Why trade tops the agenda as Abe meets Obama

Japanese PM Shinzo Abe Image copyright AP

Could the biggest free trade area in the world be announced this week?

Well, that's the ambition that sits at the top of the agenda as Japanese Prime Minister Shinzo Abe undertakes a week-long trip to Washington, though a final announcement is unlikely to be this week.

Abe's visit is being termed historic as he is the first Japanese PM to be invited to address both houses of Congress on Wednesday, and any remarks that he makes on the 70th anniversary of World War Two will be closely monitored.

Yet for Abe and perhaps also US President Barack Obama, it's their progress on a trade deal that is at the top of the agenda.

Abe has said that they are near agreement on the Trans-Pacific Partnership (TPP), which would create the largest free trade area in the world, linking the countries in Asia Pacific ranging from central America to southeast Asia. I've written before about the ambitious TPP, which notably excludes China - a notable exception at that.

Given all of Japan's economic challenges - struggle to defeat deflation as price increases have fallen back to zero - and low productivity to name a few, would a trade pact really make a huge difference?

Image copyright AFP
Image caption Japan has flirted with deflation, or falling prices, this year

Estimates by economists put the gains at 0.66% of GDP that increases to 2% by 2020 if factors like foreign direct investment are included.

For an economy that is struggling to grow, these are not huge amounts but certainly not negligible.

What is the Trans-Pacific Partnership?

  • Proposed free-trade deal between 12 Pacific Rim countries - the US, Japan, Brunei, Malaysia, Vietnam, Singapore, Australia, New Zealand, Canada, Mexico, Chile and Peru
  • Estimated to cover anywhere between one-third to 40% of world trade but is missing a key Pacific economy - China
  • Seen as a way of counterbalancing China's economic influence in the region, but US officials say the country is welcome to join the agreement in the future
  • Negotiations have been ongoing for more than five years, almost entirely in secret - what is known about its contents publicly has been limited to leaked information
  • Final deal is said to be as close as a few months away

Why Obama allies are against Pacific trade deal

So why is it the big focus in Abe's visit to Washington?

For one, it's a tangible example of a structural reform that is the crucial third arrow of Abenomics - Abe's ambitious reform plans.

Monetary and fiscal stimulus make up the first two arrows, but it's the third one that is the key to raising economic growth that has come under criticism for lacking focus. In other words, there are numerous policies that have been put forward by the Abe government, but few concrete initiatives to cite.

One exception is Womenomics, where increasing female labour force participation to the same rate as men's would add some 14% to GDP. Even with respect to that policy, it's unclear how it can be achieved.

So a new trade pact that puts Japan at the centre of the world's biggest free trade area certainly has its appeal.

'Nafta on steroids'

But it's not only up to Japan - the US also has to agree.

Image copyright Reuters
Image caption Prime Minister Abe's trip to the US marks the first time a Japanese PM has been invited to address both houses of Congress

And it's not just the usual hurdles of opening up agriculture or the auto sector to contend with. TPP has been described in the US media as "Nafta on steroids". The North American Free Trade Agreement was a contentious free trade area linking the US with Canada and Mexico under the last Democratic President Bill Clinton. Free trade has been blamed for the loss of US manufacturing jobs, for instance.

But before that stage, President Obama also needs "fast-track" authority for trade negotiations. The Trade Promotion Authority (TPA) allows the president to present to Congress an agreed trade deal and they can't pick it apart. Unsurprisingly, it's key for getting trade deals through Congress. One is in the works but is unlikely to get through Congress by the end of May, much less this week.

For President Obama's Asia Pivot, where he's reorienting American foreign policy more towards Asia, the TPP is a centrepiece. And one of the few areas where he may indeed be able to claim a legislative victory given that the Republican-controlled Congress makes it tricky for his last two years in office. I understand that the president may well be relying on executive orders like what he announced on immigration to put forward policies.

So for both Japan and the US a win on the TPP would be welcome.

For Abe, walking away with a concrete example of an economic policy that will boost growth would certainly make his historic trip to Washington worthwhile.