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US-China Power Shift and Japanese Foreign Policy

Overview

Leader Takashi Terada (Doshisha University)
Researcher Koji Murata, Wataru Yamaguchi, Ryosuke Hanada and Rumi Aoyama
Term April 2014 - March 2015
Research Outline

China’s behaviors and influences in the field of international politics and economy after the 2008 Lehman Shock can be viewed as not merely the rise of an emerging power but of a true superpower. China’s political and military influences have been enhanced by the decades-long two-digit high economic growth with a population of 1.3 billion, allowing China to become a country whose actions can have an enormous impact on both global political and economic affairs.
The project aims to examine the causal factors behind Japanese new approaches to the rise of China, with a focus on the effect of the changes in the regional structure caused by China’s superpower behavior. This analysis helps trace what impacts China’s policy actions as the regional structural change has on Japan and clarify what Japan has wanted to achieve through pushing for new foreign policy approaches such as its participation in the TPP and the proposal of a proactive pacifism. Characterisation of regional structure is methodologically used as a springboard to considering how Japan, as the agent in this case, interpreted these regional features, and how they were related to the actual impetus behind Japan’s new foreign policy approaches. As neoclassical realists claim, this project also includes domestic level analysis, including the individual policy actions and evolution of policy ideas.

Report

Leader Takashi Terada (Doshisha University)
Researcher Koji Murata, Wataru Yamaguchi, Ryosuke Hanada and Rumi Aoyama
Term April 2014 - March 2015
Achievements Outline

One panel was organized in each USJI Week in 2014-15, and both were well received in the Washington DC community with more than 70 audiences. The first panel, held in September 2014, aimed to elucidate the dynamism surrounding the regional integration politics spurred by three major powers, the US, China and Japan. The discussion was reported by China Daily with a photo of the speakers’ presentations. The second panel was held in February 2015 at the Woodrow Wilson Center, one of the major think-tanks in Washington DC. The panel was fortunate to be joined by business and government representatives, together with academics, and it provided the updated information and practical analysis over the TPP negotiations and its prospects.
With regard to the publication, the principal investigator wrote "Australia and Regional Integration Politics among Japan, the United States, and China" for the USJI Voice No.1. The paper examines the role of Australia, which has participated in both TPP and RCEP negotiations like Japan, while concluding bilateral FTAs with China, Korea and Japan. This may be a springboard for the better understanding on the development of regional integration since Australia is the only nation in the world that has signed FTAs with those largest economies and participated in the negotiations for major regional integration frameworks. The impact of the paper can be assessed by the fact that the revised version was subsequently published by East Asia Forum, a key policy blog widely read by policy intellectuals in the region, and the Japanese version by Economisuto, while the former was quoted by Jim Chalmers, a member of Australian Parliament in the ratification process of Japan-Australia FTA.

Activity Contents

Events
1) 2014 USJI Week Panel “Dynamism of Domestic Politics and Regional Integration Policy among China, Japan and the US”, Embassy Row Hotel, Washington DC, 5 Sep. 2014
2) 2015 USJI Week Panel “The U.S. Rebalance: TPP’s Political and Economic Roles in the Asia-Pacific”, Wilson Center, 27 Feb. 2015.
Publications (only by principal investigator)
1) “Assessing Abe’s Economic Agenda: Abenomics, TPP, and Domestic Politics”, Asan Forum, Vol. 3, No.1, Asan Institute for Policy Studies.
2) “Japan and Regional Integration Dominoes: Golden Opportunity or Another Political Failure?” in Rozman, Gilbert (ed.) Asia's Slippery Slope, Korean Economic Institute, pp.171-184
3) “Australia, Japan take a 'domino approach' to regional integration" East Asia Forum, 30 July.
4) "Australia and Regional Integration Politics among Japan, the United States, and China", USJI Voice, No.1 pp. 1-5
5) "China's Global Financial Ambition: Linking Mini-lateral Frameworks" in Robles. T. & K. Pitakdumrongkit (eds.) Policy Report: Governance of East Asian Regional Economic Architectures, S. Rajaratnam School of International Studies, pp.15-16.

Policy Paper

Leader Takashi Terada (Doshisha University)
Researcher Koji Murata, Wataru Yamaguchi, Ryosuke Hanada and Rumi Aoyama
Term April 2014 - March 2015
Title TPP and US-Japan Relations

The Abe government regards the Trans-Pacific Partnership (TPP) agreement as an important instrument to capture the economic growth of the Asia-Pacific region in order to put Japan’s economy on track. As a 21st century type of economic cooperation, encompassing not only traditional market liberalization, but also various economic rules on investment and services, intellectual property rights, labor, the environment, and investor-and-state dispute settlement, TPP is regarded as a keystone for Abenomics and its trade strategy, which is urgently needed for the third arrow of Abenomics, which many experts have criticized as inactive.

