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Japan has the potential to keep global free trade alive

by Takashi Imamura

For a long time, the United States has led the world as the standard bearer of free trade. Clearly, the U.S. has abandoned that role since the inauguration of President Donald Trump. Indeed, the Trump administration these days is starting to destroy the global trade order. It has unilaterally imposed new tariffs on steel and aluminum imports even from U.S. allies on “national security” grounds, while waging a trade war with China by imposing 25 percent tariffs on $250 billion worth of Chinese goods.

Fortunately, no other country or region has emerged to threaten the world’s trade order. The European Union, Canada, Mexico and China have taken retaliatory action against the tariffs imposed by the Trump administration — but what they launched were retaliatory tariffs under World Trade Organization rules.

That alone, however, will hardly safeguard the global trade order. The Trump administration is moving to take additional trade actions in response to the retaliatory steps by its trading partners. The U.S. and China have entered into a trade war through exchanges of retaliatory tariffs. Should the U.S. government go on to launch its threatened import curbs on automobiles and vehicle parts, the trade war could spread around the world and push the free trade regime to the brink of collapse.

Can we not expect other country or region to take the place of the U.S. as the new standard bearer of global free trade? China may be a leading candidate in terms of the scale of its international trade. In 2017, China accounted for 11.6 percent of global trade, surpassing the 11.0 percent share of the U.S. to become the world leader. Since the Trump administration has leaned toward protectionist trade policies, China itself has proclaimed that it will be the standard bearer of free trade.

China’s words, however, have not been matched by action. China’s import tariffs on weighted average in 2016 reached 5.2 percent — far above the 2.4 percent imposed by the U.S. China’s liberalization in the services sector remains limited. While it lashes out against the U.S. for the Trump administration’s protectionist policies, China is still far more protectionist — although the nation has been lowering its tariffs.

As for China’s intellectual property violations and its acts of forcing foreign businesses investing in the country to transfer technology to the local firms — the grounds cited by the U.S. for its tariffs on $50 billion worth of Chinese imports — the EU and Japan have agreed to the U.S. claims and were calling for joint action at the WTO. Furthermore, China maintains a large trade surplus. As it is, China’s claim to be the new standard bearer of free trade sounds less than convincing. What the country needs to do first is make a steady effort to continue its market liberalization.

The EU — which occupies a 33.1 percent share in global trade and imposes a 3.2 percent tariff on weighted average — also seems qualified as a candidate to be the next standard bearer of free trade. In addition to recently signing an economic partnership agreement with Japan, following more than five years of negotiations, the EU has agreed with Trump to start talks for a trade pact with the U.S. Its stated commitment to protecting the multinational free trade regime under the WTO raises hopes. However, the EU has also been marred by political confusion in its member states, such as the rise of populist forces, which makes it politically difficult to make a united front for championing free trade.

How about Japan? Given that its share of global trade is a mere 3.9 percent, Japan may not qualify as a standard bearer of free trade. But its recent accomplishments in the efforts to keep up the global free trade regime have important implications.

Tokyo overcame the shock of the U.S. withdrawal from the Trans-Pacific Partnership to take the lead for putting the TPP 11 together with its other members, along with inking the EPA with the EU.

The Japanese government is also taking a leading role in the negotiations for the Regional Comprehensive Economic Partnership (RCEP) involving the 10 members of the Association of Southeast Asian Nations, Japan, China, South Korea, Australia, New Zealand and India. While the path toward a RCEP agreement may not be easy, it helps that most countries in Asia remain in favor of global free trade.

An RCEP accord, if realized, will create a massive economic bloc comparable in size to the EU and accounting for about 30 percent of global trade. Given that a RCEP would occupy half of the world’s total population, its potential will even outweigh that of the EU.

If Japan succeeds in persuading the Trump administration to endorse free trade in the Japan-U.S. bilateral trade dialogue — the “free, fair and reciprocal talks, that started this month — and in the meantime move the RCEP talks forward, the current strong headwinds blowing against the global free trade regime may ease off, possibly setting the stage for turning the tide again in favor of free trade.

So far, Japan has not experienced a rise in the kind of populism and anti-establishment moves or calls for curbs on immigrants and refugees that have been witnessed in the U.S. and EU members. On the contrary, the government has indicated that it is ready to accept more foreign workers in the face of an acute domestic manpower shortage.

Japan is indeed a rare advanced country that can take quick actions to uphold the global free trade regime and actually benefit from it. I believe that if Japan realizes its unique position and keep up the efforts to uphold and expand free trade, it can possibly go down in history as a nation that played a crucial role in preventing the collapse of the global free trade system.

Takashi Imamura is the director of Marubeni Research Institute.