The administration of U.S. President Donald Trump has made it clear that it has no intention of revisiting its decision to withdraw from the Trans-Pacific Partnership free trade deal.
This comes as a heavy blow for the government of Prime Minister Shinzo Abe, which has worked harder than any previous administration to strengthen Japan’s alliance with the United States. In addition, the “third arrow” of structural reforms — including trade liberalization — is indispensable to complete his Abenomics policies.
Postwar Japan’s productivity enhancement has been the result of an interplay by which the government has exploited foreign pressure (gaiatsu) for trade liberalization to generate domestic pressure (naiatsu) for structural reform. Since the late 1990s, however, Japan, as it struggled through two “lost decades” and protracted deflation, has failed to achieve genuine trade liberalization and fallen behind both the West and many emerging economies as a result.
Moreover, both overseas and domestic circumstances surrounding Japan have undergone radical changes since the turn of the century: Chinese firms have made rapid advances in the global market, and China has begun to establish international organizations such as the Asian Infrastructure Investment Bank (AIIB) that run parallel to the post-World War II Bretton Woods system; given Japan’s declining population, the survival of Japanese companies hinges on their ability to seize the demand in overseas markets; and the U.S. has begun to retreat from the rest of the world. In order to deepen American involvement with Asia, the region’s economic ties with the U.S. must be solidified significantly. We have entered a new era in which trade strategy once again comprises the cornerstone of national strategy.
There are also growing hopes that Japan will display greater leadership in defending the global system of free trade. Professor John Ikenberry of Princeton University recently wrote in Foreign Affairs: “Abe and Merkel, the new leaders of the free world, will have to sustain liberal internationalism for as long as Trump is in office. Abe should keep promoting liberal trade agreements, modeled on the TPP, and Merkel … is uniquely positioned to speak as the moral voice of the liberal democratic world.”
Of course, no single country can simply take over the leadership role carried by the U.S. up until now. At this year’s World Economic Forum in Davos, Switzerland, Chinese President Xi Jinping played the part as if China was the standard-bearer for globalization and free trade. However, the Chinese system is increasingly inclining toward state capitalism and mercantilism; it involves a lack of reciprocity in foreign direct investment, a monopolistic industrial policy and semi-coercive technology transfer policies.
Changing global leadership is not as simple as changing the costume of a dress-up doll. As long as China keeps its current system and approach, it will not be the one to supplant the U.S. as a global leader. A “post-American world” is more likely to be characterized by chaos.
However, the European Union and Japan together can fill the void left by the U.S. The Japan-EU Economic Partnership Agreement (JEEPA), over which the two sides recently reached a broad agreement, merits attention in this regard. Japan and Europe shared a strategic intent over guiding the world’s rule-making and maintaining the international order as they agreed to open up the world’s largest free trade space.
From the European perspective, JEEPA isolates the Trump administration and highlights the folly of protectionism, while also putting Britain on notice that it is the EU that leads free trade, which sends a message in attempting to bring them around to the stupidity of Brexit. For Japan, JEEPA offers a stronger negotiating position in future bilateral talks with the U.S., as well as free trade talks such as the Regional Comprehensive Economic Partnership (RCEP) in Asia and those with China and South Korea. Japan and the EU have agreed on standardization for auto safety technology. Such moves are likely to put pressure on the U.S.
“Beyond EPA, beyond trade” — European and Japanese trade and commerce officials are employing this type of slogan as they seek to cooperate in new areas — devising rules in e-commerce and protection of personal information — and aim to construct a more strategic relationship, for example by coordinating relations with the U.S. and China.
Ever since the U.S. withdrew from the TPP, Japan’s trade diplomacy has begun to take on a new character and dynamic. Domestically, the Abe administration has managed to shut down the political influence of the agricultural lobby, which has long been the Achilles heel of Japan’s trade strategy. This strengthens Japan’s hand in trade negotiations. Not only that, but the Japanese government has finally embarked on trade negotiations without relying on external pressure. Now that the U.S. has barricaded itself behind the protectionist barrier of “America First,” Japan can no longer afford to wait for the Americans’ next move. The world will not stop simply because the U.S. no longer engages with it. Japan must pursue its own line of proactive diplomacy.
Even without American pressures or support, a historic opportunity has emerged for Japan to promote rule-making and trade liberalization with like-minded neighbors in the Asia-Pacific region under the TPP framework. The accomplishment of that would gain Japan the trust of its Asian neighbors, and further secure its image as a reliable partner in the eyes of the U.S. and the rest of the world. By maintaining the TPP 11 and salvaging the partnership, Japan can continue to be a global player.
Yoichi Funabashi is chairman of the Asia Pacific Initiative and former editor-in-chief of the Asahi Shimbun. This is a translation of his column in the monthly Bungei Shunju.