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Japan: Look East to North America
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Japan’s demographics – a population beginning to decline and aging rapidly – will also affect its ability to compete. And at the same time, there is also a sharpened global competition for natural resources, including energy, food, and raw materials. Recent trauma has resulted in policy changes in Japan that intensify these issues.
So as each individual’s life proceeds, the changes – many quite profound – affect the environment within each country in ways that we scarcely perceive. To touch on some less appreciated changes, the writer has chosen 1990 as a comparison point (with 2011 trade figures) and used some important US trade relationships to illustrate. (See Figure 1.)
Since the 1970s, Japan was the United States’ highest value trading partner, excepting only Canada, the neighbor sharing a long, peaceful border. All are aware of the huge growth of China’s economy and the corresponding surge of trade with China by both Japan and the United States is well appreciated. But fewer have paid attention to the huge growth of both Canada-US and Mexico-US trade, due significantly to mid-1990s NAFTA, abetted by climbing energy costs.
Figure 1. US Bilateral Merchandise Trade with Selected Countries, 1990 and 2011.
Source: US Department of Commerce, Bureau of Census, Bureau of Economic Analysis
Japan still has world-class exporting companies, but its demographics and slowed economy have limited the growth of trade. Of course, many exports to the US by Japanese firms, with Japan-made components, now appear as finished goods on other countries’
accounts. This tendency has been accelerated over the last year as effects of 3/11, including power and labor shortages, have caused some manufacturers to hurriedly move even more work out of Japan, especially China, South Korea, and Vietnam.
0 100 200 300 400 500 600 700
Japan Canada Mexico China
Year 1990 Year 2011
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This is not to suggest that Japan’s smaller share of US trade is less significant economically than it was or that its years of lessened economic growth have any impact on its larger relationship with the US. The alliance is bigger than this. But these figures do show that the explosive growth fostered by NAFTA within North America has shifted trading patterns. And that the world’s axis – as so many assert – may not have wholly shifted to Asia.
At the same time, as energy costs skew trade patterns worldwide, changes in energy sources within Japan have strategic implications that are too new to have been adequately appreciated. The terrible twin blows of 3/11 have naturally shocked Japan, especially in the matter of nuclear power generation. News reports reflect drastic reaction to the Fukushima Daiichi Reactor meltdown, with its releases of radioactive materials. Japan’s electric power generation, some 30 percent from nuclear reactors before 3/11, is being dramatically changed. Reports state that only two of 54 reactors nationally are still operating, with all reactors likely to be shut down soon. Clearance to restart is at the politically terrified discretion of local political leaders.
Although the government has spoken of an orderly transition over many years from nuclear generation, that is not what appears to be happening. Rather there is a shift to oil, imports of which were increased 25 percent in 2011. Residents of the US state of Hawaii, however, may know better as their oil-fired electricity costs have increased by 23 percent in a few months. Low-sulphur Indonesian oil, with suddenly increased buying by Japan, has soared in price (estimates suggest $135 and more per barrel) even more than have world supplies, currently at about $107 per barrel.
This anomaly is interesting but not critical. But it does suggest that Japan will be even more dependent than it has been on Middle East and Southeast Asian oil, moving through sea-lanes that might be vulnerable someday. Japan has long worked for energy security, and it should be concerned now.
Considerations for Broadening the Alliance:
The point of all this is to suggest consideration of a much closer tightening, beyond East Asia, of the US and Japan relationship. Although the China market is important to Japan and will stay so, Japan is a global economic player and should be seen as such. It is in Asia, but is highly unlikely to be East Asia’s “leader.” China will not be accepted as that
“leader.” But China’s size alone, and its economic weight, will require all in Asia to be mindful of its will, even if China’s newly fostered nationalistic hubris (read: some PLA statements) remains restrained.
Japan has been having strategic dialogues with other democracies, such as Australia and India. These are useful, but will only marginally enlarge Japan’s options, as both are, most of all, distant. Australia is a worthwhile partner, but probably best done in three-way cooperation with the US. India has aversion to close relations that may go back to Cold War days. Cooperation and dialogue will be useful, but any alliance impact would
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be, at best, far in the future. South Korea is the most obvious partner, but it has been hard to put a bad history far enough behind.
Participation in the Trans-Pacific Partnership, (TPP), the US trade initiative that Japan indicated would be considered at the November APEC Leaders’ Meeting, remains in some doubt. TPP, assuming Obama’s support of his own initiative – union election support, especially anti-trade auto unions, have shown an ability to paralyze the administration on trade issues. Exhibit “A” would be the case of KORUS FTA, all but ignored for three years, but finally sent to Congress and promptly ratified by a large, bipartisan margin. But TPP has picked up some momentum, and is intended to “set a template” for trade liberalization.
With nine TPP partners, and Japan as possible, and with Canada and Mexico keen to join, the measure could be quite significant. And trade agreements with the US have also served as underpinning for strategic relationships. It is not that TPP will benefit the alliance directly, but its failure could be costly. There is always concern for what some see as “three headed” trade policies followed by Japan. Despite reasonable coordination between MFA diplomats and METI trade officials, Japan’s trade policies continue to be trumped frequently by agricultural interests concerned with protection of the status quo, such as it is, with farmers in Japan largely in their 60s and 70s. Over time then, agricultural issues – if they continue to block participation – may begin to have more serious implications. And with ever-greater oil dependence, that may be risky.
Meanwhile, North America, despite the United States’ political stasis, ever- growing debt overhang that threatens serious inflation, and unemployment and income equality issues, has much residual strength. Canada emerged stronger from the world recession and its energy, crops, and metals are in high demand that is increasing. Mexico still has agonizing drug wars, but its middle class has appeared and is taking shape, its manufacturers are busy, and its economic outlook has never been better. A US recovery is emerging – slowly – in housing, and with new technology spurring exceptional natural gas development, an era of world shortages may leave North America in a new kind of leading position.
Japan has a special alliance with the US, but its future in working with the US in a broader, North American context, has real potential. With respect to energy supply, the developments in extracting shale gas in the US and elsewhere, plus strong oil stocks, may suggest to Japan that making the alliance even closer may be the best approach. The economies of the US (and in differing ways Canada and Mexico) can – in potential – provide options for Japan that are outside Asia.
It is premature to suggest that NAFTA be expanded to include Japan, but the idea – if carefully developed – might be useful to all. Japanese may find that North America may be more amenable to two-way trade expansion, not to mention political values, than many in Asia. Of course, Japan would have to be open much more than it has been to imports of food and grain. But given the stage of life of many Japanese farmers, that may become more acceptable.
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And on energy, Japanese sources in North America may offer secure choices that would offer both reliable supply and reduced vulnerability to East Asian instability if that ever unfolds. Some Japanese companies might find that locations near reliable energy sources are in their interest. In such a case, some kind of preferred status would have value.
Japan and the United States have a fine, proven, and most successful alliance. But with the world changing and relative decline a factor, a look toward North America may put the relationship on an even longer-term footing than the steadfast comity that we have had.
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