 

TPP and US-Japan possible deal

The mutual concessions in negotiating TPP market access between Japan and the United States, the two largest economies in TPP, have become vital to its conclusion. Japan is reported to be ready to make some concessions on the issues of pork and beef tariffs in response to US demands. What Japan, however, wants to gain from the United States in return for its tariff concessions is a safeguard clause which allows Japan to raise tariff rates on American beef and pork back to their original levels if imports of these excessively increased. The United States, especially the Republican-dominant Congress, is not comfortable with this Japanese request.

However, an FTA with Australia, which became effective on January 15, 2015, ahead of any final agreement with the United States, might provide motivation to the United States to quickly compromise with Japan over its tariff reduction demands on beef and other agricultural products, thereby giving Japan an advantage in the negotiations. The United States has a 35% share of the Japanese beef market, while Australia maintains a 54% share. If only Australian beef enjoyed a lower tariff, a key benefit gained from the FTA with Japan, American beef would be at a disadvantage pricewise, and the difference in the Japanese market share would be even wider. Even if TPP negotiations were concluded quickly, it would take a long time for all countries involved to ratify the agreement and bring it into effect’ so members of the American beef industry began to say “we’ll need to be prepared to be at a disadvantage for several years.” The question is whether this is politically acceptable or not in the United States.

Another concern in relation to the prospects of US-Japan cooperation is the Trade Promotion Authority (TPA) bill in the United States, which delegates authority over trade negotiations entirely to the president, is necessary to ratify TPP in the US Congress in order to restrict disputes over TPP, which all other TPP members, especially Japan, seek. Abe might face another problem when pushing Abenomics further, if the United States increases pressure to redress yen depreciation due to TPA. The American Automotive Trade Policy Council (AAPC) claims, for example, that the automobile is America’s largest export industry, and some in Congress now insist that the Obama administration should include a retaliation rule for currency manipulation in TPA. The value of the yen against the dollar, down to its lowest level in the last 40 years and expected to be further lowered after the US Federal Reserve scaled down the quantitative easing program, is arousing dissatisfaction in the US automobile industry, partially obstructing the completion of the US–Japan market access negotiations within TPP.

 

China and a new regional economic order

While the United States and Japan have struggled to find common ground in their TPP market access negotiations due to mutual domestic politics, China has actively promoted its regional integration strategy, finalizing FTA negotiations with both South Korea and Australia. China promised to eliminate tariffs for 85% of Australian goods and to raise the figure to 93% in four years and 95% upon its full implementation—a higher liberalisation rate than 88% in the 10 years of Australia’s FTA with Japan, which came into effect at the beginning of 2015. The China–Australia FTA also includes liberalisation of the service sector, which accounts for 72% of Australia’s GDP, thereby promoting Australian companies’ operations in finance, education, and healthcare services in China. Along with reducing the authorization period for renminbi transactions by Australian banks, the FTA also allows Australian companies to establish hospitals in China with 100% foreign ownership. China’s FTA with Australia has thus made China better prepared to participate in TPP negotiations in the near future.

China’s remarks regarding TPP over the past two years reveal considerable change, and its commitment to bilateral investment treaty talks with the United States and the establishment of the Shanghai Free-Trade Zone, together with FTA agreements with advanced economies such as Switzerland and Australia, suggest that China aspires to participate in developed country-type regional integration frameworks such as TPP. Yet, China has also focused on APEC’s integration framework, the Free Trade Area of the Asia-Pacific (FTAAP), as a countermeasure to TPP. In fact, references to the FTAAP have been consistently identified in official statements since APEC’s meeting in Hanoi in 2006, but any concrete roadmap was never presented. The APEC meeting in Beijing last November, however, witnessed the decision that a feasibility report on the FTAAP would be presented in 2016. Then-APEC chair China aimed to realize President Xi’s “dream” of using the FTAAP to be part of the grand design for Asia-Pacific integration, giving a cold shoulder to TPP, which the United States has attempted to promote as an economic pillar of its rebalancing strategy, targeting China. China’s recent ambivalence to TPP suggests the possibility of its future participation, a decisive move that would induce drastic change in the regional and international economic order, which can be alternatively approached through the formulation of a mechanism in which its dominance can be secured, such as the FTAAP plan. TPP would transform itself into a formidable trading bloc comprising the three largest economies in the world together, moving to establish new economic rules and norms. The Abenomics move, especially its third arrow, and Abe’s reform attitude are both urgently needed to accommodate Japan comfortably within such structural transformation in the regional economic order.

