Japan On The Edge

By Global Tax Weekly

Maybe it’s time for negotiating teams attempting to expand the Trans-Pacific Partnership free trade agreement to say “sayonara” to the Japanese delegation, with Tokyo seemingly refusing to budge from its entrenched position on protections for its agricultural and automotive sectors. Of all the world’s major economies, Japan remains something of an enigma. It achieved phenomenal growth in the decades succeeding World War Two, but it remains distrustful of foreign participation in its economy, and barriers to entry to Japan’s market for foreign investors are still high, despite free trade being the global norm rather than the exception these days. Indeed, foreign direct investment inflows as a percentage of the Japanese economy stand at a meager 4 percent, while the percentages for other advanced economies are in double-digits. Even North Korea manages an FDI-to-GDP ratio of 12.5 percent. As we know though, Japan has lost its way somewhat economically-speaking over the last 20 years, and the emergence of China, South Korea and other Asian economic powerhouses is providing ever-stronger competition for its exports. One sign of a doctrinal change within the Government is the morphing of Japan’s External Trade Organization (JETRO) from an export promotion body to an inward investment promotional agency. So it was presumed that Japan’s momentous decision to join the TPP negotiations was a part of a process to open up Japan’s economy to foreign investment, and Prime Minister Shinzo Abe was widely praised as a result. But since Japan joined the talks last year, it has seemed unwilling to give an inch on these sensitive items, which rather begs the question of why it joined in the first place. Perhaps it’s all part of a plan by Abe to play both sides of the fence. Taking Japan into the TPP was a natural extension to the expansionary economic vision dubbed “Abenomics.” Contrariwise, by standing up to America on behalf of Japan’s powerful agricultural and auto lobbies, perhaps he is strengthening his political hand at home. Whether this is by accident or by design is a moot point at the moment. Either way, after considerable progress was made in the early rounds, the negotiations have more or less come to a complete standstill, and there can be few doubts that the obstacle is Japan-shaped.

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