An Urban's Rural View

A New Economic Dialogue With Japan

Urban C Lehner
By  Urban C Lehner , Editor Emeritus
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The scores of Donald Trump's recent Florida golf games with Shinzo Abe have not been made public, but even before they teed off, the Japanese prime minister admitted his game "is not up to the level of Donald at all." The president typically shoots in the 70s, Abe in the 90s.

History, it turns out, sometimes repeats itself. Sixty years ago, Japanese Prime Minister Nobusuke Kishi played golf in Maryland with President Dwight Eisenhower, shooting a 99 to Ike's 74 (http://tiny.cc/…). Kishi vowed he would cut 10 strokes off his score before he played the president again (http://tiny.cc/…). The rematch never happened, but Abe has now carried on the family tradition. He's Kishi's grandson.

To the relief of those who care about U.S.-Japan relations -- including American farmers, for whom Japan is a $45 billion export market -- the president and the prime minister seemed to hit it off. Trump thanked Abe for the "great friendship" they'd developed, adding "we have a very, very good bond, very, very good chemistry."

Chemistry established, a new U.S.-Japan economic dialogue can begin in earnest.

Having pulled the U.S. out of the 12-nation Trans-Pacific Partnership trade agreement, Trump will now try to wrest better trade terms from Japan bilaterally. Having attacked Japan as a currency manipulator, Trump will now try to force the Japanese to change their behavior. The history of U.S.-Japan trade negotiations suggests the president's mastery of the art of the deal is about to be tested.

Bettering the TPP terms is probably the less daunting of the two hurdles. According to a Japanese expert quoted by Bloomberg, TPP would have eliminated tariffs on 81% of Japan's agricultural products while abolishing tariffs on 99.9% of manufactured products (http://tiny.cc/…). Bilateral negotiations, the expert suggested, might attack this "asymmetry."

If they did, it's possible to imagine a deck-chair-rearranging compromise that would allow both sides to declare victory. The danger for American agriculture is that the compromise could sacrifice some of ag's TPP gains with Japan, like the chilled-beef tariffs that were to drop to 9% from 38% in 16 years, at the altar of greater protection for American manufacturers.

Ending currency manipulation is a different plate of sushi. The problem starts with definitions -- distinguishing currency manipulation from ordinary monetary policy. When a country suffers from anemic growth and deflation, its central bank prints money. That's monetary policy 101. But it also has the effect of weakening the currency, which boosts exports. If this is currency manipulation, the U.S. Federal Reserve has at times in recent years been the world's most flagrant currency manipulator.

Even if American and Japanese negotiators could solve the definitional puzzle, even if they could negotiate away Japanese currency manipulation to the president's satisfaction, the yen might remain weak. Much would depend on how international investors assessed their prospects for making money by holding one currency or the other. As the world's reserve currency, the dollar will always be the default option for many investors.

The last time the two countries negotiated a currency agreement the results were to the liking of neither. In the 1985 Plaza Agreement, five countries—the U.S., Japan, France, Great Britain and West Germany agreed to intervene jointly in financial markets to drive down the dollar, which had risen sharply in the previous five years.

In the following two years, the dollar fell 50% against the yen. The U.S. trade deficit with Japan, however, widened to $56 billion from $46 billion. And the Bank of Japan, fearful of recession, printed money, inflating the bubble that eventually burst, launching Japan's "lost decade" of economic stagnation.

Donald Trump may not know or remember this, but you can bet Japan's Ministry of Finance and the Bank of Japan do. It won't be a shock if Japanese negotiators aren't eager to repeat the experience.

All that said, the good chemistry between Trump and Abe is a relief. Knotty disagreements over trade and currency policy would be even harder to resolve were there tension at the top. And tension at the top seemed a real possibility after Trump's scathing attacks on Japan during his presidential campaign. Credit Abe for taking the initiative and establishing a personal relationship with the president.

It's also a hopeful sign that Vice President Mike Pence will be involved in the bilateral economic dialogue. Having made two economic-development missions to Japan as governor of Indiana, Pence knows the country and is known there. In his pre-Trump past he was a supporter of TPP. Japan's negotiators, led by Deputy Prime Minister Taro Aso, will assume that Pence is the kind of man they can do business with.

Japanese media are speculating Pence and Aso will meet in Tokyo in April. Farmers and ranchers who've been nervous about the new administration's trade policy will be watching this dialogue hopefully.

Urban Lehner can be reached at urbanize@gmail.com

(CZ)

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