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A new phase in U.S.-Japan relations

Article - April 20, 2017

With a 30% share of FDI in the world’s third largest economy, the U.S. stands for Japan’s top investor. After months of “hard talk” during the American electoral campaign, Japanese Prime Minister Shinzo Abe and President Donald Trump open a new era of business relations between the two countries

The alliance between the U.S. and Japan has been a pillar of the post-WWII global order. While some trade skirmishes transitorily strained bilateral relations in the last few decades (especially in the 1980s), the overall goal of seeking common ground in the Asia-Pacific region has been a paramount feature in both countries’ foreign policy, irrespective of who is in charge.

No American leader has dared to challenge that status quo. President Obama nurtured that relationship and hosted Prime Minister Shinzo Abe in Pearl Harbor last year in a historic overture that rests on rock-solid diplomatic, defense and economic ties.

The election of Donald Trump, however, is sending clouds to previously clear Pacific skies. His Japan-bashing comments were a prominent element of his foreign policy pledges during the presidential campaign. Tokyo is understandably unsettled.

Certainly, it is not customary for any U.S. presidential candidate to describe Japan as a country that is taking American jobs, manipulating its currency and free-riding on the U.S. military involvement in Asia. Such crude messages can be found in books, essays and media articles by firebrand commentators (Mr. Trump himself spoke of Japan as a country “ripping us off like no one ever ripped us off before” in his 1989 bestselling book ‘The Art of the Deal’), but definitely they were not a staple ingredient of presidential campaign speeches.

Many Japanese and international observers were hopeful that, once in the White House, President Trump would phase out his heated campaign promises in favor of a sober, pragmatist endorsement of the strong U.S.-Japan bilateral alliance.

But optimistic commentators were quickly disappointed on January 24 when President Trump, soon after taking office, signed an executive order removing the U.S. from the Trans-Pacific Partnership (TPP), a 12-nation trade deal seen by Japan as a major strategic means of countering China’s rise in the Pacific. “A great thing for the American worker what we just did,” said Mr. Trump in a clear message to some of his struggling, unemployment-stricken blue-collar voters.

Withdrawing from the treaty may have been a largely symbolic gesture (Hillary Clinton also proved to be unenthusiastic about TPP during the last stage of her campaign), but speaks volumes about Mr. Trump’s determination to fulfil populist electoral promises even at the expense of a key U.S. ally.

Despite that rocky beginning, much has been done in record time to restore damaged trust. In February, Abe became the first international leader to meet President Trump, and none of the campaign’s Japan-bashing rhetoric was used in a seemingly reassuring encounter.

A hug and a shake between the American and Japanese leaders were interpreted as ostensible gestures indicating that Trump may be backpedaling on his combative electoral pledges. The American President’s remarks were also a source of relief: “We are committed to the security of Japan and all areas under its administrative control”, he said, while emphasizing that “the bond between our two nations and the friendship between our two peoples runs very, very deep”. He also promised to bring those ties even closer.

Crucially, the President’s remarks were backed by a joint statement stressing the U.S. commitment to defend Japan through nuclear and conventional military capabilities. The meeting between both leaders seemed to cast aside Trump’s promise to force Tokyo to pay for American military bases in its territory.

Prime Minister Abe probably went home with the sense that his meeting with Trump was an achievement. After all, he returned to Japan with a firm commitment that the U.S. will not compromise the vital security links between both countries.

But seen in a cold light (which, against the backdrop of Trump’s threatening remarks, is arguably difficult) the American commitment to bilateral strategic and defense ties should not be interpreted as a diplomatic achievement, but as the mere confirmation of an alliance that seems inevitable in the face of an increasingly assertive China and of North Korea’s follies.

The financial details of the bilateral security arrangement may be the object of discussion, and that of course could have important implications. But what are the chances for America to find a more reliable partner than Japan in a region that poses major geostrategic challenges for the U.S. in the immediate future? No other country in the region has the leverage, the weight and the will to replace Japan as the main steward of Washington’s strategic interests in Asia. Nor should America rely solely on its own prowess, resources and single-minded goals to become a solitary actor in the region.

U.S. President Donald Trump (Credit: Gage Skidmore)

“We are committed to the security of Japan and all areas under its administrative control. The bond between our two nations and the friendship between our two peoples runs very, very deep”

DONALD TRUMP, U.S. President

It is not clear whether it was Mr. Trump’s advisers who made the President understand the importance of maintaining the U.S.-Japan alliance, or whether it was Mr. Abe’s diplomatic touch what suddenly convinced Mr. Trump. But it worked nonetheless, and Mr. Trump even thanked Japan for hosting U.S. bases in its territory instead of threatening to withdraw them unless Tokyo paid for them (in fact, Japan pays $1.84 billion per year for the bases, something that President Trump seemed to ignore or at the very least failed to mention).

