Selling free trade

Bogged down by an unfavorable political situation in Tokyo, the Kan government has few avenues for policy innovation. In recent weeks, however, it seems that the Kan government has decided to consider joining the Trans-Pacific Strategic Economic Partnership (TPP), a multilateral free trade agreement that currently includes only Chile, New Zealand, Singapore, and Brunei, but which the United States, Australia, Peru, Vietnam, and Malaysia are negotiating to enter.

The DPJ sent mixed signals on trade during the 2009 campaign: the initial draft of the party's manifesto stated that the party would "conclude" an FTA with the United States, but, criticized by farmers' groups, the party softened its proposal to "begin negotiations with the United States" and added a clause that it would only conclude an FTA with the US if domestic agricultural production could be safeguarded. Since the DPJ took power, trade has more or less vanished from the agenda — until now.

Following Kan's declaration in his policy speech that his government is considering TPP, Maehara Seiji, the foreign minister, has emerged as the government's leading advocate for greater trade openness, arguing in his speech earlier this month at the Foreign Correspondents' Club of Japan that since Japan's foreign policy is only as effective as its economic strength, diplomacy that enhances Japan's economy should be the government's top priority. (To make the point he pointed to South Korea's superior competitiveness as something that Japan should emulate.) To that end, he outlined a three-pillared approach that included (1) building a free trade system, (2) diversifying sources of food and natural resources as a hedge against risk, and (3) ensuring that Japan has the technology and infrastructure necessary to export.

When it came to concrete proposals to expand free trade, however, Maehara balked. He said that taking steps to join the TPP would be a test for Japan, but did not promise anything. He talked about trade negotiations with the US either bilaterally or within a multilateral framework, but offered little in the way of specifics. Given the thorny politics of free trade in Japan, Maehara's circumspection comes as little surprise, and the debate that has occurred within the government since his speech has been similarly tentative. To this point the government is still collecting opinions on the matter and has not decided whether it will pursue negotiations to join the TPP. Genba Koichiro, head of the national strategy office, said that the government will make its decision late next week. It has the support of Maehara and Kaieda Banri, the minister for economic and fiscal policy, as well as Sengoku Yoshito, the chief cabinet secretary, who said that TPP could be coupled with measures to support farmers harmed by imports (the logic behind Sengoku arch-rival Ozawa's income support plans). But these advocates are of course opposed by the ministry of agriculture, forestry, and fisheries — and by Nokyo, the peak association for agricultural cooperations, whose chairman has declared the TPP will mean the destruction of Japanese agriculture. The PNP, the DPJ's partner in government, and the Social Democrats, its erstwhile partner, have also come out against TPP, and Hata Yuichiro, chair of the DPJ's upper house parliamentary strategy committee, has said that he opposes joining the trade agreement "at this time."

Given the opposition arrayed against TPP, it is perhaps wise that the Kan government has not committed to the policy and is instead floating trial balloons. However, I wonder if there will ever be a good time for a Japanese prime minister to pursue an ambitious trade agenda. By proceeding cautiously now, did the government simply give its opponents time to mobilize and thus ensure that once again the issue will be postponed? It strikes me that if Japan is ever to participate in an ambitious free trade agreement like TPP (or the hypothetical US-Japan FTA), the only way it will ever get done is if the prime minister owns the issue, building a coalition in favor of free trade and selling the policy to the public in the same way that Koizumi sold postal reform. As the political economist Helen Milner once wrote (I'm paraphrasing), for economists, the puzzle is why states would ever done anything other than free trade — for political scientists the puzzle is why states would ever practice anything but protectionism.

If the government decides next week to make joining TPP a priority, it better be prepared for a three-pronged fight: among political parties in the Diet (remember that the government needs to cobble together upper-house majorities to pass legislation), among interest groups, and in the court of public opinion. The trade agreement will not sell itself. The government will have to commit to it fully. Anything less and the government is likely to suffer yet another defeat.

