Shock therapy: How closer US-Japan ties can help the Japanese economy

Q: If the US and Japan were to negotiate a free trade agreement, what should Japan ask of the US?

Robert Fauver: The record is clear: state regulations of the insurance industry would be on the table. I would expect the US would have to undergo some changes. Japanese gaiatsu (pressure) would be welcomed in certain sectors of the US where domestic pressure has not been strong enough. Use of the metric system might be another issue. There is a well-known list of issues that the Japanese might push. Both sides would have to think this through.

Q: There is a tension between the developed and developing countries. How can we think about a US-Japan free trade agreement without considering the harm it may do to the global trade system, developing countries, and even China?

Robert Fauver: Japan must decide its own national interests. If its national interest includes fixing its economy, then it must move quickly and efficiently toward that goal. Japan cannot accept another ten years of economic stagnation. What China, Europe, and ASEAN think should not matter if we are talking about Japan's survival. In 1985, when the US negotiated the US-Canada FTA, we were the first and sixth largest economies in the world. Nobody raised questions back then. With an FTA, unlike a customs union, there is not a common or harmonized external tariff. The EU, in contrast to FTAs, has resulted in a higher external tariff. Also Japan's growth is in the interest of developing countries. Without a growing Japan, developing countries have one less growing market. So fixing the Japanese economy would help those countries. Finally, during my recent trip to Japan, I hear everyone asking, "What will China think?" This is an ironic turn of events because if China can scare everyone, it has already won the influence in Asia that it desires before it has even finished modernizing its military.

Q: Which country should be a priority for Japan to construct an FTA with-Korea, Taiwan?

Robert Fauver: Japan's priority should be to fix its economy. I am struck by the continued depressed mood in Japan-there is almost an acceptance of stagnation as the norm. A weak Japan is a destabilizing element in Asia and it has strengthened China's hand in manipulating politics in the region. Topics that are assumed to be domestic can be discussed at international negotiations. I also worry about a three-bloc world-of Asia, Europe, and the Americas-and a US-Japan FTA would help to prevent that.

Q: If we try to be too ambitious with this FTA, it might take too much time to negotiate. What would be an appropriate scope for this FTA in order for it to be realized within five years? Is the Japan-Singapore agreement significant?

Robert Fauver: The Japan-Singapore trade agreement was significant simply because it happened. It showed that Japan could build domestic support for change. But, economically, Singapore is not big enough to create the psychological impact needed. Only a full, legalistic document would be enough to revitalize and change expectations about the Japanese economy.

How feasible is a US-Japan FTA?

Robert Fauver: This FTA would take bureaucratic and political leadership. I am not sure it is there. But this is the only alternative I see to bring the Japanese economy out of its doldrums.

Q: Might such an FTA damage the WTO?

Robert Fauver: This FTA would be a way to help multilateralism. Europeans argue that the expansion of the EU helps multilateralism. This FTA could set precedents for the world trade system. For example, the US-Canada FTA brought financial services into WTO discussions; it broadened the WTO's scope.

Q: Where is the most marginal benefit? Is it possible to focus on services only?

Robert Fauver: I have been on record for being critical of non-GATT-consistent agreements. I assume that the goods element, found in agreements like NAFTA, must be included. By having a big package, it is possible for the voices that represent national interests to overwhelm the protectionists (such as those from agricultural groups).

Q: If the current problem of the Japanese economy has to do with lack of confidence, then certainly the solvency of the Japanese government and local governments is key. How does an FTA address this problem?

Robert Fauver: There is an un-funded contingent liabilities problem in Japan. Regarding this problem, nothing could be worse than a stagnant economy. High growth generates tax revenues. Moreover, pension reform is difficult during a time of stagnation. Finally, reform of the medical sector, through the pressure applied by this kind of agreement, could reduce healthcare costs.

Q: By simply engaging in talks on a US-Japan FTA, the two countries could change perceptions. After September 11, the US economy became the number one concern in the eyes of Japanese policymakers. The acceptance of the idea of an FTA with the US is growing in Japan.

Robert Fauver: Only a couple of months after September 11, the Bush Administration said that the best way for Japan to help with the war on terrorism would be for Japan to fix its economy.

Q: Would this agreement be a shock to the US economy as well?

Robert Fauver: The US would benefit directly and indirectly from a strong Japan. Japanese policymakers could add to the framework changes that it believes the US should make.

Q: What would the anti-globalizers think of this agreement?

Robert Fauver: Among the real crazies, there is no moderation. But among the moderates, it depends on how it is explained. It must be presented as an important strategic issue, rather than just, "It's the economy, stupid." When I was 35 years old, I had experienced ten years of positive economic growth in America and I therefore had positive expectations about the future. Japanese 35 year olds today have experienced economic stagnation since the beginning of their careers; these people are just expecting more of the same.