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Seminar: Protectionism and Japanese Economy
Professor Urata Discusses Japan’s Trade Strategy in Asia-Pacific

• Professor Shujiro Urata of Waseda University examined Japan’s economy during a seminar held in the Chicago area on February 7, focusing on the growing protectionism in the world and Japan’s trade strategy in the Asia-Pacific region. The seminar was held first in English at the Union League Club in Chicago and then in Japanese at DoubleTree by Hilton Chicago in Arlington Heights.

• Urata was quick to point out the recent growth of protectionism across the world, while many of the countries are looking at signing free trade agreements (“FTAs”) with others. In the background is a steady growth of the world economy and the stalled effort by the World Trade Organization (“WTO”) to promote free trade.

• Though it’s on the path to recovery, the Japanese economy is still struggling with a low growth rate and weak consumer spending, in addition to the chronic problems of the shrinking population and existing economic structure.
• Urata believes the best strategy for the Japanese economy will be to strengthen ties with the fast-growing countries, specifically those in East Asia, through promoting trade with and investment in them. By signing trade agreements with them, Japan can achieve a higher economic growth while contributing to the growth of its trade partners, Urata explained.
• He went on to discuss the problems of protectionism and Japan’s economic strategy in further detail.

Growing Protectionism

• The growing tendency of protectionism in the world is reflected in the events such as the Brexit and the U.S. withdrawal from the Trans-Pacific Partnership (“TPP”). You can also tell whether trade is free or protected by looking at the history of a nation’s tariff rate.
• Since the 1980s, the tariff rates of the developed countries have been constantly in decline, down to the current average rate of 5%, which is fairly low. The developing nations also have cut their tariff rates from 20% to 10% on average.

• While the global trend for a lower tariff indicates steady steps have been taken toward free trade, there are many non-tariff measures implemented by individual countries to stagnate free trade. Such trade barriers – safeguard, anti-dumping, temporary trade barriers, technical barriers to trade and Sanitary and Phytosanitary Measures (“SPS”) to name a few – help countries restrict trade and promote protectionism.

Growing Income Gap

• What’s behind the recent tendency of trade protectionism is the ever-expanding income gap in the U.S. and many other countries. The percentage of the income of the top 1% to the entire nation’s income was 7-8% in the 1970s; it’s as high as 24% today. The gap is not so extreme in Japan, but is growing nonetheless.

• The group of people negatively affected by this growing gap finds the cause of their plight in globalization and the imports flooding the country through free trade. When they come to hold the political power, the country as a whole leans toward protectionism. This is often the explanation, at least in part, of why Donald Trump has been elected president.

• The economists who are studying the income gap agree that technological advancement is a more critical factor. As the technology advances, an environment is created which eliminates unskilled labor, stagnating income of unskilled workers and expanding the income gap further.

• Technical advancement is caused, in part, by globalization, which invariably forces the players of the global market to develop better and more advanced technology than their competitors.
• A tax system that’s favorable to high income earners is also a factor of the growing income gap.

Impact of Protectionism

• After the end of World War II, world trade grew quickly, faster than production of goods. Economic relations among the nations grew, and consequent globalization further pushed their economic growth.
• Between 2014 and 2016, however, the rate of global trade slowed down below the rate of production. Protectionism is considered to be one of the reasons of this slowdown. A long-term slowdown in world trade will pose a problem, Urata said.

• During the 1920s and 1930s, many nations increased their tariffs, which severely impacted world trade. Particularly after the Great Depression in 1929, trade among the nations dramatically shrank as shown in Chart 1.
• The worldwide trade shrinkage led to the slowdown in production, and countries such as Japan and Germany pushed themselves for acquisition of overseas markets by military force. Many believe it was one of the causes of World War II.

• As a lesson from this experience, the General Agreement on Tariffs and Trade (“GATT”) – the predecessor of the WTO – was established to safeguard world trade. Urata stressed the need to fight protectionism, which could have a dangerous impact on the world economy.

Uncertain World Trade: Increasing FTAs

• The system of world trade that has been underwritten by the GATT/WTO – a system that champions free trade and promotes world economic growth – is in trouble today. The multinational trade negotiation initiated by the WTO, the so-called Doha Development Round, has broken down.

• Meanwhile, some nations that share an interest in free trade are getting together to negotiate FTAs among themselves. Japan signed its first FTA with Singapore in 2002; the U.S., having agreed on a FTA with Israel in 1985, has since signed many trade agreements including the NAFTA.

• The latest trend is a “mega-FTA,” such as the TPP, on which multiple countries simultaneously agree. In such agreements, “plurilateral negotiations” are used by participating countries to reach agreement on individual items. A variety of negotiation patterns are developing for freer trade and economic development.

• The number of trade agreements has jumped worldwide since 1990; a total of approximately 650 agreements have been signed so far, of which about 450 are currently active. This indicates the high degree of regional integration as a trade framework. At the same time, the traditional bilateral FTA is morphing into multilateral mega-FTA. TPP11, which is to be signed on March 8, is one of them. The Regional Comprehensive Economic Partnership (“RCEP”) is a proposal for the Association of Southeast Asian Nations (“ASEAN”) member countries plus Japan, China, South Korea, India, Australia and New Zealand as a multilateral free trade framework in the Asia-Pacific region. Another possibility under discussion is the Transatlantic Trade and Investment Partnership (“TTIP”) for the U.S. and European nations.

