U.S.-Japan Economic Relations - Fulfilling the Promise

The following speech was delivered on December 6, 2007 to Keizai Doyukai and the American Chamber of Commerce in Japan by Daniel M. Price, Assistant to the President and Deputy National Security Advisor for International Economic Affairs, National Security Council.

Good afternoon everyone. First let me extend my thanks to the Keizai Doyukai and the American Chamber, and especially to Chairman Sakurai and President Lake, for organizing this opportunity to speak to the leaders of the business community in Tokyo.

The title of my presentation is "U.S.-Japan Economic Relations - Fulfilling the Promise."

The United States and Japan have a vibrant relationship in trade and investment dating back to the 19th Century. Today, we are the world's two largest economies.

Tokyo and New York are critical financial markets, powering the engines of global development. The United States and Japan are technology leaders, inventing the solutions that will lead the world's response to key long-term challenges such as climate change, energy security and sustainable growth.

Together, we are at the forefront of responding to aging populations and the continuing challenges of human disease.

The United States and Japan remain the world's largest providers of development assistance to nations in need. Perhaps most importantly, the United States and Japan are close friends - politically, militarily, and at the individual level - and we share common values and objectives for a more peaceful, prosperous and democratic world.

There is thus much common ground between our great nations, but in the economic realm I believe we are not accomplishing as much as we could be, or should be, both bilaterally and multilaterally.

Today I would like to focus on four areas where the United States and Japan could and should be doing more. First, our bilateral trade and economic relationship. Second, how we work together in the Asia-Pacific region. Third, how we cooperate to promote trade and investment liberalization, including through the Doha Round negotiations. Fourth and finally, I would like to discuss how we work together to meet the global challenges of climate change and economic development.

Working Together to Strengthen Bilateral Economic Relations

First, let us look at the bilateral economic relationship.

Fifteen years ago this month, the United States signed its landmark free trade agreement with Canada and Mexico. At that time, no one would have predicted that the first FTA the United States would conclude in Northeast Asia would be with the Republic of Korea. Japan was clearly the dominant economy on the Pacific horizon. And although the United States and Japan had many bilateral economic issues, it seemed certain that our engagement with Japan would be more intensive than with any country in the region for years to come.

But that promise today remains unfulfilled. In the years since, South Korea undertook courageous economic policy reforms. It did so based on a firm conviction that market-opening measures were necessary if Korea were to be a vibrant and dynamic economy. As a result, when the U.S. and Korean legislatures approve the FTA, our economic relations will experience a renewed and rapid deepening, benefiting workers and consumers in both economies. And we urge Congress to pass the FTA quickly once it is submitted.

Beyond the Korean Peninsula, China looms increasingly large in the U.S. economic worldview. We face immense challenges in helping China integrate smoothly into the global economy. But there are also giant opportunities - big enough such that next week Treasury Secretary Paulson will lead more than one-third of the President's Cabinet to Beijing for our third Strategic Economic Dialogue.

So, what happened to U.S.-Japan economic relations during this period? In the latter half of the 1990's, efforts appropriately focused on Japan's overcoming its financial crisis as quickly and effectively as possible. In June 2001, Prime Minister Koizumi and President Bush launched the U.S.-Japan Economic Partnership for Growth (or EPG) in order to promote "cooperation and engagement on bilateral, regional and global economic and trade issues."

Over the subsequent six years, the EPG and the Sub-Cabinet Dialogue have served as useful channels for frank and friendly dialogue on bilateral, regional and multilateral issues. Some progress has indeed been made in regulatory reform and other areas. In particular, the United States welcomed Prime Minister Koizumi's bold work to privatize the immense state-owned financial institutions that had grown through Japan's postal system. There were also legal and regulatory improvements starting from the late 1990's that, cumulatively, improved the business environment and cracked the door open to mergers and acquisitions activity that could strengthen competition and enhance Japan's economy. And we are of course gratified that reforms were pursued largely in ways that have treated domestic and foreign companies equally. But in general, we have not yet seen the ambitious breakthroughs in U.S.-Japan economic relations that should be within reach. Instead, progress has been incremental, with only modest results.

Now, the sense that Japan needs a bolder approach is not confined to outsiders, like me, who just flew in from Washington. As Nikkei Executive Editor Naoaki Okabe wrote this week, and I quote from his article: "With the global economy now at a historic turning point, the Japanese economy might be driven into a corner. In a survey conducted by the World Economic Forum to assess countries' competitiveness, Japan dropped from 5th to 8th place, reflecting its terrible fiscal condition. Regarding the degree of integration into the global economy, Japan also keeps a low profile. The degree of Japan's market openness to foreign capital is the lowest among the major industrialized countries."

