Recent Developments and Future Direction of U.S. Trade Policy, with Particular Reference to Japan and China

I have spent almost 25 years working on U.S.-Japan issues. I spent some time dealing with the Ministry of International Trade and Industry (MITI) in the 1990s, during some of the trade negotiations between the United States and Japan. I advised Ambassador Walter Mondale as he was running for president in 1984, at a time when the U.S. was very concerned about its competitive position. Years later in the Clinton administration, the need for the U.S. to be more competitive was likewise emphasized as well the need for the U.S. to have a more reciprocal trading relationship with Japan. I was involved in the difficult auto talks of 1995, and then the last semi-conductor agreement of 1996. It has been gratifying to see the relationship between our countries proceed with less tension. It is important to remember how significant the U.S.-Japan bilateral relationship is, but also how it evolves with changing times and different kinds of challenges.

I think that the U.S. trade policy is going to have to change. President Clinton was very focused on global economics, opening markets, and globalization. His position was that the U.S. had to compete rather than retreat. Thus he worked hard to create ambitious trade agreements with the NAFTA and championed the Uruguay Rounds. Relationships were more contentious with Japan, but the issue there was still the effort to open markets, rather than restrict trade. In contrast, the Bush administration has been focused almost exclusively on the war in Iraq and the war on terrorism, and has put less emphasis on global economics despite the efforts of some of the trade representatives, such as Robert Zoellick at the outset of the administration, and Susan Schwab now.

I am a very strong supporter of the Doha Round and some of the bilateral trade agreements that the U.S. has negotiated, including some with Latin America and the Korea-U.S. Free Trade Agreement (FTA). However, the Doha Round, a leading priority for the U.S. and for Japan, is not going particularly well despite the efforts of our trade officials. I am concerned that it will not be completed by next year because major countries are not close enough together on the issues. We constantly come to these critical junctures and find ourselves falling short in agricultural and non-agricultural market access. The Democrats in Congress should give this president Trade Promotion Authority (TPA), or what we used to call "fast track," so if the Doha Round does not succeed, the blame would not be put on the U.S. Congress. That authority expired in June of this year and I do not believe it is likely to be renewed during this presidency, although I favor renewing it.

The U.S. trade policy of bilateral agreements has to be reexamined as well. We have embarked on a series of FTAs that do not have strong congressional support. In our country, the division of power between the president and the Congress creates this situation where the president has the authority to negotiate trade agreements but he still has to get them implemented and approved by Congress. Thus, we have had fierce fights over these trade agreements; for example the Central America Free Trade Agreement barely passed the Congress. Right now there are four trade agreements waiting for congressional consideration; with Peru, Panama, and Columbia, and a major trade agreement with Korea. I would argue that these are economically positive and extremely significant in foreign policy, particularly the Columbia and Korea agreements. However, the Democratic Congress is very skeptical about these two agreements; it is not clear what the outcome will be. The Peru Agreement will clearly be approved; the Panama Agreement was on its way to being approved until one of the key officials in the Panamanian government turned out to have been indicted in the U.S.

For the past few years, the economic relationship between the U.S. and Japan has been somewhat lacking in ambition on the economic issues. There is an understandable tendency to believe that the absence of disputes means a good relationship, and it is certainly preferable to the acrimonious and contentious negotiations of the past. Japan's economy is certainly more open than it was 10 or 20 years ago. Clearly the forces of globalization and the reform movements of Prime Ministers Junichiro Koizumi and Shinzo Abe, but also going back to Prime Minister Ryutaro Hashimoto with respect to the big-bang on financial services, have had an effect on the Japanese economy.

However, from the U.S. standpoint, it is striking that the overall volume of trade, and the overall importance of the U.S.-Japan trade relationship, has declined relative to others. Japan has declined sharply as a market for the U.S., relative to others. Only 5.8% of U.S. goods exports now go to Japan as opposed to 11% 10 years ago. On the investment side, direct investment from the U.S. to Japan has doubled in the last decade. However, it is still quite low compared to other areas of the world. Japan has fallen behind Canada and Mexico, the U.S.-NAFTA partners, and China, to become the fourth leading trading partner of the U.S. Our trade with Europe has gone up much more significantly than it has with Japan. Indeed, U.S. exports to Germany went up 41% in the period from 2000 to 2006; total trade between the U.S. and Germany went up 48% in six years without any special agreements. In contrast, U.S. exports to Japan in 2006 were down 8% from 2000, down 12% from 1996. The total trade level between the U.S. and Japan was actually less in the year 2006 than it had been six years before.

