The United States, Japan and Free Trade: Moving in the Same Direction? Julia F. Lowell & Rachel M. Swanger, RAND Shujiro Urata, Waseda University Megumi Naoi, UCSD 7/18/2012 RAND 1
The United States, Japan and Free Trade • Project: – Funded by Japan Foundation Center for Global Partnership as part of the Fukuda Initiative • Participants: – Julia Lowell and Rachel Swanger, RAND – Shujiro Urata, Waseda University – Megumi Naoi, UCSD • Our Goal: – To examine options for U.S.-Japan cooperation on trade and make policy recommendations for both governments – To answer the question: Is there a policy option where the U.S. and Japan are both moving in the same direction? 7/18/2012 RAND 2
We used a standard policy analysis methodology with 4 options and 5 criteria OPTIONS CRITERIA International Short-term Long-run Political Bureaucratic Stature economic economic Feasibility Capacity stimulus growth WTO Doha Round U.S.-Japan FTA Trans-Pacific Partnership (TPP) Independent Trade Policies 7/18/2012 RAND 3
Based on our research we made assessments for each country OPTIONS CRITERIA International Short-term Long-run Political Practicality Stature stimulus growth Acceptability WTO Doha Japan ++ Japan + Japan ++ Japan – Japan – Round US ++ US + US ++ US – US – U.S.-Japan Japan + Japan + Japan ++ Japan – Japan ? FTA US + US + US ++ US – US – Trans-Pacific Japan + Japan + Japan + Japan ? Japan + Partnership US + US + US + US ? US + (TPP) Independent Japan – Japan + Japan – Japan + Japan + Trade Policies US – US + US – US + US + 7/18/2012 RAND 4
What did we recommend? • The Trans-Pacific Partnership (TPP) is the best option for U.S.- Japan cooperation on global trade expansion – U.S. is engaged and committed – But…it may not be politically feasible yet for Japan • Both the relatively smooth US movement forward on TPP and the fierce Japanese resistance are somewhat surprising • Caveat: – Our conclusions are based on research as of November 2011 – TPP negotiations are highly secretive so details are difficult to obtain – The political situations in the U.S. and Japan are in flux so political acceptability and practicality can shift suddenly 7/18/2012 RAND 5
U.S. and Japanese Participation in TPP: Economic Dimensions Julia F. Lowell RAND 7/18/2012 RAND 6
Why Liberalize? Familiar Economic Answers, Worth Repeating • Trade motivates businesses to – develop new products – find new production processes and technologies – advance knowledge • Consumers gain from increased choice and better goods and services at lower prices • Countries as a whole benefit from higher employment and economic growth due to – innovation & higher productivity – export expansion 7/18/2012 RAND 7
Greatest Benefits Come From Multilateral Liberalization, But Doha Round Prospects Are Dim • Preferential liberalization brings fewer economic benefits than multilateral liberalization – Free trade agreements (FTAs) can distort patterns of trade – No guarantee that most efficient producers, best products will win out • But it looks like the World Trade Organization’s (WTO) Doha Round will collapse • So growing number of countries choosing FTA route to expand their trade – Easier to find common ground with smaller set of countries – Can exclude entire countries that are perceived to be too competitive and – Can often leave highly sensitive sectors off the table 7/18/2012 RAND 8
U.S. Policymakers See Expanded Trade As Ticket Out of Economic Doldrums National income accounting identity: GDP = Consumption + Investment + Government + Net Exports • Consumers still haven’t fully opened their wallets • Businesses are reluctant to invest • Government spending is (somewhat) restricted Exports are a potential source of growth – Asia is where the demand is, especially China and India 8/24/2011 RAND 9
Exports Are Still Major Driver of Japanese Economy • Recent consumer spending boom was supported by government subsidies • Private investment has been stagnant • Public sector spending after Tohoku earthquake has boosted economy, but it is constrained by the debt burden Exports are the reliable standby – Again, Asia is where the growth is — and where Japanese firms want to be 7/18/2012 RAND 10
The U.S. Economy Is Still Shaky 8/24/2011 RAND 11
