Looking Ahead in Promoting Free Trade and Sustaining Japan’s Defense IndustryPolitics Economy
At their summit in Beijing on May 13, the leaders of China, Japan, and South Korea agreed to start negotiations on a trilateral free trade agreement by the end of the year. For Japan, 30% of whose total exports go to China and South Korea, the elimination of tariffs under such an FTA would be a major plus. And it has been calculated that it would boost Japan’s gross domestic product by 0.3%. So the agreement to start talks is welcome. But we cannot be certain that the negotiations will actually be launched as agreed before the year ends. For one thing, South Korea has a deficit in its trade with Japan. Furthermore, South Korean companies would be better served by a bilateral FTA between their country and China than by a trilateral agreement that would level the playing field between them and their Japanese rivals in the Chinese market.
The TPP: Not Participating Is Not an Option
What should Japan do in this context? The answer is simple: Our country must participate in the negotiations on establishment of a broad Trans-Pacific Strategic Economic Partnership (TPP), a sort of super-FTA. The reason China and South Korea agreed tentatively to launch negotiations on a trilateral FTA was that last November Japan entered into discussions aimed at participation in the TPP talks. But the Japanese government has still not reached a formal decision to take part in the TPP negotiations. In remarks delivered at the banquet of the International Conference on the Future of Asia (an annual forum organized by Nikkei Inc. and the Japan Center for Economic Research) on May 24, Prime Minister Noda Yoshihiko declared his intention of promoting economic growth in Asia with a two-part approach combining discussions on participating in the TPP process and negotiations with other Asia-Pacific countries on FTAs. However, he did not go so far as to say that Japan would take part in the TPP negotiations. Noda is currently at a critical juncture in his drive to secure enactment of his administration’s comprehensive tax and social security reform package, and he probably wants to avoid causing a further split within the ruling Democratic Party of Japan, some of whose members are resolutely anti-TPP. I can understand that. But it is unwise for the prime minister to postpone a firm decision on the TPP much longer.
The discussions about the TPP within Japan have been mixing up issues from two different levels: (1) whether or not Japan should participate in the TPP negotiations and (2) what areas Japan should seek to protect and where it should be ready to yield if it does participate in the negotiations. The prosperity that Japan has enjoyed over the decades since World War II was made possible largely by the existence of the liberal international economic order centering on the United States. This international order has now reached a major turning point with the rise of China and other emerging countries. That is why the Doha round of negotiations under the World Trade Organization has ground to a halt and many countries are now seeking to enlarge their export markets under conditions favorable to themselves by concluding free trade pacts with countries and regions with which they have close economic relations.
The emerging countries will continue to become more prominent players on the global economic scene in the period to come. The economic expansion of countries like China, India, Indonesia, the Philippines, and Vietnam has already turned Asia into the world’s growth center. This is the reason for the US commitment to the TPP as its model for the Asia Pacific, where, as President Barack Obama declared in his speech to the Australian Parliament last November, the United States is seeking “trade that is free and fair . . . [and] an open international economic system, where rules are clear and every nation plays by them.” So the TPP is the touchstone for construction of a twenty-first-century international order for the Asia Pacific. Staying out is simply not possible as an option for Japan.
I am not saying that we must yield on every point in order to participate in the TPP. In the negotiation process we can expect to win on some points and to be forced to yield on others. But we already know that a number of key areas will be excluded from consideration in the TPP talks, notably food safety standards, public health insurance systems, and admission of unskilled laborers. The biggest remaining concern is the impact on agriculture. But regardless of whether Japan participates in the TPP or not, our country’s agricultural sector is in dire straits: As of 2010 the average age of Japanese farmers was already over 65, and there is a lack of young people willing to take over for them. At this rate, Japanese agriculture will die a natural death in the not-distant future. So in order to revitalize the farming sector, we should take advantage of the TPP as offering a chance to transform Japan’s agriculture into an internationally competitive industry.
Flexible Handling of Joint Production of Military Equipment
On June 6, the Research Council on the Industrial and Technological Foundations for Defense submitted its final report to the minister of defense. As far as I know, this is the first such report concerning the industrial and technological foundations of Japan’s national security and defense. I happened to chair this body, and here I would like to summarize the main points of our report.
