Impediments? No Problem : Tricky Tokyo-Washington Trade Pact

The proposed trade agreement between Japan and the United States will be a stunning success if it helps reduce the $49-billion trade imbalance between the two nations. But a future healthy relationship between the two economic giants dictates that the political will to make the agreement work must be found first.

That’s the hard part.

Indeed, it took the personal intervention by phone of President George Bush and Japanese Prime Minister Toshiki Kaifu before four days of marathon trade talks yielded the unusual trade pact. The agreement, concluded after a year of contentious negotiations, calls for the United States to take stronger action to reduce its federal budget deficit, increase savings, promote exports, improve education and encourage competition. In turn, Japan agreed to increase its public works spending sharply to $2.7 trillion over the next 10 years, simplify its import process and strengthen its anti-monopoly laws.

The two nations have finally conceded to bilateral commitments that could have profound effects on their domestic policies. Given political realities, initiating fundamental changes in the economic, legal and social structures of each nation is necessary, but difficult.

So it’s no surprise that some skepticism has greeted the first full agreement under the so-called Structural Impediments Initiative, the Administration’s mechanism to address touchy U.S.-Japan trade relations in order to shield it from a protectionist backlash in Congress.

Some experts question the validity of economic assumptions behind this pact; others doubt that Bush and Kaifu and their respective governments will mount the politically unpopular domestic political offensives needed to meld their international agendas.

Perhaps not coincidentally, Bush’s big turnabout on his campaign pledge of no new taxes came during an impasse in the SII talks. The next day, Japanese trade negotiators agreed to raise Japan’s public works spending, citing the President’s willingness to increase U.S. tax revenues to tackle the budget problem.

Bush’s careful nurturing of telephone diplomacy with Kaifu has helped the prime minister politically. He comes from a weak faction of the Liberal Democratic Party, the ruling party of Japan.

The LDP, as well as all of Japan, is groping for a new vision for the 1990s. In the past, the Ministry of International Trade and Industry has painted pictures of 10-year cycles of economic and industry-specific development. Its latest preliminary policy report, though vague in parts, pointedly encourages consumer spending. That means at least they’re listening.

What happens now?

Bush has to curb spending, Kaifu has to increase it. Their agendas are no longer mutually exclusive. In fact, they will be assessed by the same yardstick: a decline in the U.S.-Japan trade imbalance.