Tag: japan

Military Cooperation with China: RIMPAC as a Model for the Future

The Rim of the Pacific Exercise recently concluded in waters near Hawaii.  For the first time China joined the drills.  It was a small but positive step for integrating Beijing into more international institutions.

RIMPAC started in 1971.  This year there are 23 participants, including the People’s Republic of China, which explained that the maneuvers are “an important mission of military diplomacy” and a means to strengthen “friendly relations with countries of the South Pacific through public diplomacy.”

Beijing’s participation comes at a time of significant regional tension.  The PRC’s more aggressive stance in asserting its territorial claims in the South China Sea and Sea of Japan have led to dangerous maritime confrontations. 

RIMPAC offers an opportunity to create some countervailing pressure in favor of a less threatening regional naval environment.  At the political level inviting Beijing to participate demonstrates respect for China’s increased military power and international role.   Doing so also counters the charge that Washington is seeking to isolate and contain the PRC.

Moreover, inclusion hints at the benefits for Beijing of a civil if not necessarily friendly relationship with its neighbors as well as America.  No doubt, the direct pay-off for China from RIMPAC is small. 

But to be treated as an equal and regular participant in international affairs is advantageous.  Although any great power must be prepared to accept unpopularity when necessary, in general a friendly environment is more conducive to ensuring both peace and prosperity. 

The TPP Trade Negotiations Need More Japan and Less Detroit

If you harbor any doubts that the parameters of U.S. trade policy are defined by a few politically-important domestic industries, take a look at the debate over whether Japan should be allowed to join the Trans-Pacific Partnership trade negotiations.

Did you miss it?  That’s because there really hasn’t been much debate; there has been near-unanimous support for the idea in the United States.

In December 2011, the Office of the U.S. Trade Representative requested comments from the public about Japan’s expression of interest in joining the TPP talks.  In response, 115 submissions were filed on behalf of various U.S. interests (small to large companies, trade associations, unions, and other NGOs).  Five of the responses flat out rejected the idea of Japan’s participation; five expressed a willingness to support Japan’s participation with conditions, and 105 expressed no-strings-attached support for Japan joining the talks.  In other words, 91 percent of the respondents were unequivocally in favor of Japan’s participation in the negotiations.

Yet, four months after reviewing those comments, the Obama administration is equivocal about the matter.

With 91 percent in favor, the only formula that could produce executive equivocation is one that weights extremely heavily the views of those expressing opposition to Japan’s participation.  Which of these five dissenters’ views are likely to be getting extra special consideration from the administration on this matter: Humane Society International, the National Marine Manufacturers Association, the Maine Citizen Trade Policy Commission, the Central Union of Agricultural Cooperatives, or the American Automotive Policy Council (hint: the lobbying arm of the “Detroit 3” – Ford, GM, and Chrysler)?

Yes, the same GM that American taxpayers bailed out and are still involuntarily vested in to the tune of $27 billion has interest in seeing those same taxpayers denied the enormous benefits of liberalizing trade with the world’s third largest economy.  And yes, this is the same Chrysler that masquerades as an American company (remember the Clint Eastwood Super Bowl ad), but is owned by the Italian automaker Fiat. Add that little detail to the fact that GM produces more cars in China than it does in the United States and one has to question how, exactly, the process of U.S. trade policy formulation is reality-based.

There is nothing wrong with companies investing across borders and producing wherever they can to serve demand across the globe.  Indeed, freedom of capital, trade, and labor should be the rule, not the exception that it is today.  Likewise, it is to be expected that companies will respond to incentives and if policy is perceived as malleable, the incentive to influence favorable outcomes will motivate companies to lobby.  And as entities beholden to the fiduciary duty to maximize profits for shareholders, these companies try to influence the rules to their own advantages.  But who’s watching over the hen-house here?  Policymakers have a responsibility to the public interest, not to specific industries or companies.

