Prime Minister Shinzo Abe's announcement last week that Japan hopes to join Trans-Pacific Partnership negotiations, although welcome, hardly guarantees that the world's third-largest economy will join the only real free-trade game in town. Now for the hard part: Mr. Abe must overcome entrenched interests at the party, state and international levels to secure a wide-ranging trade pact. Japan's future as a leading global economy might well ride on it.

Mr. Abe's most immediate challenge hits closest to home. Back in power since January of this year, the prime minister's Liberal Democratic Party (LDP) has hamstrung its leader by demanding that he ensure tariff exemptions on five "sensitive" products: rice, beef, pork, sugar and dairy products.

Japan's tariffs on such goods are legendary. Rice is protected by a 778% tariff rate, leading Japanese consumers to pay the world's highest prices for their staple grain. Sugar imports face tariffs of 328%, and wheat 252%. The political imperative for maintaining them is obvious even if the economics are bad. Japan's postwar electoral system gives great weight to rural areas. No group has benefitted more from the agriculture lobby's support than the LDP.

Tokyo under the LDP has consequently been a laggard in free trade negotiations. Those agreements that Japan managed to conclude relatively quickly, such as with Thailand in 2007, failed to tackle sensitive agricultural issues. The TPP would be different because current participants intend it to be a high-quality deal that will cut or eliminate almost all tariffs, which theoretically leaves little hope Tokyo could continue its agricultural protections.

"I ask you to please trust me, believe in me," Mr. Abe said as he presented his trade plans to the LDP party convention on Sunday. Appeals to loyalty won't help when he brings his case for the TPP to the country at large. The opposition Democratic Party of Japan has a formidable anti-trade wing. Pro-agriculture politicians and lobbyists of all stripes will not give up without a fight.

At least Mr. Abe is enjoying historically high approval ratings, which give him a tailwind to sell the TPP to the public. If there's hope at the national level, it lies in steering the TPP debate away from agricultural parochialism toward the larger matter of Japan's long-term economic competitiveness. In this effort Mr. Abe finds support from Japan's biggest business confederation, the Keidanren, which has long called for the country to reduce its complex system of tariffs. These businessmen see the TPP as a gateway to an even larger free-trade area of the Asia-Pacific.

For now, the business group's idea is for Japan to play the leading role in crafting a trade agreement that not only benefits the country's high-quality producers, but also spurs structural reform inside Japan. They know Japan needs incentives to continue regulatory reform so as to make business more nimble and entrepreneurial. Currently, only 19% of Japan's exports are covered by free trade agreements. Joining the TPP would up that number to 27%, and would undoubtedly force producers to become more competitive.

Even if Mr. Abe is successful in building support for TPP at home, however, the prime minister faces a battle overseas. Not everyone is eager to see Japan join the TPP, which started as a modest affair among Brunei, Chile, New Zealand and Singapore but has now ballooned to an 11-nation group. Should Japan gain admittance into the club, the TPP nations would represent 38% of global GDP, up from 30%. That leaves a lot of scope for internal dissent.

American automobile companies, in particular, are opposed to Japan's entry, arguing that lack of access for U.S. cars in Japan justifies maintaining Washington's tariffs on Japanese cars and trucks. A recent letter by their supporters in the U.S. Congress, all Democrats, have pressured the Obama administration not to accept Japanese participation in TPP talks. Yet Americans should welcome a Japan that is more open to U.S. investment, and they should welcome opportunities to sell to a still-affluent market.

The TPP will go ahead with or without Japan. For Tokyo, sitting on the sidelines would only serve to isolate the country at a time when it needs to open up. Japan would lose benefits as high as $295 billion by 2025, according to a report by the Peterson Institute for International Economics. More Japanese youth need to work for foreign-owned companies and learn to thrive in cultures different from their own. Japan's domestic sector, from manufacturing to services, needs to liberalize through exposure to foreign competition.

Tokyo needs to accept short-term pain in order to maintain its position as one of the world's most advanced economies. To do otherwise is to put at risk all that has been created over the past half-century.

March 22, 2013

Source: Wall Street Journal

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