Japan’s Challenge as an Economic Unifier

February 28, 2018

By: Shihoko Goto, Senior Associate for Northeast Asia, Woodrow Wilson Center

Japan’s strength in modern history has been as a pioneer. As the first Asian country to succeed in joining Western powers in the international arena from the turn of the 20th century, Japan is no stranger in forging new paths. What’s more, the seismic shift in the landscape of the Asia Pacific is increasing expectations for Tokyo to do more to ensure that the region remains stable. Never has so much been expected from Japan as a political and economic power. Unlike great powers of the past, however, the real test of Japan’s strength will be less about asserting its strength over others, and more about its ability to act as a unifier of likeminded nations facing common vulnerabilities.

There is undoubtedly a shake-up in the regional order. Home to the world’s most dynamic region, continued growth in Asia is more critical for global prosperity than ever. Yet there is a fundamental reassessment of policies and institutions that have contributed to unprecedented prosperity in Asia. Since overtaking Japan as the world’s second-largest economic power in 2010, China has become Asia’s single biggest economic, political, and military force. Yet unlike Japan, which did not challenge the international liberal order championed by the United States even at the height of its economic influence, China has outlined an alternative vision to the global order that has prevailed since the end of World War II. The reluctance of the United States to assert itself as a Pacific power under the Trump administration has only enhanced Beijing’s position as a regional hegemon. Washington’s increasing unwillingness to commit to Pax Americana has left a vacuum in political leadership that China has not hesitated to fill.

The cry for Japan to fill at least some of the space created by Washington’s pull back, however, has been growing stronger as China’s regional hegemony becomes ever more evident. The significance and impact of Beijing’s Belt and Road Initiative can be debated, but what is indisputable is that Beijing clearly looks to further China’s own national interest through the plan.

Japan, on the other hand, has championed a vision for the region that would temper some of Beijing’s aspirations which puts China at the center of the region. But Tokyo’s ambition is less about furthering Japan’s own influence, and more about collective leadership that counterbalances China’s outreach strategy. Specifically, Japan’s focus has been to ensure that principles that have allowed Japan to flourish after World War II continue to prevail. Its pioneering role in the 21st century is in fact to champion free markets, the rule of law, and the international liberal order. This role has increased at a time when the Trump administration hesitates to take on that role. Still, Tokyo’s expectation is that US reluctance to promote the values that it had advocated for over the decades is merely temporary. That means Japan would be more of a bridge-builder that aims to preserve those values that have hitherto led to growth and stability until Washington is once again eager to make its claim as a Pacific power.

That bridge-building strategy is particularly clear in Japan’s commitment to the Trans-Pacific Partnership. The Trump administration’s decision to pull out of the TPP only days after taking office seemed to be the death knell of the ambitious trade deal. Yet a year later, not only is the agreement still alive, it is close to being signed by the 11 remaining member countries. What’s more, President Trump himself said several times at the World Economic Forum’s Davos meetings in February that he would reconsider the United States joining the TPP again if Washington were “able to make a substantially better deal,” but also not making clear what exactly would make the agreement better. Leaving aside whether or not the White House would indeed consider rejoining, what is clear is that TPP11 would not have come as far as it has since the US departure without Japanese leadership. Once it became clear that the Trump administration would not back down from its decision to pull out of the multilateral trade deal, but also not stop other countries from continuing to reach an agreement without Washington, Tokyo made a concerted effort to push TPP to the finish line.

TPP11 is largely in line with what had initially been agreed upon in the original TPP pact. But in shepherding the deal to closure, Tokyo has made it clear that it can be a political as much as an economic force to be reckoned with. Japan showed considerable flexibility by allowing 22 provisions from the original deal to be frozen, mostly on intellectual property rights which had been the focus of US negotiations. That ability to quickly adapt to changing circumstances demonstrates a pragmatism by Japan at a time when economic nationalism is on the rise in much of the world.

Granted, US withdrawal from the TPP has had implications far beyond the economic realm. The deal had been a cornerstone for US policy in Asia, making up a key component of the broader US rebalance toward Asia under the Obama administration. By ensuring that TPP11 continues to move forward, Japan is playing a key role in leaving open the possibility of the United States taking on the mantle of a Pacific power once again whilst also making clear that it remains committed to taking a multilateral approach to ensuring that free and fair markets prevail. In its new role as the leader of the TPP11—shorthand for what is now officially called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)—Japan is also tasked in keeping the door open for other potential entrants down the line. South Korea would undoubtedly be at the top of the list. Taiwan should be a strong candidate as well, especially as China is stepping up its campaign to curtail Taipei’s already shaky position in the global arena.

Trade has always been as much a political tool as it is an economic one. So while the Trump administration continues to focus on reducing bilateral trade deficits as the single biggest indicator of success in achieving trade objectives, Tokyo’s focus will be to continue to stress the mutual interests as well as common vulnerabilities countries have that could be addressed in trade deals. Japan’s public outreach strategy of emphasizing the contributions Japanese companies have made –including providing 1.5 million jobs in the United States and investments into the country reaching $424 billion – has highlighted the gains from US-Japan trade relations at the grass-roots level. At a policy level, meanwhile, Tokyo’s focus on honing in on common trade interests shared by industrialized countries will be invaluable moving forward.