Shop for Japan? (Noah Smith)

It has often been said, by this writer and others that Japan needs to "raise domestic consumption" in light of the current economic crisis. In actuality, this is a murky concept. There are a number of different reasons for this, and a number of ways it can be done.

Reason 1: Correcting international imbalances. "Surplus" countries (Japan, Germany, and especially China) produce more than they consume, "deficit" countries (the US and UK) consume more than they produce. This is unsustainable (obviously), and fuels dangerous bubbles. If Japan and the Surplus Gang consume more, the US can safely consume less without wrecking the world economy. Of course, it's too late to save the world economy this year, but if the imbalances persist, this will all just happen again.

So raising consumption is considered the safest way for Japan to help fix the international financial system.

Reason 2: Avoiding a steep drop in output. If Japan sells less to the world — as is now inevitable — it can either make less or consume more. Making less means Japanese companies must either go out of business, lay off workers, or cut wages; or, more likely, all three. It means Japan will be a less wealthy place.

So raising consumption is considered the least painful way to weather the global recession.

Reason 3: Reducing export dependence. Exports are dependent on external demand, and therefore subject to big, abrupt swings. It is difficult for the government to either predict or prevent these swings. Consumption in Japan represents only 55% of GDP, compared to almost 70% in the U.S. If Japanese people are really as risk averse as they are rumored to be, they would naturally like an economy that is less vulnerable to the wild storms of global demand.

So raising consumption as a percentage of output is considered a way to reduce future risk for Japan's economy.

There are other reasons, but these are the big three. Now the question becomes: How does Japan accomplish this feat? I am guessing that telling people to "get out there and shop," as Bush did after 9/11, will go over like a lead balloon.

The classic way of boosting consumption is to lower interest rates, which discourages saving. However, Japan's interest rates have been at or near zero for a long time, so there is no more ammo in that gun.

As I and others have noted, Japan's aging and shrinking population bodes ill for future consumption. It also makes it harder to strengthen the social safety net (since young workers are needed to pay for the pensions of old retirees). Immigration will not increase enough to compensate for this decline. Even the U.S., with over a million new immigrants a year, is aging. That leaves the much-discussed fertility rate.

Finally, there is trade. Increasing imports doesn't seem like it will raise Japanese output, but as I noted in an earlier post, it does. Output is measured in real terms. If you lower import barriers, you can get 20,000 apples per Prius instead of 7,000. That means you are richer, even if some domestic apple-growers go out of business. And it also helps reduce global financial imbalances and bias the economy toward consumption, as well. Of course, this is tricky. If you open up your country to trade with protectionist countries, as the US did with China, you can find yourself on the receiving end of a disruptive flood of cheap money. But free trade with relatively open, rich countries like the US and Europe, as well as with poorer countries like Southeast Asia and Latin America would be a great idea.

And then there's my own idea: harness wealth effects. Most Americans are homeowners. Far fewer Japanese people are. Changing regulations, especially taxes and land-use regulations, could increase that rate. The economic security afforded by homeownership could conceivably raise consumption rates, and the extra living space might encourage larger families.

In any case, "Shop for Japan" is not nearly as foolish a motto as "Shop for America" proved to be in the earliest part of this decade. Balance, in economics as in so many things, is the goal. And a more comfortable lifestyle for the hard-working, long-suffering people of Japan would not exactly hurt the electoral prospects of the party that could deliver it.

- Noah Smith

Meet the new daijin, same as the old daijin

On Friday morning, Prime Minister Abe summoned forty-eight-year-old Akagi Norihiko to Kantei and requested that Akagi serve as Matsuoka Toshikatsu's successor at the Ministry of Agriculture, Forestry, and Fisheries (MAFF). Akagi, a Tokyo University graduate, MAFF old boy (OB), and grandson of an agriculture minister in the cabinet of Abe's grandfather Kishi, was first elected the same year as Matsuoka (1990) and served in a similar succession of posts in LDP policy organs as Matsuoka.