The unmistakable conclusion is that Japan has become less significant to the U.S. in terms of overall trade and investment, and the reverse is true as well. Japan is less reliant on the U.S. as a trading partner. The share of Japan's exports bound for the U.S. market declined from 30% in 2000 to 22% six years later. The U.S. share of Japanese imports declined from 19% to 12%. We have seen Japan shift for more trade with East Asia and China, and less with the U.S. and the European Union. The global economy is rearranging itself, largely in response to China's rise. As the U.S.-Japan Business Council commented recently, many U.S. companies have not taken advantage of the Japanese economic recovery, particularly in the manufacturing sector. This is because their focus has shifted to China and other emerging markets, or because of the cost and complications of doing business in Japan. The good news is that the U.S. and Japan are still important partners for trade and investment. The bad news is that the U.S. and Japan are becoming less important to each other as global economic flows accommodate themselves to China's rise.

For many in the U.S., the principal trade issue is the rise of China and the burgeoning and exploding trade deficit with China. For too long, global economic growth depended too much on the U.S. Japan experienced a relatively long period of stagnation and, overall, there was too little growth in the world. Now thanks to China, and to some extent India, there has been a significant amount of economic growth. China's rise affects economies as far away as Latin America and Africa, sometimes very positively in terms of overall economic growth; it has brought hundreds of millions out of poverty. China is moving from being a communist state to being a more modern capitalist-oriented state. Our countries have a great stake in China's continued, successful transformation.

When Congress says that the president is not focused on the right thing in trade, what they mean is that we are not doing enough about China. What to do is another question. For the U.S., the impact of China's rise have been complicated and mixed. In 1996, U.S. total trade with China was $63 billion, $51 billion in imports. Four years later, our imports had doubled to $100 billion. By 2006, U.S. imports from China were $288 billion. These statistics mean that in 10 years, the U.S. imports from China increased 454%. Concerns about China's trade are somewhat counterbalanced and muted by a number of factors. One of the factors has been China's openness to foreign investment. A significant amount of our bilateral trade deficit with China is from goods that are made by U.S. companies operating in China. Our smaller manufacturing companies are feeling pain from China. The loss of manufacturing jobs in the U.S., due in some part to China's emergence as the manufacturing arm for the world, has been severe. But the larger companies have an important stake in China and want to keep the relationship going and stable. The U.S. is reliant on and, to some extent, addicted to Chinese products. Low-price Chinese products have kept our inflation rate down and are the reason why many people in the U.S. have some of the goods that make up middle-class life. Certainly our U.S. Treasury Department is aware of the role that China plays in making it possible for us to finance our deficit. Despite this, concern about the trade imbalance with China has been rising as deficits with China have risen to levels that are quite astonishing.

Other principal concerns have been the misalignment of currency and intellectual property violations, something that Japan and METI have also been very focused on. I am involved in the two cases that the U.S. has brought against China on behalf of the copyright industries. One attempts to hold China to its WTO commitments on IPR under the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement. The other seeks to hold China to its obligations to provide market access for foreign motion pictures, recordings and books. If the Chinese people have more opportunities to buy legitimate product, it should reduce the levels of piracy. With respect to currency, for the past few years, Congress has threatened legislation that would force China to realign its currency, by threatening to impose tariffs on Chinese goods if the Chinese yuan was not realigned with the dollar. In the past, cooler heads have prevailed, and this legislation was set aside to give Treasury Secretary Paulson a chance to try to convince Chinese leaders to appreciate the currency. There has been some movement, but not much. Congress has continued to work on legislation, and I think next year we will see legislation that attempts to put pressure on China in a way that is WTO-consistent. Overall, China may not like being pressured about its currency, and it may not like being taken to the WTO, but I think there is recognition that these are ways that countries deal with each other to solve such problems when negotiations fail to produce results.

Potentially a volatile new element is the recent concern about the safety of Chinese products. U.S. consumers think that Chinese products are less expensive because of Chinese wage rates and maybe some difference in quality: however the assumption has been that the products were basically safe. Revelations about unsafe food, adulterated drugs, and toys with lead paint have shaken the confidence of consumers. Chinese officials have responded with concern on their parts, but it is a difficult job to guarantee the safety of everything coming from China. It puts a great deal of pressure on Chinese regulators, which are often not that advanced. U.S. border inspections, which can only inspect a limited amount; and the companies that are working in China have to take on much more responsibility. It is inevitable that the next U.S. president will come to office having spoken about being firmer with China. Once in office, the need to engage with China and manage the relationship will become very apparent to the new president. Right now the world is such a dangerous place between the Middle East and concerns in the Korean Peninsula that no one in the U.S. wants to add China to the list of problems. So there will be great desire by any U.S. president to have a constructive and positive relationship and to work out problems in the context of that relationship.

