Obama, Abe and a high-stakes trade deal

 
A meeting between Japanese Prime Minister Shinzo Abe and US President Obama at the White House in February Japanese Prime Minister Shinzo Abe and US President Obama are looking to iron out their differences over the ambitious Trans-Pacific Partnership trade deal

Trade deals don't usually take centre stage at summits among world leaders. But the Trans-Pacific Partnership (TPP) is at the forefront of US President Barack Obama's first state visit to Japan.

Both leaders hope it will serve their own purposes: it is how President Obama can make his so-called "Asia Pivot" more concrete than just an aspiration, and how Japanese Prime Minister Shinzo Abe can put some substance to the structural reforms within his ambitious plan dubbed "Abenomics".

Firstly, the US and Japan are the main negotiators of the TPP, which includes 10 other nations from around the Pacific Rim: Brunei, Malaysia, Vietnam, Singapore, Australia, New Zealand, Canada, Mexico, Chile and Peru.

These countries account for nearly 60% of global GDP and over a quarter of world trade.

In other words, it would create the biggest free trade area in the world if successfully concluded, and it's estimated it would add over $200bn (£119bn) per year to world GDP by 2025.

The US calculates that the TPP would add $305bn in exports per year globally, with nearly half accounted for by an increase in US exports by an additional $123.5bn.

How will US trade deal affect Japan's economy? Linda Yueh reports

The Pivot

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The TPP is estimated to raise Japanese per capita GDP by about 1.5%, which would nearly double the slow pace of expansion the country has experienced in the past two decades”

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So, if this were solely an economic matter, excluding China - the biggest market in Asia - wouldn't be sensible. Yet, the TPP does just that.

As the US continues to be involved in crises in the Middle East and Ukraine - including negotiating yet another free trade agreement with the EU - there is little to show thus far for the Asia Pivot that had been described as the centrepiece for Obama's second term.

President Obama's Asia Pivot isn't supposed to be solely about geo-politics, but also a deeper rebalancing towards fast-growing Asia to boost America's economy. Securing preferential access to Asia's markets benefits US companies over Chinese firms that won't be part of the market-opening measures of the TPP.

This way, excluding China doesn't look just like politics or even containment, but rather that the world's second largest economy doesn't yet have the market-based economy, such as a flexible exchange rate or open capital accounts, to be part of the new free trade area.

The end result of excluding China is the same, but the framing looks more appealing.

The second opening of Japan
The entrance gate to the city of Yokohama, guarded by European troops at the time of the Meiji restoration, 1868. The three Japanese men walking through the gate are wearing Western style clothes. Japan first opened to the West in the 1800s, which ushered in a period of growth

For Japan, the stakes are even higher.

The long-awaited "third arrow" of Abenomics - or the structural reforms to increase competitiveness that ultimately are what raises growth - has been somewhat lacking.

In an op-ed piece, headlined "The Second Opening of Japan", Prime Minister Abe says that the Pacific Rim economies encompassed by the TPP is a growth centre which "will continue to propel Japan's economy for the foreseeable future".

The TPP is estimated to raise Japanese per capita GDP by about 1.5%, which would nearly double the slow pace of expansion the country has experienced in the past two decades.

It would also raise per capita growth to over 2%, essentially lifting the country out of its long stagnation.

The two giants and the farmers
Around 3,000 demonstrators, mostly farmers, take to the streets of Tokyo on December 3, 2013 Japan has faced significant opposition from farmers over its plans to join the TPP

There are certainly high expectations, but it doesn't mean that the process will be smooth sailing or that the TPP will be concluded any time soon.

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The TPP could help to provide political cover for Mr Abe's intended economic reforms”

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Of the nations negotiating the TPP, the only one that doesn't already have a free trade agreement (FTA) with the US is Japan. So, the two nations - in addition to being the main players — are the key and also the main obstacles.

One academic has described the TPP negotiations as being between "two giants and the rest".

The reason why there hasn't been an FTA between the world's biggest and third largest economies - or even when Japan was the second largest - is because of protectionism of key sectors.

In Japan, five "sacred" agricultural products of rice, beef/pork, dairy, wheat, and sugar are protected. For example, Japan has a 778% tariff on imported rice.

Conversely, the US protects its car market - and the Japanese are demanding more access.

Reform agenda

These are perennial issues, but the TPP could help to provide political cover for Mr Abe's intended economic reforms.

He is trying to abolish a policy which has been in place since 1971, that keeps rice prices high and has cost the economy an estimated 8 trillion yen ($78bn). The TPP could even force Japan to cut its tariff on imported rice.

Of course, agriculture in the US isn't without its share of problems. The Americans are also looking to reform their own farm bill which is set to cost $1 trillion over a decade.

The top 10% of the largest farm businesses receive 75% of the government subsidies, while average farm household incomes exceed the average by a whopping 25%.

It's not hard to see why agricultural subsidies are often called subsidies for the wealthy.

Tough sell and positioning

So far, trade negotiations have come to an impasse, raising the possibility that there won't be a big announcement during the Obama-Abe summit.

But it is in the economic interests of both the Americans and the Japanese to get an agreement done.

By premising so much of the Asia Pivot and Abenomics on the TPP, the stakes are certainly high.

As the politics are also overlaid with geo-politics vis-a-vis China, it will not only be a tough sell but a tricky one to position.

 
Linda Yueh Article written by Linda Yueh Linda Yueh Chief business correspondent

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  • rate this
    0

    Comment number 19.

