Direction? Julia F. Lowell & Rachel M. Swanger, RAND Shujiro - - PowerPoint PPT Presentation

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 Stature Short-term economic stimulus Long-run economic growth Political Feasibility Bureaucratic Capacity WTO Doha Round U.S.-Japan FTA Trans-Pacific Partnership (TPP) Independent Trade Policies

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Based on our research we made assessments for each country

OPTIONS CRITERIA

International Stature Short-term stimulus Long-run growth Political Acceptability Practicality WTO Doha Round

Japan ++ US ++ Japan + US + Japan ++ US ++ Japan – US – Japan – US –

U.S.-Japan FTA

Japan + US + Japan + US + Japan ++ US ++ Japan – US – Japan ? US –

Trans-Pacific Partnership (TPP)

Japan + US + Japan + US + Japan + US + Japan ? US ? Japan + US +

Independent Trade Policies

Japan – US – Japan + US + Japan – US – Japan + US + Japan + 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 7 RAND

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 8 RAND

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

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The U.S. Economy Is Still Shaky

8/24/2011 RAND 11

Japan’s Economy Is Also Weak

7/18/2012 RAND 12

Source: OECD StatExtract, July 2012

a Seasonally adjusted

• 10
• 8
• 6
• 4
• 2

2 4 6 8 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1

Percent

Quarter-to-Quarter Growth in Real GDPa

2008 2009 2010 2011

Asia Is Where the Growth Is

8/24/2011 RAND 13 Sources: UNESCAP calculations based on data from the United Nations regional commissions.

Annual Real GDP Growth

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

7/18/2012 RAND 14

* GATT: General Agreement on Tariffs and Trade; NAFTA: North American Free Trade Agreement

Canada USA Mexico Guatemala Belize El Salvador Honduras Nicaragua Panama Costa Rica Cuba The Bahamas Brazil Bolivia Peru Ecuador Colombia Venezuela Guyana Suriname French Guiana Paraguay Iceland Ireland UK Portugal France Spain Norway Sweden Finland Malta Germany Poland Lithuania Latvia Estonia Italy Romania Ukraine Denmark Kazakhstan Mongolia China Russia Kashmir Uzbekistan Turkmenistan India Turkey Syria Saudi Arabia Iran Iraq Egypt Sudan Libya Algeria Morocco Western Sahara Ethiopia Mali Niger Chad Greece Somalia Yemen Oman Pakistan Afghanistan Uganda Kenya

Nigeria Mauritania Congo Gabon

Senegal Cameroon Angola Tanzania

Madagascar Australia Indonesia Malaysia Philippines Thailand Vietnam Myanmar Laos

Papua New Guinea

New Zealand

Guinea

Argentina Chile Uruguay North Korea South Korea Japan Nepal

U.S. Free Trade Agreements

Existing Pending/Proposed

7/18/2012 15 RAND

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

7/18/2012 RAND 16

* OECD: Organization for Economic Cooperation and Development

Canada USA Mexico Guatemala Belize El Salvador Honduras Nicaragua Panama Costa Rica Cuba The Bahamas Brazil Bolivia Peru Ecuador Colombia Venezuela Guyana Suriname French Guiana Paraguay Iceland Ireland UK Portugal France Spain Norway Sweden Finland Malta Germany Poland Lithuania Latvia Estonia Italy Romania Ukraine Denmark Kazakhstan Mongolia China Russia Kashmir Uzbekistan Turkmenistan India Turkey Syria Saudi Arabia Iran Iraq Egypt Sudan Libya Algeria Morocco Western Sahara Ethiopia Mali Niger Chad Greece Somalia Yemen Oman Pakistan Afghanistan Uganda Kenya

Nigeria Mauritania Congo Gabon

Senegal Cameroon Angola Tanzania

Madagascar Australia Indonesia Malaysia Philippines Thailand Vietnam Myanmar Laos

Papua New Guinea

New Zealand

Guinea

Argentina Chile Uruguay North Korea South Korea Japan Nepal

Existing Pending/Proposed

Switzerland

Japanese Free Trade Agreements

7/18/2012 17 RAND

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

Recent Japanese FTAs Still Have Significant Gaps in Coverage

• Usually take a “positive list” approach
• Emphasize cooperation and technical assistance
• Focus on “WTO-plus” issues

