Wednesday, April 19, 2017

Unedited Crib Notes for 2017/4/17 FCCJ Event on Japan-US Bilateral Economic Dialogue

Jun Okumura went straight from school to what is now the Ministry of Economy, Trade and Industry. After thirty years in its ecosystem, though, it dawned on him that he had no aptitude whatsoever for administration and/or management. Armed with this epiphany, he went to the authorities and arranged an amicable separation. He currently holds the titles of “visiting researcher” at the Meiji Institute for Global Affairs (MIGA). He spends way too much time saying mean things about everything under the sun. He does not mean to, which probably makes it worse.

Minimal attention in Japan to Vice President Vice Pence’s visit.
Anecdote: Friday conversation with former CEO, First Section of the Tokyo Stock Exchange, retired but follows news fairly closely as private investor. “No, I wasn’t aware.”

1. Chances of any substantive agreement even lower than usual first meetings because of Pence’s policy background (largely domestic) and lack of support team.
Wilbur Ross, Secretary of Commerce
Steven Mnuchin, Secretary of the Treasury
But no US Trade Representative (Robert Lighthizer), and second, third-tier political appointments slow in coming. (Economy, probably less problematical, but…)
2. Also overshadowed by North Korea’s big day (and failed missile launch). Which Pence is totally unequipped to handle on his own.
3. Also overshadowed on Nikkei by 11-nation TPP (Nikkei, April 15)

Also keep in mind that on the economic front, it’s China, NAFTA (= Mexico), and Japan, in that order.

On the Japanese side, Deputy Prime Minister Taro Aso has historically been a front man for Ministry of Finance orthodoxy, no more, no less.

What Round 1 (April 18-19) of the Japan-U.S. Economic Dialogue (Pence-Aso talks) will produce:
Three WGs to tackle:
1) Economic cooperation:  (infrastructure (high-speed rail), energy (unconventional gas and oil))
“…exploring cooperation across sectors that promote mutual economic benefits to the United States and Japan.”
Dressing up public procurement and commercial transactions to have something to point to as successful results.

2) Macroeconomic collaboration
“…using the three-pronged approach of mutually-reinforcing fiscal, monetary, and structural policies to strengthen domestic and global economic demand.”
US goal: Keep Japan from driving down yen.
Japanese goal: Keeping a free hand on monetary policy (and the direct intervention option).

3) Bilateral framework on trade and investment
“…discussions between the United States and Japan on a bilateral framework as well as Japan continuing to advance regional progress on the basis of existing initiatives”
“…deepening their trade and investment relations and of their continued efforts in promoting trade, economic growth, and high standards throughout the Asia-Pacific region.”
Japanese goal: Rope the United States back into TPP. (Used to think Abe was nuts, and that he should go for a TPP-11. But maybe they are compatible.)
US goal: Get a better bilateral deal than it got in TPP.

The easy ones first. 1) Economic cooperation: and 2) Macroeconomic collaboration.
1) Economic cooperation:
The Japanese Government wants to help Japanese businesses sell “high-quality infrastructure” overseas. Essentially, high-speed railway systems. JBIC and NEXI can provide long-term financing, but they don’t need the Talks for that. The US doesn’t either. It could actually be harmful if it stood in the way of international consortiums, which it won’t. The outcome will be the result of international competition with the groups coming up with the most attractive package of performance, financing and operation conditions, and local production, not necessarily in that order.

2) Macroeconomic collaboration:
Japan last intervened in November 2011 when it was around 78JPY=1USD, where it remained for most of 2012. Barring another global financial crisis, it’s hard to see Japan intervening again.
On the other hand, Prime Minister Abe caused a stir by talking about the salutary effect of quantitative easing on the exchange rate. Abe went on to deny the linkage, but people remember, partly because it’s actually true. But for now, the macroeconomic circumstances are such that this is something you can keep at the back of your minds.

And now:

3)  Bilateral framework on trade and investment

Why does Abe want TPP? (Many angles, but boils down to)
a. Key element of Abenomics: 2.7 percentage-point boost to Japanese GDP by 2030 (WB).
b. Depoliticize international trade and investment relations. (Another way of saying Keep China in check. Case in point: rare metals scare. More recently, retaliation against THAAD.)
c. Keep the United States engaged in Asia (as a foil for the regional hegemon China). It’s not just about the economy.

Why does Trump want a bilateral deal?
To prove that he can cut a better deal than Obama.

Key US actors:                  
Anti-deal:
1. US automakers (Chrysler? Really?)
Want: inconvenience competitors’ global sourcing, manufacturing and marketing strategies.  Reduce their flexibility. Platforms are going global!
Not want: Open up Japanese market.
GM: Gave up on Isuzu. Ford: Gave up on Mazda.
Better deal:
2. Pharmaceuticals: Biologics data protection 12 years (TPP: 5, effectively 8, Japan and Canada, currently)
TPP deal:
1. US beef and pork industry. Lost market share to Australia, Canada and NZ due to mad cow disease. Has been making gradual but steady comeback, now overshadowing Australia in supermarkets. Will suffer as tariff rates on Australian meat go down over time. (So will Canada, NZ.)
2. Copyright owners: 70-year post-mortem works for them.