    Linda,

    Economic disaster is looming. Why? Because QE & Abeonics flouts several hundreds, if not thousands of years of practical economics.

    Free/nugatorilly price money ALWAYS causes a crash. - one of the main precedents to 2008 and the fools are daydreaming themselves into the next one post haste by doing exactly the same things that led to 2008, 1929 & 1870s.

    Stop ignoring the real problem!

  • rate this
    0

    Comment number 18.

    Leaving China out is Stuuuupid geopolitically what with the Ukraine/Russia issue arising

  • rate this
    0

    Comment number 17.

    Considering the very different economic characteristics of the TPP countries you can't help thinking that this is less of a real trade bloc and more of a negotiating card with China.

  • rate this
    0

    Comment number 16.

    Leaving China out is Stuuuupid geopolitically whatwith the Ukraine/Russia issue arising

  • rate this
    0

    Comment number 15.

    Free trade- sounds nice does it not? yet even when I read the article and view the video I am not struck by the 778% tax on foreign rice. I am struck by what would happen to the small family farms after the flood of big factory farms. All the farming dies - except for 1 or 2 that will display how it used to be done....

  • rate this
    0

    Comment number 14.

    "We're having some problems displaying the comments at the moment. Sorry. We're doing our best to fix it."

  • rate this
    0

    Comment number 13.

    Most of this deal is to make American farmers happy, Japanese agriculture produces fantastic quality but at a massive cost, You only have to drive into the Japanese countryside to see villages and towns with almost no young people.
    Japan and America could work well together as there is a great deal of Japanese technology which the Japanese does not seem able to market abroad for some reason.

  • rate this
    0

    Comment number 12.

    The US Fed is bankrupt - spent $18T which it does not have - the US Fed Reserve Bank is a private Bank to the Wall ST Cartel - also bankrupt from printing money like there is no tomorrow - America, per se, is not bankrupt it is extremely wealthy - perhaps this is an opportune time to get rid of all Fed Gov - they appear to be nothing but trouble - start wars, and cost our families their future

  • rate this
    0

    Comment number 11.

    Obama has tried to con America with all his snakeoil lies - none of which have worked - the Feds are in the hole $18T for TBTF - ObamaCare is next - say $1.5T - on top of that we have more folks on welfare, plus a declining job base - thats in addition to his marriage & drug laws that
    even Africa does not support - so what can Japan expect from a loser
    like Obama - nothing - just more lies

  • rate this
    0

    Comment number 10.

    Knowing that they cannot contain China, the US do what they could by bullying the other countries and this more about containing Japan to favour the US industries back home than anything else.

  • rate this
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    Comment number 9.

    "The US calculates that the TPP would add $305bn in exports per year globally, with nearly half accounted for by an increase in US exports by an additional $123.5bn"
    ---
    mmm...I think the US imagined an export boom when China opened up a few years back. There was...in exports from China to the US. I can see lot of lost American jobs and some big profits for US mega corp shareholders.

  • rate this
    -1

    Comment number 8.

    To Lone Gunman,
    We have strong relationships with people who murdered the native tribes of North America and those who murdered millions of people in Europe. We should quit our enmities. Forgiveness is a better future.
    The reason why Abe and others visit those shrines is because it is a national memorial to all their lost soldiers: many of them were willing murderers too. As war makes us all.

  • rate this
    +3

    Comment number 7.

    It would help if Obama could stop the Japanese politicians visiting a shrine that commemorates vile war criminals responsible for hundreds of thousands of deaths.

    How can you have a partnership with such people?

  • rate this
    +2

    Comment number 6.

    An interesting article about what in the long term may be the most important topic happening at the moment. I certainly notice that Obama is doing the TPP while leaving Ukraine to Biden, presumably showing where he thinks the USA's long term interests lie. It's unfortunate that such a significant topic attracts so few comments, keep going Linda, some of us are listening.

  • Comment number 5.

    All this user's posts have been removed.Why?

  • rate this
    +1

    Comment number 4.

    Linked from the post 3 link - China's Liquidity Crunch Slams Importers Who Are Defaulting, Reneging On Deals - is interesting reality.

    China is by design from the top down, rationalising its entire industry base and where each 100 businesses exist today, 80 will remain by 2017.They will be lean, fit and mean modernised endeavours.

    In short, there is mayhem on the way to markets. It has begun.

  • rate this
    +1

    Comment number 3.

    Reform of vested interests and accepted ways is never easy and Japan has an energy problem of significance, besides Fukushima which hasn't gone boom yet.

    http://www.zerohedge.com/news/2014-04-21/how-chinas-commodity-financing-bubble-becomes-globally-contagious


    There is a game changer in the wings, China's reforms will not go well, as history shows. The linked article does not miss the mark.

  • rate this
    +1

    Comment number 2.

    Will Congress - dominated by Republicans who want everything Obama tries to achieve to fail - allow any successful trade deal?

    Will Japanese farmers with a grip on politics allow cheaper US Beef and grain to enter Japan?

    Well, will they?

  • rate this
    +1

    Comment number 1.

    The listed problems look very resolvable and deal looks attractive

    The problem, are the issues that are not visible and that benefits calculations (growth rate of GDP and trade) seems to be done by biased parties.

    NAFTA created both, problems and benefits, but it needs reforms as well. At the same time, NAFTA demonstrated viability of the local trade agreement with mixed economies.

 

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