When I say that the trade relationship between the U.S. and Japan is diminished in importance and size, that our companies are more focused on China, the conclusion is not that the overall U.S.-Japan relationship will diminish in importance. From the U.S. standpoint I think it is absolutely essential to find a trade policy that allows more integration with Asia. The U.S. is at real risk if Asia, the most dynamic region of the world, integrates its economy without the U.S. This is one reason why I support the Korea agreement and the possibility of a deeper economic and trade relationship with Japan. The concept of a U.S.-Japan Economic Partnership Agreement has been endorsed by Nippon Keidanren, the U.S.-Japan Business Council, and others although it is not likely that serious negotiation will take place in the last year of the Bush administration or while a new administration is starting out in Japan.

A deeper economic relationship with Japan would be a powerful way to anchor our country more firmly with Asia and a vehicle for helping to bring about structural reforms in Japan. It would also be the best way possible to address non-tariff barriers that have been a real obstacle for U.S. manufacturers. We ought to be able to consider defining and breaking new ground in some important areas such as harmonizing standards in health care and life sciences, intellectual property protection for a digital age, energy conservation, and environmental protection including joint action on this question of climate change. Certainly there are areas of potential gain in the services, particularly in financial services. Of course, agricultural issues remain difficult. But I hope that even there we could find ways of at least addressing issues relating to sanitary and phytosanitary standards and looking for a cooperative effort to ensure food safety.

I think that the next president is likely to look for a very strong U.S.-Japan relationship, and a very strong U.S.-China relationship. Along with Australia, Japan is our closest friend and ally in Asia. Even if the trade issues with China are of more concern and our companies are spending more time and investment there, in policy terms I think that U.S.-Japan relations will remain an important part of the next president's agenda. Next to national security, the overriding responsibility for the new president is going to be to try to restore U.S. standing in the world, and to diminish the distrust and dislike that many nations and many people have for the U.S. Some fear that the next administration will look inward, not outward and that that would have an effect on trade. In my view, the next president is going to conclude that you can not reconnect with nations by diminishing your trade relations with them. When evaluating the potential for trade tensions, I think the next administration will make an effort to strengthen the U.S. economy by changes at home: health care, education, infrastructure spending, a move toward green technologies, tax reform. There are a lot of things that the U.S. will have to do to strengthen its economic position that will not take the form of trade. I am very optimistic that the U.S. position on climate change will change dramatically under the next president. A great deal of change is occurring in the U.S. already, led by our states and particularly California, and our corporations that are beginning to make adjustments to what they call a "carbon-constrained future." The next president will be more likely to play a leadership role in these areas, and to be much more of an ally in working against climate change with Japan and other countries which have taken the lead on this.

Q: How serious is the beef issue for the U.S. and what happens if Japan does not normalize Japanese imports of U.S. beef? Does Senator Hillary Clinton share the view that the U.S.-Japan bilateral relationship is one of the most important for the U.S.?

A: I do think that enabling U.S. beef exports to come into Japan is an important priority of the U.S., without question. Obviously, food safety issues are important to both our countries. Resolving this it in a way that ensures that Japanese consumers can be confident about the safety of beef is important.

With respect to Senator Clinton's view on Japan, the views that I have expressed are widely shared by Democrats and those that are among her advisers, and ultimately her as well, in terms of the importance of the relationship. I know that President Clinton valued the relationship with Japan enormously. I was with him when he came to Japan in 1996 when he met with Prime Minister Hashimoto. I think that he valued the U.S.-Japan relationship a good deal and was gratified that we were able to move from some of the difficult trade negotiations of the early years into a more tranquil period and resolve certain issues on the security side with respect to Okinawa and others.

Q: Is the Democratic Congress against free trade for interest group-related or ideological reasons?