What is proper, democratic, or civic-minded about U.S. policy formulated with the views of a few politically-favored companies – companies that are lobbying foreign governments on some of the very same issues – trumping the opinions of a diverse 91 percent of respondent interests?  If the goal of trade policy is to deliver the benefits of trade liberalization to a broad cross-section of Americans, then why is there this egregious imbalance of influence on the process? What is the point of collecting comments from the public on such matters, if not just to create the illusions of policy accessibility and transparency?  The whole exercise renders trade policy indistinguishable from corporate welfare and gives trade a bad name.

Consider the realpolitik of the matter.  The Chinese government sees the TPP negotiations as a U.S.-led effort to counter China’s growing influence, a perception the administration has not been shy about helping to cultivate.  Presumably, the Chinese government would like to see those efforts fail, and one way to undermine the TPP is to ensure that Japan stays out.  How might China accomplish that?  GM and Ford have big and growing stakes in a Chinese auto market that has been subject to various regulations to control rapid demand growth and stifling traffic congestion.  Might GM’s and Ford’s adamant opposition to Japan’s joining the TPP negotiations be animated by these considerations?  The argument put forward by the American Automotive Policy Council that Japan should be excluded from even negotiating because it has allegedly impermeable non-tariff barriers seems to miss the whole point that negotiations are where those barriers are discussed and, ultimately, dismantled.  It’s like disqualifying someone for a haircut because he wears his hair too long.  To my mind (and I neither offer nor have any proof), the adamancy of AAPC’s opposition whiffs of their trying to uphold their end of a bargain with Beijing.

Another explanation put forth for official U.S. equivocation over Japan is that the administration wants to proceed quickly, but the Japanese government itself has not decided whether it even wants to join the negotiations.  Even if Japan were entirely committed to the negotiations and had no domestic opposition to overcome, the process would be slower.  But there is domestic opposition in Japan, so, in fairness, the Obama administration’s concern for Detroit’s feelings doesn’t present the only obstacle.

Getting the deal done quickly is a valid reason to oppose Japan’s participation if the administration sees the TPP only as a means to a political end: having a deal – a relatively minor one, no doubt – to tout before November.  But this isn’t going to be done before November 2013, let alone November 2012.  And the economics of a Japan-less deal are, frankly, underwhelming.

Japan is the world’s third largest economy and the fourth largest trading partner of the United States.  The $6 trillion Japanese economy is more than double the size of the economies of the eight current U.S. negotiating partners combined.  The $200 billion in two-way trade between the United States and Japan equals that of trade between the United States and all of the eight current negotiating partners combined – and the United States already has free trade agreements with four of them.  If there are good reasons for pursuing a trade agreement with the eight, the reasons are much stronger if Japan is included.


Just a few short weeks ago, U.S. Trade Representative Ron Kirk waxed in the Wall Street Journal about the importance of the U.S. services sector industries.  In a piece titled “Rethinking ‘Made in America’,” Ambassador Kirk made the point that the United States is a services-exporting powerhouse and that industries in those sectors would drive growth and job creation in the 21st century. He wrote:

A commitment to services exports is why services and investment are a [sic] cornerstone of the current nine-country Trans-Pacific Partnership negotiations, in which the U.S. is seeking broad, nondiscriminatory market access for a wide range of services.

There isn’t a bigger ready-market for U.S. services in the world than Japan’s, but as of this moment an icon of the 20th century’s manufacturing economy is in the driver’s seat of this 21st century agreement.

Those who claim to want to move fast assert that Japan can always accede to the agreement at a later date – when it is good and certain that it wants to join.  But there are no guarantees that Japan would want to get into the club on terms undoubtedly less favorable than those it could secure as a charter member.  Rather than view the TPP as a model for the region, Japan, Korea, Indonesia, Canada, Mexico, China and even Europe might create their own alternative.  If the TPP is to have guaranteed drawing power, it needs the anchor of a large Asian economy.  And adding Canada and Mexico makes the endeavor all the more worthwhile.

Monday Links

  • “One of the first rules of negotiating is never to threaten to do something unless you are prepared to do it.”
  • Policymakers and pundits assume the U.S. is so dominant that we’re prepared to fight multiple fronts at once, and that it won’t affect our security.
  • Candidates for office should prepare to raise money, not rely on taxpayer subsidies.
  • More market liberalization could help prepare Japan for any other natural disaster.
  • Are Tea Party-backed Republicans prepared to go the distance on spending cuts?