More importantly, Mr. Trump also forgot about his electoral demand that Japan should halt its reliance on the U.S. nuclear umbrella and develop and deploy its own nuclear capabilities. Instead, the two leaders committed to defending Japan, including the disputed Japanese-controlled islands claimed by China.

The defense alliance with the U.S. is vital for Japan, and Mr. Abe has been quick to point out that it must be maintained no matter who sits in the White House. He has candidly acknowledged that article 5 of the U.S.-Japan security treaty, which obliges the two countries to jointly defend Japan in the event of an attack by a third country, may not be automatically fulfilled if that situation arrived. Therefore, Mr. Abe thinks that at least other countries “should believe” that both the U.S. and Japan are ready to make good on that article as a means of deterring potential attacks against Japan.

Mr. Abe clearly thinks that perceptions matter, and both America and Japan have to give the impression that an attack on the latter will immediately trigger retaliation from the former. However, and beyond American assurances and the perceptions of Asian neighbors, Japan is not sitting with its arms crossed. The threat posed by North Korea is making Tokyo rethink its strict post-WWII pacifist legislation and consider whether it should become more assertive.

In practice, this means endowing Japan with the legal ability to strike pre-emptively at Pyongyang’s missile facilities. This is something that some hawkish Japanese MPs are openly discussing, with the backing of a Prime Minister who has made no secret of its intention to amend article 9 of the Japanese Constitution, which prevents Japan from using war as a means of settling international disputes.

In keeping with that legislation, Japan has refused to acquire weapons such as cruise missiles with enough range to strike other countries, relying instead on its military alliance with the U.S. as the main means of deterrence. However, and even after receiving reassurance from Trump, there are fears that the U.S. President may suddenly change his mind, which could put Japan in an intolerably dangerous situation. Hence the call to soften Japan’s anti-military stance and the urge to develop an effective self-defense equipment capable of deterring North Korea.

Aside from relying on American protection, Japan can contribute with its cutting-edge technologies to U.S. security. According to Eva Chen, CEO of Trend Micro, a global security software company founded in Los Angeles but headquartered in Tokyo, the U.S. and Japan are poised to dramatically strengthening their cyber-security cooperation. “An army can have many drones but if they get hacked there is no point. The investment in cyber-security will grow and both Japan and the U.S. are advanced in IoT (Internet of Things) and innovation. I believe the two countries will lead collaboration to make sure we have adequate and secure infrastructure around the world”, she says.

Unlike defense, an area in which the need for both countries to cooperate seems indisputable, economic relations may prove much tougher. After all, a considerable part of Mr. Trump’s voting base consists of struggling workers from areas whose traditionally prosperous industrial sites have been dismantled. Emboldened by Trump’s protectionist rhetoric, these voters largely blame Asian competition for the decline of their industry. There are fears that the President may resort once again to Japan-bashing remarks when seeking re-election.

For the time being, however, Mr. Trump has refrained from imposing tariffs on Japanese companies’ imports, as he promised to do. In addition, it is not clear to what extent Mr. Trump’s decision to pull out of TPP will have on economic relations – after all, the TPP is a largely strategic treaty mainly intended to counteract China, not a mere free trade agreement.

“Instead of exporting the products from Japan to the U.S.A., we have investments and contribute to local employment. China keeps the manufacturing center in China, but we transfer technology”

Tadashi Maeda, CEO, Japan Bank for International Cooperation

Now that America is out of the deal, lengthy negotiations for some sort of bilateral trade treaty have started, with no clear indications of what kind of agreement the Trump administration wants to see. Some Japanese economists are worried about the economic implications of the U.S. decision to withdraw from TPP, as it will be hard to find a bilateral deal that ensures a similar level of interaction and interdependence on the economic and other fronts.

Mr. Akihiko Tanaka, President of the National Graduate Institute for Policy Studies (GRIPS), a major incubator of future Japanese political leaders, is one of the authoritative voices expressing concern. “I believe this is an unfortunate decision for both the U.S. and the Asia Pacific countries. I believe the TPP should be of interest to both America and the Pacific nations. What we should do now is explore other possibilities of mutually beneficial economic relations”. Just what shape future economic relations may take is everybody’s guess.

Perhaps the most urgent task for Tokyo in re-engineering economic relations with the U.S. is to make sure that the administration and the American voters understand that Japan, far from being the ruthless job-stealer and currency manipulator caricatured by Mr. Trump, is a major contributor to the American economy.