Last week, the Peterson Institute for International Economics in Washington released a study indicating that a U.S.-Japan FTA could create about $130 billion in economic gains for Japan and about $150 billion in gains for the United States. Japan, however, has consistently told the United States that it cannot consider negotiating an FTA because that would likely require decreasing the protection afforded to Japanese farmers. Indeed, the absence of ambitious plans for agricultural reform in Japan blocks not only consideration of an FTA with the United States - but also hinders, as we will later discuss, Japan's participation in the Doha Round of trade negotiations.

So, instead of strengthening our economic relations, we find ourselves preoccupied with this cluster of bilateral problems that remain unresolved. A few examples - in the area of civil aviation, for example, the United States has an Open Skies agreement with a number of countries, including South Korea. With Japan, while we have made some progress, travelers still face limited choices and high prices, which ultimately constrain travel and trade.

On other troublesome issues such as import restrictions on U.S. beef, there has been very limited progress, if any. For four years, Japan has restricted imports of U.S. beef without a reasonable scientific basis. In May 2007, the World Animal Health Organization confirmed the international scientific consensus that U.S. beef is safe. But Japan continues to second-guess or disregard that scientific view and restricts imports, even though not one single person has ever contracted the human variant of the disease from eating U.S. beef.

We are also concerned about a proposed new rule on the pricing of pharmaceuticals that would penalize the most innovative and widely recognized products on the market. This would discourage future investment and innovation in the pharmaceutical sector.

While our trade problems persist, our mutual bilateral trade, while strong, is growing more slowly than with any of our other trading partners in the Asia-Pacific region. The same is true in the area of foreign investment, where American capital and know-how is still constrained in its ability to gain access to Japan and contribute to Japanese economic growth.

So, our bilateral economic relationship faces significant challenges, and, frankly, the United States is looking for positive signals that Japan is prepared to undertake the type of significant economic reforms that would improve that economic relationship.

Working Together to Build an Asia-Pacific Economic Community

Let me turn now to our efforts to work together to build a stronger and more integrated Asia-Pacific economic community.

Given the size and sophistication of the Japanese economy and our strong bilateral political alliance, Japan should be our most important economic partner in Asia. But in some respects, the United States and Japan are more active with other partners than with each other.

The United States is very interested in establishing a trans-Pacific regional trade agreement in the years to come. We have already negotiated FTA's with seven of the twenty other Asia-Pacific Economic Cooperation (APEC) economies, now including South Korea. We are also continuing negotiations with Malaysia and Thailand. All of these FTA's are high-standard agreements, generating significant new flows of trade and investment. This is, in our view, a good start for building a more closely integrated trans-Pacific economic community.

Japan has also pursued FTA's in the region, most notably initialing an agreement two weeks ago with the 10 members of ASEAN, which creates a combined market of 687 million people. Across the Pacific, Japan has FTA's in force with Mexico and Chile. Talks between Japan and South Korea appear stalled, but Japan recently launched FTA talks with Australia. We in the United States will closely watch the Japan-Australia negotiations, to see if Japan will conclude a comprehensive free trade agreement with a significant and efficient agricultural exporter.

Despite some similarities, there are some differences in how the U.S. and Japan approach the region's emerging economic architecture. The most important differences relate to sequencing, as well as the level of ambition. In general, the United States adheres closely to the aspiration - which is enshrined in WTO rules on FTA's - of achieving a "comprehensive undertaking" in negotiations. U.S. FTA's go well beyond tariffs, addressing a range of non-tariff measures across many sectors: services, investment, IPR, etc. Agreements that cover only tariff reductions on goods trade cannot be considered true "free" trade agreements, and leave a number of opportunities untapped.

On a more conceptual level, Americans are puzzled by the tendency of some in Japan to focus primarily on Asian economic integration and treat trans-Pacific integration as secondary and distinct. We think this too misses an opportunity. The United States, and increasingly other economies in the Americas, are important players in the Asia-Pacific economy. It makes sense to us to use APEC and other means to bring all of these economies closer, as rapidly as we can.

Important work lies ahead in shaping what we hope will be a Free Trade Area of the Asia-Pacific (FTAAP). APEC Leaders have commissioned a number of important studies to help determine the right path toward a so-called "FTAAP." This could be by merging existing agreements, or by building up a regional FTA chapter-by-chapter, or by launching a new negotiating process. Japan and the United States both support these APEC efforts. We appreciate that Japan has taken the lead with Australia in setting up a Policy Support Unit in the APEC Secretariat to assist in needed research.

