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The U.S. and Japan Choose Stagnation?

4:40 PM, Apr 24, 2014 • By DEREK SCISSORS
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President Obama will leave Japan without a vital trade deal. The Trans-Pacific Partnership (TPP) was supposed to be wrapped last autumn, and the president’s spring trip to Asia—the one he’s currently on—was supposed to be the victory lap.

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Instead, TPP talks now look like they could drag on indefinitely, with no real deadline to push the parties forward. TPP is a microcosm of a larger failure: lack of political courage in Tokyo has long contributed to economic stagnation, and now the same thing is starting to occur in Washington.

Thirty years ago, Japan was the primary focus of American trade policy. Moreover, Japan’s economic size and growth seemed to make it a potential challenger to American leadership. But now, due to self-inflicted wounds, Japan is far less important economically than many Americans may think.

Fast forward, and Japan’s economy has been sputtering for more than two decades. Once praised as world-changing, Japanese policy now consists largely of the national government borrowing money from domestic savers and handing it to bond-holders and the elderly.

Prime Minister Abe was supposed to respond to this lost generation with reform to structurally change the economy. But he and his government have been unwilling to act, continuing to choose the past over the future. The lack of nerve and vision has now hit the TPP.

There is a case to be made to effectively suspend Japan’s participation in the TPP, try to finish the agreement, and then return to talks with Japan. There would be few real objections from other TPP countries, the increasingly protectionist U.S. Congress would be happier, and we might actually get an actual agreement instead of endless talk.

The catch is that the U.S. is far from blameless. President Obama’s statements on TPP seem increasingly detached from reality and his administration has utterly botched its approach to the Congress on trade. With regard to Japan in particular, the U.S. has made legitimate demands to reduce government intervention in agriculture and services but undercut them by insisting on government intervention in autos.

Outside the administration, some interest groups are mimicking Japanese policy-making by remaining stuck in the 1990s. They claim currency manipulation must be a top priority in the TPP, citing Japan as a past offender. But Japan is now running trade deficits. The 2013 U.S.-Japan bilateral trade imbalance was about the same size as in 1999. These are painfully stale issues.

At the heart of broad Japanese economic paralysis, American trade paralysis, and the ensuing bilateral standoff is fear of competition. Giant American automakers and giant Japanese services firms don’t want to compete. Many American manufacturing unions and most Japanese farmers don’t want to compete.

But competition is what drives change. If such large swaths of the country receive political protection from competition, the economy will tend to stagnate.

That’s why political leadership in this matter is so important. It requires leadership to overcome political opposition to competition and thus ensure economic prosperity. Unfortunately, it would appear the U.S. and Japan didn’t see any leadership this week.

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