Media  International Exchange  2018.04.27

U.S. should not Incline towards Protectionism but Invite Japanese Companies to Improve Competitiveness -Reduction in Trade Deficits and Job Creation in the U.S. through Expansion of Investment by Japanese Companies in the U.S.-

An article published in March 22, 2018
Estimation of American Analysts on Policy Management of the Trump Administration

The U.S., which is Japan's most important ally, has lost its moorings under the Donald Trump Administration.

To some extent, the tax reform and some national security policies adopted by the Trump administration over the past year have gained positive recognition.

However, Mr. Gary Cohn, the Director of the National Economic Council (NEC), who had led the process of the tax reform, announced his resignation on March 6.

It is believed that Mr. Cohn strongly opposed the measure to impose the 25% and 10% tariffs on steel and aluminum imports respectively under Section 232 of the Trade Expansion Act of 1962.

In spite of the opposition from Mr. Cohn and others, President Trump decided to enforce the tariff under Section 232, leading to the resignation of Mr. Cohn from the administration. On March 13, one week after his resignation, the dismissal of Secretary of State Rex Tillerson was announced.

By definition, the stated law stipulates implementation of sanctions against threats to national security. The Trump administration, however, has not provided a full explanation on the key points that constitute the alleged threats to the national security of the U.S.

It is believed that the actual purpose was in fact a campaign strategy to support the Republican candidate who was running for a special election for the Congressional District in Pennsylvania on March 13. It targeted steel and aluminum workers in the district for the purpose of job protection.

However, the Democratic candidate won the election by a narrow margin. The efforts of President Trump were in vain.

In favor of a short-term gain in domestic politics, which was to win an electoral victory in one district, the administration announced an increase in tariffs which provoked strong international reactions.

Official recognition of Jerusalem as the capital of Israel, which was announced last December, was also regarded as an electoral campaign strategy, taking into account internal politics. The way the Trump administration manages politics is inconceivable in the past administrations, but this has become the ordinary modus operandi of the current administration.

U.S. foreign and trade policies which have significant global impacts are administered with shortsighted consideration driven by internal politics. This is the prevalent perception of how the Trump administration handles politics.

One high-ranking official on Capitol Hill described the situation of the administration immediately after the resignation of Mr. Cohn.

"The Trump administration is divided into several groups with different ideas and views. Each group does not cooperate with the others. As a consequence, policies which are inconsistent with each other are implemented incoherently."

"There is neither a strategy nor consistency. Policy management as a whole is in chaos. Therefore, all issues including foreign policies, economic policies, budget, and personnel matters are totally unpredictable."

What Japan Should Do as a U.S. Ally

Given the situation in the U.S., what Japan as a U.S. ally should do is an extremely crucial to Japan.

When the U.S. faces a big problem, Japan seldom proposes solutions to the U.S. and implements the same. Japan waits until the U.S. comes and requests and takes actions passively. This has been always the stance of the Japanese government.

U.S. policy specialists regard Japan as a country of passivity as well. If Japan accepts an increase in tariffs on steel and aluminum announced at this time, it will be the expected stance of Japan as usual.

Recent visits to the U.S. made me understand the chaotic situation in the U.S. government which has unfolded under the Trump administration. The better I understand the situation, the stronger I am convinced that Japan, which is a U.S. ally, should not be passive any more.

From the end of World War II up to the present day, Japan has rarely made any effort to change its subordinate position as a junior partner that follows the U.S.

Last year, when the Trump administration declared a withdrawal from negotiations on the TPP (Trans-Pacific Partnership Agreement), Japan took over the U.S. position and led the process without any U.S. involvement. Eventually, under the leadership of the Japanese government, the agreement was signed by all member countries except the U.S., and the signing ceremony was held in Chile on March 8.

This was the first successful case in which Japan took a lead in the finalization of an international treaty, independent of the U.S.

With this experience, it can be said that finally, Japan has moved slightly out from the position of a U.S. junior partner and started taking action as an equal partner, which should be the way it is between two ally countries.

Because Japan took this new step as an ally of the U.S., it should take one more step forward to show its willingness to support the U.S., which has lost its mooring under the Trump administration.

What could Japan Do to Support the U.S.

The Trump administration announced an increase in tariffs on steel and aluminum imports for reasons associated with national security threats.

If the U.S. feels insecure in its domestic capacity to produce sufficient amounts of steel and aluminum, Japan as an ally would never refuse the request of the U.S. for the supply of materials.

Without an increase in tariffs on imports, the national security threat felt by the U.S. would be greatly mitigated by the Japanese support buoyed by strong production capacity.

As a leader of the free trade system, since the end of the World War II, the U.S. has substantially contributed to the development of the global economy. Japan learned from the U.S. the importance of free trade and cooperated with the U.S. to establish the free trade system, which provided the groundwork for Japan's economic development.

China joined the WTO (World Trade Organization) in 2001 and, since then, has fully benefited from the free trade system. China has made remarkable progress in economic development and is now an engine for the global economy.

In this regard, China along with Japan and the U.S., has a deep understanding of the importance of the free trade system. Therefore, it strongly advocates the continuation of the system.

In view of such historical facts, Japan, the U.S. and China, the three biggest economies, which are leading global economy, have responsibilities to sustain the free trade system and to facilitate sound development for the world.