– Expanding trade in services – Opening up government procurement – Eliminating technical barriers to trade – Protecting intellectual property rights

• Cover very few issues outside the WTO purview

– Limited coverage of competition policy – Do not require environmental and labor standards – NEVER COVER AGRICULTURE

7/18/2012 RAND 19

TPP Represents a New Direction for Both Countries

• Highly confidential negotiating process
• All products and services on the table—

including agriculture

• Rapid liberalisation schedules (?)
• In U.S., many opportunities for direct

stakeholder engagement but little opportunity for public discussion

• In U.S., very little oversight by Congress

7/18/2012 RAND 20

U.S. and Japanese Participation in TPP: Political Dimensions

Rachel M. Swanger, RAND

7/18/2012 RAND 21

Although Economic Analysis Plays a Role, Trade Agreements Are Political Decisions

• Trade is beneficial overall, but costs are

concrete and localized while gains tend to be diffuse and hard to quantify

• The political sphere is where these issues are

debated and decided

7/18/2012 RAND 22

Why is the U.S. moving forward on TPP?

• In the aftermath of the financial crisis of 2008, the economy

constricts and unemployment soars

• Even with modest signs of recovery in 2010-11 employment is not

picking up

• Republican Party has control of the House of Representatives

(2010) aided in large part by the “Tea Party” conservatives whose focus is on reining in excess government spending

• Democrats retain control of the Senate by a very slim majority
• Deficit reduction becomes the battle cry and main focus
• Obama Administration is under attack and must find a way to

stimulate the economy and create jobs at a very low cost…..

• One answer is trade expansion!

7/18/2012 RAND 23

Represented Obama Administration’s Decision that Exports = More US Jobs

• First time US has a “government-wide export promotion

strategy with focused attention from the President and his Cabinet”

– National Export Initiative (NEI) – Free Trade Agreements with Colombia, Panama, and South Korea – Trans-Pacific Partnership (TPP)

• Provides a positive role for US in Asia
• Little known but broadly supported (at first)

– AFL-CIO called for a comprehensive review of the US trade agreement template and commended the Obama Administration’s pledge to do so – US Chamber of Commerce termed it “an important step in expanding trade with the Asia-Pacific” – Boeing “trade liberalization is our lifeblood”

• But as this effort gains momentum and takes shape, opposition is developing

– Lori Wallach of Public Citizen has spearheaded the critique—along with the Occupy movement 7/18/2012 RAND 24

As the TPP gains visibility opponents are emerging

• Some opponents are industry

groups opposed to specific countries and specific rules

– New Balance CEO opposes inclusion

• f Vietnam and concessions on

footware – American Automotive Policy Council

• pposes inclusion of Japan without

significant concessions related to autos

• Others oppose it on the grounds

that it is mainly about establishing new corporate rights and not about trade

– Lori Wallach, Public Citizen

7/18/2012 RAND 25

Still the Contrast With Japan is Startling

• Motivations for Japanese

participation similar

– Tool to dislodge barriers to change and overcome stagnation – Strengthen Japan’s role in Asia

• But debate is very public

– TV programs, newspaper features, books, pamphlets, etc.

• And anti-TPP forces are well-
• rganized and well-funded
• Public, media elites, scholars are

willing to believe that the U.S. is pressuring Japan

• Consumption tax, nuclear energy,

may absorb all political capital

7/18/2012 RAND 26

Polling Evidence Doesn’t Explain the Level of Emotion

Graph and content by Dr. Megumi Naoi, UCSD

Most Sectors will Benefit or be Unaffected

Graph and content by Dr. Megumi Naoi, UCSD

Why are Japanese politicians reluctant to support TPP? TPP supporters don’t lobby and public opposes it.

Graph and content by Dr. Megumi Naoi, UCSD

Moreover, Japanese consumers are willing to support the high price of domestic agricultural products

The Cabinet Office’s Nationally-Representative Survey on Food Imports, 1987-2008 compiled by Dr. Megumi Naoi, UCSD

Whither U.S.-Japan Cooperation on TPP?

• Political situations in both

countries do not bode well for progress this year

• Japan will likely not join

without U.S. support

• Romney and 10 business

groups have gone on record

• pposing Japan’s

participation without certain concessions

• Obama Administration has

pushed for Mexico and Canada to join (instead?)

7/18/2012 RAND 31

Questions?

7/18/2012 RAND 32