Japan Premier's Balancing Act on Joining Pacific Free Trade Group

BEIJING — Everyone who is willing Japan to find the elixir to revive its listless economy and put off its day of reckoning with the bond markets should mark June on their calendars.

That is when Prime Minister Naoto Kan, if he is still in office — and it is a big if — will decide whether Japan will enter talks about a U.S.-led Asia-Pacific free trade pact, the Trans-Pacific Partnership.

If the unpopular Mr. Kan succeeds — an even bigger if, given the opposition of the powerful farm lobby — the way would be open for Japan to negotiate joining an embryonic free trade grouping that the cabinet office estimates could add 0.5 percent a year to growth by lowering barriers to goods and services.

Proponents say an ambitious pact, by making Japan open its own markets, would also galvanize a society that has watched impotently as China has overtaken it to become the largest economy in Asia — a fact Japan confirmed Monday.

Signing up for the trade pact is vital to make sure big Japanese firms are not at a disadvantage to their South Korean and Chinese rivals, said Aurelia George Mulgan, a professor of Japanese politics with the University of New South Wales at the Australian Defense Force Academy in Canberra.

“They’ve got to be part of the T.P.P.,” Ms. George Mulgan said, referring to the trade pact. “Otherwise they’re going to be on the sidelines of the Asian boom looking in.”

“Asia has become a substitute for their domestic market,” she added. “They need the ingredients for future success, and this is part of the story.”

President Barack Obama is also counting on the trade pact to help him achieve his goal of doubling U.S. exports within five years.

The United States is negotiating with Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam.

The aim is to complete the substance of a deal by the time Mr. Obama is host to the annual Asia-Pacific Economic Cooperation forum in Hawaii in November.

Separately, the Association of Southeast Asian Nations is exploring closer economic integration with six neighbors, including China, with which the 10-member group has signed bilateral free trade agreements.

Ganeshan Wignaraja, with the Asian Development Bank in Manila, believes the needs of the business community to integrate regional production chains linked to China dictate that the trans-Pacific trade pact and the pact among Asean and six others will fuse over time.

“I can’t conceive of an agreement in the Asia-Pacific that doesn’t have China in it,” Mr. Wignaraja said. “My own view is that we will have a series of interlinked agreements with variable coverage of issues and membership and eventually there’ll be some sense of convergence. We might be a decade out from that,” he added.

The immediate problem for Japan is that the existing trans-Pacific pact participants could drive an impossibly hard bargain.

The pact is meant to eliminate all trade barriers among signatories within 10 years, and U.S. businesses have urged Mr. Obama to bar Japan unless it is serious about dismantling barriers to its agriculture, services and manufacturing markets.

Japan’s farmers, average age 66, produce only 1 percent of national output. But since rural voters have disproportionate clout in Japan’s electoral system, Tokyo has protected farmers with tariffs of 778 percent on rice and 252 percent on wheat.

It has also largely fenced off the agricultural sector in market-opening pacts, going so far as to exclude goldfish and cut flowers from its 2002 deal with Singapore.

Exposing agriculture and other coddled sectors to competition would thus be a sea change.

It could break what Mr. Kan has called “a sense of deadlock” that has persisted for nearly 20 years.

“The key is to open up the country, both in terms of thinking and of the economy,” Mr. Kan said last month.

Shujiro Urata, a professor of economics at Waseda University in Tokyo, said removing trade barriers would lead to a more efficient allocation of resources and push companies to innovate.

“Indeed, observing increased competitive pressure from increased imports, the Japanese government may realize the need to undertake policy reforms such as deregulation so that Japanese firms could adopt competitive business strategies under a freer and more open business environment,” he wrote in an article for the East Asia Forum.

Put another way, deciding whether to negotiate an ambitious free trade deal goes to the heart of how Japan sees its future — open and dynamic or shackled to an economic structure that no longer seems fit for purpose.

Japan remains prosperous and has willing buyers for its bonds. Markets ignored a recent downgrade by Standard & Poor’s, the rating agency.

But Japan has a rapidly greying population, and the inexorable arithmetic of debt dynamics means that brisker economic growth is needed to stabilize its gross public debt ratio, which is already more than double its G.D.P.

That is why the increase in activity that the trade pact promises is so important, according to the country’s trade minister, Banri Kaieda.

“If Japan wants to achieve a 3 to 4 percent growth rate, it must connect with Asia and, in the longer term, Africa, Latin America, and other fast-growing economies,” he told the recent World Economic Forum in Davos, Switzerland. “We cannot otherwise provide social security in this aging society.”

But Ms. George Mulgan, the professor of Japanese politics in Canberra, is far from sure that Mr. Kan will be in office long enough, let alone show himself strong enough, to sign up for the trade pact.

“They will try to find a way to join, but at a minimal cost to vested interests. It depends on how tough other countries are with them,” she said.

Feb 14^th, 2011

Source: The New York Times