy up U.S. real estate assets,” Osanai said.

“While Trump has lumped Japan in with China in his speeches, these days the United States’ biggest trade deficit is overwhelmingly with China, while the deficit with Japan has changed little since the mid-1990s,” he said.

The Abe administration may opt to get those facts through to Trump by leveraging both political and corporate networks, including by citing Toyota Motor Corp.’s contributions to jobs in Indiana, where Vice President Mike Pence was governor until early this month.

The effort could call on business heavyweights like SoftBank Group Corp. Chief Executive Officer Masayoshi Son. The head of the telecommunications giant pledged at a meeting with Trump in New York last month to invest $50 billion in the United States.

At the same time, Trump’s presidency is a wake-up call for Japan to accelerate structural reforms and make its agricultural sector competitive enough to survive the import tariff cuts that U.S. negotiators are expected to demand.

In his Friday speech, Abe said his government will submit to the Diet a bill to reform the agriculture sector by stripping privileges from a politically powerful farming lobby.

The Abe administration has repeatedly pledged to pursue such reforms as the “third arrow” of the anti-deflationary “Abenomics” strategy. Analysts have warned that the first two arrows — monetary easing by the Bank of Japan and hefty fiscal expansion — are reaching the limit of their effectiveness.

Although the failure of the TPP would be a political blow to the Abe administration, the prime minister will maintain support from Japan’s business community thanks to other policies on corporate tax and labor regulation reform, said Hideki Matsumura, senior economist at the Japan Research Institute.

For now, Japan needs to stay flexible in order to respond to whatever Trump proposes as a replacement for the TPP and also pay attention to how his position on China evolves, Matsumura said.

“A trade war between the United States and China would be a big negative for Japan — consider the many transactions that come down to exporting Japanese goods to China and those goods then going from China to the United States,” Matsumura said.

Following informal talks in New York shortly after Trump’s election victory in November, Abe and Trump are tipped to meet again in the United States in the coming weeks.