A: Many Democrats in Congress believe that some of the trade agreements have caused job loss rather than job gain. Empirically it is difficult to confirm these things. We are still fighting about NAFTA even now, 14 years after the agreement. The unions are very important backers of the Democratic Party, and the industrial unions have remained strongly against trade agreements. That notwithstanding, the Democrats in Congress have attempted to build a trade policy that would allow them to support some of these trade agreements. Congressmen Charles Rangel and Sander Levin have worked hard to persuade the administration to include labor right and environmental issues in the trade agreements and have done some work on rebalancing access to medicines by titling our balance more toward generic drugs. Broadening the terms of the trade agreements has led to support of the Peru and Panama agreements. The opposition to Columbia, because of violence against unionists, and the opposition to South Korea's trade agreement, primarily due to automotives, remains. There are a lot of Democrats who are just not anxious to support a Bush free trade agreement.

Q: Concerning your remarks on a high-level trade or economic agreement with Japan, is tariff liberalization naturally included or would you like to have that outside of such an agreement?

A: Yes, it is naturally included but the reason I focus on some other things is because, with respect to the U.S. and Japan, tariffs do not tend to be the issue as much. We have a little bit of the same dynamic with the European Union (EU), as does Japan, what Robert Zoellick once called "competitive liberalization." With economies like ours, regulatory issues and harmonizing of standards tend to be among the important areas where we could make progress.

Q: Regarding the outlook on U.S.-China trade relations, what is the Democrats' evaluation of the Strategic Economic Dialogue that Secretary Paulson initiated about a year ago? Do you foresee it being transformed into a framework negotiation that we had rather acrimoniously 13 years ago, when the democrats came to power? Has this been mentioned by Senators Clinton or Obama in their debates?

A: It is likely that China will get a considerable amount of focused attention in the next administration. Democrats do not feel that Secretary Paulson's Strategic Economic Dialogue has accomplished very much. We will see whether the combination of further legislative efforts that are underway on the hill and some of the WTO cases will improve the situation. The acrimonious U.S.-Japan negotiations that we all remember produced some productive agreements, but economic tension was reduced primarily by the U.S. economic boom. I do not know that there will be any self-correction between the U.S. and China. We have not talked much about the U.S. economy overall except to say that the current crisis over the sub-prime mortgages and its spillover is putting the economy in a much more difficult state than it was just a couple of months ago.

Q: Some criticize the new LDP government leadership as a revival of the old LDP in terms of slowing down reform. How do you observe the faces of the new government?

A: I am not enough of an expert on the personalities involved or the Japanese political situation to really comment on that.

Q: What do you think about Toyota increasing its production all over the world, especially in the U.S.?

A: Starting with the U.S.-Japan auto talks, Toyota indicated that it was hoping to continue to expand its operations and has done that with great success all over the world. Much of the growth has been in North America; there are more Toyota sold there than anywhere else. In the U.S. there is great admiration for Toyota. People buy Toyotas because they are great cars. There is also admiration for the hybrid technology and Toyota's leadership in that regard. I think Toyota went from producing worldwide something like 6.1 million cars four or five years ago to 8.5 million now, which is an incredible increase and a tribute to the company.

Q: Is an APEC-wide FTA a sign of giving up on the multilateral track or has that already been done by Doha?

A: All U.S. trade officials have said at one time or another that we are going to open markets any way we can; multilaterally where possible, regionally where appropriate, bilaterally where necessary. This has led to the Doha Agreement, talking about an APEC FTA, talking about the Summit of the Americas, the whole Free Trade Area of the Americas Agreement, etc. Some of these ideas are just not all that realistic. With the idea of an APEC FTA, it is difficult to envision how you are going to get those various countries to negotiate something. I thought Doha would be harder to complete than the Uruguay Round. The reason was that the nations of the world had been deeply committed to the Uruguay Round, and the same level of energy was not there for Doha. The hardest issues like agriculture were front and center; there were not enough areas where you could make the trade-offs so that other nations felt they had a stake in it. Doha has been very difficult, but I think we should try to finish it. But it does not lead me to the conclusion that we are likely to see an APEC FTA.

Q: What is your opinion on the prospect for a multilateral investment agreement? And are financial services an important issue that should be dealt with in a U.S.-Japan high-level agreement?

A: I am not an optimist about a multilateral investment agreement. I have not seen that people are ready to consider it again. With respect to the financial services agreement, there have been considerable areas of the Korea agreement which provide good examples.

Q: What initiative is the next administration likely to take on environmental areas? Do you forecast a renegotiation or reconsideration of the current international framework on global warming issues?

A: I am not an expert in that area, but I am convinced that American public attitudes have changed dramatically. The next American president is likely to reflect those attitudes.