Bastiat on the Japanese Tsunami

Nathan Gardels at the Huffington Post writes (emphasis added):

No one – least of all someone like myself who has experienced the existential terror of California’s regular tremors and knows the big one is coming here next – would minimize the grief, suffering and disruption caused by Japan’s massive earthquake and tsunami.

But if one can look past the devastation, there is a silver lining. The need to rebuild a large swath of Japan will create huge opportunities for domestic economic growth, particularly in energy-efficient technologies, while also stimulating global demand and hastening the integration of East Asia.

But as French political economist Frédéric Bastiat noted, destruction isn’t stimulative because it cannot create wealth:


New Rasmussen Poll Finds Modest Support for Restraint

A just-released Rasmussen survey finds that nearly half of all American voters would withdraw troops from Europe and Japan, but fewer than one in three favor leaving U.S. forces on the Korean peninsula. This portion of the survey is attracting most of the attention, but the survey as a whole reveals some modest public support for a strategy of restraint, one in which the U.S. military focuses primarily on defending U.S. security and core interests, and calls on other countries to play a larger role in their own defense.

For example, when asked “Should the U.S. military strategy be to focus narrowly on defending the United States and U.S. interests, or should the U.S. military strategy seek to maintain worldwide stability and peace?” a solid majority of likely voters (55 percent) agreed with the former, with just 34 percent wishing to be the world’s policeman. Other polls have shown even less support for the globo-cop role (e.g. here).

On this point, and the related one of allowing wealthy allies to defend themselves, I was able to drill down in the cross tabs a bit, and I found a few suprising areas of divergence between likely voters, former military, and self-identified members of the Tea Party movement.

There is some obvious overlap in the survey among these three groups (e.g. 30 percent of former military people self-identify as Tea Partiers, compared with just 18 percent of likely voters). Tea Partiers are more likely than LVs to agree with the statement U.S. military strategy should  “Focus narrowly on defending the United States and U.S. interests” (66 pct vs. 55 pct), but they are less likely to support removing U.S. troops from Europe (40 pct. vs. 49 pct). Also interesting, this is one of the few areas where the former military members agree more with LVs than Tea Partiers. Those who have served in the military align with TPers (within the margin of error, +/- 3 pct, 95 pct confidence interval) on the question of focusing on defending U.S. interests, but agree with LVs that we should withdraw troops from Europe.

One last point: these and other surveys (including an earlier Rasmussen poll) reveal a considerable gap between what the public believes, and what is actually true. For example, when presented with the true/false question “Most federal spending is spent on only three programs—Social Security, Medicare and national defense,” only 40 percent of respondents correctly answered “True” (38 percent said no, and 22 percent were unsure). A solid majority (65 percent) agreed that “the United States military [is] more powerful than any other nation’s military force,” but that still left a troubling 21 percent who disagreed, and another 14 percent whe were unsure.

That means, as I argued here last year, that those of us responsible for explaining public policy still have a lot of work to do.

Which Nation Will Be the Next European Debt Domino…or Will It Be the United States?

Thanks to decades of reckless spending by European welfare states, the newspapers are filled with headlines about debt, default, contagion, and bankruptcy.

We know that Greece and Ireland already have received direct bailouts, and other European welfare states are getting indirect bailouts from the European Central Bank, which is vying with the Federal Reserve in a contest to see which central bank can win the “Most Likely to Appease the Political Class” Award.

But which nation will be the next domino to fall? Who will get the next direct bailout?

Some people think total government debt is the key variable, and there’s been a lot of talk that debt levels of 90 percent of GDP represent some sort of fiscal Maginot Line. Once nations get above that level, there’s a risk of some sort of crisis.

But that’s not necessarily a good rule of thumb. This chart, based on 2010 data from the Economist Intelligence Unit (which can be viewed with a very user-friendly map), shows that Japan’s debt is nearly 200 percent of GDP, yet Japanese debt is considered very safe, based on the market for credit default swaps, which measures the cost of insuring debt. Indeed, only U.S. debt is seen as a better bet.