Joint efforts by Japan, the United States, and the European Union last December to fight against unfair competition as a result of subsidies, state-owned enterprises, and coerced technology transfer at the WTO demonstrated just how the three economies could actually work together against a common threat. While the joint statement did not point to China by name, it made clear that not only is the Trump administration willing to work within the WTO framework, but that there is also scope for the multilateral approach-averse White House to see the benefits of collective action on the trade front. Japan’s challenge will be to ensure that the three sides move forward in taking concrete steps against China’s market-distorting protectionist practices, particularly in the aluminum and steel markets.

At the same time, Japan has been ahead of the curve by forging trade deals independent of the United States. Last December, Japan successfully concluded negotiating a free trade agreement with the European Union that made clear the two sides’ willingness to take a more global approach at a time when both the United States and the United Kingdom are backing out of international deals. Representing nearly 30 percent of global output, the bilateral pact will not only bolster Japanese demand for European agricultural products including cheese and wine, but it will also create more investment opportunities for European corporations doing business in Japan. For Japan, the agreement will remove the 10 percent tariff on its cars and 3 percent tariff on its car parts sold in Europe. Equally significant, though, is the fact that the European Union and Japan had gone against the tidal wave of anti-globalization and anti-trade that has gripped the Anglo-Saxon sphere.

In Asia, meanwhile, Japan continues to press ahead with the Regional Comprehensive Economic Partnership (RCEP) framework. There remains an ongoing debate about the value of RCEP in the shadows first of TPP and now TPP11, given that the less stringent tariff reductions as well as the less ambitious non-tariff related issues it addresses. Its political significance, however, remains bigger than ever. It can act as a stepping stone for emerging markets to embrace and gradually enhance their commitment to free trade and ultimately, to the rule of law and the principles of the international liberal order.

The political significance of trade agreements cannot and should not be underestimated, especially at a time when Asia is in flux. From a purely economic perspective, though, the bigger game-changer may well be technological shifts. Automation, more than any tariff barrier, has been cited as a major disrupter of industry. According to McKinsey Global Institute, automation could destroy as many as 73 million jobs by 2030 in the United States alone. The group estimates that about one-third of all jobs worldwide could be automated. Granted, it expects about 20 million of those jobs to be shifted into similar occupations, but that would require some training so that people are able to learn the necessary skills to be moved into new roles.

Companies like Uber and Amazon have already made clear that technological change will not only lead to new start-ups, but it will also change the way people travel and purchase goods. Such changes can be beneficial to consumers, but at the same time, they have led to a great deal of anxiety about the future of work and society. One of the biggest policy challenges ahead for every country will be able to balance the gains from technological advancements on the one hand, with ensuring social cohesion on the other. In order to strike that balance, there will be a greater need for policymakers to work together with corporations that lead the way in innovation.

Certainly, Japan’s experiences with balancing corporate gains with social advancement are invaluable. In the 1980s and early 1990s, Japanese corporate practice of providing on-the-job training, and investing in workers so that they can continue to contribute to the company throughout their career was seen as a role model for many other countries. Granted, that practice has been on the decline as Japanese companies rely increasingly on part-time and temporary workers. That, in turn, has led to a sharp divide between those with full-time jobs with solid benefits, and those with less secure employment prospects that have little or no safety net. As the fusion of technologies integrate the world ever more tightly and rapidly, how Japanese companies are able to train their workers, and what public policies the Japanese government is able to pursue to ensure that the income gap remains in check will be closely watched by industrialized nations and emerging markets alike.

Automation, however, is hardly the only technological shift that could be more disruptive than any trade agreement. The automobile sector is particularly vulnerable to major industry changes that may force them to make sweeping changes to their business models. So as Japanese car makers continue to closely monitor the NAFTA negotiations that might force changes in their supply chains, they are also highly attune to the fact that the proliferation of self-driving cars could be an even bigger disrupter to the way they currently operate. A car that can be driverless would be far more computer-dependent than an automobile has ever been, while the materials used could shift from steel to a much lighter metal or even a non-metal such as fiberglass.

Seismic disruptions to what, how, and where consumer goods are manufactured are to be expected, and those changes will only keep coming at an even more rapid pace in the future. That means there will be more opportunities for new businesses to flourish, but the real test of a government will be protect those who lose from the changes as much as ensuring those who will be able to ride high. To date, there has been no swelling of anti-globalization sentiment in Japan, unlike in the United States or Europe. Faith in the benefits of global integration remains strong even as the wealth gap continues to rise. Tokyo has led the way in ensuring that the rule of law in Asia continues to prevail. The challenge moving forward will be whether it can continue to lead the way in ensuring that free and fair markets continues to be embraced at all income levels, and not just by the select few.

The views represented in this paper are those of the author and do not necessarily represent the views of the Chicago Council on Global Affairs. This paper was made possible by the generous support of the Consulate General of Japan in Chicago.

Japan’s Challenge as an Economic Unifier

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