Likelihood?
Better deal? Linkage got a lot more difficult as Mike Flynn (LOL), Mad Dog Mattis and now H.R. McMaster have pulled Trump ever more deeply into center-right national security establishment against more general background of mainstreaming Trump as a GOP president. Japan is a clear, major military asset for the United States. (ROK is vastly more ambiguous.)
US meat industry gets antsy as time goes by.
Disney gets antsy as Japan (and TPP-11) refuse to adopt 70-year post-mortem copyright protection.
Long-term, US auto manufacturers will start worrying if Thailand et al decide to join TPP-11. Can India be far behind?

TPP-11 may be the lever that brings the United States back. And Abe knows it.


Thursday, February 09, 2017

On the Eve of the Abe-Trump Summit

- Key things to watch out for in Abe-Trump meeting

Anything out of kilter from the following. Because if there is, that will be the big headline that everyone will be talking about. One way to annoy Trump? Go on at length about the virtues of TPP. Are you trying to tell me Obama was right, and I’m wrong? One way to annoy China? Specifically mention East China Sea and South China Sea… and THAAD.

Expect:

Overall, warm and cordial. The entire visit is being stage-managed that way. And Prime Minister Abe brings that out from authoritarian willful strong leaders (Putin, Erdogan, Mugabe…). Besides, President Trump is actually a good host/guest. It’s usually the CNN coverage and twitter feed that get him worked up.

1) On the economy:
From the US side, the imbalance in automobile trade; from the Japanese side, how Japan has eliminated tariffs and changed regulations to accommodate imports, and what wonderful things Japanese automakers and others are doing to create jobs in the United States.

From the US side, a bilateral FTA, under which currency manipulation should be addressed. From the Japanese side, Monetary Policy and FOREX Market Intervention 101, and an expression of willingness to  take up FTA as an issue in a high-level political dialogue.

2) On security
Expression of concern on regional security issues; and firm commitment to the bilateral alliance, relocation of US forces including the new helicopter base at Henoko, and a Japanese commitment to keep increasing defense speeding (this last merely a confirmation of  the 2%/year increase in real terms in FY 2014-2018 defense plan increases)

3) General
An Aso-Spence high-level dialogue going forward, where discussions on a future FTA are likely to end up among other things. “Deputy Prime Minister” is a description, not a legal title, but Aso is a former prime minister with only a one-year tenure, useful to trot out when a run-of-the-mill cabinet minister won’t do but the prime minister would be too much.

- Top hot button issues between Abe and Trump (eg trade, currency etc)

I don’t really see a hot button issue, if by hot button issue you mean something that has a serious chance of directly upsetting the bilateral relationship. There is no JAFTA that the United States could threaten to pull out of. Heck, the Trump administration hasn’t even shown any signs that it will designate China as a currency manipulator any time soon. I do expect that Japan will eventually enter negotiations on a bilateral FTA and that the FTA will ultimately include a currency clause, if such a clause is acceptable to the United Kingdom. The Trump administration needs something to point to as being better than TPP, and I don’t see much elsewhere, except perhaps up to a 12 years’ protection on biologicals data.

- Views on the future of Japan-US relations under Trump and Japan-US-China relations

The US-Japan bilateral relations will be fine. The Detroit Three (in terms of headquarters only; and is Chrysler really a “US” company?) will keep on carping, but only to inconvenience their competitors, not to engage in the Japanese market. They gave up controlling stakes in Japanese automakers years ago, and the Japanese market is in the very early stages of its senescence. And Japan as a military base on the cheap is a genuine military asset for the United States, unlike, say, South Korea.

It’s the Japan-US-China triangle that worries me. Japan has been passive towards China on economic issues. I suspect that the Trump administration will want the Abe administration to be more engaged on industrial espionage charges, IP issues more broadly, as well as other, less politically charged problems.  But Japan has little leverage against China. And more vulnerable to counter-pressure. Security is even more problematical, since the Abe administration see China as Japan’s most important security threat, followed by North Korea, which is also China’s Whitey Bulger if you will. Again, if and when the United States escalates and Japan follows, Japan will feel the heat. Remember, if the US forces suddenly disappeared from Japan, North Korea would stop caring about Japan. So would China (although it might decide that it was high time to seize the Senkaku Islands altogether, which is a good reason for making sure that the US forces remain). Japan is not exactly a mouse, but a mongoose, say, will also suffer mightily when elephants fight.

- Views on the future of Japan's investments in the US

There are likely to be cases where Japanese businesses already based in the United States decide to reinvest in the United States to be on the safe side, particularly until there’s more clarity on how NAFTA is likely to end up. We’ll never be sure, though, because it will be just one of the factors in the cost/benefit analysis.

Likewise, major greenfield investment decisions by new entries will also affected. They don’t want to find out later that the Trump Hotel that they checked into has turned into Hotel California. .The Trump administration will not be around forever, but it could be up to eight years, and who’s to say that the United States will return to normal post-Trump?

Certain mergers and acquisitions will be a little less attractive for truly global companies, since there is likely to be political pressure over cross-border consolidation. Hotel California.
The infrastructure investments that Mr. Abe will be talking about is what I call his no-regrets policy in investment. Something that he would be doing anyway. Support for exporting “high-quality” infrastructure is an important feature of Abenomics 2.0. Essentially, the Japanese Government will provide financial support to Japanese firms bidding for infrastructure projects. Local manufacturing will be an important factor in the tender process. And the eventual outcome, years from now, may be very different from the headline numbers of today. But that’s always the case in investment deals packaged for summit pageantry.

- Anything in particular you would like to discuss?

No.