Japanese Economy and Its Problems

• Although it’s on the path to recovery, the Japanese economy is still struggling, with the growth rate of about 1%. Its export is increasing as the world economy is making a comeback, but investment and consumer spending are not as strong due to the uncertainty of Japan’s economic future with concerns such as the shrinking and aging population.

• Japan’s growing national debts are also a great concern for the country, as well as its relatively closed market being a trade barrier. The small size of direct investment in Japan by foreign investors shows Japan isn’t taking advantage of the merit presented by globalization, in which money, assets, and human resources move freely.

• Urata suggested Japan needs for its economic growth either (1) to expand its labor pool, (2) to increase investment, or (3) to increase productivity. The Japanese population is projected to shrink to less than 100 million before 2050; Japan needs to accept more immigrants in order to expand its labor force.

• To increase the level of investment, direct investment by foreign investors is a must, as the nation’s overall savings are rapidly eroding while the population ages, depleting the excess savings that can be spent in investment. The fast-growing government debts prohibit the government from contributing to the country’s economic activities.

• As for the productivity, Japan sits at the 21st position among the 35 member nations of the Organization for Economic Cooperation and Development (“OECD”). This has to be improved, Urata said, by setting up a competitive environment where the use of the resources can be maximized.
• To improve Japan’s overall productivity, Urata suggested the strong and more competitive industries be expanded and the weak ones be cut back. Such mechanism can be activated by opening up the market and implementing structural reforms on multiple levels, Urata said.

Asia-Pacific Trade Strategy for Japan

• Japan should strengthen its ties with the areas that have high productivity, specifically the Asia-Pacific and East Asian nations.

• The nations in East Asia have achieved a fast economic growth through trade and investment. Specifically, the region has established a broad network of Global Value Chain, which is a production network. Within this network, for instance, a company in the U.S. exports parts to its subsidiary in Mexico, and then the finished product is exported from Mexico to the parent company in the U.S. to be marketed to the consumers there.

• Production networks have been formed in East Asia by multinational conglomerates (primarily Japanese companies) through their “fragmentation” strategy. It’s a strategy to break down one production process into a multiple of processes and assign each process to the country that can handle it most efficiently. Through such production network, technology transfer becomes easier and more frequent, and the company can become highly efficient in purchasing, sales and other activities. This enables the countries in the network to grow. In East Asia, the trade and investment ratio to GDP is going up fast.

• A production network like this was first envisioned after the Plaza Accord of the G5 nations in 1985, which pushed up the value of the Japanese yen. This led Japanese companies to set up production subsidiaries in the Southeast Asian countries, divide the production process into several more processes, and distribute them among the nations in East Asia. Free trade was subsequently promoted, which, in turn, made it easier for multinational firms to implement the fragmentation. This is a significant factor of the East Asian economic growth, Urata said.

• Since 2000, regional integration through FTA is moving ahead in East Asia, specifically due to the role the ASEAN has been playing. In 1993, the ASEAN Free Trade Area, the first major FTA in the East Asian region, came into effect. It was followed by the ASEAN-China Free Trade Area, then the ASEAN-Japan, ASEAN-South Korea, ASEAN-India, and ASEAN-Australia/New Zealand. TPP11 is scheduled to be signed soon, while the RCEP, FTAAP, and Japan-China-South Korea FTA are being negotiated.

• Meanwhile, the establishment of the Free Trade Area of Asia Pacific has been proposed as the goal for the Asia-Pacific regional integration. The U.S. and China are the interested parties and are currently studying its feasibility.

What TPP11 Means

• The TPP is a trade agreement of high-level standards, with a high degree of trade and investment liberalization and unprecedented rules regarding the areas such as e-commerce transaction, state-owned enterprise, government procurement, environment, labor, small businesses, competition, and regulatory balance. With a rule that prohibits favorable treatment of state-owned businesses, TPP offers an environment that’s friendly to private enterprises and conducive to fair competition.

• While some question the effectiveness of the TPP11 without the U.S. participation, Urata considers the merit of adding five outsiders – South Korea, Thailand, Indonesia and the Philippines – to the agreement. That could help boost Japan’s national income, Urata said.

• A success of concluding the TPP11 is a must in order to make it easier to attract more countries. With its high-level standards and comprehensiveness, it can be a model framework for other FTA agreements. It will also be necessary in case the U.S. decides to return to the TPP negotiations (President Trump mentioned the possibility during the World Economic Forum in Davos recently).
• Above all, the TPP11 could be a significant bulwark against the protectionism that seems to be spreading across the world today.

Summary

• FTAs will play an important role in promoting economic growth in Japan and the Asia-Pacific region. Specifically, mega-FTAs such as the TPP and RCEP are viewed to be critical. Japan should be actively involved in promotion of FTAs, as it has successfully been in the TPP11 talks.

• Another strategic point to consider is to utilize the Asia-Pacific Economic Cooperation (“APEC”) in promoting the goal of free trade in the region.

• Finally, Japan will need domestic structural reforms in order to achieve higher productivity. For instance, Japan’s agriculture industry is not necessarily weak in overall competitive power; some of its sectors are more competitive than the others. Structural reforms should involve supporting the competitive sectors to grow further and cutting back the weaker ones, with the help of the government such as income compensations and vocational training for the cut-back sectors.

• This seminar (in English) was hosted by the Japan America Society of Chicago (“JASC”), and its Japanese version was hosted by the Japanese Chamber of Commerce and Industry of Chicago (“JCCC”). The Japanese Consulate-General in Chicago co-hosted both events.


Professor Shujiro Urata of Waseda University