Interest payments on debt may be a better gauge of a nation’s fiscal health. The next chart shows the same countries (2011 data), and the two nations with the highest interest costs, Greece and Ireland, already have been bailed out. Interestingly, Japan is in the best shape, even though it has the biggest debt. This shows why interest rates are very important. If investors think a nation is safe, they don’t require high interest rates to compensate them for the risk of default (fears of future inflation also can play a role, since investors don’t like getting repaid with devalued currency).

Based on this second chart, it appears that Italy, Portugal, and Belgium are the next dominos to topple. Portugal may be the best bet (no pun intended) based on credit default swap rates, and that certainly is consistent with the current speculation about an official bailout.

Spain is the wild card in this analysis. It has the second-lowest level of both debt and interest payments as shares of GDP, but the CDS market shows that Spanish government debt is a greater risk than bonds from either Italy or Belgium.

By the way, the CDS market shows that lending money to Illinois and California is also riskier than lending to either Italy or Belgium.

The moral of the story is that there is no magic point where deficit spending leads to a fiscal crisis, but we do know that it is a bad idea for governments to engage in reckless spending over a long period of time. That’s a recipe for stifling taxes and large deficits. And when investors see the resulting combination of sluggish growth and rising debt, eventually they will run out of patience.

The Bush-Obama policy of big government has moved America in the wrong direction. But if the data above is any indication, America probably has some breathing room. What happens on the budget this year may be an indication of whether we use that time wisely.

America’s Number One! America’s Number One!…Oops, Never Mind

Sometimes it’s not a good idea to be at the top of a list. And now that Japan has announced a five-percentage point reduction in its corporate tax rate, the United States will have the dubious honor of imposing the developed world’s highest corporate tax rate. Here’s an excerpt from the report in the New York Times.

Japan will cut its corporate income tax rate by 5 percentage points in a bid to shore up its sluggish economy, Prime Minister Naoto Kan said here Monday evening. Companies have urged the government to lower the country’s effective corporate tax rate — which now stands at 40 percent, around the same rate as that in the United States — to stimulate investment in Japan and to encourage businesses to create more jobs. Lowering the corporate tax burden by 5 percentage points could increase Japan’s gross domestic product by 2.6 percentage points, or 14.4 trillion yen ($172 billion), over the next three years, according to estimates by Japan’s Trade Ministry. … In a survey of nearly 23,000 companies published this month by the credit research firm Teikoku Data Bank, more than 44 percent of respondents cited lower corporate taxes as a prerequisite to stronger economic growth in Japan. … A 5 percentage-point tax rate cut is unlikely to do much to solve Japan’s woes, however. An effective corporate tax rate of 35 percent would still be higher than South Korea’s 24 percent or Germany’s 29 percent, for example. … Meanwhile, the government is trying to offset lost tax revenue with tax increases elsewhere, which could blunt the effect of reduced corporate tax burdens.

I suspect the Japanese government’s estimate of $172 billion of additional output is overly generous. After all, the corporate tax rate in Japan will still be very high (the government originally was considering a bigger cut). And foolish Japanese politicians will probably raise taxes elsewhere. But there will be some additional growth since the corporate tax rate is an especially damaging way to collect revenue.

But I’m not losing sleep about Japan’s economic future. I hope they do well, of course, but my bigger concern is the American economy. The U.S. corporate tax rate of nearly 40 percent (including state corporate burdens) already is far too high, particularly since America adds to the competitive disadvantage of U.S.-domiciled firms by being one of the few nations to impose an extra layer of tax on foreign-source income. Japan’s proposed rate reduction, however,  means the high tax rate in America will be an even bigger hindrance to job creation.

It’s also worth noting that the average corporate tax rate in Europe has now dropped to less than 24 percent, so even welfare states have figured out that a high tax burden on business doesn’t make sense in a competitive global economy.

Sometimes you can fall farther behind if you stand still and everyone else moves forward. That’s a good description of what’s happening in the battle for a pro-growth corporate tax system. By doing nothing, America’s self-destructive corporate tax system is becoming, well, even more destructive.