Japan will host the APEC meetings in 2010, the target year for the industrialized economies of APEC to achieve the so-called "Bogor Goal" of "free and open trade and investment." We believe that we are on track to achieve that ambitious - if loosely-defined - benchmark. A successful Doha Round will help. Ambitious agricultural reform is probably the most important challenge that Japan can tackle in order to help ensure that APEC can declare the Bogor Goal as fulfilled when Japan hosts that summit in 2010.

Working Together on Global Trade and Investment

Now I would like to look beyond the Asia-Pacific region, and see how Japan and the United States implement their shared interest in promoting global trade and investment liberalization. I think we can all agree that the current and future prosperity of our economies depends on access to foreign markets. A few statistics help to tell the story. U.S. exports now account for 12 percent of our GDP, the highest level in our history. Sales by the overseas affiliates of U.S.-based companies generate about 27 percent of those companies' profits in 2006. In Japan, exports have increased 60 percent in the last five years and now account for nearly 15 percent of Japan's GDP. And, on the investment side, sales by the foreign affiliates of Japanese-based companies totaled $1.5 trillion in 2003, including $581 billion in sales by affiliates in the United States.

Of course, the benefits of trade and investment liberalization go beyond the statistics. Open and competitive economies create opportunity, alleviate poverty, empower individuals and foster technology development. In addition, by strengthening the private sector, open economies create a demand for government accountability, transparency, the rule of law - all essential elements of democracy.

The best and most powerful way to liberalize global trade is through the Doha Round of trade negotiations. That is why our President has made Doha his highest international trade priority. In his address to the United Nations General Assembly, President Bush described Doha as a "once-in-a-generation opportunity."

We are at a critical stage in the Doha Round. Negotiations have been ongoing since September based on the texts issued by the chairmen of the WTO negotiating groups on agricultural and industrial goods. These texts attempt to create a framework for reaching an agreement. The goal now is to increase the areas of consensus in the two texts so that revised texts can be issued in January that provide a complete and detailed framework for agriculture and industrial goods. At about that time, we hope that the chairman of the negotiating group on services will issue a text calling for WTO members both to bind their existing levels of market openness and to provide new market access. If we can reach agreement on these frameworks, we believe that a final agreement on the Doha Round is achievable in 2008.

The United States and Japan should be working arm-in-arm to conclude an ambitious Doha agreement. And in many areas, certainly the U.S. and Japan are working closely together. Unfortunately, however, Japan has sometimes remained on the sidelines, seeking to defend its agricultural sector. This impairs efforts to secure new opportunities for its manufacturers and service suppliers. In our view, the time is now for Japan to join the advocates for an ambitious agreement in all sectors and to play a role in Doha commensurate with its position as a leading economic power. We recognize that Japan has defensive interests. So does the United States. But in order to reach an agreement, all WTO members must make tough political choices. We must not lose sight of the substantial gains from an ambitious Doha agreement, both for ourselves and for the global economy.

Aside from Doha, Japan and the United States could be working more closely to liberalize investment regimes around the world. Inbound and outbound investment stimulate growth, create jobs, expand tax revenue for local governments, enhance productivity, and foster competitiveness. And the United States and Japan are two of the world's largest foreign investors. Again, a few statistics - Japan's outbound investment flows increased from $29 billion in 2003 to more than $50 billion in 2006, with a total stock of nearly $450 billion in 2006 (that is 10 percent of Japan's GDP). U.S. outbound investment likewise increased from $129 billion in 2003 to $217 billion in 2006, with total stock of outbound U.S. investment of $2.4 trillion in 2006 (or 18 percent of GDP).

To enhance protection for its overseas investments, Japan, like the United States, is expanding its network of bilateral investment treaties. Recent Japanese treaties are, for the most part, quite similar to the high-standard U.S. model BIT. Both require that investors receive fair, equitable, and non-discriminatory treatment. Both types of agreement require that property not be taken without just compensation, that investors be allowed to transfer capital into and out of the country, and that disputes be resolved in independent international arbitration. U.S. and Japanese investment treaties, by these concordant provisions, are contributing to a common set of international standards for the treatment of foreign investment.

Beyond our respective bilateral investment treaties, Japan and the United States should continue to strengthen our cooperation on investment protection in APEC, through the G-8, in the OECD and in other fora. We should together bring to these discussions the same high standards of investor protection that are reflected in our bilateral treaties.

Working Together on Climate Change and Development Assistance

Let me turn now to the fourth and final area, where the United States and Japan are cooperating indeed most effectively. There are the areas of climate change and assistance to developing countries.

