No Third Arrow

By Global Tax Weekly

As an ardent free-trader, it gives me no pleasure at all to have been right over the extension of the Trans-Pacific Partnership trade deal to include Japan. What I can’t understand is why Japan agreed to put everything on the table, and then just a few months later refuses to negotiate over its agricultural tariffs, including the crazy 777 percent levy on imported rice. Well, I do understand that in apparently changing his mind Shinzo Abe is making a carefully orchestrated domestic gesture, probably because he thinks that the American administration will be unable to get a TPP treaty through Congress without a TPA (Trade Promotion Authority), and there is no point in spending his precious, and limited, political capital and getting nothing in return. In fact, Abe has already gone a long way towards dismantling the agricultural regime that supports high rice prices, although it will be 2018 before there is much market impact. The TPA is the bigger problem, in reality: nobody supposes that Congress in its current factionalized state is going to wave through a TPP treaty that includes Japan without mauling it half to death over labor issues. There is a chance however that with a TPA in place, a majority might be obtained. The problem is that the price of a TPA is the inclusion of a “currency manipulator” clause in future trade agreements, and Japan will not wear this. Nor should it: that countries manipulate their currencies is beyond doubt – what is quantitative easing if it is not currency manipulation? It doesn’t have much effect, because it’s not just the Fed: the Japanese are doing it, the ECB is doing it, the Brits are doing it, and we’d probably find out that the Chinese are doing it if their monetary policy wasn’t so inscrutable. So it’s a zero-sum game in terms of currency values, at present. Its impact is to keep interest rates down, which is a Good Thing, short term at least. The problem with a currency manipulation clause is that it gets used, or rather, misused as a protectionist tactic by anti-trade lobbies, and this is not even a left/right issue. There are plenty of well-funded Luddites and backwoodsmen on both sides of the aisle in legislatures around the world, and it is devilishly hard to keep them at bay even when there is a level playing field. If you give them a currency manipulator weapon, it becomes impossible. So the inclusion of Japan in the TPP negotiations was a fatal error. The best thing to do is to say thanks but no thanks, get an 11-country TPP through, and then in 2017, when the dust has settled, start all over with Japan.

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