Challenges in Trade and Economic Cooperation
Wendy Cutler (Asia Society Policy Institute, Vice President and Managing Director, Washington D.C. Office)
The U.S.-Japan bilateral trade agenda is in relatively good shape. The Phase One trade deal which went into effect a little over one year ago provided important agriculture market access for U.S. farmers, as well as an ambitious digital trade agreement. While both sides agreed to launch Phase Two negotiations last spring, these talks never materialized. The official reason given was COVID-19, but it is no secret that there has been a lack of interest in continuing negotiations in both capitals. While bilateral irritants remain in such sectors as pharmaceuticals, agriculture non-tariff measures, and autos, these issues can be addressed bilaterally without the framework of a comprehensive free trade agreement (FTA).
Japan remains very interested in the U.S. rejoining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Since the CPTPP came into effect over two years ago, no countries have expressed formal interest in accession, although the U.K. may do so soon. President Xi Jinping recently conveyed possible Chinese interest, although it’s difficult to see how Beijing could meet the CPTPP market access and rules commitments any time soon, particularly as the Chinese state continues to expand its role in China’s domestic economy. In Tokyo’s view, U.S. re-entry into the CPTPP would substantially increase the heft and influence of this high-standard agreement, at a time when the Regional Comprehensive Economic Partnership (RCEP) framework is gaining favor in the region.
Tokyo will undoubtedly want to explore the possibility of the U.S. rejoining the CPTPP with the incoming Biden Administration. But, it’s unlikely that they will be pleased with the response. The Biden team plans to focus on domestic recovery and competitiveness before entering into trade agreements. Moreover, the TPP remains controversial in the United States. It does not reflect the new trade paradigm that the Biden Administration plans to develop, which focuses on ensuring that trade agreements benefit American workers and communities.
Neither the lack of interest in pursuing Phase Two bilateral negotiations, nor the complications associated with possible U.S. re-entry into CPTPP, means that the U.S. and Japan cannot forge a closer economic and trade relationship in the coming years. Quite the contrary. Given the challenges facing the Indo-Pacific region because of China’s rise, as well as the crisis in the World Trade Organization (WTO), there is fertile ground for Washington and Tokyo to work closely together, while bringing in other countries, to address these and other challenges.
In light of this, narrower sectoral regional trade agreements, led by the U.S. and Japan, may be a more realistic approach—at least for the time being. Such agreements could also help lay the groundwork for U.S. CPTPP re-entry down the road, if that’s the course for the Biden Administration wishes to pursue. Regional deals addressing digital trade, medical supply chains, climate and trade, and anticorruption/transparency are examples of possibilities to consider.
The Biden team will be interested in working with Japan in a collective effort to address challenges posed by China, including in the trade and technology spaces. Close U.S.-Japan cooperation on this front becomes all the more important in light of the recent investment agreement concluded between the European Union and China. Such cooperation could involve rule making and standard setting, as well as coordination on defensive measures in such areas of export controls and investment screening.
U.S.-Japan cooperation on WTO reform will also be important. Japan can play a key role in working with the U.S. and others to launch industrial subsidies- and other non-market economy issue-related negotiations in the WTO, advance the e-commerce plurilateral negotiations, and repair the dispute settlement system.
Finally, the U.S. and Japan should consider hosting APEC back-to-back in an effort to replicate the accomplishments achieved in 2010-2011 during the Japan and U.S. host years, respectively. This forum could play an increasingly important role in laying the groundwork for developing rules and standards in key emerging technologies, particularly at a time when the U.S. will be reluctant to enter into major new trade negotiations.
Cooperation on Infrastructure Finance and Regional Connectivity
Saori Katada (University of Southern California, Professor of International Relations)
The world faces an estimated US$94 trillion in infrastructure investment needs over the course of the next two decades. Especially given China’s aggressive push into the developing world via its Belt-and-Road Initiative, it is vital that both Japan and the U.S. meet this challenge through better rules and higher standards.
Japan has taken the lead since 2015 by promoting its Partnership for Quality Infrastructure with US$200 billion in funding and an emphasis on life-cycle cost and debt sustainability, while the U.S. followed up with the BUILD (Better Utilization of Investment Leading to Development) Act that established the new International Development Finance Corporation. Following the declaration of the G20 Principles for Quality Infrastructure Investment at the Osaka G20 Summit in June 2019, the United States, Japan, and Australia launched the Indo-Pacific initiative called the Blue Dot Network with the goal of creating a mechanism to certify that infrastructure projects meet their high standards based on criteria including transparency, sustainability, and social/environmental impact.
As the world tackles the COVID-19 challenge, there are also concerns about debt sustainability. With declining economic activity both domestically and internationally, 83 countries around the world are currently receiving some kind of financial assistance and debt relief from by the International Monetary Fund. Even prior to this crisis, some borrower countries in Asia have faced repayment challenges, especially vis-à-vis China’s infrastructure loans. With the need for restructuring government debts under Covid-19 likely to expand, the G20 finance ministers recently agreed to establish a common framework among G20 creditors for a coordinated debt restructuring process. The U.S. and Japan are well-placed to take the lead in addressing this problem.