Just last month, when Prime Minister Fukuda was in Washington, our two governments issued a document detailing our common approaches to address climate change and energy security. Right now, our negotiators are in Bali, Indonesia, where they are trying to establish a so-called "Bali Roadmap." That is a roadmap that will guide negotiations toward a future agreement for when the Kyoto Protocol expires in 2012. The United States is intent on working constructively to negotiate a regime that is economically sustainable, environmentally effective, and global in scope. To be economically sustainable, a post-2012 agreement must be cost-effective and support the hopes of people everywhere for economic growth, energy security, and an improved quality of life. The United States and Japan agree that technology is key to achieving emissions reductions while meeting the world's growing demand for energy. Japan and the United States combined provide about three-fourths of government-funded R&D spending by all leading economies for new energy technology. Since 2001, the United States has funded $18 billion in climate technology programs. The U.S.-Japan Joint Nuclear Energy Action Plan signed earlier this year is a good example of our cooperation. We need technology advances in areas such as nuclear and renewable power, biofuels and hydrogen alternatives to petroleum, and capture and storage of carbon from coal-fired power plants.

To be environmentally effective and global, a new approach must involve commitments by the world's largest producers of greenhouse gas emissions - developed and developing countries alike - all must take effective action. An approach that requires only some, but not all, to act will not work.

Under an initiative announced last May by President Bush, which has been endorsed by the G-8, by APEC, and by the UN Secretary General, the United States has been consulting with Japan and 15 other major economies that together represent more than 80 percent of the world's economy, energy use, and greenhouse gas emissions. The United States hosted the first Major Economies Meeting in September in Washington. It was chaired by Secretary of State Rice.

During Prime Minister Fukuda's visit to Washington last month, the United States and Japan agreed to work closely together on key elements of a post-2012 framework, including the following: (1) a long-term, global emissions reduction goal, consistent with economic development needs; (2) national plans that set mid-term goals in support of the global goal, with each country selecting its own mix of binding, market-based regulations, incentives, and voluntary programs; (3) collaborative technology development and deployment strategies, especially in fossil-fuel power generation, transportation, and land use, supported by international sector-based working groups; (4) innovative financing mechanisms to deploy clean energy technology in the developing world, coupled with the elimination of tariff and non-tariff barriers for clean energy goods and services; (5) improved emissions measurement and accounting systems to track progress; and the sixth and final element (6) robust programs addressing deforestation, adaptation, and technology access, especially for developing countries.

A post-2012 agreement including these elements should be structured to encourage commitments by the major developing countries. These elements and possible structures will be discussed further at subsequent Major Economies meetings following the Bali conference. President Bush has proposed a meeting of the Major Economies' leaders next summer to try to reach agreement on an approach that allows for flexibility and diversity and is, as I said, environmentally effective, economically sustainable, and global in nature. This would be what the G-8 Communique called for: a "detailed contribution" to negotiations under the UN Framework Convention.

Practical work is underway. U.S. Treasury Secretary Paulson is discussing with other donors a new multilateral financing mechanism to accelerate use of clean technologies and help deploy lower-carbon infrastructure in developing countries. U.S. Trade Representative Susan Schwab is proposing in the WTO elimination of trade barriers to clean technologies, including ones that can help mitigate climate change. We hope Japan will join in and support these efforts, which will not only address climate change but would create new business opportunities for clean technology industries in both of our countries and around the world.

Beyond climate change and energy security, the United States and Japan are doing a good job of communicating and coordinating our strategies on development assistance. We are working side by side to promote public health in Africa, to improve the business climate in Indonesia, and to help workers in Pakistan gain the skills they need to find jobs. Two years ago, we launched a Strategic Development Alliance to share best practices and good ideas for development assistance. The United States, for example, is very proud of our Millennium Challenge Account's approach, which aims to reward good governance with additional targeted resources. This kind of "smart development" aid is a fertile area for further U.S.-Japan cooperation.

On other global issues, Japan and the United States are working hand-in-hand and we look forward to Japan's leadership during its G-8 presidency. G-8 leaders have made important commitments at recent summits in areas like energy security, health, development, nonproliferation and counterterrorism, and we must ensure that there is accountability and follow-through on those commitments. I know Japan shares this interest in accountability. Japan's G-8 team is very ably led by Deputy Minister Masa Kohno and we are confident that Japan's G-8 agenda will be purposeful and results-driven.

Conclusion

Today I have tried to explain the current situation in our economic relations - bilaterally, regionally in the Asia-Pacific, and globally. And I realize that today's message is not uniformly upbeat. But good friends can be honest with one another, and challenge each other to do better. And here, Chairman Sakurai and President Lake, the private sector is key to ensuring that governments focus on what is truly important to create growth and prosperity. I am firmly convinced that there is enormous potential for the economic relationship between the United States and Japan to become deeper, stronger, and more productive. The test will be whether we can match this great potential with great performance and thereby set an example for the region and the rest of the world.