Japan’s Economy Is Also Weak Quarter-to-Quarter Growth in Real GDP a 8 6 4 2 Percent 0 -2 -4 -6 -8 -10 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2009 2010 2011 2008 Source: OECD StatExtract, July 2012 a Seasonally adjusted 7/18/2012 RAND 12
Asia Is Where the Growth Is Annual Real GDP Growth Sources: UNESCAP calculations based on data from the United Nations regional commissions. 8/24/2011 RAND 13
Evolution of U.S. Trade Policy: From the WTO to FTAs • The U.S. has long been one of the staunchest supporters of multilateral trade – Somewhat idealistic in its approach to the GATT – More pragmatic in its approach to the WTO • With FTAs, the U.S. has been opportunistic – Most U.S. FTAs are as much politically as economically motivated – The only trade pact that is economically significant is NAFTA * GATT: General Agreement on Tariffs and Trade; NAFTA: North American Free Trade Agreement 7/18/2012 RAND 14
U.S. Free Trade Agreements Sweden Iceland Russia Canada Finland Norway Estonia Latvia Denmark Lithuania Ireland Poland UK Germany Ukraine Kazakhstan Mongolia France Romania North Korea Uzbekistan USA Italy Spain Portugal Turkmenistan Japan Turkey South Korea China Greece Kashmir Syria Malta Afghanistan Iraq Iran Morocco Nepal Pakistan Algeria Libya Egypt The Bahamas Saudi Mexico Belize Western Sahara India Arabia Cuba Myanmar Laos Dominican Republic Oman Mauritania Mali Niger Chad Jamaica Thailand Yemen Cape Verde Guatemala Senegal Sudan Martinique Vietnam Guam Nicaragua Burkina Philippines Guyana Faso Guinea Nigeria El Salvador Suriname Central Ethiopia Venezuela Sierra Leone African Costa Rica French Guiana Cameroon Honduras Colombia Republic Liberia Somalia Malaysia Panama Uganda Gabon Democratic Kenya Cote d’Ivoire Ecuador Papua Congo Republic of Indonesia Ghana Seychelles the Congo New Tanzania Solomon Islands Guinea Brazil Peru Angola Mozambique Zambia Bolivia Vanuatu Zimbabwe Madagascar Mauritius Namibia Fiji Botswana Reunion Paraguay Australia South Africa Uruguay Argentina Chile New Zealand Pending/Proposed Existing 7/18/2012 RAND 15
Evolution of Japanese Trade Policy: From the WTO to FTAs • Japan has also been a staunch supporter of multilateral trade – Japan long opposed move to preferential arrangements – Japan was the last OECD country to enter into an FTA negotiation (2001) • Japan’s choice of FTAs has been strategic – Japanese FTAs are motivated by economic goals – Want to keep key markets, facilitate production networks, ensure access to raw materials • Japanese FTAs are not as comprehensive as U.S. FTAs * OECD: Organization for Economic Cooperation and Development 7/18/2012 RAND 16
Japanese Free Trade Agreements Sweden Iceland Russia Canada Finland Norway Estonia Latvia Denmark Lithuania Ireland Poland UK Germany Ukraine Kazakhstan Mongolia France Romania North Korea Switzerland Uzbekistan USA Italy Spain Portugal Turkmenistan Japan Turkey South Korea China Greece Kashmir Syria Malta Afghanistan Iraq Iran Morocco Nepal Pakistan Algeria Libya Egypt The Bahamas Saudi Mexico Belize Western Sahara India Arabia Cuba Myanmar Laos Dominican Republic Oman Mauritania Mali Niger Chad Jamaica Thailand Yemen Cape Verde Guatemala Senegal Sudan Martinique Vietnam Guam Nicaragua Burkina Philippines Guyana Faso Guinea Nigeria El Salvador Suriname Central Ethiopia Venezuela Sierra Leone African Costa Rica French Guiana Cameroon Honduras Colombia Republic Liberia Somalia Malaysia Panama Uganda Gabon Democratic Kenya Cote d’Ivoire Ecuador Papua Congo Republic of Indonesia Ghana Seychelles the Congo New Tanzania Solomon Islands Guinea Brazil Peru Angola Mozambique Zambia Bolivia Vanuatu Zimbabwe Madagascar Mauritius Namibia Fiji Botswana Reunion Paraguay Australia South Africa Uruguay Argentina Chile New Zealand Pending/Proposed Existing 7/18/2012 RAND 17
Recent U.S. FTAs Have Been Quite Comprehensive in Their Coverage • Take a “negative list” approach • Have their own dispute resolution mechanisms built-in • Focus on “WTO - plus” issues – Expanding trade in services – Opening up government procurement – Eliminating technical barriers to trade – Protecting intellectual property rights • Cover newer ground such as – Opening up agricultural markets – Harmonizing competition policy – Establishing environmental and labor standards 7/18/2012 RAND 18
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