However, with the current trouble in U.S. economy, drastic implementation of the free trade system apparently has its own side effects. The system promotes the flow of cheap imports into the country, which will adversely affect the performance of domestic industries that are less competitive. Consequently, gaps between the rich and the poor will be widened in the country.

In the past, American manufacturers had adequate competitiveness. However, since the 1980s, the U.S. government has given more focus on finance, IT and other sectors and exerted little efforts to promote the development of traditional manufacturing industries such as steel, machines and petrochemicals. This is why the competitiveness of American manufacturers has significantly declined compared with that of Japan and Germany.

Therefore, it is highly unlikely that the competitiveness of U.S. companies would improve through their own efforts within the free trade system environment.

One new idea to solve this problem would be for Japanese companies to actively branch out into the U.S. They can expand and accelerate business operations in the U.S. through various means, such as via technical cooperation or joint investment (including minor investment of the Japanese side) with U.S. companies, as well as unilateral investment by Japanese companies.

I would like to propose the establishment of a partnership between Japanese and American companies across the U.S. in this manner, which will enhance the competitiveness of U.S. industries and especially secure jobs for low-income white Americans.

The Japan-U.S. Growth Employment Initiative, which was proposed by Japan at the Japan-U.S. summit meeting in February last year, aims for Japan to assist job creation in the U.S. through cooperation in infrastructure maintenance. It can be considered that the above proposal is in accord with this initiative.

Application of Chinese Success Model

Under the drastic promotion of free trade and market mechanisms, the United States had huge damage on domestic employment. Japanese companies will support the U.S. to create jobs in the country. The Chinese way of managing foreign companies in the process of economic development can be a good model for such a move.

It will be effective if each state and city government of the U.S. implements various measures to attract Japanese companies on a competitive basis. These measures include the provision of corporate tax incentives, provision of high standard and convenient transportation systems such as highways and railroads, and the development of sites for the establishment of factories. Similar and comparable measures have been implemented by Chinese local governments.

For example, the 2+3 years tax holiday tax incentive measure, which has been widely introduced across China, provides competent foreign companies operating in China with full exemption of corporate tax for the first two profitable years followed by a 50% reduction for three years.

What companies should be targeted for the tax incentive policy would be at the discretion of each local government.

Once Japanese companies start their operations in a local community of the U.S., it is expected that the corporate mission of Japanese companies would be well understood in U.S. society.

Generally, the missions of U.S. companies are maximization of short-term profits, increase in stock price and provision of high salaries for top management.

On the other hand, many Japanese companies aim to contribute to society, gain long-term trust and support each employee to feel secure and happy and to achieve self-realization. In other words, they value economic activities, which are in harmony with the local community in which they operate.

Such missions of Japanese companies are consistent with the needs of low-income working-class voters who support the Trump administration. If proper support was provided by local governments, it would be possible for Japanese companies to contribute to the revival of the so-called rust belt areas, where heavy industry factories were previously concentrated.

While the Trump administration tries to suppress imports with tariff increases, if domestic demand is expanded by its policies of tax cuts and budget increases, it will be difficult to control imports, resulting in increases in trade deficits.

On the other hand, once American manufacturers regain their competitiveness through cooperation between Japan and U.S. companies, control of the trade deficit will be structurally feasible. This also corresponds to policy directions of the Trump administration.

The Trump administration has requested Japan to increase its contribution to defense spending; however, significant increases in the defense budget will be very difficult given the current feelings and attitudes of the Japanese public.

In view of this, I would like to propose a new cooperation scheme for the Japan-U.S. national security alliance. The concept of this scheme is to solidify the alliance not through Japanese military expansion but through economic cooperation between the two countries. Within the framework of this scheme, policies to entice Japanese companies to the U.S. would be implemented.

In return for this Japanese assistance, if the U.S. reduces the burden regarding its military bases in Okinawa with its own efforts, the Japanese government will be able to gain political support for this scheme from the public.

Merits of the Above Proposal for Japan

This year is the 40th anniversary of the Japan-China Peace and Friendship Treaty. On this occasion, the Japan-China relationship is expected to improve. Local governments across China have strengthened their move to attract more Japanese companies by taking advantage of the improving Japan-China relationship.

If the above proposal results in success in the U.S., more U.S. communities along with Chinese local governments will take action to invite Japanese companies. Further, there is the potential that this move will spread out into other countries as well.

With this approach, it is possible that Japan will become a proactive player in the global market as a leader to protect free trade, while contributing to the stabilization of the socio-economic conditions of each country.

In addition, actual operation of Japanese companies in each locality will facilitate a common understanding on the corporate mission of Japanese companies by the public not only in the U.S. but also everywhere else in the world. Such missions are to contribute to the community, gain long-term trust and support all employees to attain security and to feel happy.

The proposal would deepen the Japan-U.S. alliance. Furthermore, it is expected to produce incidental effects. This includes globalization of Japanese companies, strengthening of Japanese soft power, correcting the inward behavior of Japanese youths and raising the awareness level of the Japanese public in global roles through clarification of how Japan contributes to the world.

Under the condition where the U.S., a major player in the establishment of world order, is in a state of chaos, it would be an opportunity for Japan, an ally of the U.S., to demonstrate its ability to contribute to the world as an independent player. It would be the next step to be taken by Japan following its achievement in the TPP11.

(This article was translated from the Japanese transcript of Mr. Seguchi's column published by JBpress on March 22, 2018.)