TCS Daily


Nippon's Bad Idea

By Alan Oxley - August 25, 2006 12:00 AM

One of the surprises about Japan's economic success in the late twentieth century was its ineptness in trade policy. It was the world's number three trading power in the eighties, yet exerted very little influence in the GATT or its successor the WTO. The ineptitude continues. Japan has just proposed negotiation of a Free Trade Area among the members of the East Asian Summit. This is a very bad idea.

The problem facing Japan today is the same as that facing any other nation in the Asian Pacific sphere: how to accommodate to the rise of China. This vexes Japan more than any nation, except perhaps the United States.

China is challenging Japan for the role of economic leader of the Asian growth miracle. Until two years ago, Japan was the leading trading partner of most East Asian economies, the leading foreign investor and the major aid donor.

The rivalry is palpable. Vientiane, the capital of Laos, has a large, shiny, modern airport; a Japanese aid gift. But the biggest civic building in the centre of Vientiane is the Cultural Palace, built by China.

China seasons the competition with discomforting reminders of Japan's 20th century military adventurism. The Chinese leadership seems adept at directing an emerging jingoism in the new China towards Japan when it suits.

What is deeply disconcerting in Tokyo is the casual and effortless way in which China has started to use trade to project regional leadership. Beijing has negotiated a bilateral Free Trade Agreement with Thailand, is negotiating FTAs with Australia and New Zealand, is negotiating a regional FTA with ASEAN, has initiated an FTA between ASEAN, Korea and Japan and has forged the formation of the East Asian Summit.

While what China has done so far is generally bad economics (by selecting favorites for liberalization and avoiding commitments on services and investment, its policies will create distortions on trade and regional markets), its shabby trade policy is enabling it to politic as regional leader.

About half the governments in the region are unhappy with the trade results, but will not rebuff China because of its new economic clout.

There is an opportunity for Japanese leadership here, but its response has been confused and ineffective. It has tried to match China (negotiating FTAs with Singapore and Thailand) but is having trouble delivering. It cannot complete an FTA with Korea and has proposed FTAs with each ASEAN economy as well as with all of ASEAN, but is making little progress.

There are two reasons. Differences among Government agencies in Tokyo over trade policy are irreconcilable. METI (formerly MITI), Japan's Trade Ministry, and the Gaimusho (the Foreign Ministry) have never agreed on who should be responsible for trade policy. As well, the Agriculture Ministry has always been a law unto itself when it comes to international trade.

The second factor is the taint of mercantilism which regularly recurs in Japanese trade policy. It is a key driver in METI. The clear ground to counter China's trade policy is to attack its selectiveness and mercantilism and the negative impact this can have on economic growth in the region. But Japanese policy interests are similarly compromised.

The two Chinese initiatives which particularly unnerved Tokyo were the idea of the ASEAN Plus Three (China, Korea and Japan) FTA and the East Asian Summit. This was clear Chinese leadership.

Tokyo has suddenly realized it cannot counter China's influence by itself. Along with a number of other economies in the region, Japan realizes they need an active US influence in the region is required.

The challenge to Japan to lead is exacerbated by the fact that Washington, preoccupied with the Middle East and the War on Terror, has paid not nearly enough attention to economic developments in East Asia.

What is Japan's response? It has proposed that the members of the East Asian Summit group - that includes ASEAN, China, Korea and Japan, as well as India, Australia and New Zealand, should negotiate an FTA.

It is hard to see how that could be a useful FTA. The ASEANs, who are not fervent liberalizers themselves (with the Philippines and Indonesia dragging the chain) have recently given up trying to negotiate an FTA with India (who is not a serious trade liberalizer) and have been privately very critical of China for wanting to exclude services and investment in negotiations for the China/ASEAN FTA.

Furthermore, the idea itself is an additional and even more pronounced statement of the formal exclusion of the US from economic regional arrangements than either the ASEAN plus three FTA or the East Asian Summit.

Japan's basic interest is to see the integral role of the US in economic growth in East Asia recognized. Proposing yet another FTA which includes everyone else in the region and excludes the US works fundamentally against that interest.

Maybe there is an ultra Machiavellian calculation in Tokyo. They have deliberately promoted an idea which they expect to fail, thus discrediting the entire East Asian Summit process. If that is the idea, then that is also inept. The emerging record in the region, unfortunately, is that governments will negotiate bad FTAs rather than do nothing.

Of course Japan's ineptitude is compounded by lack of focus in Washington itself about how to approach the rapidly changing scene in East Asia. More on that another time.

Alan Oxley is Chairman of the Australian APEC Centre at Monash University and a former Chairman of the GATT, the predecessor of the WTO.

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