its diplomatic initiatives with China; its role in the formation of APEC; its large scale global development assistance program and its role in funding and supporting the United Nations processes. The last couple of decades have been associated with diplomatic drift: with failure to commit fulsomely to a domestic reform agenda and relate it clearly to international objectives. This coincides with a time when regional and global institutions are under pressure and in a state of transition and flux.
Japan is a member of the G20, the preeminent steering committee for the global economy, but it has been missing in action in that forum as it hankers for the days when it was Asia’s sole representative at the G7/ G8 — a grouping that has outlasted its relevance, given that the global economy is no longer dominated by the rich club of advanced economies.
Characteristic of its role in the G20, Japan’s economic diplomacy has been drifting. Long-term economic slowdown has brought with it a stronger tendency of inward-lookingness, exacerbated by the Tohoku triple disaster of 2011. Lack of political leadership and the inability to carry through the liberalization of agriculture has hampered Japan’s participation in any meaningful foreign economic policy initiatives beyond narrow and relatively unimportant trade agreements. Those agreements have come in the form of economic partnership agreements (EPAs) with developing countries that aim to secure Japanese investment abroad while generally avoiding opening markets so that agriculture at home can continue to be protected.
Free trade agreements (FTAs) with Australia and South Korea are being negotiated, a China–Japan–Korea FTA is under study, and an FTA with the European Union is on the horizon. Japan has shown an interest in joining the Trans-Pacific Partnership (TPP) agreement as well, but the main barrier to Japan concluding or joining all these agreements is its inability to reform key areas at home, most notably by opening up agriculture.
It is often the case — perhaps especially so in Japan — that the private sector leads the way while government policy lags behind. That is true on many domestic issues, such as in the labour market, where the inability to reform has forced companies to hire part-time and non-regular workers, thus dividing the labour market in economically inefficient and socially unhealthy ways. Internationally, Japanese multinationals have continued to lead the offshoring of Japanese manufacturing and development of regional supply chains. And the relocation abroad of Japanese companies of all sizes has led to policies that strengthen investment protection through EPAs, not the other way around.
After multilateral liberalisation, bilateral or preferential agreements (such as FTAs or the TPP) are at most a second-best or third-best option for trade liberalisation — and it is not clear whether they may have become the enemy of the first best. If the aim is (as it should be) to further open up protected and inefficient industries and make the economy more flexible, competitive and dynamic, the country’s priorities should focus on unilateral liberalisation and reform, from which it stands to gain the most. Whatever difficulties there are with that strategy are not arguments for a strategy of narrow bilateral deals.
The purpose of Japanese trade or foreign economic policy is to increase the welfare of Japanese people and further Japanese interests abroad. The priorities in Japan are to open its economy to foreign competition, especially in services and agriculture. Japan attracts very little foreign direct investment relative to its size, and regulatory and other barriers inhibit the kinds of flows that occur into similar industrial economies. As Japanese firms continue to move operations to China and the rest of East Asia, the Japanese economy needs to continue to open up beyond its low tariffs on manufacturing goods so that it can benefit from deeper integration into the dynamic regional economy, especially with China.
Japanese leaders may need gaiatsu, or foreign pressure, to help initiate some of the difficult domestic reforms. This has been the case in the past though it may not work so well now.
The multilateral trading system has been important for Japan’s development and its peaceful integration into the global economy in the post-war period. Two examples illustrate that.
First, Australia’s decision effectively to grant most-favoured-nation status to Japan in 1957 — very soon after World War II — and then extend equal treatment to investment and people movement in 1976 helped to secure Japan’s dependence on open global markets for raw materials and energy. These arrangements were bilateral but entirely non-discriminatory in character.
The second example is China’s accession to the WTO in 2001 and the process leading up to it. China committed itself to the global trading rules, something most clearly seen in its unilateral liberalisation and 15-year-long process of showing the world its commitment to those rules, locking in reforms towards a market-based economy. That allowed the bilateral Sino–Japanese trade and investment relationship to flourish, based on comparative advantage and mutual gain instead of bedevilled by divisive politics. Their unresolved history, regional rivalry and political differences did not prevent them from developing a huge economic relationship. An FTA would not have led to the same outcome.
The importance of the multilateral framework for Japan underlines the country’s strategic interest in having a clear strategy towards regional and bilateral agreements that does not pick and choose partner countries to do business with in ways that hurt particular economic or political interests in the region. For this reason, it would be unwise for Japan to sign on to the TPP without signing on to the China–Japan–Korea agreement or a major East Asian agreement (such as the ASEAN-led Regional Comprehensive Economic Partnership), given the likelihood that China will not be a TPP member any time soon. China is, after all, Japan’s largest trading partner, and the same can be said for almost all of Japan’s other big trading partners.
There is an absence of political leadership in Japan and no clearly articulated domestic and international vision for its place in regional prosperity and security. There has perhaps never been a time in the post-war period when the risk of Japan’s descending into irrelevance or, worse, exacerbating regional uncertainties has been so high. Australia has a deep interest in retaking this diplomatic ground with Japan. Hopefully the Asian Century White Paper will set out a way forward for Australia that sees building new consensus with Japan and our neighbours on regional cooperation as part of Australia’s strategic agenda.
Dr Shiro Armstrong is a research fellow in international development economics at the Crawford School of Public Policy, the Australian National University.
This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Japan: leading from behind’.