In order to fulfill their missions, the Japan Self-Defense Forces operated by the Ministry of Defense require all sorts of equipment and supplies, including firearms, vehicles, facilities equipment, bullet gunpowder, guided weapons, communications electronics, ships, and aircraft. The industrial and technological foundations of Japan’s national security and defense may be defined as consisting of the human, material, and technological foundations for the development, production, operation, maintenance, reform, and repair of these required items. Japan depends on private-sector enterprises to provide this industrial and technological base. The size of the markets in question is extremely small: The total market for production ordered by the Ministry of Defense is only about ¥2 trillion, a mere 0.8% of Japan’s total industrial production (¥250 trillion). And given the severe fiscal crisis that the Japanese government confronts, there is no prospect of a substantial increase in the defense budget to allow this market to grow significantly in the near future. Furthermore, the portion of the defense budget going to contracts for new equipment is less than the amount budgeted for maintenance and other work on existing equipment (the figures for fiscal 2012 [April 2012 to March 2013] are ¥687.0 billion and ¥778.6 billion, respectively); this is a state of affairs that has prevailed since 2005.
Meanwhile, the unit costs of aircraft, ships, and other major items have been rising as they have become more advanced and complex; reflecting this, the numbers procured have been declining—causing unit costs to rise even further. This vicious cycle of rising costs and falling numbers has hurt defense industry firms’ profitability, making it increasingly difficult for them to keep up the research and production operations for defense-related goods with little general utility. At this rate it may become impossible to maintain the domestic defense production and technology base.
The question is what we can do about this. It is no longer feasible to maintain the entire industrial and technological base for defense within Japan. In order to achieve the “dynamic defense” called for in the National Defense Program Guidelines, it is necessary to identify the portions of this base that truly need to be kept up domestically and to work at maintain, foster, and advance these portions. If the government does this, selecting the essential domestic foundations for defense and focusing its resources on these areas while working to maintain and improve Japan’s defense capabilities steadily over the medium to long term, it will become possible for defense industry firms to manage their risks and undertake investment, research, and human resources development based on a long-term perspective.
What points should we consider in drawing up this sort of strategy? Most of Japan’s defense industry companies do not manufacture defense-related goods exclusively but are also involved in civilian production, and they have been able to keep up their defense production by sharing internal resources between their defense-related and civilian operations. But in the period since the global financial crisis and economic downturn of 2008, manufacturers in Japan have found it increasingly difficult to maintain the profitability of their civilian production operations as they struggle to cope with a strong yen, high corporate taxes, and, particularly since last year’s nuclear plant disaster, power shortages. Furthermore, unlike defense contractors in other countries, the manufacturers involved in defense production in Japan do not have the option of tapping foreign markets to expand the scale of their production (since the Japanese government effectively bans exports of defense-related goods) or to improve the productivity of their research and development setups through cooperation with the government and academia. The prospect of mergers of defense industry manufacturers is also remote.
Last December the Japanese government revised its Three Principles on Arms Exports. As announced by the chief cabinet secretary, the government decided to adopt some general exceptions to the overall ban on exports of arms, defense equipment, and the like. Most notably, it will allow international joint development and production of defense equipment in cases where Japan has a cooperative relationship in the field of security with the other country or countries and where joint development and production will contribute to Japan’s own security. I realize that joint development and production involve difficulties of their own, but if implemented well, they can have a number of positive effects, such as lowering the costs and spreading the risks of technological development and production of next-generation defense equipment, maintaining and improving the production and technology base of Japan’s defense industry firms, providing access to advanced technologies from other countries, and enlarging the market for producers of parts. In order to maintain a healthy domestic production and technology base for defense, I hope the government will apply this new policy nimbly and flexibly.(Originally written in Japanese on June 7, 2012.)
Japan Self-Defense Forces Shiraishi Takashi Noda Yoshihiko China TPP agriculture National Defense Program Guidelines South Korea defense industry Trans-Pacific Strategic Economic Partnership Ministry of Defense free trade agreement Future of Asia World Trade Organization Three Principles on Arms Exports defense equipment