This was exactly the message that Mr. Abe tried to convey to his host during their meeting in February. The Japanese leader made reference to a so called “U.S.-Japan Growth and Employment Initiative” encouraging both countries to work together to generate 700,000  jobs over the next decade.

According to media reports, Japan is also considering using its public pension fund to invest in U.S. infrastructure development. That could be a boon to the Trump administration, which envisages a plan for $1 trillion in infrastructure spending.

“The relationship between Japan and the U.S. is very strong and the fact that President Trump received PM Shinzo Abe as first international leader stands as a strong symbol”

SeishI Kitamura, President, Toho Bank

Japan’s contribution to the U.S. economy goes well beyond promises and does not need to be created from scratch. The numbers are self-explanatory: Japan is the United States’ fourth largest trading partner and a prominent destination for U.S. foreign direct investment (FDI). Perhaps more importantly for Americans worried about Tokyo’s alleged job-stealing practices, the U.S. is the main destination for Japanese FDI foreign direct investment (FDI). Japan is also the second largest source of new investment to the U.S., and holds the second biggest cumulative stock of FDI in America. Japanese companies already employ more than 700,000 Americans, meaning that the Asian country is the world’s second biggest creator of U.S. jobs after the United Kingdom.

Mr. Tadashi Maeda, CEO of the Japan Bank for International Cooperation, highlights something that may puzzle some anti-Japan Trump voters: “In 40 states out of 50 in the United States, Japan is the largest foreign direct investor, and in the rest of them, it is number two. Probably not many Americans know this, but it’s a fact”. In his view, U.S.-Japanese economic relations can only thrive on the perception that Japan is indeed contributing to make America richer. “Instead of exporting the products from Japan to the U.S.A., we have investments and contribute to local employment. China keeps the manufacturing center in China, but we transfer technology. Japan hopes to contribute to the U.S. manufacturers and suppliers”, he claims.

Those positive developments have been largely overlooked, as most of the attention (and the ire) of Mr. Trump and of millions of American workers have focused on one single fact: Japan’s hefty trade surplus ($68.9 billion last year) with the U.S.

Japanese surpluses with America are a stubborn affair. After the 2011 Fukushima nuclear disaster, Japan became used to recording trade deficits (it only managed to break that trend in 2016) but somehow continued to run surpluses with America.

Massive Japanese car and auto parts exports to the U.S., which stood at $40 billion last year, are partly to blame. But once again, Trump’s attacks at the Japanese automobile industry ignore realities that the American workers and taxpayers should know: Japanese auto companies directly employ nearly 90,000 workers in the U.S. and source from American companies many of the car components they use.

It is in the interest of the U.S. to rely on its long-standing alliance with Japan to ensure mutually beneficial links. The Japanese economy may have been characterized in the last few years by anemic growth, an aging society and a shrinking domestic market. But under the Prime Minister’s Abenomics policies, combining monetary easing, flexible fiscal policy and a more openness to foreign investment, the country shows signs of bouncing back.

Japan’s GDP growth in the fourth quarter of 2016 stood at 1.2% and, more importantly, the economy managed to expand for four consecutive quarters. While growth was mostly driven by strong exports and not by a consistently sluggish internal demand, Japan Inc. is moving ahead despite this chronic problem and laying the foundations of sustainable prosperity.

The country spent $750 billion on mergers and acquisitions last year, a figure that is smaller than America’s but well ahead of that of all the emerging markets combined. Mr. Suguru Miyake, President of Nihon M&A, a financial institution specialized in this kind of operation, whose business has expanded by 170%, looks at the U.S. for inspiration: “The American M&A industry is about 15 years ahead of Japan, which suggests that there is an excellent learning opportunity”.

He concedes that the only way for Japan to deal with its relative isolation is “to deepen ties with the U.S. but also with surrounding Asian countries”.

A better understanding of the mutual benefits that stem from this long-standing bilateral alliance needs to be properly explained.

However, some entrepreneurs are hopeful that Mr. Trump’s natural businessman instincts will prevail, thus paving the way for a pragmatic and constructive relationship with Japan. Mr. Seishi Kitamura, President of Toho Bank, a financial institution  that seeks to enhance regional economic revitalization (especially in the nuclear-hit Fukushima prefecture), is confident that things will not change dramatically. “The relationship between Japan and the U.S. is very strong and the fact that President Trump received PM Shinzo Abe as first international leader stands as a strong symbol,” he says.

Others, like Mr. Miyake of Nihon M&A, prefer deeds to words: “Mr. Trump is a successful businessman, so we shall look forward to his policies and judge them for their merit rather than looking back at his negative comments.” That is a view shared by many in Tokyo’s corporate boardrooms. But only time will tell whether some of Trump’s protectionist promises will finally translate into actual legislation, and how it will affect Japan.