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HOME NRI JOURNAL Takahide Kiuchi's View – Prospects for the International Trade System, and Japan’s Role

NRI JOURNAL

Innovation magazine that generates hints for the future

Takahide Kiuchi's View – Prospects for the International Trade System, and Japan’s Role

Takahide Kiuchi, Executive Economist, Financial Technology Solution Division

Oct. 12, 2018

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The Japan-U.S. summit meeting held in September 2018 ended in an agreement between the two countries to officially open trade talks covering, among other issues, revisions to tariff rates. The time has finally come when Japan can no longer refuse to conduct bilateral trade negotiations, which the U.S. government has sought for a long time.

Japan-U.S. Trade Negotiations to Focus on Automobiles and Agricultural Products

During the Japan-U.S. trade negotiations, the U.S. government is expected to push hard for Japan to lower its tariff rates on imported beef and agricultural products as well as cut its automobile exports to the U.S. In order to avoid making major cuts to tariffs on farm products, which is a politically sensitive topic, the Japanese government might be forced to make concessions to the U.S. on the automobile front.
The U.S. government could potentially ask that Japan boost its stateside production or voluntarily restrict its export volume in order to reduce the number of U.S.-bound Japanese auto exports. It is estimated that if this were to result in auto exports from Japan to the U.S. getting cut in half, Japan’s GDP would suffer a direct blow, dropping by 0.5%. If the ripple effects are also taken into account, this development would have quite the adverse impact on the Japanese economy.

Fears of a Weakened International Trade System

Professing an “America First” policy, the U.S. government has taken a firm stance toward its trading partners, following this sort of bilateral framework approach. Should the global economy take a temporary turn for the worse, this inward-looking stance could well spread to other nations. And if it becomes more prevalent for major powers with protectionist streaks to push conditions favorable to themselves onto their counterparts during bilateral negotiations, the free trade trend that emerged after the Second World War would likely be fundamentally undone. This could lead to the reemergence of the sort of block economies seen in the prewar period, and it could have tremendous adverse effects on global trade and economic activity.
The global free trade system is now therefore at a critical juncture. It is precisely at a moment like this that the world must reaffirm the importance of the free trade system and its merits from a global economic perspective. And the role to be played by Japan at that time is by no means a small one.

Japan’s Role: To Promote an Expanded TPP

The major role that Japan is expected to play lies in further expanding the scope of the TPP (Trans-Pacific Partnership) Agreement that it has spearheaded, and to use it as a basis for rebuilding the free trade system. The number of countries eager to join the TPP is growing, and includes the U.K., Thailand, Indonesia, and Colombia. The TPP represents a massive regional integration, and if the number of member states grows even further, it could serve as a breakwater to halt a global trend towards economic blocs.
Plus, the higher the number of TPP member states grows, the tougher the competitive environment will become for non-member countries when they export their goods to member states, and this could potentially have the effect of encouraging even more nations to join the ranks of TPP membership. For the U.S., the drawbacks to not joining the TPP will certainly become greater, meaning that in the future the U.S. could well be called upon again to join the TPP and become part of this multinational free trade system.
Although U.S. trade protectionism currently poses a significant threat to the global free trade system, if Japan can demonstrate its capabilities as a coordinator to expand the TPP in the face of such adversity, the philosophy behind the postwar free trade system—now so far in retreat—could perhaps even be restored.
Japan may be compelled to fight a defensive battle in its negotiations with the U.S. at the moment, but my hope is the Japanese government will take a strong stand and pursue various trade negotiations from a medium-to-long-term perspective going forward.

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Nomura Research Institute, Ltd.
Corporate Communications Department
E-mail: kouhou@nri.co.jp

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