The third arrow of a new growth strategy should be implemented given the decreasing Japanese population and the need for private companies to continue to enhance their productivity with a view to sustaining Japan’s economic growth. From this perspective, one lingering issue for Abenomics’ growth strategy comes in the form of deregulation bent on spurring companies to invest their massive cash stockpiles into more productive, profitable activities. Yet, regarding what Abe has called “hard-rock regulations,” vested interest groups remain too stubborn to change. One of the TPP’s significant functions is to gather collective pressure from likeminded states to create new, enforceable rules concerning fair competition. They would support Abe’s execution of regulatory reforms, especially concerning the most formidable resistance in the farming sector, the Central Union of Agricultural Cooperatives (JA Zenchu), which represents 47 prefectural-level agricultural cooperatives and maintains a gigantic insurance company and the second largest bank in Japan.

 

Abe’s Agricultural Reform and TPP

The effectiveness of JA Zenchu as a pressure group in elections has been proven time and again. One reason farmers are considered to be powerful despite the agricultural sector accounting for little more than 1% of Japan’s GDP is that farmers are key in rural constituencies in terms of money, votes, and personnel (volunteers for election offices). The value becomes amplified since smaller constituencies in rural areas hold larger population of farmers than urban constituencies, meaning farmers can enjoy more relative voting power, which can be enough to make candidates lose, rather than win, the election. Therefore, the issue of trade and investment liberalization tends to draw less attention. In fact, the trade issues involving TPP did not take center stage in the Lower House election campaigns in December. The LDP touched upon TPP in its manifesto by stating merely that “the party will seek the best way which meets the national interests, based on the resolutions made by the party and the Diet,” while the DPJ, which initially sought to join the TPP negotiations when in power in 2010–2012, retreated from promoting a liberal trade policy in order to pull agricultural votes, claiming that Japan should be prepared to withdraw from TPP if national interests were threatened. As a result, suspicions concerning Japan’s commitment to the successful conclusion of TPP negotiations, which should have been pivotal in the growth strategy of Abenomics, have emerged both inside and outside Japan.

Abe expressed his determination to carry out structural reform in his keynote speech at the Davos Forum in January 2014, mentioning “no vested interests will remain immune from my drill,” which was believed to target JA Zenchu. If Abe’s commitment to agricultural reforms materialised, this could give Japan an advantage in negotiations with amplified room to accept demands on agricultural concessions from its counterparts, which could then compel the other countries to comply with Japanese requests through the form of “give-and-take” rules of trade negotiations. In fact, Japan’s resistance against radical tariff reductions on some agricultural products, such as sugar, contributed to the Australia-Japan FTA shelving the investor-state dispute settlement (ISDS) clause, which all other 13 Japanese bilateral FTAs, except for ones with the Philippines and thus ASEAN, included. ISDS is considered to be a useful mechanism for Japanese companies in negotiating with investing countries over the conditions, although the actual use is supposed to do the harm to the relations with the countries . This is in sharp contrast to the case of Australia’s FTA with Korea, for which Korea promised to eliminate tariffs on many agricultural products which Australia demanded, instrumental in allowing Korea to incorporate the ISDS clause into the FTA with Australia .

 

Conclusion

If stalled bilateral negotiations on market access between Japan and the United States continued, Japan’s strong resistance to tariff reductions or elimination in the five “sanctuary”agricultural products, including rice and raw sugar, as well as America’s resistance to proposals for the liberalization of the automobile sector, could lead to the eventual failure of the negotiations. In effect, the other participating countries have been in a wait-and-see situation due to these prolonged market access negotiations between Japan and the United States after the TPP members had come to agreement over the use of the uniformed tariff ratios approach if some sensitive products were allowed to maintain tariffs. This means the lowered tariff ratios the United States would obtain as a result of its market access negotiations with Japan would be eventually applied to the other members, allowing the United States to act as a proxy negotiator against Japan on behalf of the rest of the members.

In his statement in March 2013, Abe highlighted the universal values of freedom, democracy, human rights, and the rule of law as a political foundation for the economic rule-making approach, implying that TPP members will take collective action not just economically but politically against countries that do not share those values, especially China, an approach which may subsequently evolve into political and security, as well as economic cooperation based on that shared stance. This view is symbolically echoed by Michael Froman, who also declared that the TPP was essential not only for its economic benefits, but also its geopolitical viewpoint, stressing America’s economic engagement as the foundation for regional security.

Abe, together with Obama who claimed: “if we do not help to shape the rules so that our businesses and our workers can compete in those markets, then China will set up rules that advantage Chinese workers and Chinese businesses”, inevitably identified the TPP conclusion necessary in terms of reversing the waning regional influence of Japan while China has been assuming a more prominent role in forging the regional economic order, especially through the establishment of the China-led Asian Infrastructure Investment Bank (AIIB) which attracted 57 countries as founding members with an authorized capital of US$100 billion. The US-Japan market-access negotiations will thus determine not only TPP’s potential as a dynamic economic rule-making architecture but also the degree of Abe administration’s commitment to making Japanese economy more robust and competitive.

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