As many regions start to dig out from the crisis, the U.S. and Japan have to be leaders in promoting sustainable and high-quality infrastructure around the developing world, so that these societies can explore bankable infrastructure projects and make those projects the engine of economic recovery and growth. President Biden’s “Build Back Better” Economic Recovery Plan should include an international component to support infrastructure improvements in developing countries with the emphasis on inclusive development, and clean and sustainable growth. Japan should continue to be the leading voice in quality infrastructure and sustainable development through the Free and Open Indo-Pacific forum and in the context of Sustainable Development Goals. It is important for both Japan and the U.S. not to be tied to inward-looking recovery as both countries will face significant post-Covid fiscal challenges. Finding ways to channel private funds (which is fueling stock markets in both countries) into infrastructure investment in Asia and beyond will yield long-term benefits for both countries and the rest of the world.
Climate Cooperation: Opportunities and Challenges
Jane Nakano (Center for Strategic and International Studies, Senior Fellow)
The United States and Japan have strong cooperation across a range of fields, including in energy. In the coming years climate change may become the dominant focus of bilateral energy engagement, as the Biden Administration is set to join Japan and nearly 100 other countries that have some form of mid-century carbon neutrality commitment. Innovation will be essential for the Biden Administration and the Suga Cabinet to reduce carbon emissions and transform their economies.
Although much of the bilateral energy engagement of the last four years has centered on the effort to increase energy security through hydrocarbon trade, there already is a strong foundation for bilateral cooperation in clean energy technology. This should be jumpstarted. As two leading global economies with strong scientific and technological capabilities, the United States and Japan have extensive clean energy collaboration at the government-to-government, business-to-business, and scientist-to-scientist levels. The two countries have much to gain by leveraging what they both can bring to the table, including smart grid, nuclear energy, hydrogen, energy storage, and carbon capture and storage technologies.
But climate cooperation will need to go beyond clean energy technology cooperation. The Biden Administration’s climate commitments include stopping China from subsidizing coal exports and seeking a G20 commitment to end all export finance subsidies of high-carbon projects. The Biden Administration appears resolved to follow up on China’s commitment per the Obama-Xi agreement of 2015 to “strictly controlling [sic] public investment flowing into projects with high pollution and carbon emissions both domestically and internationally.” Meanwhile, Japan in August announced that the Japanese government as a rule would no longer support coal plant exports, although with some notable caveats. The two governments should take care to align their coal export policies to ensure a united front in urging China to deliver on its climate commitments and to facilitate energy transitions around the world.
The Impact of COVID-19 on Asian Geoeconomics and US-Japan Relations
Yves Tiberghien (The University of British Columbia, Professor of Political Science; Co-Director of the Centre for Japanese Research)
COVID-19 has had several major impacts. First, in responding to COVID-19, East Asian countries, Australia, and New Zealand aced the health policy response. They clearly did better than anyone else, including the advanced economies of North America and Europe. Taking just the aggregate measure of total Covid-19 deaths per million on January 15, 2021, the worst 4 countries are Slovenia (1501), Italy (1345), the UK (1288), and the U.S. (1185). In East Asia, the numbers look very different: Indonesia is at 93 deaths per million, the Philippines at 90, Japan 33, South Korea 24, Malaysia 18, Singapore 5 (along with New Zealand), China 3, and Thailand 1. Even more impressive are Mongolia (0.6), Vietnam (0.36), and Taiwan (0.29). They punched way above their weight due to three key features: high institutional preparedness and reactivity; competent and centralized management that put health specialists in charge; and generally high social cohesion with respect to public health measures.
Second, due to their effective health responses, East Asian economies are bouncing back from the COVID-19 crisis faster than other regions. According to the Asian Development Bank’s December 2020 Development Outlook, Northeast Asia (not including Japan) is the only region that will end 2020 with a positive growth rate (+1.6%), to be followed by an expected bounce of 7.0% in 2021. China and Vietnam both finished 2020 with annual growth rates of +2.3%. Japan took a larger hit with an expected -5.4% in 2020, to be followed by a slower recovery in 2021 (+2.3%). One major consequence: COVID-19 is an asymmetric shock that accelerates the relative rise and regional integration of East Asia.
Third, 2020 was also marked by the failure of major institutions of global governance, particularly the G20, the G7, the UN Security Council, the World Trade Organization (WTO), and partially at least, the World Health Organization (WHO).
Fourth, regionalism picked up some of the slack, especially in East Asia, Africa, and Europe. The two most significant institutional advances of 2020 may well be the conclusion of the Regional Comprehensive Economic Partnership (RCEP) among 16 Asian and Oceanian countries in November and the EU-China Comprehensive Agreement on Investments (CAI) on December 30.
Finally, the Covid-19 crisis has accelerated the shift to digital technologies and mobilization around a green economic transformation. The green acceleration (including the Net Zero pledges by 2050 made by Japan and Korea and 2060 for China) opens the door to intensified competition for dominance of the new economy.
The start of the Biden administration offers great opportunities for cooperation between Japan and the US after years of stress in the relationship. Japan is a staunch supporter of the entirety of the liberal international order, including global economic institutions, rule of law, democracy, and human rights. Emerging US-Japan priorities for cooperation under the Biden administration include:
- Health policy cooperation, including cooperation on reforming the WHO in the wake of the US return to the organization;
- A joint strategic vision for buttressing the liberal international order;
- Cooperation on reforming the WTO to ensure a return of the US to the adjudication body (and of course, if possible, renegotiating the Trans-Pacific Partnership to ensure the return of the US);
- Cooperation on innovative industrial policies to advance innovation and competitiveness in the US and among allies;
- Cooperation on digital governance to advance the Osaka track on data free flow with trust;
- Cooperation on green technology and planning for a green economic order in the 2030s that is not dominated by China.
- US Support for healthier Japan-Korea relations.