Sunday, November 13, 2011

Free-trade agreements-Opening up the Pacific

MOST Americans have not heard of the Trans-Pacific Partnership (TPP), a free-trade area of countries dotted around the Pacific Ocean. They will soon. This weekend it has suddenly emerged as the most promising trade liberalisation initiative since the Doha round of world-trade talks stalled in 2008. On November 11th, Japan, the world’s third-largest economy, announced its intention to join America and eight other countries in negotiating what its advocates hope will emerge as the new gold standard for free trade in the world’s most dynamic economic zone. Reuters reports that if the ten-country deal is concluded, it will cover a market 40% bigger than the European Union. The news has electrified the summit of Asia-Pacific Exporting Countries (APEC) convening in Honolulu this weekend. President Barack Obama, who acts as the meeting’s host, hopes the TPP will be the cornerstone of an APEC-wide free-trade area. With the euro zone in shambles, that would further shift the world’s centre of economic gravity from the Atlantic Ocean to the Pacific.

There are plenty of reasons for the mood of celebration. After less than three months in office, Yoshihiko Noda, Japan’s prime minister, has made one of his country’s boldest policy decisions in years, which could unleash a chain reaction of reforms in the moribund national economy. His decision may spur other big economies, such as Canada, to make renewed efforts to join the negotiations, which currently include America, Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam. If America and Japan can pull off such a deal, the TPP could challenge China’s own free-trade push in the region, which revolves around the Association of South-East Asian Nations (ASEAN), South Korea and Japan, rather than the Pacific Rim. By joining with America, Japan also hopes to influence global technological standards in industries like electric cars and clean energy, rather than having those heavily swayed by China.

There are, however, huge hurdles to overcome in the meantime. Mr Noda’s decision was delayed by a day because of the extent of opposition to trade liberalisation within his own Democratic Party of Japan (DPJ), let alone the opposition. His ambitions threaten to be hijacked by Japan’s farm lobby, which is hugely powerful politically, if of puny economic significance. In announcing the deal, he pandered to his own party’s sensitivities, declaring he would “firmly protect Japan’s world-class medical system, traditional Japanese culture and beautiful farm villages.” Such talk is bound to echo ominously in Honolulu; the other nine TPP countries will have some reservations about letting Japan join the talks. Ron Kirk, America’s Trade Representative, while welcoming Japan’s participation, set out America’s concerns that Japan should be prepared to lower hurdles to competition within farming, services and manufacturing, as well as non-tariff barriers. Congressmen from car-producing states such as Michigan have urged the Obama administration to be cautious in welcoming Japan. Ford, the carmaker, described Japan as “the world’s most protectionist country”, which ships 200 cars to America for every one that is sent to Japan. Montana ranchers also complain about sanitary barriers to imports of American beef.

Many of the smaller TPP countries welcome Japan’s participation for the access it would give them to a second giant market, alongside America’s. But they, too, are concerned that Japan will try to water down the treaty’s ambitions, which are for free movement of almost everything except labour. They also worry that bringing Japan on board will slow down negotiations, which, after eight rounds so far, they had hoped would be completed next year. Until Mr Noda has more solid support from his own party, or more broadly from the Japanese public, they will also have legitimate concerns about his ability to negotiate in good faith. Pointedly, he has kept open the possibility that Japan could pull out of the talks if it does not like the direction in which they are headed. This would of course be anathema to the rest of the TPP nations.

According to Meredith Broadbent of the Centre for Strategic and International Studies in Washington, DC, there is a “fortuitous window” for Japan to join the talks now. She does not think Americans are inclined to concentrate on trade issues during the presidential election campaign in 2012. After the election, whoever wins would be able to win support for a deal with the TPP. However trade with Japan has long been a bone of contention in America; some of its top trade negotiators cut their teeth battling for access to Japan’s markets in the 1980s. Japan’s participation in TPP talks could push it up America’s political agenda, unhelpfully.
In Japan, meanwhile, this decision will almost inevitably define Mr Noda’s premiership, even as he struggles with other huge issues, such as tackling the aftermath of the March tsunami and nuclear disaster. It is not clear he has the political strength to pull it off, but at least he should be commended for trying.

On November 11th, before he made his decision, American academics, including Ms Broadbent, spoke at a panel in Tokyo called: “How Japan Can Survive the 21st Century”. In broad strokes, they found that the best grounds for optimism lay in the possibility of its joining the TPP. If Mr Noda can achieve that, it would be a great bit of news for reform in Japan and for the world economy at large. Right now, that’s something everyone badly needs. By Banyan for The Economist

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