Business | DAVOS SPECIAL 2017

Uncertain future fed by growing populism, protectionism

by Hiroshi Suzuki

Special To The Japan Times

The year 2017 started with a significant level of uncertainties in global politics and economies — certainly true for the world economies over the last decade since the global financial crisis in 2007 — after the surprising outcome of the U.S. presidential election in November.

With only three days left to the inauguration of U.S. President-elect Donald Trump, Japan — along with the rest of the world — is still struggling to see a clear picture of what the world will look like in the near future.

Ironically, one thing certain about the days ahead, many analysts say, is raised uncertainty due to growing populism and protectionism; topics that are expected to be discussed at the 2017 annual meeting of the World Economic Forum, dubbed the Davos meeting after the Swiss resort where the meeting is held.

With the current limited visibility for the future of Japan, the country needs to find the best solutions for emerging challenges both in political and economic issues, and needs to pursue them, even though they may be only for a short-term period, analysts said.

For Japan, the Davos meeting is an opportunity to exercise one of its few options by taking an initiative in reaffirming the benefits of free trade, which is now under threat amid rising protectionism, and promoting the concept of trade on behalf of the global economy, economists said.

“The damage of the downward spiral of protectionism, now with Europe drawn into it, is very significant to the world economy,” Toshiki Takahashi, a senior researcher at the Institute for International Trade and Investment, told The Japan Times. “Japan has to take a leadership role in ending the spiral.”

Protectionism, as a matter of fact, was discussed at the G-7 Ise-Shima Summit, held in May in Mie Prefecture, and the participants reaffirmed their commitment to keep their markets open and fight all forms of protectionism. The threat to free trade, however, was not the primary focus of the discussions at the meeting then, because the aftermath of the leak of the Panama Papers, originally discovered in August 2015, still held the world’s attention. Additionally, Trump was not considered a viable candidate for the U.S. presidency at the time.

The concern over protectionism grew after Trump became the official presidential nominee of the Republican Party in July, and the America-first policy of his campaign intensified it. The Leaders’ Declaration issued at the APEC Economic Leaders’ Meeting held in Lima, in November, stressed the significance of securing free and open trade, and the 21 member countries reaffirmed their commitment and pledge to fight against all forms of protectionism.

For Japan in particular, the biggest and the most tangible near-term impact of Trump executing his presidential power as promised is the possible U.S. withdrawal from discussions on the Trans-Pacific Partnership (TPP), a trade agreement involving 12 pan-Pacific nations, including Japan and the U.S., economists said.

The framework of the economic alliance is now under discussion, or even in the ratification processes, in those nations except for the U.S. There, it is under direct threat after Trump made it official that he plans to pull out of the ongoing talks on his first day in office.

The impact of the U.S. withdrawal from the TPP talks is devastating to Japan in particular, economists said, as the trade pact is the centerpiece of Japan’s future economic growth plan until 2020 under the current Shinzo Abe administration. Without the U.S. presence, the significance of the trade alliance will be lessened, and Japan’s economic recovery plan will be in danger, they said.

One way for Japan to have Trump come around on this issue is to promote bilateral trade pacts with other countries, said Hajime Takata, chief economist at the Mizuho Research Institute. The move makes imported products from countries in trade alliances with Japan more attractive pricewise, and will eventually cost the U.S. more. Trump must realize it through cost-benefit analysis, he said.

“This way gives Trump an excuse to take back his pledge,” Takata said in a phone interview. “Japan can put the TPP talks with the U.S. into a freezer for now, and can warm them up later to resuscitate the TPP.”

Strong support for Trump in the Midwest and parts of the Rust Belt is believed to have delivered him the presidency, and Trump promised to bring more employment back to the region.

“Japan should make him realize that, to achieve his America-first policy, it is more reasonable to take part in the TPP talks, rather than to preserve the particular interests of the Rust Belt,” Takahashi of the Institute for International Trade and Investment said.

On the security front, there are not many options on the table for Japan, as it is unclear for now how U.S.-Sino relations will progress from here, researchers said.

During his presidential campaign, Trump repeatedly said the U.S. couldn’t serve as the policeman of the world. In Japan, this comment stoked the idea that the U.S. would reduce its forces in the Asia-Pacific area, leaving a power vacuum in the region.

This view, however, was dispelled by another surprising move by Trump in early December when he had a phone conversation with Taiwanese President Tsai Ing-wen and disclosed it publicly. This act, coupled with his comments on Twitter questioning China’s One-China policy, made Japan believe the U.S. will take a hard line against China.

In fact, this was underpinned by the speech of Admiral Harry Harris, commander of the U.S. Pacific Command, delivered at the Lowy Institute in Australia on Dec. 14, researchers said. Harris told the audience that it is in the U.S. national interest to continue its engagement in the vital region, and that U.S. security commitments in the region remains strong.

For now, researchers say it is believed that Trump will use his Taiwan call as a bargaining chip to gain an upper hand over China in trade negotiations, but it is unclear what his real intentions are about how to use the chip on the security front between the two countries. So far, China has been taking a trial and error approach to figure out how to respond to Trump, said Hiroko Maeda, Research Fellow of the Center for International and Strategic Studies at the PHP Institute.

“Until now, Trump’s unpredictability serves as a deterrent,” the researcher told The Japan Times. “Much of his administration’s attention on security issues is expected to be focused on Russia and ISIS to start, and it is unclear how much the Asia-Pacific region counts.”

Another element grabbing the world’s attention is recently growing populism, first evidenced in the U.K. with a move to withdraw from the EU in June last year, and then fanned during Trump’s U.S. presidential campaign.

This year, Europe is the center of concern, researchers said, as a series of elections is lined up through the year, starting with the Dutch general election in March, followed by the French presidential election in April, the French legislative election in June, and the German federal election in the fall.

Even so, it is questionable that populism will be a focal point of discussions at the Davos meeting, according to Sayuri Ito, a senior research fellow at the NLI Research Institute, partly because it is a difficult theme to discuss in a political arena. And, it is also because the world this time may not listen to any message produced at the meeting on this issue, she said.

The outcome of the U.S. presidential election, as well as the U.K. decision to pull out of the EU, represents the defeat of the establishment to the challenges made by the general public. Ordinary people believe that the establishment, despite past economic measures taken, has failed to improve their daily lives in reality, Ito said.

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