As Japan welcomes a new emperor on May 1st, it also welcomes the beginning of a new era in the Japanese calendar – Reiwa, or “beautiful harmony”. One of the key features of this newly formed era is Japan’s vigorous and proactive trade agenda. The latest development in that field is the EU – Japan Economic Partnership Agreement (EJEPA), and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which entered into force on February 1st 2019 and January 14th 2019 respectively.
The agreements are landmark victories not only for Japan, but also the world. As the EPA covers almost 30 percent of world GDP and CPTPP about 13 percent of world GDP, the agreements are a stark contrast in a period otherwise marked by protectionism and increased economic hostilities. In the face of these challenges, the future of Japanese trade policy will play a crucial part in providing economic stability and progress in the land of the rising sun.
As a country historically characterized by trade seclusion and restrictions, Japan’s path to become a vocal champion of free trade is fairly new. One of the reasons is the drastic change in attitude towards trade under the Trump administration. Viewing the current trade system as unfair and trade policy as a mechanism to squeeze concessions out of friends and foes alike, Japan has every reason to be weary about President Trump’s trade-rows.
In 2018, the Trump administration used a safeguard clause, known as Section 232, as a pretext to impose tariffs on steel and aluminum on grounds that it may threaten national security. Although Japan was to a large extent exempted, a near identical case is now being pursued, but this time on automobiles. As Japan runs a bilateral trade surplus in cars and auto parts of about $50 billion with the US, it was a clear target of the tariffs. Holding the automotive industry hostage, President Trump hopes he can strong arm Japan to concede with voluntary export restraints in exchange for exempting them from the tariffs.
Although it is likely Japan will accede to the terms in order to maintain their strategic alliance with the US, it does not come without consequences. To shield itself from future trade disruptions, Japan has speed up the process of finalizing free trade agreements (FTAs) with both developed and emerging economies and seeks to create a strategic trading framework.
This became evident when Japan took the initiative to continue the effort of creating the CPTPP even though President Trump took an executive decision prompting a US exit from the agreement. Together with the EPA, Japan sends a firm message that it is committed to the ruled-based system and to free trade. This presents Japan as a reliable and trustworthy trading partner, which is essential in times where such parters are lacking.
By diversifying its FTA portfolio, Japan also gains access to expanding markets and provides economic stimulus to its own industries. More importantly, fostering greater economic cooperation and integration strengthens Japan’s position at the negotiating table and brings allies to its fold, such as the EU. In this way it can project its influence such that it can more effectively safeguard its own interests in bilateral talks or in the WTO.
This will come to the test as American farmers and ranchers’ complain that the access to Japan’s agricultural sector is distorting due to the preferential treatment given to their European and Pacific competitors via FTAs. As pressure is building up on the Trump administration to remedy what is perceived as unfair competition, Japan finds itself in a new bargaining position where they, unlike for the automotive industry, have more cards on the table.
Another reason for Japan’s new trade agenda is the rise of China. In the last decade, Japan and other Western powers have accused China of forced technology transfers, intellectual property thefts and opaque use of subsidies to state owned enterprises (SOEs). These trading practices create uneven playing fields and provide negligible market access terms, in which Chinese firms profit on the expense of foreign firms.
One of the key objectives of the CPTPP was to combat these issues. Through specific chapters, obligations and through the safeguarding of intellectual property rights, technology and management of SOEs. The provisions in the CPTPP would fill loopholes under the current WTO rulebook that could give rise to these kinds of issues as well as establish precedents for other regional and multilateral negotiations.
CPTPP would also be the stepping-stone to greater economic integration in the region and spur the creation of new FTAs. In theory, this would hinder Chinese hegemony over the trading system in the region, effectively preventing the creation of a conflicting trading framework. As China pushes through with its Belt and Road Initiative, however, future efforts will become even more paramount if the attempted containment policy is to materialize.
In a world where protectionism is becoming the new normal and tit-for-tat escalation is on the rise, Japan carves out a different path. As a reluctant globalist turned free trade champion, it is evident that Japan’s trade policy agenda will be an important tool to provide economic stability, growth and development in the foreseeable future. Although domestic issues such as an ageing population looms in the horizon, a progressive trade agenda today will provide better conditions for facing the challenges of tomorrow. Who knows, the path to beautiful harmony might yet still be achievable.