FINANCIAL TIMES

Why saying 'sayonara' is the hardest thing to do
By Matthew Goodman and Michael Green

27 June 2006

Just months before he steps down as Japan's prime minister, Junichiro Koizumi arrives in the US this week for a "sayonara summit" with President George W. Bush. The most memorable image of the event is likely to be the two leaders' pilgrimage to Graceland, the former home of Elvis Presley, to pay homage to Mr. Koizumi's hero. Having put US-Japan political and strategic relations on their most secure footing in years, the two friends have reason to celebrate with a road trip. Before leaving Washington, however, they should spare a moment for one aspect of the relationship that could still use their personal attention: the US-Japan economic agenda.

At their first meeting in 2001, Mr. Bush and Mr. Koizumi launched the so-called "economic partnership for growth" as a framework for bilateral economic dialogue. This centered on three main objectives: ending deflation in Japan, resolving the non-performing loan problems of Japanese banks and promoting deregulation and structural reform. There has been some notable progress in the five years since: the Japanese economy finally appears to be growing its way out of deflation, and banks have largely cleaned up their balance sheets. But the momentum behind the EPG has long since petered out. A long-simmering dispute over beef trade has effectively put bilateral economic dialogue on hold for more than two years. Meanwhile, both Japanese and US businesses have been dazzled by the allure of China and India, making it difficult to sustain political interest in bilateral engagement.

Yet the case for a robust economic agenda between Washington and Tokyo remains strong. While Japan's economy is growing again, it still needs substantial structural reform, which the US remains well-positioned to encourage. Closer US-Japanese economic co-operation could create incentives for China to play a more constructive role in the region and the world. For this reason, and because of collective US and Japanese weight in international financial institutions, in big development initiatives and in management of the global economy, the rest of the world also has a vital stake in US-Japanese economic relations.

Some or all of this logic has prompted various calls for Tokyo and Washington to negotiate a free trade agreement, or some variation on this. Both the US-Japan Business Council and American Chamber of Commerce in Japan support moves toward an economic integration arrangement. Japan's main business association, Keidanren, has taken no official position, but individual chief executives have supported versions of an FTA. Meanwhile, Japanese officials in the US are agitating for some kind of formal arrangement to keep Washington focused on ties with Japan.

We share the scepticism of many US-Japan experts about the feasibility - or desirability - of an FTA at this time.

On one hand, the idea is not ambitious enough: with few formal trade barriers between them, a conventional FTA would add little to US or Japanese economic welfare. Any such arrangement would need to be a "super FTA", attacking barriers to integration beyond borders. At the same time, an FTA is probably overly ambitious in light of current political realities. Until both sides - but especially Japan - are ready to open fully their agriculture markets, a free trade agreement would be incomplete and politically untenable. A multilateral deal on agriculture under the Doha trade round could prepare the ground for a broad bilateral accord; but the prospect for the former appears remote at present.

A more realistic approach would be to work on the "building blocks" of an eventual comprehensive agreement. The two governments could seek to negotiate a series of smaller deals that addressed the underlying structural obstacles to full economic integration, covering services, investment, customs procedures and so on. When Japan is ready to open its agriculture market, many elements of a "super FTA" would already be in place. In particular, the two governments could productively work on convergence of regulatory standards such as those covering healthcare products and services, financial services and intellectual property. As the world's two biggest economies, with shared values, the US and Japan have much to agree on. Moreover, they could set the pace for global standards in the face of opposing challenges: on one side, European efforts to impose market-interventionist approaches; on the other, Chinese diffusion of weak disciplines in an effort to win friends or cut corners to their own development.

It is not realistic to hope that Mr. Bush and Mr. Koizumi could agree details of a new bilateral economic agenda along these or any other lines this week. Mr. Koizumi's successor as Japanese prime minister should in any event have scope to shape new initiatives with the US. But for now, Mr. Bush and Mr. Koizumi could set out a vision for deeper US-Japanese economic integration and instruct their bureaucracies to come up with options by the end of the year.

Before they leave for their road trip to Memphis, the US and Japanese leaders have an opportunity to round out the legacy of their extraordinary five-year partnership. Thanks to them, US-Japan political and strategic relations have never been better; the same should be possible for economic ties.

Michael Green was US special assistant to the president in charge of Asia until December 2005 and is now at the Center for Strategic and International Studies and Georgetown University; Matthew Goodman handled Asian economic policy for the White House 2002-04 and is now at Stonebridge International.

Return to In the News

Back to Top^