In other words, he's a younger, more elite version of the late Mr. Matsuoka. (I say more elite because, as I wrote in this post, Matsuoka was not a Todai grad, not a ministry generalist OB, and not a hereditary politician.)

There are no indications that the policies Akagi will pursue will be any different from Matsuoka, and there are already signs of inappropriate monetary dealings between Akagi's koenkai and groups seeking contracts from MAFF. As Abe made clear when appointing him, Akagi will, like Matsuoka, seek to promote further reform of Japanese agriculture, work to the target of one trillion yen in agricultural exports, and act as a tough negotiator in WTO negotiations. In other words, agricultural mercantilism and favoritism on behalf of companies and farmers supporting the LDP.

Akagi's accession to the cabinet is a clear illustration that the problem is much bigger than Matsuoka: the problem is systemic. No cabinet-eligible LDP politician has clean hands.

Whitewashing Matsuoka

Others bloggers have provided thorough reviews of the press response to Matsuoka Toshikatsu's suicide — see Adamu's post at Mutantfrog and Matt Dioguardi's at Liberal Japan — so I will not do so here.

Instead, I want to take issue with the Yomiuri Shimbun's editorial on Matsuoka's death (and by extension Abe's high praise for Matsuoka's skills as an agriculture policy specialist), specifically what it says about Matsuoka's role in agriculture policy.

Yomiuri comments:

High priority has been given to the promotion of the WTO and free trade agreements, and agriculture policies to reform domestic agriculture.

Prime Minister Abe appointed Mr. Matsuoka, a former MAFF bureaucrat, as minister of agriculture because of his command of the details of agricultural issues. He judged that if Matsuoka was the minister, he could stifle domestic opposition so to maintain progress on liberalization.

Moreover, in the agreement to commence negotiations on economic partnership agreement (EPA) with Australia, he valued the agriculture minister's abilities.

In the age of globalization, what should Japanese agriculture do? His death comes at a critical moment.

The implication in this passage is that Matsuoka's presence at the head of MAFF made a critical difference for the adaptation of Japanese agriculture to globalization, that he was a great free trader struggling against the forces of protection in Japanese agriculture.

Anyone with a passing familiarity with Matsuoka's activities as a norin zoku member would know that he has, if anything, been the leader of the forces arrayed against liberalization of agriculture. Aurelia George Mulgan describes incident after incident of Matsuoka — prior to his service as minister of agriculture — traveling abroad to harry WTO officials and trade representatives from other WTO members, trying to impress upon them the uniqueness of Japanese agriculture as grounds for protecting it. Defenders of Matsuoka might point to his efforts to promote Japanese agricultural exports, efforts that drew the support of former Prime Minister Koizumi — but promoting exports did not make Matsuoka a free trader, they made him a mercantilist of the basest sort, because he was hardly enthusiastic about the prospect of more liberal food imports. If he supported trade agreements, it was because they presented an opportunity for the government to redistribute funds to farmers — his supporters — who would purportedly be harmed by trade agreements. It is telling that one of Matsuoka's major activities during the 1990s was participation in the LDP's committee concerned with Uruguay Round countermeasures.

Matsuoka was similarly opportunistic as an environmentalist, which he came to realize was another way to direct funds to rural Japan; he could argue that support for farmers was critical to keeping Japan "green."

If Matsuoka was an expert on the details of agriculture policy, it was because he spent so much time trying to figure out ways to direct more money to rural constituencies, resulting in more money for his campaign chest.

None of this is secret. It was all laid bare in Aurelia George Mulgan's Power and Pork, which in some way reads like a record of the charges against Matsuoka from the span of his career.

Grief over a tragic death is no excuse for whitewashing Matsuoka's past as protectionist Japanese agriculture's best friend in Nagatacho.